James Pethokoukis

Politics and policy from inside Washington

Can Obama spend US back into prosperity?

Sep 22, 2009 18:07 UTC

Presidents, particularly Democrats it seems, love to try and attach catchy titles to their agendas. FDR’s New Deal and JFK’s New Frontier made for powerful branding. Bill Clinton’s New Covenant, not so much.

Barack Obama seems to be going with “New Foundation,” the title of a big-think economy speech from last spring. As the President said back then with biblical flair: “We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity.”

As a follow up, the White House’s National Economic Council, headed by Lawrence Summers, just released a new white paper that fleshes out how the administration plans to create that “new foundation.” In a post on the official White House blog, Summers says the government needs to take an active role in strengthening America’s “economic ecology.”

But let’s examine the diagnosis before we turn to the prescribed treatment. The most important statistic for analyzing a nation’s economic strength is worker productivity. And since 1995, U.S. worker productivity has increased at a terrific annual rate of about 2.6 percent.

But is that somehow a phony number, a mere derivative of the equity and housing bubbles? The White House doesn’t seem to think so. As economic adviser Jared Bernstein told me recently, “There is nothing that’s changed in the basic underlying productivity and strength of the American workforce and the American economy. [Productivity] remains in that kind of post –’95, elevated, 2 ½ percent range.”

In other words, Obama actually inherited an economy with a pretty solid foundation, though clearly one with some cracks. And don’t forget that despite the financial crisis, the World Economic Forum still recently ranked the American economy as the second-most competitive in the world, far in front of major competitors such as Germany and France.

The key, then, is to build on America’s existing strong foundation of innovation-driven productivity. Summer’s NEC makes a variety of recommendation such as increased government investment in education, infrastructure and basic research. And as long as that spending is limited to the “building blocks” of economic growth as opposed to picking winners, Uncle Sam might actually do some good here.
Unfortunately, the White House has been picking winners in a sort of an ad hoc industrial policy. Maybe the banks were too big too fail, but GM and Chrysler?

And why should the tax code continue to favor the housing sector? Is building bigger homes and vacation getaways the best use of American capital? Yet there is little evidence the White House plans on changing that sector’s privileged position.

And the President continue to favor the idea of high-speed rail, a favorite of unions and green activists, despite numerous studies questioning the economic benefit of such a system in the vast, spread-out United States.

The administration also seems to be making a bet that higher taxes on small businesses, investment and higher incomes will have limited or no negative effect on the nation’s entrepreneurial climate.

Finally, any productivity guru will tell you that perhaps the most important thing a country can do to boost innovation and economic efficiency is keeping markets open. Or to use the favorite phrase of Diana Farrell, former director of the McKinsey Global Institute and now a Summer’s deputy at the NEC, “creating maximum competitive intensity.” Obama’s tire tariff doesn’t seem to qualify as a pro-innovation measure by that standard.

So by all means, repair some bridges and spend more bucks at federal labs. But innovation and productivity involve a whole lot more.

COMMENT

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Posted by Camron Barth | Report as abusive

Social Security may be in worse trouble than we think

Sep 22, 2009 18:00 UTC

Over at Hot Air, Ed Morrissey has gotten hold of an internal CBO report distributed to Congress that  predicts Social Security will start running a cash deficit next year as opposed to 2019. And even that, apparently , is based on some pretty rosy revenue projections.  Indeed, over the span of  2017, 2018, 2019, SS will run a $126 billion deficit, according to the CBO. Gee, and you wonder why the Chinese are getting skittish about the dollar?

COMMENT

When people talk about debt and ar aghast at the $1.7 trillion deficit this year and national debt of $11 trillion now, just think how horrified/terrified they would be if they knew the whole picture! If you inlude gov’t pledges and underfunded liabilities – fancy naming gimmickery for what is plain old DEBT – the total is closer to $70 trillion, or roughly 375-400% GDP. When the Social Security ‘situation’ finally really comes to public attention there will be some scared people, and most of them foreign investors. I don’t like to be a doom and gloomer, but I don’t see lots of happy numbers to change my mind…

Posted by the Shah | Report as abusive

TARP and the 2010 election

Sep 22, 2009 17:40 UTC

The following quote is from a Democrat, Rep. Peter DeFazio, but I would not be surprised to hear a lot of GOPers say a similar thing on the campaign trail (via The Hill):

The view of the Larry Summers crowd down at the White House that has the president’s ear is, ‘What a tremendous success — everyone at Goldman Sachs is getting a $700,000 bonus this year, so it’s working,’ ” said Rep. Peter DeFazio (D-Ore.), a consistent critic of the Wall Street bailouts. “If your total focus in life is enriching a few people on Wall Street and protecting their assets, it’s working. If your focus is jobs for Americans and their assets, this whole thing has been a disaster.

COMMENT

Would be curious to see how he voted, or if he even read it, as he was passing it into law…

This kind of political posturing is why there can never be any real debate in America, because it’s not what politicians think, it’s what they think they can win on.

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