“The administrati0n’s stimulus program has failed.” Thus began an op-ed by economist Allan Meltzer, of Carnegie Mellon University, in the Wall Street Journal of June 30. Yes, the gazillion dollar splurge failed – but not for the reasons Meltzer, or any other critics of Barack Obama’s administration tend to push. The stimulus bill failed because of impossible expectations. People expected the package worth almost a trillion US dollars to kick-start the economy. That it would bring back the good ole’ times in a flash. It didn’t, it was never meant to do that, and until large chunks of the US economy are completely reinvented and reformed, it never will.
Consider the dire predicament of the US economy. For all the laughter about ‘ old and dead Europe’ , however true such criticism about the Old Continent may be, the United States seem to be in even bigger trouble.
The US economy is between a rock and a hard place. Consumers and companies aren’t spending money, as they simply have little money to spend now that the credit waterfall has – quite rightly – changed into a mere drizzle. Relying on consumer spending therefore won’t cut it. The economy is thus not aided by domestic demand; that’s the rock.
The second pillar that normally supports a recovery is the exports economy – but alas, the US still imports many more goods and services than it exports elsewhere. The US trade deficit is enormous. This trade deficit is the hard place.
Unable to lean on either domestic support or exports, little else but massive government spending is available as the sole option to keep the economy going. Money simply has to come from somewhere. Aside from providing a pillow to allow a soft landing after a crisis, government spending – in a Keynesian way of thinking – ordinarily also pushes investments, which in turn creates money, which then creates demand, and which then gets the wheels of the economy spinning on its own.
The problem with the US economy is that the wheels are old and rusty. They were never replaced with light and shiny new ones. Whatever the US is manufacturing simply isn’t in demand, and even if there is such a high-demand product, such as the iPhone 4 or a computer operating system like Windows 7, it is manufactured, assembled or massively multiplied outside of the United States, thus not resulting in jobs that provide many Americans with money to spend.
The simple truth is that the base of the US economy never really moved with the times, and neither politicians or voters cared. The best (or worst?) examples are the US automobile companies. Only after they were faced with annihilation and ultimately saved by the Obama administration did companies like General Motors and Ford realize that they had to change their ways. The car industry is now leaner than ever while innovation levels are top-notch. Those companies are willing to take risks again because they understand that they must be at the forefront, outpacing the competition.
The problem with the stimulus isn’t the stimulus. President Obama is probably right when he says that the country would have been worse off if it hadn’t been for the stimulus that kept jobs from being destroyed. But given the state of the US economy, which is still largely based on an outdated manufacturing model in many sectors, the stimulus didn’t do much else but keep large parts of a dying economic infrastructure from collapsing completely.
What is needed is for the US economy to partly reinvent itself, like the automobile companies did. Obama knows this. During the presidential election campaign of 2008 he repeatedly said that the United States should try to take the lead in certain economic sectors, such as inventing environmentally friendly products and new concepts for alternative energy sources. Obama let the world know that he understood that the US had to move into new and different directions in order to once again take the lead in new economic sectors, even creating them if necessary.
Economists like Meltzer criticize Obama for just keeping the patient alive. That’s the wrong line of attack. What Obama should be criticized for is that he isn’t teaching the patient how to get up and walk, even though he promised he would.
On the other hand: the guy has been in office for only 1,5 years while he’s had to deal with an economy where time has stood still for ages in some places. Cut him some slack. Aside from that, showing the economy ways to get its mojo back requires more government intervention, such as guidance, which is what many economists in the US (like Meltzer) don’t like.
But those are new rocks and hard places. Let’s give Obama a chance to deal with the current ones first.