Opinion

Anatole Kaletsky

Obama’s best strategy: Do nothing

Anatole Kaletsky
Mar 8, 2013 13:05 UTC

Ronald Reagan had a catchphrase when faced with a crisis, especially a synthetic “crisis” of the kind Washington loves to concoct. He would call in the officials and media advisers rushing manically around the West Wing and calmly tell them: “Don’t just do something – stand there.”  In this respect, as in several others, “No Drama Obama” seems to resemble the man he once admiringly described, despite their ideological animosity, as the last great “transformational” U.S. president.

With Wall Street hitting new records as Washington supposedly plunges into its latest fiscal crisis with the budget sequestration that began this week, Obama could do well to emulate Reagan’s laid-back style. In addition to doing nothing about the latest manufactured fiscal crisis, he could explain why nothing is the right thing to do.

To be more specific, Obama could negotiate a truce in the budget war. Instead of insisting that Republicans must “pay” for Democratic spending cuts by agreeing to higher taxes, the president could offer a much more attractive deal to both sides. If Republicans eased the sequester and demanded no new spending cuts, the Democrats could promise not to raise any taxes. Such a ceasefire would  be seen by both parties as an honorable draw. Republicans would have fulfilled their pledge to stop higher taxes; while Democrats would have thwarted efforts to gut government and the welfare state.

There would be only one drawback. My fiscal ceasefire proposal does nothing to reduce deficits or government debts. But doing nothing on deficits is exactly the right policy for the U.S. today. Apart from the political pendulum, which is swinging all over the world against austerity, as described in this column last week, there are four strong economic arguments for U.S.  “deficit denial.”

First, there is absolutely no market pressure on the U.S. government to reduce borrowing. On the contrary, investors are so desperate to lend to the U.S. Treasury that unlimited amounts can be raised in the bond market at the lowest interest rates ever offered. While these low rates are partly due to Federal Reserve monetary policies, private investors, too, have been stampeding into U.S. bonds. Since nobody is forcing American individual savers or foreign sovereign wealth funds to lend money to the U.S. government on the same generous terms as the Fed, these lenders presumably believe that U.S. Treasury bonds are a good investment.

Is Mitt Romney a closet Keynesian?

Anatole Kaletsky
Oct 10, 2012 21:45 UTC

John Maynard Keynes said back in 1936 that “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” Keynes himself is now a seemingly defunct economist, but his influence connects the two most important events of the week and perhaps of the year: the sudden reversal of fortunes in the U.S. election and the powerful critique of overzealous fiscal austerity produced by the International Monetary Fund.

What connects these two events is an economic question that almost nobody dares to raise publicly, but that now seems destined to dominate the U.S. election and that hung over the IMF annual meeting in Tokyo this week: Do deficits really matter? Or, to restate the issue more precisely: Are government efforts to cut budget deficits counterproductive in conditions of zero interest rates when fiscal austerity suppresses economic growth?

This conclusion is strongly suggested by the IMF’s “World Economic Outlook” produced for the annual meeting. The WEO presented six detailed case studies, starting with Britain from 1918 to 1939, of economies that tried to reduce large public debt burdens with various policy mixes in the past 80 years. It concluded that two conditions were essential for success: very low interest rates and adequate rates of economic growth. If fiscal austerity produces high unemployment and economic stagnation, it is doomed to failure, causing the government’s debt burden to go up instead of down. After examining this historical evidence, the IMF report hinted strongly that at least two major economies were now caught in self-defeating debt spirals: Spain, where the debt trap is created by political pressures from the euro zone, and Britain, where the futile austerity is entirely self-imposed.

  •