Is America a failed state?

Barack Obama won the Democratic nomination and then the presidency by offering the same program that Peter Pan gave the Darling children: Close your eyes, think happy thoughts, and you will be able to fly. "Yes we can" in the meantime has changed to "No he can't," as America lost five million jobs in 2009 and its effective unemployment rate, including so-called long-term discouraged workers, rose to 22%, a level unseen since the Great Depression.

Within 24 hours, the voters of Massachusetts may turn the freshly-baked president into a prematurely lame duck, by electing an obscure Republican to the senate seat held for a generation by Ted Kennedy. If that occurs, Obama's veto-and-filibuster-proof majority in the senate will disappear and faint hearts in his own party will hedge their bets on the proposed public healthcare program. The Republicans should be careful what they wish for: no one is voting for the opposition, for the Republican party has no economic program and no unifying theme except its objection to Obama.

The voters are protesting a radical change in their status for the worse, and will penalize whoever has the misfortune to be in power. During December, more than 600,000 workers disappeared from the official count of the American labor force, erasing the illusion that the employment situation would recover. But the voters knew that before the economists. The most reliable index of economic sentiment is the president's deteriorating approval rating. For a by-the-numbers explanation of why the US economy will not recover, see my October 6, 2009, essay, Obama's permanent depression.

America is the world's most successful state, and the one with the greatest longevity in its present constitutional form. But either of the major parties is presently capable of governing it. The Republicans have been hoping that rage against Obama's failed economic policies would carry the party through the November congressional elections. But it is entirely conceivable hat the Obama presidency will implode as quickly as the Obama campaign metastasized during the 2008 primaries, and that the electorate will call the Republicans' bluff.
Americans understood well enough in early 2008 that the traditional leadership of both parties had led them into a
dead-end. As I wrote in January 2008 (Obama bin lottery) after Obama's surprise landslide in the South Carolina Democratic primary:

People of modest means do not understand the stock market, but they are sly: they can read the panic in the eyes of their leaders. After assuring them for months that all was well, Washington last week offered an emergency interest rate cut for the first time since September 11, 2001, and an emergency economic package which will send a small check to every American family earning less than a certain threshold. Both President George W Bush and [Bill] Clinton proposed essentially the same program. If that is "managerial ability", thought the voters of South Carolina, we might as well buy the lottery ticket.

That is why at that time, January 2008, I believed America was going for Obama: "America faces not a dip in the business cycle, but the end of a 25-year run of wealth creation. Rising home prices were supposed to provide America's retirement nest egg, the substitute for the savings that Americans never amassed ... Despite massive evidence to the contrary, they still cling to the delusion that 20 years from now, everyone will retire by selling his home to his neighbor at double the price. It is like the passengers on the Titanic selling each other annuities."

Obama appealed to the voters' bottom-dollar hope that a new face in the White House would reverse the tide of misery. He did not have to offer specific promises: he only needed to give the voters the opportunity to kid themselves, which they were eager to do considering the unpleasant taste of the alternative.

The electorate is like Archilochus' hedgehog, which knows one big thing, rather than the fox, which knows many things, in the classical aphorism cited by Russian-British philosopher and historian, Sir Isaiah Berlin. In 2008, the voters knew that the capital gains and home equity cushion gleaned during the Ronald Reagan boom were at risk, and that the likes of presidential candidate John McCain as well as former candidate, now Secretary of State Hillary Clinton, would not make things different. A vote for Obama under these circumstances had no downside from the vantage point of the ordinary household, and they held out the hope that Obama actually might have a magic wand up his sleeve. The voters were not entirely misguided, for the current economic situation almost certainly would have been just as bad under a McCain administration.

The big thing that the American electorate has learned during 2009 is that Obama is all talk. There are many little things that annoy voters: special treatment for trade-union health plans, a Treasury secretary who seems to have given special treatment to Goldman Sachs in the rescue of the insurance giant AIG, and a  confusing foreign policy. But the idling of one-fifth of the opulation overwhelms every other issue. Tens of millions of amilies that only two years ago felt affluent and secure are now anxious and impoverished. And Obama can do nothing about it.

When Reagan took office in 1981, the baby boomers were in their 20s and 30s, America had a 10% savings rate, the current account was in surplus, and America was the world's largest net creditor nation. Reagan was able to cut taxes and finance an enormous budget deficit because the world's demand for US Treasury securities was correspondingly large. In 2010, the baby boomers are in their 50s and 60s, America has saved nothing for  a decade, the current account remains in severe deficit and the world is choking on the existing supply of Treasury securities. Cutting taxes to stimulate the economy is not as simple this time round.

Professor Reuven Brenner and I argued in the December 2009 issue of First Things that fundamental changes in American economic policy are required to emerge from the Great Recession. We proposed that the United States fix the dollar to the Chinese yuan and other currencies in order to re-orient trade flows to the developing world. We added, "We have been borrowing in order to consume; we need now to save in order to invest. We need to shift the tax burden, moving it away from savings and investment and toward consumption. We should replace individual and corporate income taxes with consumption-based taxes."

Americans need to be told that they will need to invest before they can consume, and that the cure will take years rather than months to take effect. It's not a happy message, and no one in politics is willing to deliver it - if indeed anyone in politics understands it.