Shadow Government

The color of your glasses

From an economic perspective, should we be optimistic or pessimistic in the wake of the election? The redoubtable Wolfgang Munchau offered an appealing and different way to think about this in the Financial Times over the last couple weeks. In the context of the euro crisis, he asked not what a crystal ball foretells for the future of the euro crisis, but rather what you have to believe in order to be optimistic about that future. How heavily tinted do your rose-colored glasses have to be for things to look good?

So, what does one have to believe to be optimistic about the U.S. economic situation? There certainly are such optimists. A fundamental premise of the Obama campaign was that the president had adopted all the right economic palliatives, but that they just took time to kick in.

There are at least a couple broad economic arguments one could make in support of a cheery view. Carmen Reinhart and Ken Rogoff cannot usually be accused of excessive cheerfulness in their forecasts. They have been vehemently arguing that downturns that stem from financial crises take a long time to sort out. This is a prompt to lower our expectations. We need not be disheartened by weak economic performance, the message goes. These things just take a long time; they get better eventually. This suggests restored confidence in tools (such as the stimulus) that might otherwise seem to have been ineffective. It would seem to promises payoffs to the patient and perseverant. That was an Obama campaign theme: Give it more time.

This plug for patience is consistent with the second principal positive premise: It's all cyclical. Economists have long discussed the booms and busts of business cycles. Such discussions had faded during decades of relative prosperity (sometimes referred to as "the great moderation"). Moderation is now out the window, so we can turn back to some familiar cyclical arguments. Why should things turn around? Cars and dishwashers and machine tools wear out. People can put off replacement purchases for a while, but eventually they need something new. Along the same lines, young people who may have stayed in their parents' house a while longer than otherwise finally go out, get married, get a place, and furnish it. The price of the house they had looked at may finally seem to have bottomed out. These are all cyclical arguments for a turnaround. Enthusiasts of such explanations point to blips in consumer confidence like buds signaling the start of spring.

If one buys this reasoning, President Obama will now get to reap the benefits of his work and take credit for the inevitable recovery to follow. Had Gov. Romney won, the reasoning goes, he would have unjustly taken credit for the good times to come. Perhaps.

What does one see with untinted glasses? U.S. economic growth has to come from somewhere. It is hard to argue that it will emerge from a bold revival of consumer spending. Pessimism on this point is part of what is behind discussions of a "new normal" that features slower growth. Consumers are still working their way out of debt, the country is still borrowing, and the future liabilities toward an aging population loom large. This is a difficult time for a spending binge. The impending fiscal cliff is one sign of this, though much bigger pension and entitlement challenges remain unaddressed. If you tax people now, they have less money to spend. If they worry about future taxes, they may well save to meet those coming obligations. That would be in lieu of spending.

If the growth is not to come from selling to U.S. consumers, what about selling abroad? The Obama administration did this math quite a while back. The president set a goal of doubling exports in 5 years. Laudable, but how to achieve it? The administrations proposals largely centered around small export promotion initiatives and initial success was claimed when exports rebounded from their recession lows. When the administration finally moved to pass the free trade agreements with Korea, Colombia, and Panama, it claimed those, too, as part of its plan to double exports. Serious new market-opening could help spur markets, but the only such initiative that President Obama has pushed forward -- an expanded version of President Bush's Trans-Pacific Partnership -- faces major obstacles.

In terms of growth through exports, all of these policy measures pale in comparison to the economic health of trading partners. For the United States, NAFTA looms largest, taking almost 1/3 of U.S. exports in 2011. Any economic booms to be found there? The latest IMF World Economic Outlook predicted that Canadian growth would slow from 2.4 percent in 2011 to under 2 percent in 2012 and 2013. Mexican growth, while faster, was 5.6 percent in 2010, 3.9 percent in 2011, and is supposed to keep decelerating through 2017. So where else might we see growth? The European Union takes 18 percent of U.S. exports, but it has its own well-publicized troubles. The latest figures show that Germany may be approaching a recession. China buys about 7 percent of U.S. exports, but its growth has also slowed. Add in a troubled Japan and we've now described just over 60 percent of U.S. export markets.

In all likelihood, the actual picture is worse than just described. These tepid growth prospects assume nothing drastic will happen to throw off the world economy. One of the striking things about this last election season was that there were any number of foreign policy and economic crises that could have exploded. Syria came closest, but Iran, U.S. fiscal troubles, and the euro crisis all remained relatively quiescent. That may be considered good fortune, or it could be the result of hard policy work sweeping problems under the rug. It was no accident that the fiscal cliff arrived after the election. Treasury Secretary Geithner was pretty blatant about asking European countries to move smoothly past deadlines that might have ignited an economic conflagration. I do not have the expertise to speculate about why Israel was so well-behaved over election season, despite its deep-seated concerns about Iran. The upshot was that there was no Middle East conflagration disrupting oil supplies.

These all appear to be problems deferred, not problems solved. Such deferrals often lead to more explosive outcomes later on. To foresee that these potential problems will all remain tranquil for the four years to come would require one to look through a particularly garish set of lenses.

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Shadow Government

Questions the election did not answer

President Obama's victory last night was decisive enough to spare the country weeks of litigation over provisional ballots. And it delays for at least four years the ceremony where we handed over the cyber-keys of Shadow Government to our friends across the aisle. Aside from that, it is hard to argue that the election decisively resolved the question of where the country should go for the next four years.

As numerous people observed, after years of campaigning and some $2 billion dollars of campaign-related expenditures, the country ended up about where it was in 2010: the reins of government split between the two parties, an electorate narrowly and bitterly divided with neither side apparently capable of empathizing with the other side, and with no apparent national consensus on the big issues facing the country. The Democrats clearly have the whip hand, but does anyone seriously believe that President Obama received a strong mandate on key policy issues?

This applies especially to the foreign policy and national security issues near and dear to the hearts of Shadow Government. What did the voters say about the following key decisions President Obama must make in the coming six months:

  • Should the United States press for a U.N. mandate to intervene in Syria's bloody civil war?
  • Should the United States lead a coalition (from in front or from behind) on Syria with or without a U.N. mandate?
  • Given declining leverage in the region, how can the United States mitigate the damage of the spiraling sectarian warfare in the Middle East?
  • How involved should the United States be in an intervention in Mali?
  • Beyond the obvious steps of hunting and bringing to justice the terrorists who carried out the Benghazi attack, how should the United States deal with a Libya that is spiraling towards chaos?
  • What is the worst deal we can live with on the Iranian nuclear program? Should we surrender redlines regarding enrichment that all Administrations have insisted on? What should we do if that "worst deal" is still not good enough to satisfy the Iranians? Is a military strike that only delays an Iranian nuclear program worse than learning to live with a nuclear Iran?
  • How should the United States manage relations with partners like Pakistan and Egypt, who are too dangerous to fail and apparently too frail to ensure our interests and values?
  • What, if anything, can and should the United States do if the eurozone inches towards a collapse?
  • If China's rocky leadership transition produces spikes in hyper-nationalism and adventurism, can we simultaneously reassure our allies and partners in Asia without triggering escalation spirals?

If you expand the horizon to encompass the full remaining term of the Obama administration, the list of foreign policy and national security challenges gets even more daunting:

  • How can the United States repair a fraying coalition in support of the war against terrorist networks, especially when we increasingly rely on a tool the world increasingly abhors: drone strikes?
  • Is it possible to nudge Iraq back onto the positive trajectory it was four years ago or is that opportunity lost for good and, if so, how can we mitigate the damage?
  • Should the administration honor its apparent campaign promise to abandon Afghanistan completely in 2014, or should it proceed with what had been its policy until very recently -- negotiating a Status of Forces agreement that provides for a sizable stay-behind presence?
  • How can the United States adequately resource the "pivot" to Asia without either restoring some of the promised defense cuts or pursuing deep and painful cuts to military pay and compensation?
  • How can the administration repair the lost trust across the civil-military divide?

And so on....

What all of these questions have in common is that on each of them the Obama campaign avoided presenting a clear set of proposed answers and so received from the electorate no clear guidance.

In fact, to the extent that foreign policy was discussed, it seemed to devolve into scorched earth attacks on Romney and the pedigree of his advisors or unqualified defenses of a caricatured version of the last four years.

Privately, my friends in the administration would admit to mistakes but publicly the campaign refused any such candor. When pressed, my friends would claim that they were simply adopting a page from the Bush 2004 playbook, implying that they, too, would do serious mid-course corrections as needed once they had secured a second term.

I hope so and, if so, there should be plenty of opportunity for those of us in the cheap seats to applaud the administration and to work to repair areas of bipartisan consensus.

Of course, those of us in the cheap seats have plenty of other work to do or we might be buying a lifetime lease on the bench. The campaign exposed some divisive internal Republican debates on America's role in the world, and perhaps Shadow Government can be a place where that debate is resolved in a compelling and coalition-expanding way.

SAUL LOEB/AFP/GettyImages