James Pethokoukis

Politics and policy from inside Washington

Can Obama spend US back into prosperity?

September 22, 2009

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.

Comments

“The administration also seems to be making a bet that higher taxes on small businesses……will have limited or no negative effect on the nation’s entrepreneurial climate”

This is exceptionally unwise thinking. If anything, the government should be making it easier to start a small business. I have considered several business ideas, and yet I always reach the same conclusion- starting & successfully running a business in America is an expensive proposition. Clearly, it will only become more costly in the future.

While there may be productivity gains due to technological and organizational advancement, small businesses will likely contribute proportionally less to productivity in the future. Just another step towards a corporatist state.

Posted by Greg Harkness | Report as abusive
 

Yes I was writing in regards to my home loan. I don’t know where to turn. I did a modification with Homeq and I had no choice reason being because I had no insurance and I had lost my job in 2008. Well I was a few months behind, so we spoke of the modification. Well because of the time frame I was only given a short while to make a decision . I was not able to realize that the modification did not help me at all. Keith Becker and I have spoke but I can’t make him understand that it only made my payments go down $30.00. I know that they had to put the escrow but after that I was back where I was the first time. In five years after this modification I will owe the same amount that I started with. I would like to know if there is any way I could possibly redo the modification or do a remortgage to get a permanent fixed rate. Maybe lower my principle or something. I went over my finances with Keith but at the time I did tell him that I did not have everything in front of me, all I could do Is estimate. I have gone over my expenses and I am ready to present them. Please help so I can possibly get a remortgage to start all over again.
just wanted to say this are the kind of modifications they are doing. Now does this look like help?

Thank you,

Posted by Ann | Report as abusive
 

the american citizens never save their money. This was the consequence of the currently recession

Posted by Carlos | Report as abusive
 

the messages from the wall street is spend, spend & spend. Never save your money.

Posted by Carlos | Report as abusive
 

The more I hear and read the more I see that there is no leadership in this administration. I do not think any of them has a clue as to what it takes to start a business and what it takes to make a country competitive in the world market. But this has been the same in the Clinton and Bush admin because they were so busy giving away business for money to China and so busy cleaning the water and the air they forgot that people have to be employed to pay taxes. Don’t look for miracles from people who can only talk a good program.

Posted by f belz | Report as abusive
 

The US Had intercity rail unti the Forties. High-speed rail would be very efficient from Boston down to Baltimore and D.C. It’s embarrassing that we don’t have it when all of Europe does. It should also be in place between Las Vegas and LA. and San Francisco, Oakland, and Sacramento. Why? Because it saves a lot of energy and all the money for oil goes out of the country and out of our economy and makes us all poorer.
All of the government’s spending to make us more energy efficient is money well-spent as is the moeny on research and education. Those expenditures will grow our economy and make richer. The GI Bill after WWII is proof of that as is the Interstate highway system. The other spending makes us poorer.

Posted by Mark Weber | Report as abusive
 

To have a Foundation you truly need solid ground to build on. The ground is not only constantly moving but of poor quality to start with. Our Congress has become a major impediment to get any progress in the right direction. When you have somebody like Christopher Dodd who everybody knows is a crook running key committees you have a major issue. But we the American people keep on accepting this as the norm. You want true healthcare reform then our congressman should live with the same healthcare as the rest of us and they’d fix it quickly. You want our congressman to vote with their hearts and minds get the money out of the process (campaign finance reform). You want a true marketplace then stop subsidies to products that are only there for votes from congressman’s constituents (tobacco subsidies-a product we’re trying legislate out but subsidizing at the same time. $200M a year to subsidize wool producers because we can never live without cheap wool!). Section 42 housing is a great one. We subsidize rent to a certain demographic to live in an area in need of urban renewal. The majority of the time it’s artists and it’s so loosely defined that if you print a poem and try sell it to a friend you qualify for 15-40% off your rent.
These are just a few of the many things that we as taxpayers should be saying enough! enough! These are not Republican or Democrat owned problems. They’re ours.
I ask myself quite often what can I do to seize control of what I know is the real problem. I honestly don’t know the answer other than writing to my congressman and demanding better. But there has to be more than that. Some other type of mechanism to demand common sense and get the money influence out.

Posted by Steve | Report as abusive
 

It seems we have failed to acknowledge that there have been huge financial crises with in every ten years since more than a century.

That constitutes that we have been stimulating a wrong economical system for many years (economy on the same pile of SAND). Thus, arguing about THE SAME values based up on the same methodology of a failed system (worker productivity, equity, housing market, etc too many based on foreign investments and guaranties) proves to be irrelevant.

Therefore what we need is an entirely new financial and economical constitution and mechanism rather than prolonging the same problems – [build our house upon a ROCK].

Posted by Mack Name | Report as abusive
 

Wow, Reuters is getting more right wing by the minute. Talk about a half-baked, and purposely skewed article. I think we should call this Fox light.

Posted by James Perly | Report as abusive
 

It won’t work.
spending must be organic,and government needs to
get out of the way.

Posted by Dave | Report as abusive
 

Why does this fellow point out in his reuters bio that he is a Jeopardy! champion? Trivia doesn’t seem relevant to economic policy.

Posted by David | Report as abusive
 

Second guessing is less than ethical profession. If the President succeeds, the Country benifits, If the President does not succeed, we will get a new President. That is as simple as it gets, and nothing he has proposed so far is even near what President Carter did, and that hurt the citizens of this country for every year since the interest rates went up during his Presidency 21% Prime rate, and Credit cards were allowed to go to 19%, That has persisted until the last few years.

Posted by Merlin D. DuVall | Report as abusive
 

It is clear that Obama is only working for the banks. Just watch the free video called obamadeception that clearly outlines his real agenda.The US is being systematically looted. These people know exactly what they are doing. The economy will not recover and the dollar will continue to sink. The dollar is controlled by the privately owned federalreservebank which has complete autonomy over economic policy and is owned by international bankers.

Posted by jayson | Report as abusive
 

We follow fourteen of the top world economist, not one can calculate how the dollar will can recover, do to inflationary figures from our over spending. Right now each tax payer is over one hundred thousand dollars in debt to Federal Reserve.
We are looking at an infinite reprise over our “Bail Out Program.”
Maybe our President and his advisers forgot to buy the “all solutions calculator” from Wal-Mart.

Editor of WSOPNE.org

 

Obama’s administration has already done some terrifically big spending. Not too much debate when seeking approval for it either. In case no one noticed, the economy depends on the prosperity of everyone,, not just bankers.

Here’s another thought,, A democracy is two wolves and a sheep deciding what’s for dinner. Unless it’s an American democracy. Then it’s two wolves and a sheep with money and the decision shifts to how do you carve up a wolf skin for a hat?

Posted by Unemployed | Report as abusive
 

no

Posted by Camron Barth | Report as abusive
 

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