How Bad Is It?

The markets tumbled again today. Down 520 points. The market: Monday - big down; Tuesday - big gain; today - big down. Net loss: over 700 points. Paul Krugman had a tough post this afternoon, titled "Dismal Thoughts". His ending sentence:

"I’m still trying to make sense of this global intellectual failure. But the results are not in question: we are making a total mess of a solvable problem, with consequences that will haunt us for decades to come."

Here, in the US, we need to spend. With the consumer retrenching, and business seeing little demand and therefore not investing, government spending is needed to create jobs and generate demand. To Krugman, a student of the Depression, this is obvious. To conservative economists and Republicans, this is anathema. Progressive critics of the President like Krugman and Robert Reich say the President has failed miserably. He has bought into the Conservative argument that deficits and debt levels are the problem, that we must cut back. He says we now need to pivot to jobs, but with almost no prospects for real legislative progress.

My question: if Obama agreed with Krugman, would he have been smarter to ignore spending and deficit issues, and try to mobilize support for a second stimulus? Even if he had not been successful, would this have been the right path? Does a good leader always have the responsibility to stand up for what he/she believes is right, even if the public does not agree?

I don't think so. No leader can get too far ahead of his troops. America is afraid again. The last time we became afraid was after 9/11, when America's splendid geographic isolation was penetrated by terrorists. This time the crisis was economic - the September-October 2008 financial meltdown. Through completely false Republican messaging, this private debt crisis was converted into a sovereign debt crisis, brought on by "terrifying deficits" and "completely unsustainable debt levels". The Tea Party arose out of this ground of fear, spurred on by endless Republican attacks, decrying the coming "government takeover of healthcare" and "exploding. unsustainable entitlements".

Polls may show that the American people are more concerned about jobs than they are about the deficit. But try polling: "Would you support a second stimulus of $1 trillion to create jobs?" I think Americans in much larger numbers than just the Tea Party, would have risen up in opposition. Many Americans were afraid that the country's economic system was teetering, and that it might all fall down if we did more government spending.

I believe Obama needed to engage the spending and deficit conversation, because even though Americans wanted more jobs, what they were terrified of was that the economy would collapse under the weight of government spending and debt. The President needed to engage this conversation. If he had done otherwise, he would have moved too far ahead, or even way off to the side of the "conversation road' the people were traveling. He needed to travel with them, and demonstrate he understood their fears.

Obama did this honestly.  He adopted the people's desire to put America's fiscal house in order. Progressives like Krugman and Reich were and are dismayed. But I think Obama made the right choice. Right economic policy thinking would have had him push for more spending. Right political thinking had him step squarely into the people's concern about fiscal order and discipline. He does not own that ground. He shares it with Republicans. But he did not abandon this ground, nor ignore the people's concerns, in order to pursue correct or right economic policy.

I don't come to this conclusion lightly, because economically, I completely agree with Krugman and Reich. But a leader must stay with his team. He must understand their concerns and represent them fairly in the day to day rough and tumble of life. There will be time for the "right policies". But first we need to be in the coming 2012 election fight. And we need to win.

So how bad will this be? Double dip recession, or just Japanese like limping-along? Right now, I favor the latter, but if Europe were to go down hard, we are quite probably looking at a double dip.

Hold on to your hats. The ride will be a bit rough.