What Barack Obama needs now more than anything else is an economic bubble to form early enough to save his presidency. Nothing spectacular about that wish since the American economy has become dependent on economic bubbles in order to generate noticeable growth.
Let’s not forget that in the most recent years the economic growth we experienced was mostly based in the bubble of the housing sector that in turn created enough wealth for the Americans to borrow and spend against.
Contrary to popular belief, the American economy is not the dynamic young thing it used to be. Large parts of it have been thoroughly Europeanized – see New York, California, and Illinois, for example – slowing and burdening the whole. Demographically, America is not getting as old as Europe but it’s getting older nevertheless. And instead of reforming a welfare system that basically acts as an income transfer mechanism from younger generations to older ones, America has chosen (see Obama/Congress) to enlarge it and multiply its deficiencies.
So the administration must be hoping for some kind of a bubble. Bubbles have many drawbacks – as we have discovered yet again recently – but they also have a major advantage: they can form and develop even if the fundamentals of an economy are quickly deteriorating.
A classic example of that is Greece in the recent years. As a Greek journalist wrote, “Each year we were generating a 10 billion government deficit, we were increasing public debt by 12 billion and private by 27 billion, saddling the trade deficit with 5 billion, and all that in order to increase the GDP by….16 billion euros – of that 16 billion, 6 billion were coming directly from the European Union as aid.”
This bubble of public and private debt gave the impression of a booming economy. Back in 2007 the Economist wrote about the Greek finance minister: “During his first term, George Alogoskoufis, the canny finance minister, got public finances back in order and removed bureaucratic obstacles that were preventing Greece from receiving its full share of EU funding. The economy is growing by more than 4% a year. Tourism is headed for a record year, with more than 16m visitors expected. Unemployment fell at the start of the tourist season to 7.7%, the lowest rate in memory.”
The advantage of the sovereign debt bubble in the case of Greece was obvious. It permitted a country with an overregulated economy and a humongous public sector to pretend that economic growth and statism were compatible, an argument not only bought by the Economist but many others at the time as well.
Now the Obama administration will find itself in a similar position. Since the more regulations and taxes it proposes won’t bring prosperity, what it really should hope for is another bubble. The bubble should give the growth numbers that the President needs and which, at least in the short run, would validate the narrative behind the stimulus and the health care bill. The bubble-generated growth would not only validate policy choices, but also the worldview that sees the greater involvement of government in the American economy as necessary and beneficial.