An Overleveraged Presidency

An Overleveraged Presidency
Like a troubled bank, President Obama is overleveraged. When a bank makes risky loans and many of them default, the bank goes bankrupt (or gets bailed out). When a first-term president adopts risky policies and many of them fail, his prospects for sustained public approval and reelection diminish.

One of Obama's policies--the decision to close the Guantánamo prison within a year--has already gotten him in a jam. He has no plan for relocating most of the 241 detainees, and Congress refuses to fund the shutdown until he produces one. Both Congress and the public oppose transferring the prisoners to jails on American soil.

The president's distress was reflected last week in a speech in which he blamed the Bush administration for what he called the Guantánamo "mess." He said captured terrorists should never have been sent to Guantánamo, but he offered no alternative of what should have been done with them. Obama also denounced Bush officials for using tough interrogation tactics such as waterboarding to get information from terrorists. But a new poll by Whit Ayres for Resurgent Republic found a majority of Americans disagree with Obama and believe the tactics were justified.

So Obama, like a banker who made a bad loan, is confronted with a problem of his own making. The president said Bush acted too hastily in setting up Guantánamo. But Obama's announcement, two days after his inauguration, of a deadline for closing Guantánamo was a rash decision made in even greater haste.

Most presidents propose two or three risky policies in their first year--risky because there's a significant chance of failure to deliver what's promised. In 1981, President Reagan's policies of deep cuts in taxes and spending and aggressively confronting the Soviet Union were dicey. But the economy rebounded 18 months later and the Soviets buckled, though not until Reagan's second term.

Obama has outdone Reagan or any president since Lyndon Johnson, perhaps even since FDR, in risk-taking. He's adopted or proposed eight or nine risky policies (by my count). Re-election doesn't require all of them to succeed. If his policies bring about a briskly growing economy and nothing more, that may be sufficient for Obama to win a second White House term.

The president has been criticized for trying to do too much in his first year rather than focusing on a few important issues. But the size of Obama's agenda is less of a problem than the likelihood that much of it will be enacted, given the large Democratic majorities in the Senate and House.

The difficulty is that some of his policies are likely to hinder others. Tax hikes, increased energy costs, and new regulations work against the economic recovery that soaring spending and peacetime deficits at historic highs are supposed (by Obama at least) to spur. A more likely result: stagflation, a simultaneous surge in inflation and interest rates.

Obama is now trying to deleverage. The purpose of his speech last week was to take the risk--or at least the appearance of risk--out of his policy on Guantánamo and terrorists. He insisted the safety of Americans would never be put in jeopardy by the release of prisoners from Guantánamo or their transfer to prisons in this country.

In his appearance with Israeli prime minister Benjamin Netanyahu, Obama toughened his policy toward Iran. His position, a risky one, had been that friendly diplomacy is the best policy for persuading the Iranians to abandon their effort to build nuclear weapons. But Obama indicated he'd turn to stronger measures if the Iranians haven't responded favorably by the end of 2009.

Obama has set "energy independence" as a goal. But his policies make that goal harder to achieve. His administration has refused to open new areas in the United States and offshore for oil exploration and production. It favors lavish subsidies for renewable energy (wind, solar) that will do little in the foreseeble future to make up for the shortfall in domestic production of gasoline. As the demand for gasoline increases, as it almost certainly will, there will be only one place to turn: foreign oil.

His takeover of the Big 2 in Detroit, General Motors and Chrysler, poses another risk: downright failure. The auto companies are a money pit, requiring tens of billions in federal subsidies just to stay alive. The public opposes the continued bailout of the auto companies, but Obama is stuck with it. And the chance that either company will soon return to profitability is slim.

Taken together, Obama's policies on energy, health care, and financial institutions are risky for still another reason. They require more government control of the economy, which leads inevitably to a less dynamic and innovative economy and to less growth.

The raft of new regulations should have the same effect. Obama's crackdown on the credit card industry may be justified on ethical grounds. But there's a simple economic fact that applies here: The more you regulate something, the less you get of it. Though more credit is critical to reviving the economy, the new regulations mean we'll get less of it.

Obama is also a fan of labor unions. Through card check or whatever else it takes, Obama wants unionization of the workforce to grow. This, too, is risky. Unionization leads to higher wages for union workers but fewer jobs for everyone else. For Obama, the best outcome in 2009 is counterintuitive. The fewer of his risky initiatives that pass--in effect deleveraging his agenda--the better for the economy, and the better for him politically.