The Obama Watch

Failing Downward

Even by Keynesian standards Obamanomics is an embarrassing flop -- yet its only solution is more of the same.

By 7.25.12

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President Obama thinks he is so clever in continuing to try to trick us into believing his disgraceful record on the economy and jobs is really the fault of the Republicans in Congress. You see, 10 months ago in September, 2011, Obama proposed the American Jobs Act. But Congressional Republicans refused to pass most of it. So that means that the continued high unemployment and worst recovery from a recession since the Great Depression must all be their fault.

The Obama American Jobs Act was just a brain-dead half-brother of the original nearly $1 trillion Obama "stimulus." That so-called stimulus will go down in history as not stimulating anything except government spending, deficits and debt. Of course, that won't mean anything to the Keynesians of the future, who just as the Keynesians of today will be practicing not economics but public relations for neo-socialist politicians.

Infrastructure Addicts
After the first nearly $1 trillion "stimulus" didn't work, Obama's innovative idea was to do basically the same thing, but only half as large at about $500 billion. Part of this Stimulus II bill would go again to finance the building of so-called infrastructure. As former Obama OMB bureaucrat Jeffrey Liebman wrote in the Wall Street Journal of June 22:

[T]he crash of the housing markets continues to take a toll on construction workers. There are still two million fewer construction workers employed than when the recession started in 2007. Yet Congress has failed to act on the president's plan to put construction workers back on the job rebuilding our roads, bridges and airports.

But that is what Stimulus I was supposed to do, remember? If it didn't work then, why are we talking about coming back again now to do the same thing, only half as much? Because President Obama has no new ideas beyond what he learned in college freshman economics from liberal left "academics."

Construction industry experts have tried to tell the community organizer Democrats that housing construction workers are not actually trained or qualified to build roads, bridges and airports. But "progressive" Keynesians, like all "Progressives," already know everything about everything, and so are not interested in what construction industry "rednecks" have to say.

Real economists have also tried to explain to the Keynesian PR flacks that infrastructure building projects are not well suited to counter economic downturns because they suffer such long lead times to get up and running. That is why President Obama ended up joking in public that his supposed "shovel ready" construction projects financed by Stimulus I turned out to not be so "shovel ready" after all. Haha, America, the joke is on you.

The bipartisan 2012 Highway Bill finances over $100 billion in spending on infrastructure, primarily for the nation's roads and bridges, more than any other nation. Congressional Republicans overwhelmingly supported that rational and orderly spending. With our nation facing a historic fiscal crisis, asking us to commit to hundreds of billions in further infrastructure spending is a reckless abuse of authority we should have come to expect from Democrats.

Taxpayer Bailouts of State and Local Liberals
Another part of Obama's "son of stimulus" proposal amounts to a bailout of the most liberal, spendthrift state governments by taxpayers in more conservative states nationwide. Liebman helpfully explains on behalf of his former employers in the Obama Administration, "One of the largest drags on our economy has been the layoffs of public employees like teachers, firefighters and police officers due to state budget cuts." You see, it's all so simple. According to Obama's liberals, getting state spending under control is actually the root of the problem.

So Obama would reverse that by providing federal taxpayer funds to the states to hire hundreds of thousands of state bureaucrats. No, there have been no real layoffs of firefighters and police officers overall, let alone 450,000 as Liebman argues. But anyway, while hiring teachers, firefighters, and police officers may be a national government responsibility in Indonesia, it is a state and local government function in America. Until Obamanomics, where teachers, firefighters, and police officers serve as props for a federal taxpayer bailout of spendthrift states like California and Illinois.

But such federal funding for states was a central component of Stimulus I. If it didn't work then, why are we talking about coming back again to do the same thing now, only half as much? Because President Obama's community organizer economics is out of ideas on how to spark renewed economic growth and prosperity.

Obama's Temporary Tax Cut
A final component of Obama's Jobs Plan is to extend his 2% cut in the Social Security payroll tax for another year. But such temporary tax reductions do not stimulate jobs and economic growth, as permanent cuts and incentives are necessary for permanent jobs and growth. That was proved yet again last year when this same tax cut was already in force for a year, and failed to do anything noticeable to produce economic recovery and jobs.

Nevertheless, congressional Republicans joined in extending the payroll tax cut anyway, because they did not want to be accused of increasing taxes on the middle class by letting the "temporary" Social Security tax cut expire. This shows that Social Security financing is endangered now, as any expiration of the "temporary" tax cut will be assailed as a tax increase on the middle class. Yet we hear not a peep from AARP, supposedly a watchdog for seniors, but in reality a kept lapdog pet for the Democratic National Committee, as we learned during the Obamacare debate in 2010. Just take this message to your friends and family -- friends don't let friends join the highly partisan AARP. There are better, alternative, conservative organizations for seniors today than this dishonest, rip-off organization.

But, notice, this temporary tax cut has failed yet again this year to help stimulate jobs and economic recovery. That reflects Obama's completely inadequate, community organizer understanding of tax policy. What makes the economy boom is not just any tax cut, but permanent cuts in tax rates. That is because it is the rates that determine what percentage producers can keep out of what they produce, and therefore determine the incentives for productive activities, such as savings, investment, expanding businesses, starting businesses, job creation, and work.

President Kennedy understood it. Kennedy proposed legislation to reduce income tax rates across the board by 30%, similar to the Kemp-Roth tax cuts that President Reagan embraced and that worked so spectacularly. Kennedy explained:

It is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates….[A]n economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.

Kennedy's proposed tax rate cuts were adopted in 1964. The next year, economic growth soared by 50%, and income tax revenues increased by 41%! By 1966, unemployment had fallen to its lowest peacetime level in almost 40 years. U.S. News and World Report exclaimed, "The unusual budget spectacle of sharply rising revenues following the biggest tax cut in history is beginning to astonish even those who pushed hardest for tax cuts in the first place." Arthur Okun, the administration's chief economic advisor, estimated that the tax cuts expanded the economy in just two years by 10% above where it would have been.

But today's Obama/Che Guevara Democrats don't understand any of this. That is why even though Obama tries to brag that he has cut taxes for small businesses 18 times, none of it has worked. As Investor's Business Daily explained on July 13:

[I]f you look at Obama's list, you quickly realize that all but four have either expired or will soon expire, aren't cuts at all, or are double counted. And the rest are pretty much worthless…. One of these makes it easier to deduct cellphone costs and another limits penalties for errors in tax reporting. But these two changes will cut small business taxes a grand total of just $567 million over the next decade.

IBD adds:

And then there's the small-business health insurance tax credit. The Obama administration promised that this credit [would help] 2 million to 4 million small companies get money back for providing health insurance benefits to their employees. But a Government Accountability Office report found that just over 170,000 companies actually claimed the credit. The reason: You had to wade through a thicket of rules to see if you were eligible for what turned out to be, in the GAO's words, an "insubstantial" amount of money. 

IBD concluded:

This is the problem with Obama's entire approach to tax cuts, and why none of them has made a noticeable difference. They are either too narrowly targeted or too complicated, require businesses to jump through hoops to qualify, or are too temporary to have any long-term incentive effect. "These are rifle-shot provisions that don't have the same benefit as permanently lowering individual income tax rates…," said Chris Witcomb, tax counsel to the National Federation of Independent Business.

This is the same problem with the further tax cuts Liebman touts in Obama's proposed Jobs Plan, tax cuts "for small businesses that add jobs or increase wages." Those are tax credits, not rate cuts, for taking actions the government commands. The same idea was tried and failed in the 1970s, like every economic policy Obama embraces.

Tooth Fairy Economics
Liebman reflects the fallacies, actually the more accurate word after long experience now is stupidities, underlying Obamanomics, saying: "There is a strong consensus about what the immediate challenges facing our economy are: first and foremost, a continued lack of demand as a lingering result of the recession….And we have a good idea of what tools work best to address these problems." Those tools are increased government spending, deficits, and debt which supposedly provide the missing demand.

But economic recovery and growth are not based on increased government spending, deficits and debt, a fallacy that Wall Street Journal senior economics writer Steve Moore has rightly labeled "tooth fairy" economics. That is because the money for such spending needs to come from somewhere, and so drains the private sector to the extent of such increased government spending, leaving no net effect at best.

What drives economic recovery and growth are incentives for increased production, as Reaganomics proved. Obama's assault on such incentives by raising virtually all federal tax rates this January 1 is why trillions are sitting on corporate and bank balance sheets, and America is suffering a capital strike and capital flight. If demand was inadequate, prices would simply fall to clear the market. The result would not be the perpetual stagnation and depression we have seen under Obamanomics.

U.S. News and World Report chairman Mort Zuckerman explained that ongoing stagnation and depression in yesterday's Wall Street Journal, writing:

The official unemployment rate is 8.2%. But if you add to that the number of discouraged workers who have dropped out of the labor market since the recession began in early 2008 -- approximating eight million -- the rate would be an alarming 12%. Fifty percent of the jobs created since the recession hit have been part time, with no benefits and a wage that's inadequate to enter the middle class. If you add the number of part-time workers into the mix, the unemployment rate climbs to 14.9%. Fewer Americans are working today than in the year 2000, despite the fact that our population has grown by 31 million, and our labor force by 11.4 million.

Zuckerman adds:

Job seekers are only one-third as likely to find a job as before Mr. Obama was elected. Today, a record number of Americans have been out of work for more than six months, and a record number of households have at least one member looking for a job… some employers are shortening the work week or asking employees to take unpaid leave, which doesn't show up in official unemployment numbers.

But Obamanomics is not even good Keynesian economics. Liebman explains, "The president has also put forward a budget that would reduce the deficit by more than $4 trillion over the next decade and stabilize our debt-to-GDP ratio. But he would achieve that deficit reduction while continuing to invest in education, infrastructure and innovation."

In other words, the President proposes to increase federal tax rates to finance increased federal spending, which is the worst combination of economic policies possible to promote economic recovery and growth. Even under Keynesian economics, increasing tax rates and reducing spending and the deficit reduces demand, and so means continued stagnation and depression.

The voters understand all this. That is why they delivered a shellacking (Obama's word) to the Democrat party, with a New Deal size defeat for Democrats nationwide in 2010. The voters are not buying the snake oil that Obama and Liebman are selling. They don't believe that increased government spending, deficits, and debt promote economic recovery, growth, and prosperity. That is why they delivered a 63 seat swing toward the Republicans in the House in 2010, giving them a strong majority precisely to stop such policies as reflected in the so-called American Jobs Act. Republicans are to be commended for sticking by their campaign promises, and refusing to go along with more Obamanomics stupidity.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.