Niall Ferguson: A runaway deficit may soon test Obama’s luck

[The writer is Laurence A. Tisch Professor at Harvard University and author of ‘The Ascent of Money’]

President Barack Obama reminds me of Felix the Cat. One of the best-loved cartoon characters of the 1920s, Felix was not only black. He was also very, very lucky. And that pretty much sums up the 44th president of the US as he takes a well-earned summer break after just over six months in the world’s biggest and toughest job.

His stimulus bill has clearly made a significant contribution to stabilising the US economy since its passage in February. His cap-and-trade bill to reduce carbon dioxide emissions passed the House of Representatives in June. He has set in motion significant overhauls of financial regulation and healthcare. Considering the magnitude of the economic crisis he inherited, his popularity is holding up well. His current 56 per cent approval rating is significantly better than Bill Clinton’s (44 per cent) at the same stage in his first term and about the same as George W. Bush’s.

Consider the evidence that the economy has passed the nadir of the “great recession”. Second-quarter gross domestic product declined by only 1 per cent, compared with a drop of 6.4 per cent in the first quarter. House prices have stopped falling and in some cities are rising; sales of new single-family homes jumped 11 per cent from May to June. Credit spreads have narrowed significantly and the big banks are recovering, some even making enough money to pay back Tarp bail-out funds. The S&P 500 index is up nearly 48 per cent from its low in early March. Best of all, the economy lost fewer jobs in July than most pundits were expecting. Non-farm payrolls declined by just 247,000, half the number that were disappearing each month in the spring. The unemployment rate has actually declined slightly to 9.4 per cent.

Credit where it’s due: although the gold medal for staving off depression goes to Ben Bernanke, the Federal Reserve chairman, and the silver medal to China’s leaders for their even more impressive stimulus, the president deserves at least bronze. According to Moody’s, the ratings agency, the stimulus package has saved more than 500,000 jobs. Without the jump in government spending, GDP would still be in a nosedive.

In foreign policy, as in economic policy, this is a president who makes his own luck. His Cairo speech in June was a big success and has even been credited by some for the recent setbacks for Hizbollah in Lebanon and for President Mahmoud Ahmadi-Nejad in Iran – though in truth the crisis in Tehran has been a serious blow to the administration’s strategy of negotiating with Iran. The press has put a very positive spin on former President Clinton’s mercy dash to North Korea to secure the release of two American journalists, despite the reality that this, in effect, rewarded the world’s craziest regime for its missile firings. If you still don’t believe this man is lucky, think of those Somali pirates shot dead back in April by Navy Seals rescuing Captain Richard Phillips. If Jimmy Carter had tried a stunt like that, the Seals would have hit Capt Phillips and missed the pirates.

Felix the Prez is lucky in domestic politics, too. After months of wrangling, Al Franken was finally confirmed as senator for Minnesota, giving the Democrats a potentially crucial margin of advantage in the upper house of Congress. To prove the point, the Senate last week voted by 68 to 31 to confirm the president’s pick, Sonia Sotomayor, as the next associate justice of the Supreme Court. In the House of Representatives, Mr Obama’s party has a majority of 256 to 178. Best of all, the Republican party has traded in Newt Gingrich’s 1994 Contract with America for a suicide pact with itself. Between Sarah Palin’s baffling decision to quit as governor of Alaska and Mark Sanford’s Argentine affair, the Republicans look not just leaderless but clueless.

Yet this might just be where the president’s luck runs out. For precisely the power of his own party in Congress could prove to be a source of weakness rather than strength. On my most recent visit to Washington, I could not help being struck by the shift that has occurred from the imperial presidency of the Bush era to something like parliamentary government under Mr Obama. This president proposes; Congress disposes. It was Congress that wrote the stimulus bill and made sure it was stuffed full of political pork. It is Congress that will ensure the healthcare bill falls well short of being self-financing. Mr Obama recently snapped at an unnamed “Blue Dog” (conservative-leaning) House Democrat: “You’re going to destroy my presidency.” He could be right.

According to the polls, voters disapprove of Congress by 61 per cent to 31 per cent. What’s more, the two parties would be neck and neck if the midterm elections were held today. The reason is clear. While the stimulus package had a sound macroeconomic rationale, the growing structural imbalance between federal revenue and spending scares the hell out of voters. A recent USA Today/Gallup poll showed that 59 per cent of Americans think government spending is excessive. Mr Obama receives his lowest approval ratings for his handling of the federal budget deficit....

Six months in, Mr Obama still has the look of a lucky, two-term president. But that could change if voters become even more disenchanted with the legislative branch and start blaming the president for the looming fiscal train-wreck. The scariest possibility for Mr Obama is that the runaway deficit could leave him with the worst of both worlds: exploding debt and flat-lining growth.

Even Felix the Cat’s luck ran out during the Depression. His creator Pat Sullivan drank himself to death in 1933, baffled that audiences now preferred mice like Mickey and Jerry. President Obama should take note.

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John a Wilson - 8/15/2009

These columns need a Read by date just like a gallon of milk. Today's news is anything but good for Felix the Obama. He's looking more an more like the junior senator from Illinois than the POTUS.

Randll Reese Besch - 8/14/2009

I just wish Obama would stop protecting Bush and Cheney and carrying on their fascist moves they made like rendition (Clinton) and preventive incarceration for life. Obama stonewalling on transparency etc.

Also our economy isn't that well off. The real numbers is more to 16-22% unemployment now as they originally counted it in 1940.

Cary Fraser - 8/14/2009

According to Ferguson: "While the stimulus package had a sound macroeconomic rationale, the growing structural imbalance between federal revenue and spending scares the hell out of voters. A recent USA Today/Gallup poll showed that 59 per cent of Americans think government spending is excessive."
It is remarkable that a society that was enthralled by the absurd economic theories of the Greenspan era, and seemingly unaware that the George W. Bush administration's wars, its deficit spending, and its lax oversight of Wall Street's incompetence were steering the country toward bankruptcy, should suddenly awaken to the perils posed by the Obama administration's efforts to clean up the mess it inherited.
As a student of British imperialism, it would be useful for Ferguson to think about the ways in which the Great Depression and World War II accelerated the "transfer of power" from Western Europe to the US, and to ask the relevant questions about the current economic imbroglio and what it implies for America's economic primacy.

rob h adams - 8/14/2009

It is premature to declare victory over the elements of the Great Recession and therefore premature to discuss reducing the debt. This is the same problem FDR had in 1937 with pressure from the Right which caused him to tighten spending and the US economy as a result to take another noseddive in 1938.

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