“President Obama’s Greatest Challenge”
It is undoubtable that there is a very high level of expectations for the Obama Presidency. He is like a stock that has a PE of 100, at a time when President Bush and the rest of Congress are valued considerably less cheerily. It is likely that his Presidency, like virtually every one before (at least in modern times) will be judged heavily by the perceived success of the economy; for instance, in modern times, Reagan and Clinton’s Presidencies are viewed very favorably, while others are viewed less so, correlating heavily on the strength of the economy during their tenures.
It is this high level of expectations, largely hinging on the strength of the economy, that will create a significant challenge for President-elect Obama. His ability to meet or exceed these expectations will have very far-reaching implications for the nation, extending significantly beyond such ostensible measures such as how his Presidency will be viewed and the inherent importance of economic strength.
President-elect Obama has recently categorized the severity of the current economic problems as “the worst financial crisis in a century.” He seems to be aggressively responding to the crisis before taking office, already announcing his “economic team” as well as announcing the impending unveiling of various stimulus plans. Unfortunately, what appears to be an appreciation of the problems may not be enough for him to fulfill peoples’ embedded expectations for economic success – for three main reasons, as explained below:
1) Inherent limitations of what a President can do: As previously noted, a Presidency’s putative success seems to be highly correlated with the degree of economic success. A corollary of this is that a President “controls” (or can substantially effect) the economy, which is highly flawed in innumerable respects. Many other factors completely uncontrollable by the President come into play; therefore, to expect Obama, or any other President, to be able to “control” the economy is highly shortsighted, regardless of how well that President may comprehend the economic situation or have admirable intentions regarding its vigor. Thus, any expectations that President-elect Obama’s actions may be significantly more beneficial than those enacted during President Bush’s tenure are most likely overdone. If, as posited, President-elect Obama is unable to fulfill peoples’ expectations of his ability to quickly, and significantly, positively impact the economy, the loss of confidence, not only in President-elect Obama, but in the entire political / economic system, could prove highly significant, especially in such a time of low confidence and economic upheaval.
2) This economic situation is seemingly far more complex than any before it: Perhaps the key issue is whether the economic problems confronting the US (and in many ways the world) are completely understood. There are various reasons to believe they are not –
· Recurring, significant “downside surprises” keep occurring, confounding the expectations of virtually all economists and other experts. Virtually no one has been able to accurately predict the size and scope of our current economic problems. A plentitude of underestimations regarding virtually every facet of future economic weakness can be found in the last 2-3 years. In fact, it was only a few months ago that many experts and other expectations were geared toward a 3rd quarter (2008) recovery. Economic discussions through this summer questioned as to whether the U.S. was even in a recession. Along these lines, even the NBER has only recently announced a “recession” status – albeit one that is backdated a year, to December 2007. This cumulative record of “missed calls” and other massive underestimations of impending economic weakness really calls into question how much of the current economic situation is understood – especially since it is now evident that the economic decline is accelerating.
· A significant number of severely “odd” occurrences. While the list of these occurrences is virtually inexhaustible – and spread across a broad economic and business spectrum – collectively they signal that “this time things really are different”. An example of this is the stock market’s VIX index – a reading of stock market volatility. It has held above the 40 level since the beginning of October; which is highly significant since it has rarely (usually a day or two at most) been above 40. What is important about this, aside from it being a very significant occurrence, is that one can infer that this level of volatility (and what some would also classify as fear and / or uncertainty) signals that we are in a completely new environment – one in which previously completely unimaginable occurrences not only may occur – but are more likely to occur.
· The dynamic, and ostensibly accelerating nature of this decline. One example of this is the aid request General Motors recently made before Congress. In the two week interval between the first and second meeting, GM’s request went up by a seemingly incredulous amount. This, and an array of other examples, seems to collectively testify to the rapid and heretofore unseen nature of this economic decline.
· A litany of poor omens. Again, these omens are too numerous to mention. One of significant note is the lack of success of the $150 billion tax rebate that was distributed in late spring/early summer 2008. It seemed to have a barely perceptible positive effect, despite its significant size. Another of these omens is how the stock market has continued to progressively sell-off in the face of ever-greater announced, and in some cases implemented, stimulus packages and other intervention measures.
In aggregate, it appears as if either there has been far too casual an analytical approach to these economic problems, and/or this crisis is of such significant complexity that it is outpacing our ability to analyze and process it. While President-elect Obama’s characterization of this economic crisis as “the worst financial crisis in a century” may be accurate, it doesn’t necessarily portray the trickiness of solving this crisis, which in terms of depth and complexity appears to be epochal.
3) Solutions to the problem: While President-elect Obama has yet to officially unveil any major economic programs, it is worth contemplating how much different President-elect Obama’s response can be to the responses already unveiled. Perhaps a greater issue is the pressure inherent on President-elect Obama to improve the economy, given that expectations are so high. Could this pressure drive President-elect Obama to act in an over-aggressive manner? Given the current political climate, where “doing more” stimulus measures (and in greater quantities) seems to be almost unanimously favored to “doing less,” it certainly is a possibility.
Regardless of President-elect Obama’s merit or that of his team, the magnitude of the problems and our limited understanding is problematical. Because of this, even if President-elect Obama and his economic team prove to have an excellent understanding of the scope of the economic problems, people’s confidence in his ability to revive the economy may be overstated.
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