Has Obamanomics Failed?

* There is an important debate going on as the run-up to mid-term elections moves on. The debate seems to go back and forth between whether the government should spend more money, or less. I am going to start off with a readers comment, which suggests that more spending and dramatic actions are needed to pull the economy out of a hole:


“Rick, While I understand a trader’s point that the smart move is to play things conservatively and hold onto cash, your blog often ventures into points on policy such as the blog about the U.S. Mojo. I believe every moment of national adversity should be met by determined action. I do not believe the best course of action is defeatism where we decide the problems are too great and the answers too difficult. While you are correct that China is in ascendancy, I believe this is a snap shot in time. I refuse to believe that a despotic dictatorship can navigate the rough waters better than we can.


The developing world is making money at this time by selling raw materials and creating exports in a world where the dollar is strong. They are investing this money in new economic infrastructure. Infrastructure that we will compete against for the next 50 years (new rail systems, new schools, new ports, and new energy grids). The world is handing us an opportunity to rebuild our aging national infrastructure. In the worldseconomic downturn, most folks have decided the U. S. is the safe bet and they have driven treasury bond rates down to historic lows. We can borrow money to rebuild this infrastructure which will employ millions and, at the same time, pull us out of this downswing. We need to create more money because too much of it has been lost. Less dollars in the world that are chasing the same amount of goods and services creates a negative imbalance that will be very tough to overcome unless we create more money. If we create that additional money, and spend it wisely, we will be set up not only to overcome our current mess, but to continue to lead the world in economic output when this mess is over. 


I believe your pessimistic view of the future is a good bet for investors. However, these times call for more than hiding in the corner huddled with your piggy bank hoping to come out the other end better than most, but living in a smaller and less imaginative U.S. You are obviously very bright and energetic. It is time to offer some solutions. The Tea Partiers and conservatives who lambast deficit spending really point no light on a way out. Shouldn’t we try to lead a course to calmer waters.” (end of readers comment)


I agree with you on a number of fronts:


1>  It is not altogether clear that China is going to lead the world to a bright future when their economy is state run. What China has achieved is a mercantilist approach to capitalism by exploiting their cheap labor markets, and low standards of living, which has allowed them to produce things so much cheaper than most of the developed world. Given their lead, which I measure in terms of their cumulative trade surpluses and $2+ trillion in foreign currency reserves, they have a lot of latitude to make mistakes. Over the short term, I do not see China getting knocked off its apple cart. At the same time, because China’s publicly listed companies are controlled by the state and not free market capitalistic interests, I do not see any reason to invest over there.


2>  I agree that the debate about whether Obama is spending money in the right places has more to do with what it is being spent on, not “if” money needs to be spent. The other twist to this debate has to do with Obama’s over-riding agenda, and the signals he is sending to business. These concerns are best described in a recent piece by Allan Meltzer, in the WSJ, which a reader sent in. The following reader comment, and attached WSJ opinion piece suggests that Obama-nomics has failed. Here is the readers comment, and then the full piece by Alan Metzer, from the June 30th  WSJ:


“Dr. Allan Meltzer, the well respected Professor of Economics at Carnegie Mellon University wrote the following op-ed in the Wall Street Journal. In it, he essentially describes the uncertainties Washington has created for investors.  As a result, investors have “taken their ball and gone home”. 


Is it any wonder that corporate America is babysitting, as of the 1st quarter, nearly $2 trillion in cash, a record amount, instead of investing it for the future?” (end of readers comment)


“Why Obamanomics has Failed”, by Alan Meltzer


The administration’s stimulus program has failed. Growth is slow and unemployment remains high. The president, his friends and advisers talk endlessly about the circumstances they inherited as a way of avoiding responsibility for the 18 months for which they are responsible. 


But they want new stimulus measures-which is convincing evidence that they too recognize that the earlier measures failed. And so the U.S. was odd-man out at the G-20 meeting over the weekend, continuing to call for more government spending in the face of European resistance. 


The contrast with President Reagan’s anti-recession and pro-growth measures in 1981 is striking. Reagan reduced marginal and corporate tax rates and slowed the growth of nondefense spending. Recovery began about a year later. After 18 months, the economy grew more than 9% and it continued to expand above trend rates.


Two 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.


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.


Another defect of Obamanomics was that part of the increased spending authorized by the 2009 stimulus bill was held back. Remember the oft-repeated claim that the spending would go for “shovel ready” projects? That didn’t happen, though spending will flow more rapidly now in an effort to lower unemployment and claim economic success during the fall election campaign. 


In his January 2010 State of the Union address, President Obama recognized that the United States must increase exports. He was right, but he has done little to help, either by encouraging investment to increase productivity, or by supporting trade agreements, despite his promise to the Koreans that he repeated in Toronto. Export earnings are the only way to service our massive foreign borrowing. This should be a high priority. Isn’t anyone in the government thinking about the future? 


Mr. Obama has denied the cost burden on business from his health-care program, but business is aware that it is likely to be large. How large? That’s part of the uncertainty that employers face if they hire additional labor. 


The president asks for cap and trade. That’s more cost and more uncertainty. Who will be forced to pay? What will it do to costs here compared to foreign producers? We should not expect businesses to invest in new, export-led growth when uncertainty about future costs is so large. 


Then there is Medicaid, the medical program for those with lower incomes. In the past, states paid about half of the cost, and they are responsible for 20% of the additional cost imposed by the program’s expansion. But almost all the states must balance their budgets, and the new Medicaid spending mandated by ObamaCare comes at a time when states face large deficits and even larger unfunded liabilities for pensions. All this only adds to uncertainty about taxes and spending.


Other aspects of the Obama economic program are equally problematic. The auto bail-outs 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 investor’s and producer’s uncertainty. That’s not the way to get more investment and employment.


Almost daily, Mr. Obama uses his rhetorical skill to castigate businessmen who have the audacity to hope for profitable opportunities. No president since Franklin Roosevelt has taken that route. President Roosevelt slowed recovery in 1938-40 until the war by creating uncertainty about his objectives. It was harmful then, and it’s harmful now.


In 1980, I had the privilege of advising Prime Minister Margaret Thatcher to ignore the demands of 360 British economists who made the outrageous claim that Britain would never (yes, never) recover from her decision to reduce government spending during a severe recession. They wanted more spending. She responded with a speech promising to stay with her tight budget. She kept a sustained focus on long-term problems. Expectations about the economy’s future improved, and the recovery soon began.


That’s what the U.S. needs now. Not major cuts in current spending, but a credible plan showing that authorities will not wait for a fiscal crisis but begin to act prudently and continue until deficits disappear, and the debt is below 60% of GDP. Rep. Paul Ryan (R., Wisc.) offered a plan, but the administration and Congress ignored it. 


The country does not need more of the same. Successful leaders give the public reason to believe that they have a long-term program to bring a better tomorrow. Let’s plan our way out of our explosive deficits and our hesitant and jobless recovery by reducing uncertainty and encouraging growth. (end of Allan Meltzer’s piece)


Usually I try to summarize what an article might say, except the Meltzer piece covers lots of important topics, so I thank you for taking it all in. From where I sit, it appears that Obama is doing as he is told by his Keynesian biased Counsel of Economic Advisors. With the exception of his “Green” ideology, there is nothing new or transforming about Obama’s economic policies, except for the adverse legacy his health care and carbon policies will burden the country with. In other words, transforming a country and exacting costs on society usually works best when we are in a period of economic expansion, not fighting the strong headwinds of deflation. While it’s nice to be optimistic and supportive of the current administration, if you go by Meltzer’s critique, it’s a losing battle; you would be better served with a conservative investment philosophy, because I do not see Obama changing his tune anytime soon.