Earlier this week, the Wall Street Journal’s Allan Meltzer dared to tackle a rather sensitive question: Why Obamanomics Has Failed. The fact that the Democrats did not even bother to attack Mr. Meltzer as a racist for using the “f-word” with respect to the Obama Administration illustrates, I think, how pessimistic they have become regarding their prospects for retaining control of Congress after the November elections.
Meltzer’s reasoning is rather straightforward:
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.
Democrats can whine about “failed policies of the Bush Administration” until they are blue in the face, but nothing they say can disguise the dire economic straits that their own policies have directly led this country into.
The Stimulus was, of course, a colossal failure. It was little more than an enormous slush fund used to pay for the substantial number of daydream projects that Democrats had been unable to fund during the years of Republican Congressional control, and to dole out pork barrel rewards to loyal Democrats in key voting districts. It also provided short term cash to help state governments plug expanding budget deficits, thereby keeping state workers employed and government-funded projects on track. None of these things contributed in any substantial way to a sustained national economic recovery.
But the real drag on the economy has been the increasing level of uncertainty about the overwhelming costs of President Obama’s long-term vision of America: a nation where the government tightly controls and heavily subsidizes (or in some cases completely funds) health care, banking, energy, transportation, housing, and every sector of the economy affected by those industries.
This uncertainty has not only paralyzed private sector spending, but it has deeply affected the banking industry as well. A few weeks ago, Todd Zywicki explained this phenomenon in The Washington Times: “Why Aren’t Banks Lending?“
Since President Obama was inaugurated, Congress has launched one of the most ambitious legislative agendas in American history – proposals that would fundamentally transform the economy: from remaking the health care system, to a far-reaching set of taxes and regulations to combat climate change and remake the energy system, to a comprehensive financial overhaul bill that would fundamentally reshape the banking system.
How, one wonders, can borrowers and lenders possibly price the risk associated with the imposition of the massive new cap-and-trade system or other new environmental regulations? How could a start-up or growing company anticipate the costs to be imposed by the health insurance reform legislation? How can a lender make a loan today knowing that a new Bureau of Consumer Financial Protection or state attorney general might later decide the loan is “abusive”? Or what future taxes will have to be levied to fund our unsustainable budget deficits?
When the new SBLF [Small Business Lending Fund] was unveiled in February, I testified before the House Financial Services Committee along with several businesspeople and bankers. Their refrain was nearly uniform: Washington’s tax-and-regulation orgy was spawning unworkable uncertainty for small businesses and banks, leading to curtailed lending. The SBLF doesn’t address that.
Of course there are other reasons why the biggest banks aren’t interested in lending or opening new lines of credit. “Too big to fail” banks were given a golden opportunity via TARP and TALF to replenish their cash reserves and restructure toxic assets, thereby magically transforming their financial condition from “broke” to “highly profitable” in only a matter of months. And with the Fed now paying these banks interest on their cash reserves, they have little reason to risk their money in a weak economy. The Credit CARD Act’s strict limitations on fees and interest rates have also undoubtedly made banks and retailers more cautious about issuing new credit cards. All of this can be traced directly back to banking policies endorsed by the Obama Administration.
These disincentives for lending, and the overwhelming uncertainty that is currently blanketing consumer spending (and by default, business growth) have combined to produce our current state of economic stagnation. The levels of public doubt, distrust, and fear that have all but trampled the “green shoots” that briefly sprouted at the beginning of the year are now on par with the national mood during the “days of malaise” at the end of Jimmy Carter’s presidential term. And the fears of small to medium sized businesses over growing government regulatory interference and taxation reflect the sentiments among business leaders at the height of FDR’s massive Federal power grab in 1937. Both of these periods ended in recessions of historic proportions. Can our own “double-dip” recession be close at hand?