Tom Palley on why Obama is failing

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Tom Palley has written an excellent opinion piece for the Financial Times on why Obama is failing, and he requested that I reproduce it here. However, to read it, I’d prefer if you clicked on the link in the title of Tom’s piece below. That will take you to the Financial Times blog itself–the more hits that pieces like this are seen to get in the conventional media, the better (to encourage this, there are some links in the Financial Times piece that I haven’t reproduced in this repost).

Though I concur with Tom’s opinions, I can fully understand Obama’s decision to use the same advisors that Clinton before him (and to some extent Bush) had also used. Fundamentally, Obama is a politician, not an expert in economics, and as a politician determined to take an intelligent approach to the problems confronting America, he sensibly decided to get his information on these challenges from the very best.

How was he to know that the world’s leading economists, the “very best” in this crucial field, actually knew nothing about how the real economy actually functions?

Only after 2 years in office, when the economy is not recovering from the recession as his advisors told him it would, and the remedies that he throws at it (on their advice) turn out to be more damp squibs that the weapons of mass economic reconstruction he was told they would be, must it slowly be dawning on him that may don’t understand the economy.

He’s learning the hard way the lesson I and many other critical economists acquired as we studied for our economics degrees–mostly by reacting incredulously to weird propositions that our Professors would use to derive their models–that there is something rotten in the state of economic thinking.

Fortunately, I had time to undertake scholarly research to confirm that initial guttural reaction. Yes, what simply felt like crap to me rather than wisdom, really was crap: the weird propositions that my Professors would put forward were kludges to hide fundamental flaws in the underlying theory. In full view in the academic literature of economics, paper after paper proved that the theory did not hold together.

Sometimes, as with Piero Sraffa, a critic had proven a fatal flaw in one aspect of the theory (in Sraffa’s case, the theory of income distribution and the concept of a production function linking output of goods to inputs of labor and capital). Other times, it was an “own goal”, as leading neoclassical economists tried to prove something they hoped was true–such as that market demand curves obeyed all the laws they had derived for individual demand curves, and that they therefore necessarily sloped downwards so that there could be only one equilibrium between supply and demand–and proved that this wasn’t true.

In any genuine science, these discoveries, being fundamental to the theory, devastating in their impact and vast in number, would have caused an intellectual crisis that would ultimately have led to a revolution–as with the shift from the Ptolemaic to the Copernican view of the structure of the solar system. But in economics, what happened instead was that these flaws were ignored–if they had been discovered by the critics like Sraffa–or papered over by truly absurd assumptions, if they had been “own goals”.

The end result was that economic theory was an utter shambles of false abstractions, and I wrote Debunking Economics to bring this to the attention of people who fighting for social justice but whose endeavors were being blocked by economists.

Unfortunately, Obama didn’t read it.

So now a man who had hopes to be remembered for not only being America’s first black President, but also for being one of its great social reformers as well, will probably go down like Herbert Hoover, who is known more for his failure to prevent the Great Depression than for anything else. To cite Wikipedia here:

When the Wall Street Crash of 1929 struck less than eight months after he took office, Hoover tried to combat the ensuing Great Depression with volunteer efforts, none of which produced economic recovery during his term. The consensus among historians is that Hoover’s defeat in the 1932 election was caused primarily by failure to end the downward economic spiral. As a result of these factors, Hoover is ranked poorly among former US Presidents.

Such will almost certainly be Obama’s fate as well, though not because he was a poor President but because he was determined to be a good one, and he therefore followed the advice of the economists in combating the beginnings of the Second Great Depression. How was he to know that their wayward economic theories had actually helped set up this calamaity in the first place, and that having caused it by means they did not understand, that they were the last ones who were able to give him the economic advice he actually needed?

So much for me; over now to Tom’s views–and please read them via the link, as requested. One of the many reasons that neoclassical economics has become dominant is that newspaper editors believed, as Obama did, that the dominant economists were the best ones, and non-orthodox thinkers like Tom and I were shut out of the opinion pieces even more effectively than we were marginalized within the economics profession itself. The more pieces like Tom’s get read in the mainstream media, the sooner those days will be over–and the long-overdue intellectual revolution in economics can begin.

Deaf to History’s Rhyme: Why President Obama is Failing

Financial Times Economists’ Forum, December 2, 2010

Copyright Thomas I. Palley

The great American novelist Mark Twain observed “history does not repeat itself but it rhymes.” Today the rhyme is with the 1930s, and if you don’t hear it read FDR’s great Madison Square Garden speech of October 1936:

“For twelve years this nation was afflicted with hear-nothing, see-nothing, do-nothing government. The nation looked to government but the government looked away. Nine mocking years with the golden calf and three long years with the scourge! Nine crazy years at the ticker and three long years in the breadlines! Nine mad years of mirage and three long years of despair! Powerful influences strive today to restore that kind of government with its doctrine that that government is best which is most indifferent.”

Despite this clarity, the Obama administration insists on hearing a rhyme with the 1990s. That tone deafness has its roots in political choices made at the administration’s outset and explains why the administration has stumbled so badly in its first years. If continued, the economic and social consequences will be grave.

In 2008 President Obama captured the nation with a message of change, yet in office he has chosen to deliver change of style rather than change of substance. At the headline level this choice was reflected in his call for bi-partisanship that looked to split the difference with Republicans. In economic policy, it was reflected in the wholesale reappointment of the Clinton administration team led by Larry Summers and Timothy Geithner, a case of continuity not change.

Now, the administration is sinking under failure of its economic policy. That failure is due to its attempt to revive a 1990s paradigm that never worked as advertised and can only deliver stagnation. Painful though it is for Democrats to acknowledge, the reality is the economic policies of President Clinton were largely the same as those of President Bush. On this the record is clear for those willing to see. The Clinton administration pushed financial deregulation; twice reappointed Alan Greenspan; promoted corporate globalization through NAFTA and China PNTR; initiated the strong dollar policy; spoke of the “end of the era of big government”; contemplated privatization of Social Security; and struck down a core element of the New Deal by ending the right to welfare.

The main difference between the Clinton and Bush administrations was the former’s willingness to offer some helping-hand policies to cushion the harsh effects of the invisible hand. Differences in outcomes were not policy driven but reflect the fact the Clinton administration enjoyed the good fortune of the Internet investment bubble. It also benefitted from the beginning of the housing bubble when American families had plenty of untapped home equity and credit.

President Obama’s fateful decision to go with Clintonomics meant the recession was interpreted as an extremely deep downturn rather than a crisis signaling the bankruptcy of the neoliberal paradigm that has ruled both Republicans and Democrats for thirty years. That implied the recession could be fully addressed with stimulus, which was the same response as the Bush administration to the recession of 2001.

The current recession is the deepest economic downturn since the Great Depression of the 1930s, inviting comparisons with President Franklin Delano Roosevelt. FDR had the advantage of taking office three years into the Depression when the unemployment rate was near 25 percent. The verdict was in: the system needed change. President Obama took office as the crisis was deepening. Those who had designed the system could still argue it could be revived and as establishment insiders they had the upper hand. But that argument is done and today the prospect is of long stagnation.

The New Deal was a break with both the politics and economic policies of the past. Its economic policy innovations like Social Security, the Securities and Exchange Commission, the Fair Labor Standards Act, and the Wagner Act granting the right to organize, are still celebrated. However, it was FDR’s new politics of solidarity and compassion that created the necessary political space: solidarity that recognized the country was in the Depression together and compassion that recognized many were suffering through no fault of their own. That is the political rhyme President Obama must hear, while the New Deal is the policy rhyme.

The President’s failure to deliver on the country’s desire for change of substance has left a vacuum that is being filled by dangerous unstable forces. This is the tale of the Tea Party, which is a tale that has resonance for Europe. The economic risk, already more advanced in Europe, is a doubling-down of disastrously failed hardcore neoliberal economic policies. The political risk is a rise of intolerance and xenophobia.

These are not normal times. If the administration persists with its deafness to history it will surely hit the rocks and an historical opportunity for progressive change will be squandered. Worse yet, its deafness will leave the field open to the extreme right whose “blame-the-victim” social message and “liquidationist-austerity” economic policies clearly confirm today’s rhyme is with the history of the 1930s.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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90 Responses to Tom Palley on why Obama is failing

  1. Derek says:

    You’re being a bit unfair to Smith’s successors. David Ricardo in particular did some good work at the beginning of the 19th C. Things only started going badly wrong with economics at the end of the 19th C when the ultra-rich realised that they could influence the direction of economics research by threatening to to withhold their charitable donations to universities and foundations who were giving tenure to professors that were producing the “wrong kind” of research or educating their students to hold “incorrect” beliefs. Mason Gaffney and Fred Harrison have written an interesting book on this particular aspect of economic history. It’s called “The Corruption of Economics” and discusses why neoclassical economics was originally created to replace classical economics.

  2. Brian Macker says:


    You are an ignoramus when it comes to Austrian economics. Austrians do not believe that the markets are perfect and can correct any problem. In fact, one of their main points is how free banking causes the business cycle. Murray Rothbard is completely against free banking. I’d continue to correct all your mistakes but I’ve got better things to do. Stop listening to straw man claims about the theory and read it for yourself.

  3. BrightSpark1 says:

    Derek, the system suffered its first system failure in the 1840’s, early nineteenth century. A depression occurred, which meant that when the Irish potato crop failed, even the great British Empire, where the elightenment began was unable to look after people at it’s own heart and over one million people died. The song “Hard Times” was written by Stephen Foster in the US about this depression. The ultra rich of the Britain were the true killers of the Irish farmers not the potato blight.

    I feel certain that even Ricardo did not try out the view from the shoulders of Newton. Even classical economics did not adequately follow on from the work of Smith.

  4. TruthIsThereIsNoTruth says:

    Hi Brightspark1,

    I was thinking of replying to your original post but this beauty captures a good deal of what I was going to say (in a way)

    “even the great British Empire, where the elightenment began was unable to look after people at it’s own heart”

    I’m wondering what the theory of economics would have looked like were it invented in one of the countries enslaved (colonised) by ‘the Great British Empire’. Or could Smith have come up with his enlightened theory if the Empire wasn’t in the business of slave labour and mineral extraction from it’s colonies. It’s easy to attribute great economic prosperity to enlightened theory when one is pillaging the world.

  5. mahaish says:

    problem is derek,

    the ludicrouse propostions contained in ricardian equivilence are still part of one variant of the mainstream agenda, and they have done more harm than good, in my opinion,

    the reason why we need more government austerity in this crisis according to its supporters, is that we have a whole nation of ricardian consumers running around anticipating tax increases as a consequence of larger government deficits. they are apparently saving for their future tax bills.

    so many holes in such a proporsition that it would get enviouse glances from swiss cheese makers.

  6. mahaish says:

    interesting anecdote about hoover being an engineer, brightspark1

    suddenly i feel a little downcast,

    here i am thinking we might be better served by there being more engineers in politics,

  7. Philip says:


    Good overview. A great deal of economic theory (neoclassical and Austrian) is still stuck in the 19th century, the cornerstones of Marxism (rational central planners, LTV, falling rate of profit, etc.) have been falsified and Keynesianism in general has been neutered by the mainstream to make it more palatable.

    The engineer/physics viewpoint is an interesting one and is likely to be the eventual savior of economics. You would probably be interested in the work by a physicist turned economist Joseph McCauley. He has written an excellent book called Dynamics of Markets: Econophysics and Finance, its well worth reading. Using extensive mathematics, he shows why modeling markets using static equilibrium models are completely invalid.

    In one of his journal papers he advocates the following:

    “I therefore suggest that the economists revise their curriculum and require that the following topics be taught: calculus through the advanced level, ordinary differential equations (including advanced), partial differential equations (including Green functions), classical mechanics through modern nonlinear dynamics, statistical physics, stochastic processes (including solving Smoluchowski–Fokker–Planck equations), computer programming (C, Pascal, etc.) and, for complexity, cell biology. Time for such classes can be obtained in part by eliminating micro- and macro-economics classes from the curriculum. The students will then face a much harder curriculum, and those who survive will come out ahead.” (p. 608).

    McCauley, Joseph. 2006. Response to ‘‘Worrying Trends in Econophysics’’, Physica A, Vol. 371, pp. 601-609

  8. Derek says:

    Understood and agreed, mahaish. The thing is that Ricardo himself thought that Ricardian Equivalence was bollocks. He raised it as a theoretical possibility only to denounce it as a practical actuality. In his own words…

    But the people who paid the taxes never so estimate them, and therefore do not manage their private affairs accordingly. We are too apt to think that the war is burdensome only in proportion to what we are at the moment called to pay for it in taxes, without reflecting on the probable duration of such taxes. It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1000.

    In fact it was actually the modern neoclassical economist, Robert Barro, who went on to promote Ricardian Equivalence as being a sensible way of looking at the world in the 1970s, as part of his rational expectations hobby-horse.

    Poor old Ricardo will be spinning in his grave to see such an unrealistic view of the world as Ricardian Equivalence becoming mainstream.

  9. BrightSpark1 says:

    G’day mahaish
    The leader of the worlds currently most successful and populous country China, Hu Jintao is in fact an engineer. The trouble is that while he knows how to use technology to create wealth his understanding of the mess that is neoclassical economics appears to be wanting. China is at present accepting IOUs in return for cargo as Japan has been doing for many years. The Japanese have not benefited for accumulating IOU’s which they cannot spend and neither will the Chinese. China has an exponentially growing current account “investment” which is really worthless if Hu took the time to consider this and perhaps he has, he would see the folly. But perhaps even in communist China neoclassical economic theory has ascendancy he may be finding himself in the same position as did Herbert Hoover. I don’t think that we will find a solution until after the whole system falls in a heap yet again.

    Lets hope we can climb on the shoulders of Newton and Smith when this happens and not persist with Smith’s throw away line (the “invisible hand”) as the world has done after the previous three depressions.

  10. Derek says:

    That’s a good point, BrightSpark1. The best engineer in the world is useless if the engineering theories that he is using are wrong. And that is the basic problem: the modern neoclassical synthesis just contains too many flaws to be useful for macroeconomics. That is why Prof Keen’s work is so important. We are at a stage where we need to review what has been achieved in economics over the last 300 years and decide what is worth keeping and what should be thrown out. Only then will economists be able to do work at anywhere near the level of reliability that engineers can.

  11. peterjbolton says:

    All ‘economic / banker’ induced failures end in war – appears to be historically correct in one form or another:
    Reading as widely as possible and being retired that means I inhale a lot of information, opinion, statistics, etc., and I am now of the impression that we will soon experience, here in Australia, another war. I explain very briefly: Greenspan openly pushed for the invasion of Iraq from Clinton’s presidency onwards 24/7.

    The neocons pushed desperately the PNAC which was wars for a hundred years or so. The FedRes is desperately trying to keep US influence at its peak while killing off everything else including its own people. Was in Iraq, Afghanistan, Pakistan, Yemen, Somalia, Euroasia, Koreas’, the Arctic NATO alliance, South America, etc. The US behavior is perceived as pure insanity. But, what if Greenspan knew what was coming around the mid 90’s and then the prelude of 1997? Certainly the have the resources to arrive at that conclusion with a fairly low risk of error, and of speak of total Global Systemic Collapse (GSC), in other words, a global Dark Age, by 2011/2012.

    Australia’s PM Julian Gillard is now on public record as having invited US military occupation of Australia and it is rumored that in WA alone this will involve some 100,000 on-shore US servicemen. A US team led by a high ranking US General is currently taking stock. The purpose of this military occupation is apparently as stated, a joint US/Australian confrontation with China. Is this what Rudd meant as “force”? Gillard deposed Rudd as PM apparently with the assistance of the Americans, and Israeli via the subterranean services of Senator Arbib, the US secret source (deep throat perhaps?)

    Has Wikileaks been compromised – certainly Zbigniew Kazimierz Brzezinski seems to think so and he should know being fairly experienced at such things, and many other analysts have been reports certain bias which could induce a perception of planned instabilities.

    To me the situation today in global matters suggests that the banker/politico leadership is irreparable without a total collapse, as has always been the case, more or less, and the amount of debt, must be destroyed (I use this term as it will not be forgiven) so my sense is that a “confrontation” for supremacy and power, is about to be launched from, Australia soil, albeit with the vision that the US will be the sole winner.

    I have approached this matter with Occam’s Razor and can say, more than 30 years on thought and research; I hope that I am wrong, whereas I did predict a global Dark Age in late 2006, after predicting correctly the collapse of the USSR, the 1997 Asian crisis, the 2000/2001 walk-in-the-park, but never a global war of desperation at any point of time.

    Now I do… and is scares the hell out of me. If I am indeed correct, many anomalous events of the past are clearly explained and all will make sense; the whole craziness of humanities vs. humanities, but if I am wrong, I will be preferably happy. As such, the statistics and charts, and indicators will be of little value as the outcome will determine the way forward – or backwards, whichever be the case.

  12. mahaish says:

    ” The purpose of this military occupation is apparently as stated, a joint US/Australian confrontation with China.”

    this may happen sooner than we think peterj,

    the fly in the oinment geo politically and economically may end up being what transpires on the 38th parallel .

    think ive mentioned this mant times before, the geo political dog wags the economic tail in many ways.

    and one of those dogs in the pack, just happens to be the hegemonic rivalry between the chinese and the yanks when it comes to the 38th parallel.

    china has always had a strategic interest in the korean peninsula going back many milenia, mainly as a bulwark against japanese hegemonic ambitions. bitter memories indeed for them .

    but ever since the general sherman(a heavilly armed american merchant ship) steamed up the taedong river in 1866, in order to submit the locals in the hermit kingdom to trade with the americans , and duely proceeded to fire upon them when the locals took offence( the americans were all killed by the locals by the way), american hegemonic interest in the sea of japan and the yellow sea have been sown

    the economic deck of cards the yanks and the chinese have built for themselves may well come tumbling down as a consequense of the seeds sown over a hundres and fifty years ago, as i suspect american grapeshot in one form or another will again be heard in the hermit kingdom in our lifetime

  13. mahaish says:

    “China has an exponentially growing current account “investment” which is really worthless if Hu took the time to consider this and perhaps he has, he would see the folly”

    folly indeed brightspark1,

    perhaps the chinese leadership think they can defeat their inglorious past when it comes to these matters,

    they have played this game before and lost. then it was with the british. now its the americans.

    chinese history throughout the 19th and early 20th century is testament to the failure of policies , they are currently persuing, just the veneer has changed.

    anybody thinking the chinese are just going to waltz towards global pre eminence in the 21st century, need to remind themselves of one very brutal fact , dare i say curse about chinese history,

    every change of dynasty has just about brought with it a bloody civil war.

    the so called communists are at 60 years and counting. how long will it be before they face dynastic meltdown

  14. peterjbolton says:

    @ mahaish…

    strangely, having spent many years in both the US and China I don’t see any coherency today with my observations and memories of the past, as impressive as they were. I always wondered why the Chinese with their wealth of ancient philosophies, adopted under Mao, something as crude, rude and primitive as Marxism. But then, I realized (eventually) that this is where Australia has been, is, and the USA aspires to be, and is almost there, and just about all countries are heading in this direction, if not already there, while all pausing in the warm oxidized ooze of fascism prior to desolation; odes of v. Hayek and The Road to Serfdom; a cynical & cyclical given event horizon.

    And while all and sundry amuse their gaze on the numeric fireworks of the phase transitional energetics in their translated form of unbelievable and certainly erratic statistics, the game being played out is actually survival, the basic and fundamental drive of every biological cell in existence, and in the form of the USA, perhaps the play of extremis – that is to say, the last days of the organism brought about by the joys of the finalities of cancer.

    In this Epoch, it is well known that “leadership” is drawn from the lowest common denominator of society, or, you might say, the dregs (which certainly agrees with ancient descriptions as “camp-followers” – [and their infernal stench, clanging pots, and barking dogs]), and where modern psychiatric research suggests that such persons desire, a priori, to preside over… – and they don’t particularly have a preference as to what they preside over, eg success or disaster – as long as they preside over something!

    Korea: I have also spent much time here too – and the artistic senses have always impressed me as does the sense of Zen of the Japanese (besides the food and hooch of both Nations) – but… is this the flash point? No doubt we shall find out soon.

    “Destructive evolution”: if this is the point then we have it all wrong about ourselves but maybe the economics is entangled into our Laws of Thermodynamics where to me, it all then makes sense. Parmenides inferred there was just physics and human behavior but the inference went further to suggest that there was just physics. Quantum entanglement, which really just means, a scalular analogy… or meta-physics

    Whatever, the pounding of cannon will not be welcome – all for the sake of the ignorance that we elect to “leadership” so that they can corrupt us with their already corrupted and fatally flawed banking system, which always ends in War, more never less.

  15. John Prentice says:

    LOL. Once again Bolton, you do not understand. Marxism? A pure intellectual fantasy based similiarly on Hayek and “free market” fraud. The free market is a pure intellectual idea. It has no “basis” in nature. To the materialistic masters, a function of domination of the merchant caste.

    We will not have countries or folk, we will have the international market. Basically one world government by market statism. Marx’s attempt was to push this to the next level of “equality” was a hute. Ficitional. To say the US wants to go there is rediculous. Everything the “government” does is by the means of the market. The market was not “hellbent” on deleveraging like Keen thinks, but instead was ready to use the governments power to stop it in its tracks. They want the old asset inflation regime back to cover the implosion that the current global system has created. They think if they can create another bubble in financials, they can also force unbalanced global sphere back into balance slowly over time. So when the next bubble pops in a few years. The economic landscape will be ready for liquidation without systematic failure.

    A pure fantasy for sure.

    You need to read Evola, Spengler,Yockey.

    Also, Hayeks road to serfdom was about the “free market” itself, it only uses “socialism” as a cover. Failed men like Hayek represent the weakness of the enlightment. The party is over for materialism.

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