Five Economic Mistakes Obama is Making
To ensure long term prosperity, Obama needs to be smarter about tax cuts, stimulus spending, and his rhetoric towards business
The economy is improving, but problems remain. Should President Obama receive credit for the improvemen or blame for the problems? Obama took office after the worst financial panic since the Great Depression, and the stock market crash following his inauguration suggests that investors expected worse to follow. The economy has partially recovered, meaning at least that Obama hasn't made mistakes big enough to prevent annualized GDP growth improving from negative 6.7 percent in early 2009 to 3 percent in late 2011, and unemployment from 9.9 percent to 8.2 percent, all while core inflation has generally remained below 2 percent. But even though the economy looks promising in the short run, the administration is making mistakes that threaten long run prosperity. Here are a few:
1. Unnecessary Tax Cuts
The federal government needs revenue. Current receipts are well below the post-World War II average as a percentage of GDP. Balancing the budget by cutting spending might be better than raising taxes, but as long as spending remains high, it has to be paid for somehow.
The most prominent tax cut supported by President Obama was the reduction in the employee portion of payroll taxes from 7.65 percent to 5.65 percent for one year. The idea behind the cut was to stimulate spending by putting more money in the hands of workers. But by announcing that the cut was temporary, the administration informed workers that they should save the money, because taxes will go up next year. One of
Bank reserves are well above regulatory minimums, so additional reserves gained from worker savings will not increase lending, and so will not stimulate the economy. The tax cut will cost the federal government an estimated
Obama pushed other, less well known tax cuts. One example is bonus depreciation, enacted first in
2. Inefficient Stimulus Spending
Academic studies suggest that stimulus spending did boost the economy -- but not all spending is created equal. Infrastructure spending and aid to poor families had the biggest effects, while grants to states for education and law enforcement had negligible, or even negative effects. The only stimulus from this kind of spending is political, as the administration rewards powerful allies. The same studies show that states with more senior congressional delegations received the most per capita spending.
Overall, the best estimates suggest each job lasting one year created by stimulus spending cost somewhere between
The reason wasteful stimulus spending matters, of course, is that the money borrowed to pay for it must be repaid someday. That money will come from taxes, which will depress the economy. It might be worth it to gain stimulus in bad times at the cost of higher taxes in better times, but waste is still costly, so it is best to spend stimulus dollars with care.
3. Failure to Liberalize Markets
Before the financial panic of 2008-2009,
A consequence of flexibility is that unemployment rises during economic downturns. The U.S. unemployment rate briefly exceeded that of the
European countries are proposing significant deregulation of labor and other markets. Instead of stimulus, they hope that structural reform of their economies will produce growth. The U.S. economy has plenty of structural issues that could be addressed, such as the increasing number of occupations that require licensing, frivolous lawsuits, and red tape discouraging household employment.
Instead of structural reform, the Obama administration has proposed new restrictions on employers and has helped unions to reduce employer flexibility. At a time when many countries are improving their scores on indices of economic freedom,
4. Demonizing Business
Nobel Prize winning economist
While Obama's rhetoric is less harsh than FDR's, he has given business cause to worry. He has talked of "fat cat bankers," wealthy people and
Combined with new regulations on the healthcare and financial industries and constant talk of higher taxes on "the wealthiest," this rhetoric convinces businesspeople that if they invest and succeed, their profits might be taxed or regulated away.
5. No Long Term Plan
Probably the most serious shortcoming in Obama's economic strategy is the lack of a long term plan to reduce government debt. In his 2013 budget, the president claims to lay out a strategy to put "the nation on a sustainable fiscal path" but that same budget proposal contains supplemental materials forecasting that federal debt will eventually rise to nearly 200 percent of GDP, not including shortfalls in
Businesses are understandably reluctant to invest at the moment, knowing that if debt isn't reigned in there must eventually be dramatic spending reductions, tax increases, inflation, or a default on federal obligations. If they at least knew which to expect, they would invest more.
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