It’s time for Obama to stop declaring new recovery plans

September 7, 2010

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.


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its time for obama to either resign or be replaced…

Posted by blackghost | Report as abusive

All I see here is Volatility. No concrete direction. And this can go to any extreme level on Equity and other markets.

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Amaresh Gangal

Posted by Amaresh_Gangal | Report as abusive

Pfffft. Take your rational, level-headed, and lucid editorializing and go somewhere else. Doing nothing isn’t the American way, even if it is the right way.

No politician is going to be the next one to do nothing irregardless of how correct that course of action may be because we Americans are interested in electing charismatic men of action, not men of inaction. We want decisiveness. We want iron resolve and a fearless certainty that the ground ahead will bear our weight, no matter how fat we become. “Wait and see” is for pansies too afraid to step forward and seize the world by its skinny little throat. Inaction smells too much like failure, and we just can’t have that, no sir.

Posted by rdavi | Report as abusive

[…] Obama’s constant announcing of new plans is, itself, an impediment to growth, Gregg Easterbrook writes. “When leaders act perpetually panicked, voters and business […]

Posted by Viral Stash Financial News » Maybe Obama’s constant announcing of new plans is, itself, an impediment to growth, Gregg Easterbrook writes. “When leaders act perpetually panicked, voters and business managers become nervous,” and th | Report as abusive

[…] Obama’s constant announcing of new plans is, itself, an impediment to growth, Gregg Easterbrook writes. “When leaders act perpetually panicked, voters and business […]

Posted by Viral Stash Financial News » Maybe Obama’s constant announcing of new plans is, itself, an impediment to growth, Gregg Easterbrook writes. “When leaders act perpetually panicked, voters and business managers become nervous,” and th | Report as abusive

While I agree with the article as a whole, my only point of disagreement is with the $50 billion in infrastructure spending. Doesn’t infrastructure spending make the American future more valuable? While I agree that debt spending is not good, spending in infrastructure typically provides economic returns. I mean, how much did the interstate highway system cost and how economically successful has it been?

Posted by Craigeria | Report as abusive

The reason you haven’t seen the true benefits of Obama’s recovery plan is due to Republican obstructionism. Congress doesn’t legislate. They bicker and argue and negotiate. They end up with watered down bills.

Tax cuts and tax loopholes may be rhetoric to some, but I can see the benefits. If small businesses are concerned about additional cost due to healthcare and the expiration of the Bush Tax Cut, then this would alleviate any additional cost they will incur.

Posted by joy6625 | Report as abusive

This is a great piece, and sums up the contemporary Western politician’s mindset exactly: “I can’t solve the problem, so find me one I can – and we’ll do that”.

Keynes was clear on two things with QE (although he didn’t call it that): it isn’t a tickling contest, and only do it if the public finances are in good order. In short, big bang without bankruptcy.

The Government doesn’t have these conditions…because action has been left far too late. It COULD still do it by passing draconian legislation to force private sector cash hoarders and banking firms to cough up towards serious stimulation. But (a) Obama lacks the cojones for that and (b) after November he’ll lack the Congressional votes.

So batten down the hatches, stick to giving what relief you can afford – and wait for the storm to pass. kingnew-evidence-blows-stress-test.html

Posted by nbywardslog | Report as abusive

You have it right that running up more debt only depreciates the future. Gold is bid up on the hope of being able to escape the future loss. Gold was once money to prevent the goverment from counterfeiting the currency. The stimulus only goes to bid up stocks, corporations for buy-out, real estate, but it is just the same old stuff at a higher price that makes everybody feel better-off. The good times are all illusion, nothing new was actually built. You have to build an economy, financial games don’t do that.

Posted by dyllman | Report as abusive

Obama’s Ohio push aims to jumpstart the ailing US economy – CNN…

We cover the same subject but your aproach is intersting….

Posted by All Around The World News | Report as abusive

You’re right on the mark this time, Gregg.
Excellent article.
If previous government plans worked, there would be no need for more of them, and the Democrats would not be facing a debacle in November.

Posted by yr2009 | Report as abusive

Good article! It’s seems this government hasn’t learned anything from history. Excess government spending and “targeted” stimulus programs haven’t ever been successful at stimulating growth or consumer confidence. Some economist argue that that they actually slow growth and lengthen recovery time; and they keep proposing the same types of programs over and over! Not even learning for there own and/or the mistakes of the past……. We may need a new captain at the helm……

Posted by jb914 | Report as abusive

Hoover tried doing nothing, and he’s remembered as one of the worst presidents in history.

Posted by drewbie | Report as abusive

@nbywardslog QE (assuming this stands for quantitative easing) involves the fed buying a wider range of debt instruments when the yield on tbills is close to zero. It has nothing to do with fiscal policy.

Posted by iPlunder | Report as abusive

[…] Time for Obama to Stop Declaring New Recovery Plans”–headline,, […]

Posted by Headlines | Report as abusive

American’s are the best in the world at solving problems. The United States Government needs to downsize by about 50%, reduce taxes and let the entrepreneurs get to work.

Posted by isagenix | Report as abusive

Great article that gets to the heart of the problem. We have had enough of programs designed to reward the elite and the special interest groups at the expense of the middle class and small businesses.

Posted by isogenics | Report as abusive

I think it’s hard for Obama to just get a quick result in just 2 years, he needs more time, and all these plans need time to see the results. I truly believe in his heart, he’s trying to get US better. Just that we as citizens should always keep an eyes on him.

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Posted by Property Solicitors | Report as abusive

[…] money, and continuing to Obama, who has backed three “stimulus” giveaways despite clear evidence that this doesn’t work. At the current pace, the national debt will hit $23 trillion in 10 years,  meaning the country […]

Posted by Facing down the debt | Gregg Easterbrook | Report as abusive

[…] that America today needs tax-reduction, & deregulation and deficit-spending “stimulus” is like prescribing an emergency weight-loss diet to cure an anorexic.  America needs a […]

Posted by Reaganomics and Prudent Taxation | Matthew Slyman | Report as abusive

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