Nov 16 2009

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“Bankrupt Economics”

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  • In a White House that is defined by the maxim that, “success is never having to admit that you’re wrong,” the announcement of a “Jobs Summit” in December is as close as we will get to an admission of false economic promises made by the Obama administration this past year.
  • This Journal has chronicled the statistics for some time.
  • Sketching visions of cataclysm if the hastily assembled and unvetted Stimulus bill was not passed immediately back in February, President Obama promised America that should the bill become law, unemployment would not go above eight percent.
  • In November, after committing close to a trillion dollars in stimulus, unemployment has continued to soar, reaching a 26-year high of 10.2% in October. Today, 32 states and the District of Columbia have unemployment rates higher than eight percent. 12 states and the District have unemployment higher than 10.2%.1  More than 2.8 million Americans have become unemployed since the Stimulus became law.2
  • Yes, the Administration has released its own accounting of jobs “created or saved” by the Stimulus – 640,000 at last count.  But these “notional jobs” go unacknowledged in the official (and credible) statistics of the Department of Labor, due to a lack of standing in the revealing errors of Stimulus job reporting.
  • For instance, the Associated Press found that two-thirds of the 15,000 jobs one agency reported creating or saving did not really exist. Rather, the agency reported workers who received raises with stimulus funding as having their jobs “saved.” In another case, a shoe store in Kentucky that provided nine pairs of boots to the Army Corps of Engineers for $889.60 reported saving nine jobs. Such errors pervade the Stimulus job creation estimates making any serious reliance on them dangerous and foolhardy.3
  • Other, broad measures of economic activity have been superficially positive.
  • GDP in Q3 was 3.5%, a most positive development if it were not undermined by evidence that temporary government stimulus in the form of the “Cash for Clunkers” program and the first time home buyer’s tax credit, were the reasons for the majority of the gain.4
  • Personal income, a measure of what Americans are making has been negative since May. Wages and salaries were down $11.2 billion in September.5 That is not what occurs in an expanding economy, even when we acknowledge that employment is a lagging indicator.
  • Exports are up, a good sign for the manufacturing sector which has been beaten by the recession. But this is largely on the enduring weakness in the value of the dollar, making US products more competitive abroad even as it poses significant, longer-term problems for the US economy through the potential for inflation.
  • The stock market is up, normally a good sign. In this instance, the market’s resilience can be tracked to several factors: slack from the panicked sales of 2008; bank and financial sector profits, which have been created by institutions hording instead of lending money; and the low value of the dollar which makes US equities a bargain for foreign investors.  This is not the underpinnings of a bull rally.
  • The tepid good news on the stock market is coupled with continued ominous economic news on the housing front; Freddie Mac and Fannie Mae – who together control 57% of the mortgages in the US – reported a surge in delinquencies.
  • The Mortgage Bankers Association stated in its most recent report that homes in foreclosure or with payments past due was at 13%; the highest ever recorded. The report indicates that the crisis has moved beyond the sub-prime market, made famous last year, to the ostensibly more secure and reliable fixed prime market, mostly on the upward number of unemployed and their inability to stay current on their loans.6
  • The weak economy and breathtaking Democratic economic interventions and initiatives have also catapulted government spending, deficits and debt to unheard of levels, threatening inflation and longer term loss of living standards due to what will become monumental debt payments for the next generation.
  • According to the Congressional Budget Office (CBO), the deficit for the final year of the Bush administration – 2008 – was $459 billion. President Obama’s deficit in 2009 was an eye popping $1.6 trillion.7
  • Blame-mongers at the White House are quick to point the finger at the Bush administration and the “mess” that was inherited. But does Bush culpability extend to FY 2010 when CBO projects a $1.4 trillion deficit? Or 2011 when the deficit is projected at $921 billion? CBO estimates do not have deficits returning to Bush’s previously “unacceptable” levels until 2016 at the earliest.
  • So, back to the Obama Jobs Summit. What is Obama going to do?
  • The Stimulus was gigantic, political, misdirected, wasteful and ultimately ineffective in its core mission. Increased unemployment has aggravated the foreclosure crisis, which negatively affects neighborhood, county and state housing valuations and individual net worth. Financial institutions refuse to lend, sensing an unsteady market and the risk of additional losses.
  • Without demand, suppliers have little reason expand and make do with what they have. Productivity is up, but that is simply a function of making do with less. As far as public Stimulus, the debt now matches the economy among voter concerns.8
  • POTUS is boxed in and probably vexed. Why is it that all this money has come to so little a result?
  • What is chilling here is that among all the “supposed” economic heavy-hitters on Team Obama – the august Larry Summers stands out – there seems to be no one with a sensible idea of how to spur, organic, private sector led economic growth, the kind of growth that has led the US out of each recession in the 20th and 21st centuries.
  • It makes the December Summit, as Obama might say, a “Teachable Moment,” for a broader set of economic issues that confront the nation. After all, robust economic growth is at the heart of Obama economic success and the nation’s prosperity.
  • But the uncomfortable emerging and fundamental paradox is that the Obama legislative program is itself the biggest drag on any real economic growth, through misallocation of resources, new direct and indirect taxation, market uncertainty and colossal federal intrusion into the workings of the private market at all levels and sectors.
  • In sum, the Obama legislative program undermines its own economic goals, ironically making his policies the antithesis of the prosperity he ostensibly seeks to create.
  • So what to do?
  • Market dynamism is grounded in certainty and restraint; certainty regarding the investment environment and restraint on the arbitrary power of government. If anything, Obama policies have created exponential uncertainties for investors.
  • Consider taxation:
    • The Administration has said that it would allow the Bush tax cuts to expire, effectively raising taxes on wage earners and capital investors who already provide 70% of US income taxes.9 It will increase taxes on capital gains, pivotal for increased investment in equities and business stock.
    • In its new health care reform effort, Congress is considering an array of new taxes on high earning individuals and certain types of health insurance plans, including an increase in the payroll tax. Businesses will be forced to provide health care or pay a tax on employees.  Individuals will have a mandate to have health care or pay a penalty. Technology innovators, who keep the US medical system on the cutting edge, will be taxed. This creates enormous uncertainty for business creation and expansion, both for the medical sector and businesses that will now have to implement these new mandates as part of their business plan.
    • Cap N’ Trade legislation monetizes carbon emissions and creates the greatest direct and indirect tax on Americans in history. If you make energy or use it, you are taxed. It is gargantuan and regressive, costing up to $6,000 for a family of four by 2035.10 By regulating carbon emitters, the bill effectively rations available sources of energy. Energy literally powers economic recoveries. The absence of plentiful and affordable energy will cost expansion, growth and jobs.
  • Consider regulation:
    • Health care reform will create sprawling new bureaucracies, with sobering powers to regulate the cost and provision of medicine and treatment, unleashing investigative bureaucracies to probe “unfair” or anti-competitive” pricing.
    • Cap N’ Trade will literally bring government oversight into the price of gasoline and electricity, the way we insolate our homes, buy cars and even light bulbs. The indirect cost of the micromanagement of the Cap N’’ Trade bill are so large as to be undeterminable.
    • And then there is financial regulation. Not only is government now in the business of capping pay and bonuses in the private sector, it is also designing a completely new set of laws governing micro-oversight of the financial industry.  The oxymoron of a Consumer Financial Protection Agency is disheartening.
  • Consider direct government intervention in the economy:
    • The US already owns Freddie Mac and Fannie Mae which own 57% of the mortgages in the US, not including HUD-FHA backed loans.  The US government controls the housing market.
    • As a result of TARP, the government is a major shareholder in the banking and finance sector, using its position to reorder the firms to the Obama administration’s liking.
    • The Administration not only took over GM and Chrysler, but created forced bankruptcy settlements that directly challenged existing shareholder rights, and reordered and awarded ownership to politically favored constituencies.
    • Who is next? The health care overhaul would effectively place US medicine under the control of the US government for those under 65.  When Cap N’ Tax runs fossil fueled energy producers into the ground, could a bailout and nationalization of this industry be far behind? There is even talk of a bailout of newspapers, raising interesting First Amendment questions when the government owns the press.
  • When politicians play entrepreneur with taxpayer money, the risk/reward paradigm that governs private investment transactions does not apply.
  • The government does not have a stake in the outcome of the investment; risk/reward is thus measured in political outcomes; outcomes that are not market-based, logical or efficient and lead down the unpleasant road to cronyism, distortion and failure.
  • This kind of central planning creates huge and complicated conflicts of interest for the public sector and compromises oversight ability, while serving as a significant drag on the economy.
  • Be honest. Beyond national defense, is there anything that the government does that is not done better by the private sector?
  • If you had the choice between a Veteran’s hospital and a private hospital, which would you choose? If it was Medicare or private insurance, which would you choose? If it really needed to be there tomorrow, and the choice was FEDEX or the Post Office, who would you choose?  Right now, are you more likely to buy a government-owned GM/Chrysler or a private-sector owned Ford? Can you guess which one of these car companies has posted a profit?
  • For all these reasons, is it any wonder than the normal business cycle, which left to its own devices will eventually lift the economy from recession, has yet to kick in?
  • There is no getting around the fact that the problem with Obama’s economy is Obama’s programs.
  • Ironically, Obama’s greatest contribution to economic recovery at the December Summit would be an announcement that he is freezing his legislative program and unwinding what he has already done, as unlikely as that is to occur.
  • Writing on his blog on November 10th, CBO Director Elmendorf said, “If current laws remained in place, the federal deficit would shrink sharply in the next few years.”11
  • That’s a start, if the Administration and Democrats were willing to take it on board.
  • Unfortunately for the American people, it may take midterms and a Republican Congress to dismantle the impediments of economic growth so quickly and mindlessly put in place by Democrats.
  • The economy is not a computer with absolute inputs and outputs.  It is a living, breathing entity that responds to penalties and incentives in a dynamic manner, more often than not, in a way that is contrary to the view of central planners.
  • Ideas, potential, initiative, drive, determination.  Government can’t create these, or control them.  And the logical result of a successful idea – profit – government can’t’ create that either, it can only tax it or redistribute it. For sustained economic growth to occur, it needs to simply get out of the way.
  • So it will be left to the electorate in 2010 to restore government involvement in the private market to its traditional role, and return incentive to its proper place in spurring individual achievement and innovation as tools of an expanding economic pie; with an increased standard of living for all.
  • In the meantime, it would be to the President’s benefit to focus our energies on the kind of accountable and transparent government that Obama promised in the campaign but failed to deliver.  Not on new expansions of government programs that are bordering on failure and financial ruin, but by reforming the public institutions that are failing to restore the public trust.
  • We have precious little time before our legacy to our children and grand children is not one of accomplishment, success and achievement, but of broken promises and squandered generational theft.
  • It’s time to get started.

1. Bureau of Labor Statistics, Department of Labor

2. Ibid

3. Boston Globe

4. Bureau of Economic Analysis, Department of Commerce

5. Ibid

6. Mortgage Bankers Association

7. Congressional Budget Office

8. Gallup and Rasmussen Reports

9. Internal Revenue Service

10. Wall Street Journal 6/09

11. CBO Director’s Blog


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