Der Spiegel, 02/09/2010
Obama's Misguided Approach
America Has Become Too European
A Commentary by Thomas Straubhaar
Thomas Straubhaar is a professor of economics at the University of Hamburg and director of the Hamburg Institute of International Economics (HWWI). In early 2010 he became the Helmut Schmidt Fellow at the Transatlantic Academy in Washington DC.
The Obama administration and the Federal Reserve want to fix the United States economy by spending more money. But while that approach might work for Europe, it is risky for the US. The nation would be better off embracing traditional American values like self-reliance and small government.
There's no question about it: The 20th century was America's era. The United States rose rapidly from virtually nothing to become the most politically powerful and economically strongest country in the world. But the financial crisis and subsequent recession have now raised doubts about its future. Are we currently witnessing the beginning of the end of the American era?
A firm belief in the individual's ability, ideas, courage, will and a reliance on one's own resources brought the US to the top. The American dream promised everyone the chance of upward mobility -- literally from rags to riches, from minimum wage to millionaire. The individual's pursuit of happiness was seen as the crucial foundation for the well-being of society, rather than the benevolent state which cares for its subjects -- and certainly not the welfare state, which provides a social safety net for its citizens.
In the American system, every man was responsible for himself -- in good times and bad. No one could count on government assistance, not even the wannabe millionaire who did not make it and ended up homeless.
For many US citizens, the financial crisis has turned the American dream into a nightmare. Millions of Americans are struggling with high levels of debt, and not only because they bought overpriced houses during the housing boom and can no longer afford their mortgages. Often families are burdened with loans they took out during better times for cars, furniture, electronic gadgets or university tuition. Uncertainty and worries about the future are keeping many families awake at night.
From 'Hire and Fire' to Just 'Fire'
The economic data reveals just how deep the misery is. After a good beginning to the year, the economic recovery in the US has slowed significantly. There are hardly any new jobs, and the official US unemployment rate remains high at 9.5 percent. The actual unemployment rate could be almost twice as high, partially because of the many Americans who are working part time against their will and also because of the millions of people locked up in the country's prisons.
Particularly troubling is the phenomenon of long-term unemployment, something which is unusual in the US. The number of people who have been without work for more than six months has skyrocketed as a result of the recession, from just over 1 million to 6.8 million. The traditional policy of "hire and fire" has become a one-way street: Now it is all firing and no hiring.
The state is also suffering as a result. Heavily indebted state, county and city governments have less money to spend. Even before the crisis, roads full of potholes were part of everyday life in some places, as were power outages and other problems with the public energy and water supply. What's new, however, is that some cities in America are deliberately choosing to cut core services, such as switching off street lighting. Last winter, Colorado Springs, which with its 400,000 inhabitants is the second largest city in the state of Colorado, turned off one-third of its street lights to save money.
Nothing is immune from the wave of budget cuts, it seems. Schools have been closed and teachers laid off. Roads have been allowed to fall into disrepair and parks left to rot.
Fear of the Double Dip
It appears that the US economy, after the worst crisis of the postwar period, is slow to recover its old dynamism, unlike in previous recessions. Some economists are warning of a double-dip recession, and putting forward radical proposals to prevent this worst-case scenario from becoming reality.
In his widely read Friday column in the New York Times, the Nobel laureate economist and Obama adviser Paul Krugman last week called for the administration to bet the farm on a new attempt to stimulate the economy. Krugman recommended that the Federal Reserve buy up government securities and corporate bonds on a massive scale, announce its intention to keep short-term interest rates low in a bid to push down long-term rates, and raise its medium-term target for inflation. The Obama administration should also use its two government-sponsored real estate lenders, Fannie Mae and Freddie Mac, to help heavily indebted homeowners refinance their mortgages, Krugman wrote.
On Friday, Federal Reserve Chairman Ben Bernanke made a speech that sounded like it had been based on Krugman's column. He announced exactly what the New York Times columnist had called for, saying that the Fed was ready to intervene and would reanimate the sluggish US economy with further cash infusions if necessary. Then on Monday, Obama said he and his economic team were "hard at work in identifying additional measures" to stimulate the US economy.
A Return to Traditional American Virtues
Both the behavior of the American government and the Federal Reserve makes one thing clear: They do not see the solution to the US's economic woes in a return to traditional American virtues. Obama is not calling for the unleashing of market forces, as Ronald Reagan once did during an equally critical period in the early 1980s. On the contrary: Obama, driven by his own convictions and advised by economists who believe in government intervention, has taken a path that leads far away from those things that catapulted America to the top of the world in the past century.
The Obama administration's current policies rely on more government rather than personal responsibility and self-determination. They are administering to the patient more, not less, of exactly those things that led to the crisis.
The crash was partially caused by a policy of cheap money. If interest rates stay as low as they are, the state will get into more and more debt. One day these debts will have to be repaid, together with interest and compound interest. This will result in tax increases, which will reduce wages, the result of individuals' hard work. In addition, low interest rates will make saving unattractive for private individuals, thereby making it harder for America to break with its addiction to credit.
Helping America's Enemies
It's not just wealthy Republicans who are now accusing Barack Obama of betraying American ideals, although the conservative zealots of the Tea Party movement go too far in their criticism. They regard the Obama's administration approach to fighting the crisis as a treacherous attack by dark powers on the freedom of the United States. For them, Barack Obama is working on behalf of America's enemies.
But the move away from policies based on the American Way, which made the US by far the world's stronger economy, is also making well-meaning observers increasingly nervous. They are asking questions like: Why should the government care about the economic status or health of individuals? Why should one person pay for the misfortunes or illnesses of others?
The highest commandment of the American worldview was always to maximize individual freedoms and minimize government influence. It was an approach that was highly successful. According to that rule, self-directed action would remain the rule and government intervention the unpopular exception. But that is no longer the case.
Loss of Faith
This raises a crucial question: Is the US economy perhaps suffering less from an economic downturn and more from a serious structural problem? It seems plausible that the American economy has lost its belief in American principles. People no longer have confidence in the self-healing forces of the private sector, and the reliance on self-help and self-regulation to solve problems no longer exists.
The opposite strategy, one that seeks to treat the American patient with more government, is risky -- because it does not fit in with America's image of itself.
In Europe, the state is the result of centuries of struggle by relatively homogeneous societies and it has always played a major role in European societies. Therefore, a broad majority of the population supports economic policies based on government intervention, especially in difficult times. And Germany's current successes in dealing with the crisis suggest that the Europeans are probably right in their approach. The German economy will probably grow more this year than the American one. In Europe, government-prescribed medicine goes down well.
But what is good for Europe and Germany does not automatically work for the US. The settlers of the New World rejected everything, which included throwing out anything with a semblance of state authority. They fled Europe to find freedom. The sole shared goal of the settlers was to obtain individual freedom and live independently, which included the freedom to say what they wanted, believe what they wanted and write what they wanted. The state was seen as a way to facilitate this goal. The state should not interfere in people's lives, aside from securing freedom, peace and security. Economic prosperity was seen as the responsibility of the individual.
End of the American Way?
If you take this belief away from Americans, you are destroying the binds which interlink America's heterogeneous society. Removing this belief could lead to conflicts between different sections of society, clashes which have long bubbled beneath the surface.
What could help would be a return to the American Way, the approach which made the US so historically powerful. The success of this model is illustrated by history. In 1820, twice as many people lived in the United Kingdom as the US, and its economic performance (measured by gross domestic product) was three times as strong and the average standard of living (measured by GDP per person) was a quarter higher. Today, there are about five times more people living in the US than the UK, America's economic performance is about seven times better than Britain's and the average American is about 50 percent better off than the average Briton.
What should be done? It would be more intelligent to repair the elevator which helped the US rise from the bottom of the heap to the top, instead of trying to transplant a European style of operating onto American soil. Either the US follows the American Way -- an approach characterized by a shared history, economic success and constant progress -- or the US will have to adjust itself to the "European" way, sparking economic and social tensions in the process.
If the US manages to revert to its former ways, there is potential for hope. If not, the American age will have really come to an end.