Author: James Pethokoukis

As long-time readers know, I am convinced that the Obama administration is itching to slap the US economy with a value-added tax. Team Obama just needs to figure out how to do it politically. Listen to the POTUS in this BBW interview:

The whole point of it is to make sure that all ideas are on the table. So what I want to do is to be completely agnostic, in terms of solutions. What I can’t do is to set the thing up where a whole bunch of things are off the table. Some would say we can’t look at entitlements. There are going to be some that say we can’t look at taxes, and pretty soon, you just can’t solve the problem.

In short, how I read this is that Obama is willing to consider a broad-based tax hike on the middle class. Smells like a VAT. But I don’t see how the WH gets there absent a financial crisis that puts Washington into a panic, just as happened with TARP. Maybe if Congress rejects the proposals of the new deficit commission, a bad market reaction would be a catalyst to action.

Of course, Obama could suggest the Hall-Rabushka flat consumption tax, a favorite with conservatives. It is like a VAT with part of the tax paid directly by individuals. This makes the tax more transparent, which politicians don’t like. To them, transparency is a bug not a feature. But the concern on the right is that an invisible VAT would make it too easy to raise taxes and finance a vast expansion of government. But even with an H-B tax, conservatives have no interest in a tax that would raise the tax burden as a way of increasing revenue as a portion of GDP from around 18 percent.

Why should Tim Geithner be so confident that America will “never” lose its AAA credit rating? The White House doesn’t currently have a long-term plan to stanch America’s fiscal hemorrhaging. Hoping and wishing for a successful deficit commission does not make a plan. The Treasury secretary’s statement sounds like one of those perfunctory defenses of the dollar.

But the so-called “Party of No” does have a plan. And Republicans may have a chance to sell it should they retake Congress. Yet even if the plan works, the financial bleeding wouldn’t stop for decades.

To be accurate, Rep. Paul Ryan has a plan. The Wisconsin Republican is a rising party thinker and odds-on future Budget Committee chairman if Republicans capture the lower chamber. The Ryan plan does eventually put America into the black without raising taxes, according to the Congressional Budget Office. This is critical since growth-killing tax increases will only make budget balancing that much harder.

How does he do it? By sharply cutting future social insurance benefits and partially shifting Americans into private retirement and healthcare plans. The new Obama budget plan forecasts a total debt-to-GDP ratio of 77 percent in 2020 (vs. 53 percent in 2009) with an annual budget gap of around 4 percent (vs. 10 percent in 2009). Talk about a rosy scenario. It assumes brisk economic growth, atypical following financial crises. It also assumes some budget cuts and tax increases that are politically unlikely. An alternative CBO forecast using — by its own admission — more realistic policy assumptions predicts a 2020 budget gap of 7.4 percent and a debt-to-GDP ratio of 87 percent.

The Ryan plan tops both. In 2020, it would have a budget gap of 3.7 percent and a debt-to-GDP ratio of 67 percent. But notice: even a plan created by a conservative budget hawk accepts abnormally high budget deficits a full decade from now. So beware of any politico selling quick fiscal fixes.

The Obama outline ends at 2020, but the CBO and Ryan plans take their forecast decades out. By 2040, Ryan still sees annual deficits of over 4 percent of GDP (and a debt-to-GDP ratio of 99 percent) before a long decline toward annual surpluses in the 2060s as spending eventually dips below tax revenue. Those numbers seem alarmingly high — though not vs. the stunning CBO forecast of a 223 percent debt ratio in 2040 and over 400 percent by the 2060s.

One can quibble about Ryan’s policy choices. Democrats might prefer more taxes and fewer spending cuts. But the essential point is that politicians will, at best, push for a slow departure from massive deficit spending. The question is whether financial markets will be patient enough to allow such a terribly long goodbye.

Even before the U.S. capital was buried under three feet of snow in a matter of days, Washington was frozen solid. Democratic bumbling and Republican obstructionism had sapped legislative momentum from key reforms in finance as well as healthcare and energy. That gridlocked state of affairs is unlikely to change even after Snowmageddon blows into history and the federal government reopens its shuttered offices.

Of course, even if Congress had some desire to make progress on those critical issues, Mother Nature would not have cooperated this week. A former city mayor was dead-on when he declared Washington not a snow town. Commuter trains into the city aren’t running, the Metro subway system offers only limited service, airports are closed and Amtrak closed its rail link to Wall Street (the Acela Express).

Even Pennsylvania Avenue, the main thoroughfare between the White House and Capitol Hill, is barely passable. As a result, federal agencies and departments have been shut all week, a bill that will run to about half a billion dollars in lost productivity and opportunity costs, according to government estimates. Both the House of Representatives and Senate have canceled all votes until after next week’s recess.

Of course, it’s an ill Snowpocalypse (residents’ other storm nickname of choice) that doesn’t blow someone a bit of good.

Toyota caught a break when a congressional hearing to investigate its car recall was postponed for two weeks. And lawmakers skeptical of climate change guffawed when the Obama administration chose the middle of this Arctic blast as the best time to announce a new agency to study global warming. Then there are the jokes. What’s Washington’s snow removal plan called? Spring.

But the snow will eventually melt, and there will be a general thawing out. If only the same warming could be confidently predicted for relations between Democrats and Republicans in this heated election year. As long as both sides keep things icy inside Congress, it really won’t matter much what the weather outside is doing.

… the resumption of this blog. Until then, you can follow me on Twitter at http://twitter.com/JimPethokoukis.

President Barack Obama is now calling the carbon trading scheme that is supposed to heal the planet a “cap-and trade-thing.” That can’t be a good sign for the concept.

Here is the president in New Hampshire yesterday: “”The most controversial aspects of the energy debate that we’ve been having — the House passed an energy bill and people complained about, well, there’s this cap and trade thing. And you just mentioned, let’s do the fun stuff before we do the hard stuff. The only thing I would say about it is this: We may be able to separate these things out. And it’s conceivable that that’s where the Senate ends up.”

Whatever the impact on the environment, the probable demise of President Barack Obama’s cap-and-trade carbon plan would be a much bigger fiscal failure for the White House than the implosion of healthcare reform, at least over the near term. Taxing carbon was the hidden key to funding his administration’s policy agenda while limiting budget deficits. Now the White House is scrambling for a realistic Plan B.

For months, the Capitol Hill consensus has been that a legislative limit on carbon emissions isn’t going anywhere in 2010 or beyond. New job-killing regulations and taxes just aren’t popular when unemployment is in double digits. Now the White House seems to agree on the plan’s political prospects. But there already were hints of this in the new Obama budget proposal. Now Obama’s budget last year assumed auctioning emissions permits would generate $646 billion in revenue over 10 years. Of that amount, a fifth would have gone toward funding clean energy research, and four fifths to funding a worker income tax credit.

The administration’s new budget proposal simply contains an accounting line labeled “allowance for climate policy” followed by, well, nothing. Not a single dime of revenue is assumed for the years 2011 through 2020. The line item looks to be nothing more than a placeholder to keep hope alive for greener Democratic voters.

The near-term impact is that the worker tax credit won’t be renewed after 2011. But longer-term, the proposal’s failure would stymie administration efforts to get closer to balancing the federal budget.

Internal White House estimates predicted cap-and-trade auctions might generate two or three times as much revenue as forecast in last year’s budget, or up to $1.9 trillion. By contrast, proposed tax hikes on upper-income Americans would raise $678 billion. The extra money from cap-and-trade could have taken a big bite out of the $8.5 trillion 10-year deficit projected in the latest budget — just the kind of broad-based, if politically stealthy, tax that Obama’s economic advisers think is necessary to balance the books.

The administration’s healthcare plan was supposed to knock another $132 billion off the 10-year deficit, according to the Congressional Budget Office. With that on the back burner too, Democrat deficit hawks are left hoping Obama’s proposed fiscal commission can somehow create a menu of spending cuts and tax increases that could actually win congressional approval in 2011. Sadly for Obama, that’s about as likely as that “cap-and-trade thing” passing.

Illinois voters are not too thrilled with their choices for US Senate, according to Public Policy Polling:

I think one of the most striking things about last night’s Illinois primary results for Senate is how poorly both Alexi Giannoulias and Mark Kirk closed.

In the December Chicago Tribune poll Giannoulias was at 31%, followed by Cheryle Jackson at 17%, and David Hoffman with 9%. There were 35% undecided. Giannoulias ended up with 39% to 34% for Hoffman and 20% for Jackson. That suggests that over the final seven weeks of the campaign Hoffman picked up more than 70% of those who had been undecided to 23% for Giannoulias and less than 10% for Jackson. Not too impressive and you have to wonder how far Hoffman’s momentum would have carried him if he’d had another week or two.

Kirk didn’t do all that well as the campaign heated up either though. In that December survey he had 41% to 3% for Patrick Hughes and a total of 10% for the variety of lower tier candidates in the race. Based on the final results he appears to have picked up about 37% of the undecideds from that point on to 35% for Hughes and 28% for the assortment of less serious candidates. Given how little money any of his opponents were spending that’s not too impressive.

Well, Simon Johnson thinks it should be Tom Hoenig, president of the Kansas City Fed:

He’s currently the only senior Fed official who has been outspoken (or even spoken out) against banks that are undoubtedly Too Big To Fail (TBTF).  Hoenig has been a beacon of clarity on this issue over the past year.  Compared with central bank officials – and almost everyone else – Hoenig stands out as a model of straight thinking and a proponent of tough action.  With his disarming but no nonsense approach, he is the perfect person to take on the likes of Lloyd Blankfein (Goldman Sachs) and Vikram Pandit (Citigroup) both in the corridors of power and in the nitty gritty of their rather sordid business models.  Hoenig is a career bank supervisor and nobody’s fool.  Blankfein and Pandit are just two more guys who run banks that have gone bad.  You know how that movie ends.

Hoenig, who sits on the Federal Open Market Committee, is also an inflation hawk – at least by today’s standards.  This makes some would be supporters – including fans of his attitude on TBTF – rather wary of advancing his name (e.g., as chairman of the Fed Board).  This hesitation is understandable although likely mistaken; you don’t keep the federal funds rate essentially zero for long when nominal GDP is growing at more than a 6 percent annual rate.  In any case, the issue is irrelevant for the Treasury job.  The Treasury Secretary’s responsibility in a modern administration is to run financial sector policy, meaning bailouts and how to avoid them.  Peter Orszag has the budget and Ben Bernanke (gulp) holds the monetary tiller.  What we desperately need is someone who can sort out our largest banks.

Tom Hoenig is almost certainly a Republican, although – as head of a regional reserve bank – the full range of his views, outside of banking and money, are not widely known.  Paul Krugman reasonably points out that if he (Krugman) were nominated for the Fed (or Treasury or anything else), this would likely run into trouble in the Senate.  Hoenig is a completely different kettle of fish, appealing to sensible Democrats and Republicans – yes, there are a few – who increasingly worry about massive banks and their electoral implications.  And while financial sector policy is job one, serious efforts to address the budget – led by people of all ilk with a strong grip on economic realities – also lie in our future.  Either that or the republic will perish.  Not a tough choice in the end, but it does need to involve at least a few Republicans.

He’s a Republican.  See point 3 above, and remember that President Obama offered Senator Judd Gregg (R., New Hampshire) the position of Commerce Secretary at the beginning of his administration.

The market will react negatively, because it will sense the era of unlimited bailouts is drawing to a close.  Sure, but that’s the point.

He’ll be captured by Big Finance, just as Geithner was. Spend some time with Tom Hoenig before you jump to this conclusion.

There will be objections to be sure.

• He’s just a regional Fed governor. True, but so was Tim Geithner.
• He’ll be captured by Big Finance, just as Geithner was. Spend some time with Tom Hoenig before you jump to this conclusion.
• The market will react negatively, because it will sense the era of unlimited bailouts is drawing to a close. Sure, but that’s the point.
• He’s a Republican. See point 3 above, and remember that President Obama offered Senator Judd Gregg (R., New Hampshire) the position of Commerce Secretary at the beginning of his administration.

The Tax Foundation thinks the White House is too sensitive about charges that middle-class taxes are going up:

The Administration’s outrage is a bit overdone, though, for three reasons:

Democrats didn’t support most of the middle-class tax cuts in 2001. The only Bush tax cut provisions that enjoyed any Democratic Party support in 2001 were the 10% rate and the doubling of the child tax credit from $500 to $1,000. In running for president, Obama made the political calculation that the middle- and upper-middle income tax cuts (marriage penalty relief, cutting the 28% rate to 25%, and cutting the 31% rate to 28%) were unassailable; hence the $250K threshold promise. (Throw AMT relief in that basket.) In his progressive heart, Obama can’t really believe those cuts were virtuous. And now the Administration is desperate for big new sources of tax revenue, so there is suspicion that middle-class tax hikes are coming. As many commentators are pointing out, the new fiscal commission is exactly the vehicle that could deliver those tax hikes in a way that would look as if the President were being forced to do it, that he didn’t break his tax promise willingly.
Bush’s middle-class tax cuts were huge. Even now the President uses the phrase “mostly for the wealthy” in describing the Bush tax cuts as a package, which is false (at least by his own, new definition of wealthy — over $250K). Even the most anti-Bush tax think tank in town, Citizens for Tax Justice, can’t come up with numbers that portray the tax cuts for people over $250K as reaching 50% of the whole package.

So many shocking things have happened that rational expectations are shaken. No one thought this Congress and Administration would allow the estate tax to reach full repeal, as it did on January 1, a month ago. But they did, violating every premise of progressive tax policy. And quite aside from politics, it’s a nightmare for executors. Following that shocker was the health bill train wreck, resulting in a level of political and fiscal uncertainty that is almost unprecedented for a non-crisis situation.

Or so says Ed Yardeni, who puts the current economic situation in a philosophical perspective:

We are all Austrians now. Over the past few weeks, in Los Angeles, San Francisco, Sacramento, New York City, and London, I’ve run into more and more institutional investors whose economic and financial views either knowingly or unknowingly reflect the influence of the Austrian School of Economics. I am in Zurich today and Geneva tomorrow.  … How do you know if you are an Austrian? Here is a simple test. Answer yes or no to the following question: “I believe that this will all end very badly.” If you agree, then you are probably worried that all the government policies that rescued us from a depression in 2008 and 2009 only postponed the coming wipe-out of debt and the collapse of asset prices–and will actually make the inevitable calamity even worse.

I share these concerns, but I believe that Globalization will save us from such an awful fate. The end of the Cold War marked the end of the greatest trade barrier of all times. The resulting proliferation of free trade liberated billions of people around the world from their lives of quiet desperation. Standards of living are rising rapidly, especially in emerging economies, as prosperity displaces subsistence. Previously immiserated people are less miserable. They are earning enough so that they can both save and have more discretionary income to improve their material well-being. In other words, Globalization is stimulating more growth in incomes, saving, and consumption. Such growth is the best antidote for the grim Austrian prescription of debt deflation.

Brad DeLong looks at the Obama unemployment forecasting record:

The Washington consensus is that taxes will go up sharply because there is no will to cut spending. Yet that may not be the view outside of the 202 area code.I just got back from a wing-ding at the Hoover Institution where economist Robert Hall quite matter-of-factly assumed big future spending  cuts because, in his opinion, Washington did not have the will to broadly raise taxes. Certainly, the new Obama budget sticks to the Dem pattern of only raising investment and incomes taxes on the so-called wealthy, at least transparently.

Via John Ellis:

The answer, I think, is that whatever pivot is made will be irrelevant. The fact is President Obama doesn’t have the luxury of proposing an agenda. Agendas (or at least, agendas as we have come to think of them) are for people who have money. The United States is broke. And the debt gets worse by the day.

Therefore, President Obama’s job is to get us out of debt (or start us down the path toward that end). This job would be difficult in the best of times. President Obama has to do it in the midst of the worst recession since the 1930s. He has to do it in the midst of two wars in regions perpetually hostile to foreign influence. And he has to do it in the midst of a global recession so severe that it now threatens what erudite commentators call the “social cohesion” of our allies and trading partners around the world.

That being the case, and I think it is inarguably the case, President Obama will never be successful until he accepts the assignment that history has given him. No one (anywhere) believes for one moment that he can add 30-35 million people to the health insurance rolls and not increase (sharply) the cost of health insurance. President Obama has been peddling this fable for months now and it has only served to make him look either (a) naive, or (b) utterly cynical. No one believes that “cap and trade” legislation is anything like an urgent priority at this time. No one believes that securing the Olympics for Chicago in 2016 is an urgent use of the President’s time. No one believes that President Obama deserved or should have accepted the Nobel Peace Prize. The reason that Obama has seen his approval rating fall sharply is that people think he’s not doing his job.

His job is to get the country on a path to fiscal sustainability and to defeat (as much as humanly possible) those who seek to put nuclear weapons in our cities and detonate them in time for the evening news. His job, more accurately, is to cut costs, delay benefits, right-size government programs, rethink military and diplomatic strategies, re-focus our war efforts, all while rebuilding (or expanding) intellectual and physical infrastructure for the years ahead. And he must do all this while devising new strategies for jump-starting wealth creation. It’s more than enough agenda for anyone, even someone with President Obama’s admirable self-confidence and perhaps grandiose self-esteem.

“Stop spending money you don’t have” was the real message of the Massachusetts Senate election that vaulted Senator-elect Brown from the back benches of one of the most useless political institutions in America (the Massachusetts State Senate) onto the front page of The New York Times. “Do your job,” was the other, direct message to President Obama.

That is how IHS Global calls it:

The fourth-quarter GDP surge was produced by a sharp turn in the inventory cycle. Firms still cut inventories in the fourth quarter, but much less severely than in the third. That led to increased production, which boosted GDP. Final sales growth, a better guide to the underlying path of the economy, was much more sedate, at 2.2%, but that was still an improvement on the third quarter’s 1.5% pace.

The best news in final sales was on exports and business spending. Exports surged 18.1%, their second strong increase in a row. And there was a 13.3% increase in business spending on equipment and software (two-fifths of which came from computers). The improving trend in capital goods orders suggests more gains in equipment spending ahead. If firms are feeling confident enough to raise their equipment spending, they’re probably confident enough to start hiring again. That will support consumer spending, which showed a moderate 2.0% gain in the fourth quarter.

The weakest spot was business structures spending, down sharply again as the commercial real estate crisis took its toll.

We must be careful in drawing implications for the future from today’s release. There’s more help to come from the inventory cycle, since inventories were still falling in Q4. But we won’t see a boost as big as 3.4 percentage points again. And we’re doubtful that foreign trade can continue to be a plus for growth, as we expect imports to rebound.

The Q4 GDP surge doesn’t change the view that growth is likely to be subdued by historical standards, in the 2.5-3.0% region for 2010.

Or so says RDQ Economics:

The recovery from the Great Recession firmed in the fourth quarter as real GDP increased at its fastest rate since the third quarter of 2003.  However, also as expected, a sharp slowing in inventory liquidation accounted for 3.4 percentage points (or 60%) of the 5.7% increase in real GDP.  We are particularly impressed by the 13.3% increase in nonresidential investment (upside risk in this area was flagged by yesterday’s durable goods report).

We were also pleased that none of the growth came from government spending, which fell by 0.2%.  From the Fed’s perspective, however, this report does not bring a rate hike closer.  First, the unemployment rate rose from 9.6% in the third quarter to 10.0% in the fourth (raising upside risk to the estimates for potential growth).  Second, the GDP deflator increased by only 0.6% (although, perhaps counter-intuitively, this modest gain was due to the subtraction effect of higher import prices, which surged 16.3%—the price index for domestic purchases rose 2.1% in the fourth quarter, which is a measure of what people and businesses paid, whereas the GDP price index measures the price of what the U.S. produced).

Nominal GDP growth was a robust 6.4% in the quarter (and 0.8% year-over-year).  As the addition to growth from inventories fades somewhat, we see growth in the first quarter of 2010 at around 2½%

Almost twice as many no votes as Volcker who got 16 back in 1983. BB will have to tough it out against a Congress that wants to push the Fed around.  Barney Frank, for instance, wants to kick the regional bank president off the FOMC since they are not confirmed by Senate — and are often to hawkish for his tastes.

If Mike Barone thinks so, so do I:

I have not seen a party’s fortunes collapse so suddenly since Richard Nixon got caught up in the Watergate scandal and a president who carried 49 states was threatened with impeachment and removal from office.

The victory of a Democrat in the special election to fill Vice President Gerald Ford’s House seat in February 1974 was a clear indication that the bottom had fallen out for the Republican Party. Brown’s victory last week looks as if something similar has happened to the Democratic Party.

Many people ask me whether the Democrats are in as much trouble as they were in 1994. The numbers suggest they are in much deeper trouble, at least at this moment. Back in 1994 I wrote the first article in a nonpartisan publication suggesting that the Republicans had a serious chance to win the 40 seats necessary for a majority in the House. That article appeared in U.S. News & World Report in July 1994.
Read more at the Washington Examiner: http://www.washingtonexaminer.com/politi cs/Democrats-fall-as-fast-as-Nixon-Repub licans-in-1974-82731837.html#ixzz0dvZU4E pA

The White House political team loves comparing Barack Obama to Bill Clinton and Ronald Reagan, predecessors who easily won second terms despite early stumbles in their first ones. But the economic and fiscal pincers which constrain Obama are much tighter. None of the president’s proposals in Wednesday’s State of the Union speech can do much to free him.

Obama said high unemployment would be his number one focus this year. No wonder, as it is the issue of most concern to voters, and the biggest reason their support for the president and Congress is falling.

The president made some proposals — money for small business lending and a tax credit for hiring — which may help at the margins. But the new initiatives would probably cost around $100 billion, a fraction of the $300 billion or so in stimulus spending so far, which has not prevented the unemployment rate from climbing to 10.0 percent currently from 7.7 percent at the start of 2009. Good luck finding an economist — even inside the Obama administration — who has great expectations from the proposed new spending.

On unemployment Obama is falling behind his comeback predecessors. As it is, the Congressional Budget Office predicts unemployment will remain close to 10 percent heading into 2011, a forecast echoed by many private economists. By contrast, the first full year of the Reagan recovery in 1983 saw unemployment fall by 2.5 percentage points, while Clinton inherited a growing economy and a falling jobless rate.

And don’t forget the moribund housing market. A new piece of analysis from Goldman Sachs concludes that “recoveries from post-bust recessions tend to be more sluggish than normal and substantial excess capacity generally remains for some time.”

Looking at the political damage caused be high joblessness, Obama would no doubt have preferred to announce something bolder. The liberal Economic Policy Institute has a $400 billion plan that takes in everything from tax credits to government make-work positions. (And major cuts in investment and corporate taxes are out of the question with this administration.)

But that price tag doesn’t go with the double-digit deficit, which spooks financial markets and independent voters. Obama nodded in their direction with a proposed idea-seeking commission and a very limited three-year spending freeze. While not exactly a frugal Hooverite response, it’s not exactly New Deal II, either.

In the end, it was a limited agenda outlined by a constrained president — constrained by the loss of a Senate supermajority, constrained by the Scott Brown win in Massachusetts, constrained by his own falling popularity and constrained by investors whom he fears are reaching their debtload tolerance.

So forget Reagan and Clinton.  Given Obama’s economic challenges, one-term Jimmy Carter might be the better historical comparison.

It was a limited agenda outlined by a constrained president, constrained by the loss of a Senate supermajority, constrained by the Scott Brown win, constrained by his own falling popularity and constrained by investors whom he fears are reaching their debtload tolerance.

Not a reboot but a retreat. The reboot will come NEXT January. I didnt even think his heart was really in the Wall Street bashing. There was also an interesting moment in the Frank Luntz focus group after the speech. Those folks hated when Obama talked about the economy having turned the corner. They think the recession continues.

I will not read a more entertaining column all year. Mr. Kudlow paints a picture:

Now, sir, let’s join hands, you and me, and go for a full-throated spending and debt limitation approach that will last not three years, but many decades to come. It will keep us out of bankruptcy, re-balance our books and promote growth.

And, sir, let’s you and I visit with Sen. Scott Brown, sit down and watch his ad of President John F. Kennedy talking about the need to grow the economy and create new private jobs by slashing marginal tax rates across-the-board for all families and all businesses. No class warfare. Together, we’ll show the stock market what pro-growth really means.

And then sir, let’s you and I visit with beleaguered Ben Bernanke. Let’s tell him to stop covering up bailout nation. Put all that behind us. Instead, Mr. Bernanke should be defending the value of King Dollar to give American families more consumer spending power in their pocketbooks. Now that will get the stock market’s attention.

I want to welcome you sir, with open arms, back to the free market supply-side capitalist camp. It’s just what we talked about at George Will’s house in Washington a year ago when you had dinner with a few of us.

As explained by Joel Kotkin:

Gentry liberalism combines four basic elements: faith in postindustrial “creative” financial capitalism, cultural liberalism, Gore-ite environmentalism and the backing of the nation’s arguably best-organized political force, public employee unions. Obama rose to power on the back of all these forces and, until now, has governed as their tribune.

Obama’s problems stem primarily from gentry liberalism’s class contradictions. Focused on ultra-affluent greens, the media, Wall Street and the public sector, gentry liberalism generally gives short shrift to upward mobility, the basic aspiration of the middle class.

Now that the ball is in his court, the president and his party must abandon their gentry-liberal game plan. The emphasis on bailing out Wall Street and public employees, supporting social welfare and manufacturing “green” jobs appealed to the core gentry coalition but left many voters, including lifelong Democrats, wondering what was in it for them and their families.