Thursday, February 26, 2009

Obama & the End of Prosperity

While Obama may sound good on paper, his words if translated into actions could spell the end of prosperity for the US and possibly the world in the near term.

In his address to Congress on 24 February Tuesday, he talked about cut in Cold-War era weapons programme. If he thinks that the US budget deficit is caused by war and a sharp contraction of the war industrial complex is the answer to the deficit problem, then he had better - and he must - come up with a better economic response to fill in that vacuum.

Not that I suport war or the war machinery. I don't.

But the economics of it is drastic. The war in the Middle East could have been the result of the end of the Cold War where new platforms of destruction need to be identified to keep the war factories going.

There was earlier talk of the Peace Dividend - where the resources leftover from the Cold War could be reallocated to peacetime consumption prosperity. That didn't happen. So, maybe there is the real time to extract the Peace Dividend.

I suspect that the current meltdown in the US is the result of the misallocation of resources, where the war has produced a lot cash in the system which could not be flushed out (with the deployment of the equipment in the Middle East) but led to the asset bubble which finally burst with the death of Sadam Hussein.

There is now a big hole in the US economy, where most of the blame is placed on the poor Chinese peasant workers who slogged all day in sweatshops for peanuts.

Obama and his economics team led by Larry Summers have a big job ahead to fill in that hole with new types of industry and jobs.

Does the US still got the technological or innovative edge?

If not, then I am afraid that Obama administration may, in history, be associated with one of the bleakest economic times in the US, since the 1930s.


de minimis said...


Could you offer some views on the allocative efficiency of resources in respect of stimulus packages? This is what I fear about any stimulus packages. A shotgun approach is useless. A targetted approach makes sense. But which targets?

etheorist said...

De minimis,

A longer piece maybe later.

For now, my comments are:

1. That is why I try not to get involved in discussions about stimulus packages because they tended to be misdirected. Throwing good money after bad.

2. I favour the construction of a proper economic system so that the rules of the game are stimulative in themselves. It is for the people to take risks - at least if they fail they suffer their own errors.

3. I am a fundamentalist. I take care of the basic fundamentals and then let a thousand flowers bloom.

de minimis said...

Well put. I look forward to reading your thoughts on this.