Obama's warning

US President Barack Obama has responded to Boris Johnson's journalistic musings concerning the President's personal feelings about Britain. Johnson had been angered by, and was responding to, the President's strong endorsement of the campaign to keep Britain in the EU.

In his article, Johnson suggested that President Obama, on account of his family background, and specifically his Kenyan heritage, may well have less than positive feelings about the UK and its imperial past. He referred to a story that a bust of Winston Churchill had been removed from the Oval Office at the beginning of Obama's tenure.

The mainstream media came out strongly against Johnson, with accusations of racism, and various sources claiming that the removal of the bust was not Obama's decision at all.

Obama's subsequent comments confirm however that it was his decision.

"When I was elected as President of the United States my predecessor had kept a Churchill bust on the Oval Office. There are only so many tables where you can put busts otherwise it starts looking a little cluttered," he said.

“I thought it was appropriate and I suspect most people here in the UK might agree, that as the first African American president it might be appropriate to have a bust of Martin Luther King in my office to remind me of all the hard work of a lot of people who had somehow allowed me to have the privilege of holding this office.”

He claims to have warm feelings about Winston Churchill. "I love the guy," he said.

But his remarks also contained a warning about trade links with the US should Britons vote to leave the EU.

The Independent reports:

He said the US would rather the UK remained in the bloc, and said a unilateral free-trade deal between the two countries would not be a high priority for America.

He added that he was merely offering advice to a “friend” and that it was up to the British public which way they voted. [Britain votes on 23 June on whether to stay or leave the bloc.]

Sounds like a threat to me; and a curious one, given that the Obama administration will no longer be in place when decisions about a bilateral deal with a post-Brexit Britain would need to be made. [In the event of a vote to leave the EU, there would be an extended transition period during which Britain would remain within the trading bloc.]

In a piece written immediately after Boris Johnson's initial announcement of his support for the leave campaign, I suggested that his popularity and mainstream credentials could possibly swing the balance of probabilities towards Brexit. But the polls seem to indicate that a majority of Britons still favour remaining in the EU.

As Obama speaks

Here are a few random thoughts on the upcoming U.S. presidential election and the economic situation.

Mitt Romney seems to be holding his own in the polls, and his campaign seems to have some momentum. He has shown himself to be steadier and more astute than John McCain four years ago (for example, in his choice of a vice presidential running mate). Also, I have heard a lot about younger voters losing enthusiasm for the President and being less likely to vote than older voters are.

And then there are the one million or so undecided voters in swing states whom commentators believe will determine the election outcome. I would not be surprised if all Romney has to do to win most of them over is to continue to look like a competent economic manager in an economic environment which increasingly looks like it desperately needs just that. (A couple of days ago it was announced that U.S. manufacturing contracted for a third straight month in August.)

Some are looking to Federal Reserve Board Chairman Ben Bernanke for a solution, but his policies are increasingly being questioned. Many economists and bankers are talking about a fundamental structural shift having occurred in the U.S. economy.

At the recent Jackson Hole meeting, James Bullard (St Louis Fed president) suggested that the sluggish recovery and persistent unemployment stem not so much from cyclical weaknesses as from longer-term structural factors. Other Fed district bank presidents - and many economists - agree, doubting the wisdom of further easing action on the part of the Federal Reserve.

The Federal Reserve Bank of Dallas recently published a paper by the former chief economist at the Bank of International Settlements, William White, which warns of the unintended consequences of ultra easy monetary policy. White sees the economy as a complex adaptive system which cannot be readily modelled. He believes that cheap credit leads to malinvestment and has a pernicious effect on the financial sector, essentially corrupting markets.*

Governments and the financial sector will resist tightening but the current easy money environment is not sustainable. The long-term risks include hyperinflation and deflation.

On the fiscal front, President Obama has, as I understand it, no long-term plan for dealing with the national debt. (Under his proposals, the debt would stabilize and then start to rise again after ten years.) It's clear, at least, that the Republicans take the debt issue more seriously than the Obama team.

The national debt constitutes a threat to America's long-term economic future and geo-political standing, and the problem seems all the more intractable given the alarming degree of political polarization (and social fragmentation?).

I am not an American so I can't speak with any authority on this - and I hesitate to speak at all on these matters - but it certainly seems that the country is seriously divided, and President Obama has been contributing to this with his class-oriented rhetoric. (I find this mildly shocking, actually, coming from the head of state of an advanced country.)

As I write this, President Obama is giving his acceptance speech at the Democratic National Convention. I am not tuned in but will check news reports before posting, just to make sure nothing unexpected happened or was said. Suspect that many in the audience will be cheering like mad but secretly wondering how it all could have gone so badly wrong.


* Dallas Fed president, Richard Fisher, who has openly supported White's views, is a former Democratic Senate candidate and worked for the Clinton administration. (He has an interesting background. Born in L.A. to an Australian father and a South African mother (of Norwegian descent), he grew up mainly in Mexico and struggled financially before completing degrees at Harvard, Oxford and Stanford.)

'Stimulus' spending

I continue to be amazed at the extent to which economists are driven by ideology. How else can you explain the diametrically-opposed views of conservative and Keynesian economists on the effects of government borrowing and spending? One side or the other are kidding themselves; and it's not easy for us non-economists to join - or even understand - the debate.

Clearly, values are involved here, but the question of whether specific policies work is an objective one.

Writing in The Wall Street Journal, Arthur B. Laffer makes a case (based on figures from the IMF) that stimulus spending has actually been counterproductive, "more like a valium for lethargic economies than a stimulant."

Of the 34 OECD countries, those that 'stimulated' the most from 2007 to 2009 saw the least growth in subsequent GDP rates.

"Sorry, Keynesians. There was no discernible two or three dollar multiplier effect from every dollar the government spent and borrowed. In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP. This is an even more astonishing result because government spending is counted in official GDP numbers."

It might be objected that an economic downturn will trigger increases in public spending, and so the appearance of a negative relationship between stimulus spending and economic growth. But Laffer focuses on changes in the rate of GDP growth to help isolate the effects of more spending.

"The evidence is extremely damaging to the case made by Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That's an expensive leap of faith with no evidence to confirm it."