Thursday, March 20, 2008

Scapegoat: Obama Blames War for Economic Problems

Obama Economy and Iraq

As if the Wright controversy wasn't enough, Barack Obama's proving to be a leading member of the "Hoover Democrats," given his intemperate and uninformed remarks on the Iraq war and the economy.

The New York Times has
the story:

Senator Barack Obama on Thursday blamed the fragile economy on “careless and incompetent execution” of the Iraq war, imploring voters in this swing state to consider the trickle-down economic consequences of the war as they choose a successor to President Bush.

“When you’re spending over $50 to fill up your car because the price of oil is four times what it was before Iraq, you’re paying a price for this war,” Mr. Obama said to an audience at the University of Charleston. “When Iraq is costing each household about $100 a month, you’re paying a price for this war.”

One day after Senator Hillary Rodham Clinton campaigned here, Mr. Obama arrived in West Virginia for his first trip before the primary on May 13. The state is also likely to be a general election battleground, and Mr. Obama delivered a critique of Senator John McCain, the presumptive Republican presidential nominee.

“No matter what the costs, no matter what the consequences, John McCain seems determined to carry out a third Bush term,” Mr. Obama said. “That’s an outcome America can’t afford. Because of the Bush-McCain policies, our debt has ballooned.”

Frankly, I wasn't planning on a second big economic analysis in one day (after this one), but hey, Obama's on shaky ground here.

In addition to my earlier post, see the Council on Foreign Relations, "Iraq, Afghanistan, and the U.S. Economy":

Expert opinion varies wildly on the relevance of U.S. war spending in Iraq and Afghanistan to the health of the U.S. economy. At the most basic level, economists disagree whether these wars will have a positive or negative long-term economic impact. Total military spending (including spending on support and operations inside Iraq and Afghanistan, as well as operations tied to the “Global War on Terrorism,” all of which are budgeted separately from the U.S. defense budget) remains relatively modest compared to historical levels. During World War II, defense spending rose to levels as high as 37.8 percent of U.S. gross domestic product (GDP). Even including war-spending supplements and terror-war expenditures on top of the normal defense budget, today that number comes to about 6.2 percent of GDP. While experts say the total costs of the wars should thus be kept in perspective, they also point to collateral economic consequences beyond direct expenditures. These include international debt accrued to sustain war costs, volatility on the global oil markets in part attributed to violence in Iraq and Afghanistan, and the geopolitical uncertainty engendered by a war that remains widely unpopular outside the United States. These things, experts say, all come with economic consequences of their own.

Thus, just looking at that introduction casts some doubt that the war's caused current U.S. economic difficulties. Even in the case of some "collateral damage," most people look right here at home for the source of our troubles, with the housing market for starters.

The latest Business Week, for example, describes current economic woes as a credit crisis linked to collapsing real estate. War spending's not mentioned, and even the instability of the dollar is discounted as foretelling deeper economic problems.

The Economist focuses more comprehensively on decades-long trends in financial markets:

The seeds of today's disaster were sown in the 1980s, when financial services began a pattern of growth that may only now have come to an end ... At first this growth was built on the solid foundations of rising asset prices....

But something changed in 2001, when the dotcom bubble burst. America's GDP growth since then has been weaker than in any cycle since the 1950s, barring the double-dip recovery in 1980-81.

Yet, like Wile E. Coyote running over the edge of a cliff, financial services kept on going. A service industry that, in effect, exists to help people write, trade and manage financial claims on future cashflows raced ahead of the real economy, even as the ground beneath it fell away.

The industry has defied gravity by using debt, securitisation and proprietary trading to boost fee income and profits. Investors hungry for yield have willingly gone along. Since 2000, according to BCA, the value of assets held in hedge funds, with their high fees and higher leverage, has quintupled. In addition, the industry has combined computing power and leverage to create a burst of innovation. The value of outstanding credit-default swaps, for instance, has climbed to a staggering $45 trillion. In 1980 financial-sector debt was only a tenth of the size of non-financial debt. Now it is half as big.

This process has turned investment banks into debt machines that trade heavily on their own accounts. Goldman Sachs is using about $40 billion of equity as the foundation for $1.1 trillion of assets. At Merrill Lynch, the most leveraged, $1 trillion of assets is teetering on around $30 billion of equity. In rising markets, gearing like that creates stellar returns on equity. When markets are in peril, a small fall in asset values can wipe shareholders out.

The crisis in housing and finance is also the basis for the recent UCLA Anderson School economic forecast, which discounts consensus predictions that the U.S. economy's in recession.

The Los Angeles Times summarizes the findings:

The Anderson forecasters contend that the economy has been wounded mainly by the collapse of residential real estate. The number of jobs overall will continue to increase, but not at a pace fast enough to employ the growing numbers of people seeking work.

National unemployment will peak at 5.6% at the beginning of 2009, according to the forecast, from 4.8% currently."

In a recession, jobs are easy to lose and hard to find. This time there are not a lot of layoffs, so jobs aren't easy to lose, but they are hard to find," [UCLA Anderson Forecast Director Edward] Leamer said.

So far, most of the jobs lost in California and the nation have been in construction and financial services, but those losses are small compared with the severe manufacturing job losses in the recessions of 1990 and 2001.

Obama's campaign is at a crossroads. He's gotten a lot of media time in defending his relationship to Wright's Trinity United Church of Christ, although he's lost ground in public opinion polls to Hillary Clinton and John McCain at the same time.

Apparently, Obama's looking to the financial crisis to restore some traction to his flailing presidential bid. Unfortunately, a number of the latest reports on economic circumstances don't seem to be cooperating.

(To be fair, see also, "Slump Moves From Wall St. to Main St.")