wo overarching reasons explain the failure of Obamanomics. First, administration economists and their outside supporters neglected the longer-term costs and consequences of their actions. Second, the administration and Congress have through their deeds and words heightened uncertainty about the economic future. High uncertainty is the enemy of investment and growth.
How about the “stimulus”?
Most of the earlier spending was a very short-term response to long-term problems. One piece financed temporary tax cuts. This was a mistake, and ignores the role of expectations in the economy. Economic theory predicts that temporary tax cuts have little effect on spending. Unless tax cuts are expected to last, consumers save the proceeds and pay down debt. Experience with past temporary tax reductions, as in the Carter and first Bush presidencies, confirms this outcome.
Another large part of the stimulus went to relieve state and local governments of their budget deficits. Transferring a deficit from the state to the federal government changes very little. Some teachers and police got an additional year of employment, but their gain is temporary. Any benefits to them must be balanced against the negative effect of the increased public debt and the temporary nature of the transfer.
The Obama economic team ignored past history. The two most successful fiscal stimulus programs since World War II—under Kennedy-Johnson and Reagan—took the form of permanent reductions in corporate and marginal tax rates. Economist Arthur Okun, who had a major role in developing the Kennedy-Johnson program, later analyzed the effect of individual items. He concluded that corporate tax reduction was most effective.
Don’t expect much of that any time soon. Instead, businesses face,
- the burden of government-mandated healthcare, and whatever it may mean if they hire new employees
- cap and trade, “Who will be forced to pay?”
Additionally, the expansion of Medicaid increasing the burden on the states, the bailouts, which
ran roughshod over the rule of law. Chrysler bondholders were given short shrift in order to benefit the auto workers union. By weakening the rule of law, the president opened the way to great mischief and increased investors’ and producers’ uncertainty.
And, to top it off, something the article doesn’t mention directly:
As the Gulf oil spill is demonstrating, an absence of leadership and an overload of bureaucratic shortsightedness.
None of the above make for sound economic policy. Combined, they are recipe for disaster.
As James Pethokoukis notes, private-sector led growth is the only way to avoid U.S. economic collapse