Economic Optimism Carries Risks

To the president, it’s the “most dynamic free market economy on Earth.”

To his top economic adviser Larry Summers, current low stock prices are “the sale of the century.”

To his press secretary Robert Gibbs, “there is no safer investment in the world [than] that in the United States.”

Coming from an administration that was warning just weeks ago of “economic catastrophe,” all of these comments Friday marked an unmistakable change in tone – and perhaps a jarring one, even though Barack Obama has been edging closer to this brighter outlook in recent days.

But taken together, the messages yesterday showed the Obama administration is intent on trying to tell nervous investors, worried consumers and even the Chinese government that United States economy is going to be just fine – maybe not today, maybe not tomorrow, but that there’s a long-term plan to rebuild the “pillars” of the biggest economy on Earth.

"If we are keeping focused on all the fundamentally sound aspects of our economy - all the outstanding companies, workers,all the innovation and dynamism in this economy - then we're going to get through this," President Barack Obama told reporters in the Oval Office.

"And I'm very confident about that."

Those comments verged very close to the quote that got John McCain in so much trouble during the presidential campaign last fall – “the fundamentals of the economy are sound,” McCain said, and was accused of sounding out of touch to the economic worries of everyday Americans.

To be sure, Obama and his team always are careful to add a dose of reality to their more upbeat words– with Obama reminding Americans yesterday that he knows “a lot of individual families who are experiencing incredible pain and hardship right now.”

Yet the overall rhetorical turnabout is fraught with risks for Obama and his aides. One is to the president’s credibility if the new language is not seen as driven by objective evidence. Another is that Americans who are hurting feel abandoned by the increased talk of recovery. A third danger is that the prophesied economic rebound is not actually at hand and that investors or consumers who heed Obama’s advice could end up even deeper in the hole.

Those must have seemed like risks worth taking to Obama and his team. A large new worry emerged late Friday, when the Chinese prime minister Wen Jiabao spoke in blunt terms about China concerns over the stability of its $1 trillion dollars in U.S. debt holdings. He sought U.S. assurances that no matter how tough things got in the U.S. economy, the government could still make good on the debt.

It’s the global equivalent of the bank calling to make sure that a family is going to be able to make their mortgage payments – not calling the loan, but certainly making clear the bank is nervous.

“President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Wen said. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

Still, even Team Obama was careful not to overreach with its optimism.

Gibbs said Obama’s team had no desire to repeat in the economic arena President Bush’s 2003 mistake of declaring, from beneath a “Mission Accomplished” banner, an end to major combat in a war that would drag on for five more years. The spokesman said it would be “most premature” to pronounce an end to the fiscal crisis, “Whether the trajectory is now completely on the upside is hard to tell at this point,” he said.

But, in a measure of the administration’s intense desire to accentuate the positive, when Gibbs was aked whether Obama still believes the economy could get worse before it gets better , the spokesman answered tersely, “Yes.”

In his speech, Summers argued that the markets were moving “from an excess of greed to an excess of fear.” He indicated that stocks were undervalued because, adjusted for inflation, the present capitalization is roughly equivalent to that of four decades ago.

“That the market would be at essentially the same real level as in 1966 when there were no PCs, no Internet, no flexible manufacturing, no software industry, our workforce was half as large as today, and our capital stock was a third as large as today, would be regarded by some as suggesting the presence of the sale of the century,” he said.

Gibbs later said Summers was not intending to “provide stock tips for the American people.”

Summers, who heads the National Economic Council, said the stimulus plan passed last month and other administration efforts may deserve some credit for helping to lower borrowing costs for some businesses and to produce signs that consumers may be slowly regaining confidence. “It is modestly encouraging that since it began to take shape consumer spending in the United States, which was collapsing during the holiday season, appears according to a number of indicators, to have stabilized,” he said.

Summers also said car sales and housing starts were almost guaranteed to rebound from current levels due to the need to replace old vehicles and create more homes to accommodate population growth.

And while many business leaders are predicting economic damage from so-called cap-and-trade legislation the administration is advancing to address climate change, Summers claimed that uncertainty about implementing the policy was the greater danger and that it could “spur a whole range of great investments” when enacted. “In the long run, we believe this can create jobs on a substantial scale,” he said.
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