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Played: Will he ever get it?

By Byron A. Ellis – November 04, 2010

Job creation is the number one priority for Americans. Leadership is about using proper judgment to influence potential followers. Proper judgment results from understanding and prioritizing followers’ needs, as well as understanding the mechanisms to achieve those needs. Mr. Obama and the Democrats failed to use proper judgment and their failure was costly.

Obama and the Democrats did not understand the mechanism for job creation. Thus, they relied on fiscal policy, a blunt policy instrument, instead of monetary policy to create jobs. Perhaps, their reliance on fiscal policy was because they gave control of monetary policy to a Republican.

Reappointing a Republican to head the nation’s central bank was clear indication that the Obama and the Democrats did not understood the value of political economy. And, this is confirmed by their choice at Treasure; here too they nominated another Republican, who presided over the New York Federal Reserve and their open market operations from 2003 to 2009. During that period the money supply, M1, was flat.

Political economy relates to the interrelationships between monetary policy and politics. Historically, political economy dictates the outcome of elections. That is, the state of the economy affects election results. For instance, when the economy is improving and unemployment is falling, the party in power tends to be reelected.

The central bank (Federal Reserve) and the banking system can stimulate, or stagnate, the economy at will; if the Federal Reserve engages in an expansionary monetary policy, aggregate demand and employment rapidly increases. And, Bernanke knows that aggressive monetary policy would have restored effective demand and employment.

However, aggressive monetary policy could also overheat the economy and create inflation. Nonetheless, for many the cost of unemployment is higher than the cost of inflation. Furthermore, given the high level of unemployment and economic stagnation, the risk of inflation is low.

Restoring the economy through monetary policy prior to the election would have benefited Obama and the Democrats. Therefore, action from the Federal Reserve to restore the economy had to wait until after the election. Today, the Federal Reserve announced plans to pumped billions of dollars into the US financial system. Thus, any improvement in the economy will now be attributed to the Republican wave; this is classical political economy.

Obama and the Democrats in the spirit of bipartisanship foolishly gave up the true job creation mechanism, (the Federal Reserve) to a member of the opposition party. Thus, they were unable to use monetary policy to create jobs

Furthermore, when they placed at Treasure the individual responsible for formulating monetary policy for the United States from 2003 to 2008, a period in which the M1 money stock remained virtually flat; it is not difficult to conclude that they do not understand economics. As the M1 money stock graph fro the Saint Louis Federal Reserve shows, when the money supply is not allowed to grow, recessions occur.

It is clear, that the Democrats handicapped themselves by positioning Republicans in key economic and defense positions to the detriment of their constituency.

Thus, their constituency, as well as independents, questioned their judgment and hence leadership capacity. In a chess game, it would be folly to incorporate the opponent’s pieces on your side of the board. Politics, like chess, is an adversarial game of strategy.

Apparently, Mr. Obama, after the wave, is still in the cooperative bipartisan mood. The question that many Democrats are asking is, will he ever get it? 

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