According to press reports, Barack Obama will start his term of office tomorrow by calling for a “New Era of Responsibility” and a spirit of sacrifice in the face of parlous economic times. He will then proceed straight to lobbying for nearly a trillion dollars in appropriations, to be deployed to protect lenders from losing money, workers from taking pay cuts, businesses from refashioning their product lines, and the country as a whole from having to adapt to recession and overcome it through energy and enterprise.
The last time that a President actually called on Americans to endure hard times and rely on themselves was when Ronald Reagan urged us to “stay the course” before the 1982 elections. Barack Obama, who later wrote sneeringly of the 40th President’s “dirty deeds”, was one of those who vituperated against “Reaganomics”. The voters agreed with him; they handed the Democrats gains in both Houses of Congress – but not large enough gains to steer a course back to the Carter era, and not long afterward a decade-long boom began.
President Reagan was confident that temporary pain, brought on by the monetary tightening needed to overcome years of “stagflation”, would lead to long-term prosperity. President Obama’s plan is pretty much the contrary: to hand out money left, right and center without worrying about the impact on inflation or the credit markets. An odd way for an Age of Responsibility to start off.
I’d be less apprehensive if there were any cases on record where this strategy has worked. None comes to mind. Surely the proponents would be trumpeting precedents, had they any to trumpet. The plan is somewhat like the Japanese government’s response to that country’s housing bust in the 1990’s. Trillions of yen were expended on public works projects while banks and businesses were protected from failure. Success was not rousing. In fact, economists have ever since been citing Japan’s policies as cautionary tales.
If government spending and budget deficits do indeed stimulate the economy, one would think that a lot of stimulus has already been enacted. Without the Obama proposal, the Congressional Budget Office projects a $1.2 billion deficit next year, eight percent of Gross Domestic Product. This will be the first time since the 1930’s, I believe, that the federal deficit has exceeded spending on national defense. The new budgetary gap clearly stems from the Democratic Congress’s acceleration of domestic spending (hardly kept in check by the last couple of Republican Congresses, one should note), not from the costs of war.
So we are already set to get a huge dose of stimulus, yet the incoming President has decided – on what basis we know not – that it must be nearly doubled, to a level approaching a banana republic, in order to fund a hastily assembled grab bag of roads, bridges, museums, loss-making “green” industries, health care subsidies, refundable tax credits (a/k/a welfare checks) and so forth.
Perhaps this spree would do little harm if a trillion dollars in capital were hidden under mattresses and was now being put to some, even if not necessarily the best, use. But a mass of uneconomical expenditures won’t do much good either. If one believes that the world economy suffers from a gigantic liquidity trap, the optimum response would be not to throw cash into the air but to deal with the root causes of capital holders’ unwillingness to invest. Could those causes include the prospect of higher tax rates in the relatively near future, accompanied by a proliferation of expensive federal rules and regulations? Tax hikes in 2011 are “built in” unless Congress and the President affirmatively act to stop them. Meanwhile, our legislators are rushing to make lawsuits against businesses easier to bring and win, to micromanage more aspects of labor-management relations and to spare unions the need to convince workers that their “services” are worth having. Is this an environment that encourages risk-taking and entrepreneurship? Will a massive wave of government borrowing to subsidize inter alia successful entrepreneurs’ failing competitors improve the picture?
We have seen a financial panic, which now seems to be calming down without a great deal of intelligent government action. The Obama Stimulus smacks of political panic. The downturn may indeed be the “worst since the Great Depression”, as the media keep telling us, but that is rather like saying that Rockford is the largest city in Illinois except for Chicago. In the Great Depression, stock prices fell by over 80 percent, economic output declined by 30 percent, and unemployment reached 25 percent (not dropping below 17 percent until World War II). The present bear market has undergone less than a 50 percent drop (comparable to, say, the early 1970’s). The Congressional Budget Office forecasts a GDP decline of two to three percent this year, with unemployment peaking at nine to ten percent. Those numbers aren’t delightful. Neither do they justify fiscal policy an order of magnitude more aggressive than has ever been tried before.
So I am apprehensive about the Age of Obama. Conceivably, a gambit that has never been very successful in the past will prove a splendid success this time. More likely, we are headed toward, at best, a Carter-like escalation of Misery Index.
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