President Obama's greatest need is to escape the ideological grip of congressional Democrats and the liberal base of the Democratic party (they're one and the same). But he either doesn't recognize this or, as a conventional liberal himself, isn't so inclined. This self-inflicted difficulty has put Obama in worse political straits than President Clinton faced after the Republican landslide of 1994.
On January 27, the secretary of Homeland Security, Janet Napolitano, was roundly criticized at a meeting of the House Homeland Security Committee. She had ducked the hearing, which was about the Christmas Day terrorist attack, and lawmakers were animated. The surprise was that it was Democrats doing most of the attacking.
In April 2009, President Obama laid out his domestic agenda in a speech at Georgetown University. This was no ordinary chat; Obama envisioned nothing less than a reorientation of the American system. He sought to shift the economy from the rough and tumble cowboy capitalism of the past to a less risky, pricier, and perhaps slightly more comfortable European future. "We must lay a new foundation for growth and prosperity," Obama said.
Markets hate uncertainty, so the conventional wisdom goes. And it is true. But the reduction of uncertainty can be a mixed blessing, especially if what becomes more certain is likely to interfere with recovery from the recently ended recession.
Ben Bernanke has been confirmed for another term as chairman of the Federal Reserve Board. But confirmation came at a price -- the further dilution of the Fed's independence. The leader of the Senate Democrats, Harry Reid, says that in return for his support Bernanke has promised to ease credit further. How that is possible with interest rates already effectively at zero, and printing presses working overtime to turn out dollars, is unclear. And it is unclear how the Fed chairman could have made such a promise while at the same time repeating his commitment to begin withdrawing central bank support from the mortgage market.
My own guess is that Bernanke will move gingerly to tighten, a little bit and not right away, even though inflationary expectations have risen from 2.25 percent in March to somewhat above 3 percent. He will keep a wary eye on the politicians upon whose favor and support he is increasingly dependent. Ignore them, and encourage the drive for legislation that will limit the Fed's freedom of action in money markets.
Another uncertainty that has been dispelled concerns the president's reaction to his party's loss of the Massachusetts senate seat long occupied by Ted Kennedy. A similar setback prompted Bill Clinton to move from left to center -- the place on the political spectrum that is home to most voters. Not Barack Obama. In this week's State of the Union message he repeated the themes of his campaign and inaugural -- transformation of the health care and energy sectors, regulation of big banks, support for education, and economic stimulus, the latter relabeled as a jobs package. And he challenged his congressional colleagues to use their huge majorities in both Houses to pass his proposed legislation. A display of political courage, or of deafness to the expressed wishes of the electorate, depending on which side of the aisle you sit.
So we know that the era of big government is not over, as Bill Clinton claimed when he swung right after disastrous mid-term elections. Any doubts on that score were dispelled when the president announced his risible deficit reduction program. The annual deficit was reported last week to be $1.3 trillion. And it's rising. The president proposes to attack this elephant with a pop-gun -- a freeze on a tiny portion (17 percent) of the budget. In the unlikely event that unhappy liberals in Congress accept such a plan, it will cut spending by only $25 billion per year.
Meanwhile, legislation requested by the president and already approved by the House calls for new spending in excess of the projected savings. More spending on education subsidies, childcare benefits, infrastructure, subsidies for low-income mortgage holders and energy efficiency, funding of basic research in energy production, "a comprehensive energy and climate bill" certain to drive up energy costs -- a list that warmed the hearts of his congressional colleagues, or most of them. Throw in a second stimulus and $30 billion for small, regional banks, and it easy to see why Democrats who do not represent far-left constituencies such as House Speaker Nancy Pelosi's San Francisco, fear they will have difficulty selling themselves as the guardians of the taxpayers' purse when the mid-term elections roll around in November. And little wonder that the non-partisan Congressional Budget Office says the U.S. budget outlook is "bleak."
So we now know that taxes will go up. Call it "fees" in the case of banks, or taxes on "the rich" in the case of income taxes, but up they will go. And swamp the tiny tax benefits the president plans to bestow on small businesses that "hire new workers or raise wages," the latter not considered by most economists a sensible way to create jobs.
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