It’s time for Obama to stop declaring new recovery plans
Pundits are restless, an election looms – so this week, President Barack Obama is proposing yet another round of special favors, aimed at improving the economy. Prominent columnist Paul Krugman wants the plans to be “bold” and to involve huge amounts of money. Here’s a contrasting view: government should stop declaring recovery plans, bold or otherwise.
Maybe the constant announcing of new plans – especially plans backed by borrowing or tax cuts – is, itself, an impediment to economic growth.
Two years ago this month saw the beginning of the financial-sector meltdown that is the primary feature of the current high-unemployment, slow-growth mess. Since then, Republican and Democratic presidents and Treasury Secretaries alike have announced bold plan after bold plan after bold plan. Often the plans change week-to-week. Many of the plans are just political talking points, with no follow-through. Many are mutually contradictory, like advocating tax cuts and tax increases simultaneously.
Here’s what the endless succession of plans has in common – they haven’t worked. If something hasn’t worked, why does this cause us to think more of the same is required? The White House, Treasury Department and Congress should stop contemplating new plans.
Endless emphasis at high political levels on the need to “do something,” if only to appease the press, communicates the message that U.S. leadership is either panicky or has no idea what’s going on or both. When leaders act perpetually panicked, voters and business managers become nervous. Voters want new leaders and business managers put off decisions until they have a better idea what may happen next. The result, for the economy, is slower growth than the mainly good world situation — no resource shortages, low international tensions, rising education levels, liberalizing trade – would seem to suggest.
Maybe plan after plan after plan is a cause of the sluggish U.S. economy.
Maybe presidents George W. Bush and Obama, and Treasury Secretaries Henry Paulson and Tim Geithner, by constantly vacillating in public about their plans, are creating the impression government privately knows things are worse than they seem. This, in turn, slows economic growth –- why invest or hire if government privately knows things are worse than they seem?
My guess is things are better than they seem: but regular announcements of new special giveaways creates the opposite impression. So President Obama and both parties, stop announcing new plans! Leave the situation alone and let a sense of normalcy resume.
Dramatic government plans were a leading cause of economic contraction in September 2008. As detailed by University of Chicago economists John Cochrane and Luigi Zingales, the Lehman Brothers bankruptcy that month did not deflate markets. The Wall Street plummet and credit-markets malfunction began two weeks later, when Paulson nervously announced a mega-bailout — then began months of leaking mutually contradictory plans, many composed, Cochrane and Zingales point out, during preposterous middle-of-the-night conference calls. The plans were bold! But I don’t think clearly at 2 A.M., and neither did Paulson. The fact that there was a new plan with every phase of the moon diminished confidence, which is essential to a vibrant economy.
Obama’s infrastructure spending plan is obviously an election-year handout to interest groups. The president proposes an addition $50 billion per year in federal spending for roads, bridges and subways. This kind of spending should be justified on the merits: if road repairs are needed, then spend regardless of political considerations. To propose new spending just to quiet critics or reward voting blocs creates an impression that the White House is lurching from day to day without a larger vision. In that kind of environment, why invest or hire?
To justify more handouts, the president is talking down the economy. New initiatives are needed, Obama said last week, “to break the back of this recession.” The recession ended nine months ago, when growth resumed. Growth isn’t as strong as anyone would like, and unemployment remains the number-one domestic issue. But Obama, other Washington political leaders and pundits constantly use the word “recession” to describe a situation that is not a recession. This scares voters and business managers into believing things are worse than they are. But – scare tactics are historically a way to rationalize special-interest giveaways.
New infrastructure spending will make the deficit worse. In the category of it-would-be-funny-if-it-wasn’t-true, President Barack Obama says the new spending will not increase borrowing because it will be paid for by closing corporate tax loopholes. Yet he gives no specifics. Demanding more spending now while vowing discipline later is a roasted chestnut of Washington doubletalk.
In his January State of the Union address, Obama said he would make dramatic spending cuts that would begin around now. Instead, now he proposes more spending – while vowing dramatic cuts in future.
And closing corporate loopholes — yours truly is all for that. Politicians love to say they will close loopholes. When has it happened? In June, the White House backed off from a House of Representatives move to close the “carried interest” loophole exploited by some private-equity and venture-capital funds, a loophole that is strictly a cookie jar for wealthy campaign donors. The administration was too timid to close this loophole – even the Wall Street Journal calls carried interest a “loophole” — though doing so would raise about $2 billion per year. But we’ll make an unspecified $50 billion a year cut in loopholes in the future!
Immediately after saying he will crack down on corporate taxes, Obama also proposes corporate tax cuts. Is this public policy or a Saturday Night Live sketch? Tomorrow, the president is expected to propose $200 billion in tax giveaways to business. This will make the national debt worse. Will it help the economy? Corporate profitability isn’t a problem! Corporate profits and cash positions are quite good. What’s needed is rising demand, which this giveaway does not address.
Nearly three decades ago, your columnist showed in detail that corporate taxes are at most a secondary factor in business decision-making – demand, innovation and expectations for the future are far more important. Giving business yet another tax handout – the fourth or fifth in the last decade alone – could actively backfire if the debt incurred reduces economic confidence.
Don’t we need a bold plan for the housing sector? Many Americans have serious problems making their mortgages payments – but many also talked their way into homes using liar-loans or no-down-payment deals that were essentially renting with an option to buy. More important, the real estate market has always fluctuated, and this has never been a cause of panic or debt-based bailouts before.
Even with the 2008-2009 decline, according to the Case Shiller Index, the typical American home today is worth 40 percent more than a decade ago. This is a national emergency?
And don’t tell me the emergency is the “underwater” problem of people owing more than their home are worth. If you need to sell your house right now, being underwater is terrible. If you don’t need or don’t want to sell your house, being underwater is irrelevant! Unless you’re selling, appraised value is just a number. If you plan to stay in your home, your situation vis-à-vis your monthly payment is exactly what it would be regardless whether you’re underwater or on the surface.
Yet at a time when Federal Reserve policy is lending unprecedented support to today’s homeowners – at the expense of tomorrow’s – there is pressure on Obama to announce yet another round of mortgage-subsidy “bold” plans. Right now nobody’s buying because buyers want to wait and see if there will be another handout, like the $8,000 bonus that just expired. The real estate market will not return to normal until the “bold” plans stop.
Doesn’t a second stimulus sound good? Free candy always sounds good – till it’s time to visit the dentist. Any additional debt-based initiatives would be a third stimulus – Congress dispensed $200 billion in stimulus funds in 2008, then $800 billion in 2009. Backers of more debt-based spending, such as economist Laura Tyson, are saying what they want is a “second stimulus” because this sounds less nutty than asking for a “third stimulus.” If a nation could borrow its way out of economic languor, then all nations would envy Greece.
Both parties are demanding more of policies they claim don’t work. Republicans say the 2003 tax cuts for the rich must not expire, because they are needed for economic growth. But those tax cuts have been in place for seven years and economic growth has slowed. If something doesn’t work, why is more of it the solution?
Democrats say more debt-based stimulus spending is needed for economic growth. But $1 trillion in formally designated stimulus funds have already been spent and economic growth remains slow. If something doesn’t work, why is more of it the solution?
Core problem – we are making the American future less valuable. Left-wing plans to incur more debt and spend, and right-wing plans to keep taxes very low, share this in common – both borrow from the future. When you borrow from the future, you make the future less valuable.
This is a core reason constant Washington “bold” economic plans don’t inspire the economy – the plans deplete the country’s future. If you believe the future will be worth less than the present then why hire, why build, why feel optimism? Investment spending can make a future more valuable. But neither party proposes merits-based investing – both just propose panicky new handouts to their constituencies and donors. Do these possible additional plans make you feel confidence — or dismay?
The best and smartest action Washington could take about the economy would be to stop declaring new plans. There are plenty of programs in place. Letting the situation stabilize is what the economy most needs – and a surer path to job growth.