NEWSROOM
Commentary Articles
In The News
News Releases
Experts



Media Inquiries

Kim Cloidt
Director of Marketing & Communications
(510) 632-1366 x116
(202) 725-7722 (cell)
Send Email

Robert Ade
Communications Manager
(510) 632-1366 x114
Send Email


Subscribe



Commentary
Facebook Facebook Facebook Facebook

Contribute
Your participation will advance liberty. Join us as an Independent Institute member.



Contact Us
The Independent Institute
100 Swan Way
Oakland, CA 94621-1428

510-632-1366 Phone
510-568-6040 Fax
Send us email


Interested in working with us?  Click here for more information.

Commentary

January 20, 2009


     
 Print 

WASHINGTON—Just as Barack Obama was being sworn in, it struck me that the greatness of America’s institutions is their flexibility to accommodate revolutionary changes without the need to destroy the old and build the new from scratch.

America’s first black president assumed his office in the name of the same values and founding document with which his earlier predecessors, under whom blacks were less than equal under the law, had taken their own oaths.

Now, faced with the greatest economic crisis in generations, Obama will need to make a choice between his intellectual formation, which points to interventionist government, and his temperament, which pulls him toward restraint.

There is a short-term and a long-term challenge. The first has to do with the recession, the second with government commitments that cannot be met and that will sap the capacity of Americans to remain prosperous.

The response to the first problem, which is under way, has been extremely risky. In the last three months alone, the money supply has increased by an annual rate of 40 percent, if we don’t count savings deposits. (It was 17 percent with savings deposits included.) That is half the rate of growth between 2001 and 2005, the period of easy money that created the conditions that led to the financial crunch in the first place.

Since the Great Depression is the precedent most cited these days, we should remind ourselves that one of the most important causes of the crash of 1929 was the 61.8 percent increase in the money supply that took place between 1921 and 1929.

The longer-term problem that Obama inherits is in the government’s net operating cost. Considered a more accurate measure of the budget deficit, the net operating cost for the last fiscal year was $1 trillion. You can imagine what these numbers will look like at the end of the current fiscal year once the economic stimulus package, probably worth close to $1 trillion, is added.

The government’s overall debt amounts to $10 trillion—a bit less than half related to Social Security and Medicare. In 2008, the cost of Medicare was already far in excess of the money generated by the tax that funds it; in 2017, when a second Obama administration would end, Social Security will be in the same situation. According to the Financial Report of the U.S. Government, which reads like a Stephen King novel, 15 years from now the debt will be higher, as a percentage of the nation’s GDP, than at its worst period in American history.

Obama’s wise temperament faces this challenge from his socialistic intellectual formation: how to resist the pressure to continue to throw money at the recession, and how to reverse the entitlement growth that is turning the government into an albatross around the people’s neck.

He has two advisers who could help hold his formation in check: Paul Volcker, whose tight-money policy at the Federal Reserve in the 1970s facilitated the prosperity of the Reagan years, and Christina Romer, whose 1994 paper “What Ends Recessions?” sought to prove that fiscal spending was not the cause of recovery after the eight recessions that took place between World War II and the early 1990s.

Obama’s temperament should find reassurance in the Democrats and Republicans who, in the 19th century, resisted pressures to expand the money supply and increase the size of government in times of recession, ushering in long periods of economic growth. As Ivan Eland shows in his book Recarving Rushmore, that was the case of Martin Van Buren in the Panic of 1837, Ulysses Grant in the Panic of 1873, Rutherford Hayes in a lesser meltdown the following decade, and Grover Cleveland in the Panic of 1893.

The president’s intellectual compass will be inclined to follow Franklin Roosevelt’s example. But his temperament should remind his formation that the New Deal, an orgy of public spending, actually postponed the recovery. According to economists Harold L. Cole and Lee E. Ohanian, by 1939 unemployment was still high and real output was 25 percent below trend. Long-term investment did not pick up until 1941. A decade had been lost.

If Obama’s temperament prevails, he could be one of this country’s great leaders. If it does not, his remarkable journey will signify only a stirring symbol.


Alvaro Vargas Llosa is Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His Independent Institute books include Global Crossings: Immigration, Civilization, and America, Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America.

(c) 2009, The Washington Post Writers Group

New from Alvaro Vargas Llosa!
GLOBAL CROSSINGS: Immigration, Civilization, and America

The erosion of national boundaries—and even the idea of the nation state—is already underway as people become ever more inter-connected across borders. A jungle of myth, falsehood and misrepresentation dominates the debate over immigration. The reality is that the economic contributions of immigration far outweigh the costs. Learn More »»






Home | About Us | Blogs | Issues | Newsroom | Multimedia | Events | Publications | Centers | Students | Store | Donate

Product Catalog | RSS | Jobs | Course Adoption | Links | Privacy Policy | Site Map
Facebook Facebook Facebook Facebook
Copyright 2014 The Independent Institute