The Public Policy

Obama Is Delaying the Economic Recovery

Or to be more precise, he's preventing economic recovery -- and thus dooming his political future.

By 7.22.09

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Unemployment continued to rise in June to 9.5%, with the loss of almost another half million jobs in the month (467,000). Stretches of the country can be considered in a depression, with the unemployment rate for Michigan at 15.2%, California 11.6%, Nevada 12.0%, Oregon 12.2%, Ohio 11.1%, North Carolina 11.0%, South Carolina 12.1%, Kentucky 10.9%, Tennessee 10.8%, and Indiana 10.7%. Over 100 urban areas now have unemployment rates over 10%.

Adult male unemployment nationwide is already in double digits at 10%. Black unemployment is 14.7%, with Hispanics at 12.2%. Teenage unemployment is 24%, with black teenage unemployment close to 40%.

In a shocking article in the Wall Street Journal on July 14, Mortimer Zuckerman, chairman of U.S. News and World Report, explained why the economy is even worse than these numbers indicate. At least another 1.4 million people have already given up looking for work and so are not counted in the official unemployment rate. Another 9 million workers have taken part time unemployment because they cannot find full employment, yet they are not counted in the unemployment rate because they have some employment. Zuckerman reports:

The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago.

Zuckerman suggests that adding those whose hours have been cut to those who cannot find a full time job would leave the real unemployment rate at 16.5%. He adds:

The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.

Because of all this burgeoning unemployment and underemployment, incomes across the board are now declining.

Why Obama Failed

Don't believe the Obama Administration rhetoric about how this economy has just turned out to be so difficult and they are doing the best they can. While the economy is still getting worse, the truth is the recovery is long overdue. The National Bureau of Economic Research dates this recession as starting some time during December, 2007. The longest recession since World War II was 16 months, with the average being 10 months. The current recession has now lasted 19 months. By this reckoning, we should have had a normal cyclical recovery at least 3 months ago.

When President Obama was hawking his stimulus package costing the American people close to $1 trillion with interest, he told us that it would prevent the unemployment rate from rising above 8%. If we didn't pass it, he said, unemployment would go to 9%. He and his Administration savants also promised that the stimulus package would go to work reviving the economy immediately. As Fred Barnes wrote in the Wall Street Journal on Monday,

Once the stimulus passed, Democrats said the impact would be practically instant. House Majority Leader Steny Hoyer (D-Md.) predicted "an immediate jolt." Economic adviser Larry Summers said, "You'll see the effects almost immediately." White House Budget Director Peter Orszag said it would "take only weeks or months" to be felt.

Obviously, President Obama and his economic gurus didn't know what they were talking about. Not only is unemployment today at 9.5%, but even the Obama Administration is now saying it will go over 10%. President Obama is now changing his story, saying the stimulus was never supposed to work this fast, and it is really a two-year program. But if the economic was in such tragic shape when he came into office, why didn't he develop an economic program that would work faster?

President Obama also told us when seeking approval for his stimulus that it would create or save 3 to 4 million jobs. But America has already lost 7.2 million jobs from this recession, so President Obama spent close to a trillion taxpayer dollars on his stimulus to do half the job, even if it worked as planned. Since January when President Obama entered office, America has lost over 2.6 million jobs. So the stimulus as yet is not working as planned.

Indeed, it was obvious from the beginning that the stimulus as designed was going to create or save exactly zero jobs, because it was based entirely on old-fashioned, throwback, Keynesian economics, proven not to work over and over. The stimulus package involves just borrowing a trillion dollars from the private economy to increase government spending in the economy by a trillion dollars. That involves no net increase for the economy in any event. In fact, it involves a net loss at best, because the private sector spends the money more productively and efficiently than the government.

Moreover, this Keynesian borrowing and spending does nothing to change the basic incentives that govern the economy. Indeed, nothing anywhere in Obama's entire economic package increases incentives for economic growth, or for investment in particular.

Reducing tax rates provides such incentives because it allows producers to keep a higher percentage of what they produce. If a tax rate is reduced from 50% to 25%, what the taxpayer keeps out of his own production rises by one third from 50% to 75%. That provides increased incentives for investment, starting new businesses, expanding businesses, creating jobs, entrepreneurship, and work. This is what Reagan did in comprehensive fashion, producing a 25-year economic boom. But President Obama won't even consider such policies because they run counter to his ideological left-wing extremism.

Even President Obama's tax cut for 95% of Americans is not pro-growth. That turned out to be just a pitiful $400 per worker tax credit, less than $8 per week, which is economically the same as sending each worker a $400 check. That involves no change in the future incentives to invest or produce for anyone. And borrowing $400 from someone else to give you $400 again does not add anything to the economy on net. Moreover, even this sop is eliminated after next year.

You Ain't Seen Nothing Yet

But the disastrous policy failures of Obamanomics are just beginning. President Obama is now campaigning daily for a government takeover of health care involving comprehensive government health care rationing, where the government will tell Americans what health care they can have and when, and ultimately deny them health care to reduce costs. This is all fully explained in a recent report from President Obama's own Council of Economic Advisors, which Obama has touted as showing how he would reduce health costs.

But because government spending overall under that health takeover will go up, not down as President Obama is promising, the health care takeover bill in the House, fully endorsed by Obama, now specifies exactly what tax increases will be necessary to finance this increased spending. These include:

• An income tax increase on workers who do not purchase the government required health insurance equal to 2.5% of adjusted gross income or the average individual premium amount for such insurance for the year, whichever is less.

• A new payroll tax on employers who do not provide health insurance equal to 8% of payroll.

• A new excise tax on private health insurance plans.

• A new income tax surcharge on small business and others that would raise total income taxes paid to start by 1% in 2011, rising to 2% in 2013, on families earning from $350,000 to $500,000, 1.5% in 2011, rising to 3% in 2013, on families earning from $500,000 to $1,000,000, and 5.4% in 2011 on families earning over $1,000,000. These income tax surcharges would start for singles earning $280,000.

These tax increases are all on top of the tax increases in the Obama budget that will go into effect in 2011. All of these Obama income tax increase proposals together would raise the top marginal federal tax rate to almost 48% from 35% today. Counting state income taxes, the average top income tax rate in America would climb to about 52%.

Such tax rates would be almost the highest in the world, higher than in socialist Europe, formerly socialist India, and Communist China. Only three countries, Denmark, Sweden, and Belgium, out of the 30 Western countries measured by the OECD, would suffer under higher top marginal tax rates. If you are a blue-collar worker with a job in manufacturing, say goodbye to it as it moves to South Korea, where the total top marginal tax rate is 38.5%. The U.S. rate would be over 35% higher, completely uncompetitive. The U.S. rate would also be higher than France, Germany, Canada, and Poland, among 23 others in the OECD.

Indeed, in five states politically dominated by liberal Democrats -- California, New York, New Jersey, Hawaii, and Oregon -- the total top tax rate would be higher than in socialist Sweden. The nonpartisan Tax Foundation reports that 10 states would suffer total top tax rates above 54%, which is higher than in socialist Belgium at 53.7%. The Tax Foundation reports 39 states would suffer total top income tax rates over 50%.

Moreover, the economically sensitive federal capital gains tax rate would be almost doubled from 15% today to 26.5%. The tax on corporate dividends would be more than tripled from 15% today to 46%.

When these tax rate increases become effective in 2011, America will be left completely uncompetitive in the world economy. These tax increases will translate into still higher unemployment, fewer jobs, lower wages, and still slower economic growth. The new employer mandate payroll tax is a heavy new burden sharply raising employment costs for small business, which will result in still higher unemployment.

The top 1% of income earners already pay 39% of all federal income taxes. The top 5% pay 61% and the top 10% pay 73%. President Obama's tax piracy policies on top of this will cause capital flight from the U.S., as both domestic and foreign capital seeks more friendly tax jurisdictions in emerging markets in India, Brazil, China, South Korea, and even in Eastern Europe where favorable flat tax policies now proliferate. Yes, even the Communist Chinese feature more pro-growth economic policies than Barack Obama. As discussed above, even most of Western Europe will have more competitive tax policies. There is no rule of reality that says America has to have the highest standard of living in the world. Under this tax piracy, it soon will not.

But even this is not the whole disastrous economic policy picture. President Obama is also campaigning for the new cap and trade tax that has already passed the House, designed to increase the cost of energy so much that the use of fossil fuels will eventually decline by 83%. The resulting unreliable supply of high cost energy will be another enormous competitive disadvantage for America that will only further sink the economy.

A Cyclical Recovery

In the shorter term, over the next year, the American economy will start growing again. Indeed, the index of leading economic indicators is already flashing restored growth. But this will only be the result of the normal cycles of the American economy, as that recovery is already long overdue, and Obama's economic policies do nothing to restore growth, as explained above. The steepness of the declines we have suffered will naturally promote faster growth, as will the future mega tax increases promised by Obamanomics, as everyone scrambles to earn today what will be taxed into oblivion tomorrow.

But that growth will not be nearly strong enough to bring down unemployment rapidly, which will persist well into next year at over 10%. Instead, as that growth collides with Obama's trillion dollar deficits, interest rates will rise sharply. The Fed is now promising that it will reverse its very loose monetary policy in time to short circuit inflation. But doing so would further contribute to sharply rising interest rates, and threaten to abort the recovery, and the Fed will blink at doing that.

By 2012, Obamanomics will have re-created the 1980 misery index, with high unemployment, high inflation, and high interest rates. Let me be the first to predict that President Obama will not even be running for re-election then.

Vice President Joe Biden recently said the Obama Administration might consider a second stimulus package. But what we need instead is a fundamental change in economic policy, especially since we have already passed a second stimulus package. In early 2008, then President Bush caved in to the Democrat Congressional majorities to pass the first Keynesian stimulus package. This stimulus, fully supported by then Sen. Obama, was so ineffective, just as Obama's stimulus this year has been, that it has been totally forgotten. But it is important to remember that this longest recession since World War II has been countered from the beginning with throwback, brain dead, Keynesian policies, rather than supply-side economics.

Former Speaker of the House Newt Gingrich has been vigorously advocating precisely such comprehensive economic policy change through his grassroots organization American Solutions. Even the conservative media has not given these efforts enough attention. Perhaps Newt will be the one running in 2012.

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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.