Barack Obama spends much of his time these days running for re-election, campaigning as a populist, bashing millionaires and extolling the Occupy Wall Street movement. Although “populist” means different things to different people, the Oxford American dictionary says it describes a politician who seeks to represent the interests of ordinary people. So how does the president measure up as a true populist? Not well.

Food prices are an important component of the living expenses of ordinary people, especially the elderly or families struggling to make ends meet. Last week the U.S. Department of Agriculture forecast that food prices will rise by 3.5%-4.5% this year, the sharpest year-to-year increase since 1978. (That year, by the way, was prelude to 1979-80 double-digit inflation, when prices at one point in 1980 were soaring at nearly 15% annually.)

Commodity futures prices for animal feed staples like corn and soybeans are riding high. Oil and gold blipped upward again last week after a hiatus that followed the end of the QE2 monetary stimulus. Overall, dollar inflation is approaching an uncomfortable 4% annually.

So what else is happening? The economy picked up a little steam in the third quarter, growing at an annual rate of 2.5% on the strength of higher consumer spending and business investment. But personal disposable income, inflation adjusted, dropped 1.7%, the first decline since the 2009 recession. The personal savings rate fell back to the recession level, a meager 4.1% of personal income. Why should anyone save, when money-market accounts yield only a skimpy half a percentage point?

What we have here looks like the early stages of stagflation. (more…)

When President Obama meets with his counterparts from other G-20 countries in Cannes later this week, American economic leadership will, unfortunately, largely be absent.

At the most recent meeting a year ago in Seoul, the G-20 rejected the president’s pleas for a deficit-increasing Keynesian stimulus and instead urged credible budget-deficit reduction and a return to sound fiscal policy. And on that trip he had to defend the activist monetary policy of the Federal Reserve against widespread criticism that its easy money was damaging to emerging-market countries, causing volatile capital flows and inflationary pressures.

With a weak recovery—retarded by new health-care legislation and financial regulations, an exploding debt, and threats of higher taxes—the U.S. is in no position to lead as it has in the past.

By contrast, in the years after World War II, the U.S. led the world in promoting economic growth through reliance on the market and the incentives it provides, the rule of law, limited government, and more predictable fiscal and monetary policy. It created a rules-based, open trading system by helping to found the General Agreement on Tariffs and Trade, which slashed tariffs multilaterally. The miraculous postwar European and Japanese recoveries came from greater adherence to these principles of economic freedom and direct support from the U.S. (more…)

One year ago, on Aug. 27, 2010, Federal Reserve Chairman Ben Bernanke explained the rationale for a second round of quantitative easing. “A first option for providing additional monetary accommodation is to expand the Federal Reserve’s holdings of longer-term securities,” he said, thereby supposedly “bringing down term premiums and lowering the costs of borrowing.”

Yet the bond market promptly reacted by raising long-term interest rates. The yield on 10-year Treasurys, which was 2.57% at the time of his Jackson Hole, Wyo., address, climbed to 3.68% by February 2011 and did not dip below 3% until late June when QE2 was coming to an end. The price of West Texas crude oil, which was $72.91 a year ago, remained above $100 from March to mid-June and did not come down until QE2 ended and the dollar stopped falling.

When Mr. Bernanke spoke, the price of a euro was less than $1.27. By the week ending June 10, 2011, 15 days before QE2 ended, the dollar was down about 15% (a euro cost $1.46). In that same week, The Economist commodity-price index was up 50.9% from a year earlier in dollars—but only 22.8% in euros. How could paying much more than Europe did for imported oil, industrial commodities, equipment and parts make U.S. industry more competitive?

The chart nearby subtracts the contribution of government purchases (such as hiring and construction) from real GDP growth to gauge the growth of the private economy. The generally negative contribution of government purchases (column two) does not mean government spending has slowed, as some contend. Instead it reflects the fact that federal and state spending has been increasingly dominated by transfer payments (such as Medicaid, food stamps and unemployment benefits) which do not contribute to GDP, and in some cases reduce GDP by discouraging work.

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As the economy continues to struggle, we are reminded of a course offered at Yale University titled “Grand Strategy.” Drawing on a weighty curriculum of history and philosophy, the course seeks to train future policy makers to tackle the complex challenges of statecraft in a comprehensive, systematic way. Clearly, U.S. economic policy is sorely lacking an effective grand strategy, and we are likely to endure high unemployment, weak economic performance and trying financial markets until such a strategy is articulated and pursued.

Policy makers should cease the barrage of ad hoc, short-term policy initiatives. Is increased federal spending across government agencies a grand strategy? How about checks in the mail to spur spending? Cash for clunkers to move auto inventories? Fast trains and faster Internet? Mortgage modification programs and fleeting tax credits to re-stoke home ownership?

Inducing consumers to do today what they would otherwise do tomorrow is hardly a grand strategy. Hundreds of billions in “stimulus” spending has stimulated little but more debt. Forty-eight months have passed since the onset of the financial crisis, 26 months since the recession technically ended. Yet job creation remains remarkably weak, and markets deeply uneasy.

We can’t go on like this.

The debt-limit debate caused policy makers to recognize what citizens already knew: We must put our fiscal house in order. Cutting spending is essential. But we will never cut our way to prosperity. (more…)