Special Report

Obama’s Failed and Tired Ideas From the Past

This president talks and acts as if Reagan and everything he did never happened.

By 2.11.09

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The entire U.S. GDP is roughly $14 trillion. The government currently spends roughly $3.5 trillion of that. In his stimulus plan, Obama proposes effectively to borrow another $1 trillion from the private economy to add to $1 trillion in still further government spending.

How exactly is that supposed to stimulate economic growth and recovery? Is America's economic growth and prosperity produced by increased government spending, deficits, and debt? I don't think so. The American people don't either.

But Barack Obama thinks it is so obvious it's funny. Speaking before a laughing House Democrat Caucus last week, he said, "So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is? [HaHa]. That's the whole point. [HaHa]. No, seriously. That's the whole point. [HaHaHa]."

As the Wall Street Journal said over the weekend:

So there it is: Mr. Obama is now endorsing a sort of reductionist Keynesianism that argues that any government spending is an economic stimulus. This is so manifestly false that we doubt Mr. Obama really believes it.

In fact, there is no net gain to the economy from this stimulus fraud, which is all the more obvious when you look at what Obama and his hopeless liberals spend the money on. There is funding for federal baby sitting programs, for needles for drug addicts, for federal birth control programs and condoms, for the National Endowment for the Arts, and for increased welfare. In fact, 30% of the stimulus spending is for increased welfare. Is this the foundation for future American prosperity?"

As the Journal further explained:

A dollar doled out in jobless benefits may well be spent by the worker who receives it. That $1 of spending will count as economic activity and add to GDP. But that same dollar can't be conjured out of thin air. The government has to take that dollar away from someone else -- either in higher taxes, or by issuing new debt in the form of a bond. The person who is taxed or buys the bond will have $1 less to spend. If the beneficiary of that $1 spends it on something less productive than the taxed American or the lender would have, then the net impact on growth will be negative.

Moreover, as I have emphasized in this column, what drives economic growth is incentives to save, invest, start or expand businesses, create jobs, take risks, and work. Incentives are increased through reductions in tax rates and unnecessary regulatory costs, which allows people to keep a higher percentage of what they produce. But for the government to borrow a trillion dollars from the private economy to increase government spending by a trillion dollars does nothing to increase such incentives.


Keynesian Economics

Keynesian economics was born in the 1930s, was always a failure in life, even though it was heavily favored because it justified expanded government power, and died at the end of the 1970s, when it was slayed by Ronald Reagan in self-defense.

Keynesian theory argued that the way to stimulate the economy was precisely to increase government spending and deficits, because this would increase total aggregate demand in the economy, stimulating producers to produce more to meet this demand. The discussion above shows why this theory is wrong. Keynesians failed to consider where the government would get the money for its increased spending, and the offsetting economic impact of that. Moreover, they failed to appreciate that it is economic incentives that drive the economy.

That is why it has always failed over and over. FDR embraced Keynesian economics as the cornerstone of his New Deal. As a result, federal spending soared during the 1930s to the equivalent of a trillion dollars a year today. Yet Census Bureau data shows that the unemployment rate for nonfarm sectors never fell below 20% during the decade. By the end of the 1930s, the U.S. economy was still 10% smaller than it was in 1929. The stock market did not return to its 1929 levels until 1954.

Amity Shlaes told this revealing story recently in the Washington Post:

One evening in the 1930s, a 13-year-old named William Troeller hanged himself from the transom of his bedroom in Greenpoint, Brooklyn. William's father was laid up in Kings County Hospital awaiting surgery for an injury he'd suffered on the job at Brooklyn Edison. A federal jobs program was paying William's older brother Harold for temporary work. But the amount wasn't nearly enough to make ends meet. Gas and electricity to the family's apartment had been shut off for half a year. Harold told a New York Times reporter that both hunger and modesty had driven William to act. 'He was reluctant about asking for food,' read the headline in the paper….The surprising part is that William Troeller killed himself not in 1930, when Herbert Hoover was president, but in 1937, in Franklin D. Roosevelt's second term. The New Deal was almost five years old, but the economy was not back. In fact, the country seemed farther from recovery than before.

By the end of the 1930s, even FDR's Treasury Secretary and close personal friend Henry Morgenthau told the House Ways and Means Committee, "We have tried spending money. We are spending more than we have ever spent before and it does not work.…I say, after eight years of this administration, we have just as much unemployment as when we started…and an enormous debt to boot."

For a more recent example, Japan suffered an economic crisis in 1991 very similar to what the U.S. is suffering now, with collapsing stock and housing bubbles. They turned to old-fashioned Keynesian economics, increasing government spending by the equivalent of $900 billion in the U.S. today. As a result, Japan fell backwards during the 1990s just as the U.S. fell backwards in the 1930s. Japan's per capita national income fell from 86% of the U.S. level in 1991 to 74% in 2000.

Obama has repeatedly told us in recent days that he will not return to the old, failed, tired ideas of the past to address America's economic problems. But that is exactly what he is doing in subjecting America to the outdated, failed theories of Keynesian economics from the 1930s. He even proposes now to bring back FDR's old Works Progress Administration (WPA), which spent the equivalent of hundreds of billions today building the infrastructure of the 1930s. As we saw above, it did not work to revive the economy.

Harvard economist Robert Barro recently wrote that we have learned a lot about macroeconomics since 1936, when the father of Keynesianism, British Economist John Maynard Keynes, wrote The General Theory of Employment, Interest, and Money. But none of it seems to have seeped through to Barack Obama. Joe DiMaggio was a rookie in 1936, and Babe Ruth had just retired.


Supply-Side Economics

By the end of the 1970s, Keynesian economics was killing the American economy, with double-digit interest rates, double-digit inflation, and soon double-digit unemployment. It was called stagflation -- stagnant economic growth along with roaring inflation. According to Keynesian theory, this result was impossible. You couldn't be both overspending to cause inflation and underspending to cause stagnation.

Reagan did the right thing for all concerned, and put Keynesian economics out of its misery. He adopted tight, anti-inflation monetary policies that worked spectacularly to reduce inflation to 3% by 1983. Then to get economic growth booming, he adopted sharp cuts in marginal tax rates, reducing the top marginal income tax rate from 70% first to 50%, then cutting it further all the way down to 28%, with just one more rate of 15% for middle income workers and below. He also adopted sharp cuts in corporate income tax rates and capital gains tax rates, as well as a thorough program of deregulation reducing business costs.

The Keynesian economists of the time all laughed, with one of the smartest making the celebrated comment that the Reagan economic plan was the equivalent of tying locomotives to both ends of the same train facing opposite directions and sending them both forward full throttle. Under Keynesian analysis, this is, indeed, what it was.

But besides the rapid elimination of serious inflation, the result was what economists Art Laffer and Steve Moore have recently explained was a 25-year economic boom, from 1982 to 2007, disrupted only by two short, shallow recessions. In their new book, The End of Prosperity, Laffer and Moore write,

"We call this period, 1982-2007, the twenty-five year boom -- the greatest period of wealth creation in the history of the planet. Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years."

Indeed, the result was a worldwide boom lifting many nations towards greater prosperity, aided by spreading global adoption of the same policies. These policies were called "supply-side" economics, because they focused on increasing supply instead of the Keynesian focus on increasing aggregate demand.


Obama's No-Growth Tax Cuts

Obama and his defenders keep saying his stimulus package includes a balance of tax cuts as well as increased government spending, alleging that "We can't rely on a losing formula that offers only tax cuts as the answer to all our problems." But Obama's tax cuts are Keynesian "garbage" as well, as Barro recently called them.

The centerpiece of Obama's tax cuts is, again, the $500 per worker tax credit. But that credit is the equivalent of just sending a welfare check of $500 to everyone, as far as economic stimulus is concerned. It is just another way of trying to increase overall spending, just like the Bush stimulus "tax" rebates adopted early in 2008, which also failed utterly to revive the economy. Neither those Bush rebates nor the Obama credits do anything to change the fundamental incentives that govern the economy, the incentives to save, invest, start or expand a business, take risks, etc. That requires supply-side tax cuts which reduce tax rates, as we have seen.

But for Obama, time stopped in 1979, and he talks and acts as if Reagan and everything he did never happened. While he says he is interested only in what works, not ideology, just the opposite is true. He won't consider the tax rate cuts that worked spectacularly for Reagan, and Kennedy, and Bush also, because of his unreconstructed liberal/left ideology. Instead he is embracing just what that ideology commands, a trillion dollar addition to spending, the deficit, and Big Government. Obama is developing a pattern of saying the opposite of what he is doing, which is another Saul Alinsky tactic.


The Gingrich Revolution

In sharp contrast to Obama and his ideological delusions, Newt Gingrich has recently offered an economic recovery plan that is based on modern economics and what would work. It includes a reduction in the federal corporate income tax rate from 35% to the 12.5% rate that over the past 20 years has lifted the standard of living in Ireland from the bottom of the EU to the top. It would eliminate the capital gains tax to match China, Singapore, and other international competitors, enticing capital investment from the world over to America. It would provide middle class tax relief by reducing the 25% income tax bracket to 15%, establishing a flat rate tax of 15% for close to 90% of American workers. He would also cut the payroll tax by 50% for 2 years.

Gingrich also proposes to control government spending to balance the budget, something he achieved when he was Speaker of the House. He would adopt a real, comprehensive energy program that would allow production of domestic U.S. oil and natural gas, as well as nuclear power, clean coal, ethanol, and renewable fuels. He would also protect the current federal right of workers to decide in a secret ballot election whether to join a union, replace the extremely costly, heavy-handed Sarbanes-Oxley regulation that has crippled entrepreneurial start-ups in America, and abolish the death tax, among other provisions.

If Congress were adopting these reforms this week instead of the retro Obama "stimulus" package, the American economy would be off on another historic boom before the end of the year. Maybe we need a new President already.


Party Like It's 1979

Obama's ideological nostalgia for the liberal salad days of pre-Reagan 1979 is going to take the entire U.S. economy back there. Over time, we will find that Obama's policies have led us back to persistently high unemployment, resurgent inflation, double digit interest rates, stagnating growth, even gas shortages and the high gas prices he supports as good for the environment. And that will also effectively be another pre-Reagan moment as well.

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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.