President Obama is on a national economic policy speaking tour, with a series of speeches across the country on finally getting the economy growing again, now in his fifth year in office. It is a subject long overdue.
President Obama and his paid spokespeople like to point out that the economy is doing better now than during the depths of the last recession, which ended in official records four years ago! But economies always do better in recoveries than during recessions. So that is a very low standard by which to judge Obama’s record.
The real question is how does President Obama’s recovery compare to the other recoveries of other Presidents from other recessions. Since the Great Depression, there have been 11 other recessions in America before this last one. In all those recessions, the economy recovered all jobs lost during the recession an average of 25 months after the recession began. So the job effects of prior post Depression recessions lasted an average of about 2 years. But here we are today, 5½ years, or 67 months, after the recession started, and we still have not recovered all of the jobs lost during the recession. As AEI President Arthur Brooks wrote in the Wall Street Journal last Thursday,
“In 2008, the Bureau of Labor Statistics reported that total nonfarm seasonally adjusted employment was 138 million workers. Today, it is fewer than 136 million. Meanwhile, the number of Americans has grown by 12.8 million. In many areas of the country, more than one in five adults who want full time employment can’t find it.”
In sharp contrast, President Reagan’s recovery from the sharp 1981-1982 recession, which resulted from the monetary policy that broke the back of the roaring 1970s inflation, recovered all of the jobs lost during that recession within 36 months. At this point in the Reagan recovery, jobs had grown nearly 10% higher than when the recession started, representing an increase of more than 10 million more jobs.
Similarly, in the 11 post depression recessions before President Obama, the economy recovered the lost GDP during the recession within an average of 4.5 quarters after the recession started. But it took Obama’s recovery 16 quarters, or 4 years, to reach that point. Today, 5½ years, or 22 quarters, after the recession started, the economy (real GDP) has grown only about 3% above where it was when the recession started. By sharp contrast, at this point in the Reagan recovery, the economy had boomed by about 20%, or one fifth.
In addition, middle class incomes have continued to fall during Obama’s recovery, losing even more ground than during the recession. The number in poverty has also continued to soar during Obama’s supposed recovery, to about 50 million, the most in the more than 50 years that Census has been tracking poverty, with the poverty rate up to 16.1%, higher than when the War on Poverty started in 1965. Indeed, despite all of Obama’s rhetoric, inequality has started rising during his Presidency.
These are the reasons why President Obama’s recovery has been commonly characterized as the worst recovery from any recession since the Great Depression.
In his national economic policy speaking tour, the President is effectively posing a fundamental question to the country. He is not actually trying to defend this past economic performance as sufficient. He is not saying low economic growth, declining wages and incomes, soaring poverty and dependency, and actually increasing inequality is the new normal, and it is not possible to do better.
He is instead opening a national economic debate over what is the best way to promote economic growth, good jobs, and the middle class. His answer is increased taxes, government spending, and centralized government direction of the economy, instead of the traditional American answer of lower taxes, government spending, and regulation, and pro-growth incentives in a decentralized free market.
That debate was more explicitly raised in his speech last Tuesday in Chattanooga. There he proposed what he calls a Grand Bargain, which involves raising still more in taxes to finance still more in spending. In his fifth year in office, he is finally ready to look at tax reform, which is supposed to involve closing loopholes, deductions, and exemptions in return for lowering rates. But only if it is yet another huge tax increase overall on net, providing more money to the government, which is the real source in Obama’s view of economic growth and good jobs for the middle class.
Obama said in Chattanooga,
“So I’m willing to simplify our tax code [through reform that] closes those loopholes, ends incentives to ship jobs overseas, lowers the rate for businesses that are creating jobs right here in America, provides tax incentives for manufacturers that bring jobs home to the United States….But if we’re going to give businesses a better deal, then we’re also going to have to give workers a better deal too. I want to use some of the money that we save by closing these loopholes to create more good construction jobs with infrastructure initiatives….”
Or as the Wall Street Journal explained it on Wednesday, “If Congressional Republicans agree to a corporate tax increase, he said, then he’ll agree to spend more on his favorite public works projects.” That echoes Senate Majority Leader Harry Reid, who recently dumped cold water on tax reform, saying he would not consider it unless it involved another tax increase of a trillion dollars overall on net. That shows it is not just President Obama, but the entire Democrat Party that is going hard left, for still more taxes and spending.
The Journal further explained on Wednesday, “The real bipartisan reform opportunity would be to get behind the chief Senate and House tax writers, Democrat Max Baucus and Republican Dave Camp….The rub for Mr. Obama is that both men conceive of using whatever money they would raise from closing loopholes to reduce tax rates. This is crucial to getting rates as low as possible, especially given that the statutory U.S. corporate rate of 35% (plus state corporate taxes) is the highest in the developed world.”
The problem with President Obama’s proposal is that it is just more of the same that he has already tried, with the dismal results described above. President Obama’s nearly $1 trillion 2009 so-called “stimulus” bill was supposed to finance “shovel-ready” infrastructure projects too. But it didn’t work, for a good reason. Taxing or borrowing a trillion dollars out of the private sector to spend a trillion dollars in the public sector is not going to increase jobs or economic growth overall on net. At best, it will just shift jobs from where the market directs to where the government directs. More likely, it will be a net drag on the economy, because the market spends money more productively and efficiently than the government.
The lower tax rates of real tax reform, by contrast, provide market incentives to increase production, jobs and economic growth. In particular, that promotes capital investment, as investors can keep a larger share of what their investment produces. As I have explained in previous columns, such capital investment is the foundation for increased jobs, higher wages and incomes, and increased economic growth in a capitalist free market. That capital is used to start new businesses and expand existing ones, which increases the demand for labor, and so bids up wages. Capital investment also increases the productivity of workers, by providing them with new tools and equipment to do their work, for example providing them with mechanized steam shovels for digging, rather than hand shovels, or using their bare hands. That increased productivity means that workers produce more, which provides the funds for employers to pay them higher wages.
House Budget Committee Chairman Paul Ryan kicked off the tax reform debate by proposing in his budgets both individual and corporate tax reform. For individual taxes, Ryan proposed slashing income tax rates to 10% for families earning less than $100,000, and 25% for families earning more. That can be financed by closing loopholes, because those are the average effective tax rates at those income ranges today. But Obama wants a net tax increase for individual taxes too, as the Journal also explained last Wednesday: “A White House press release clarified that the President would also like to raise taxes on individuals, not just businesses, while allowing federal spending to rise still higher….But the President is willing to forego this tax increase for now because he wants to work with Republicans.”
Ryan also proposed to reduce the federal corporate tax rate from 35% to 25%, which Camp and Baucus have been working toward. But as the Journal explained Obama’s proposal, “his plan is to take the headline corporate tax rate of 35% down to only 28%, while eliminating deductions and creating a new minimum tax on foreign earnings so that corporations will actually pay a higher tax bill. The White House says that manufacturers will pay an effective tax rate of “no more than 25%.”
But it is not the effective rate, which is determined by the final total tax bill divided by the taxpayer’s income, that determines the incentives for capital investment and increased production, but the marginal rate, or the tax on the next dollar to be earned. That is what Paul Ryan and the Republicans are focused on.
The rest of Obama’s Chattanooga speech continues this same theme of promoting economic growth, creating good jobs, and advancing the middle class by increased taxes, government spending, and centralized government direction of the economy. Obama continued his mindless attack on the sequester, which only cut the growth in government spending by about 2%, saying “Instead of reducing our deficits with a scalpel to get rid of programs we don’t need, but keep vital investments that we do, this same group has kept in place this meat cleaver called the sequester that is just slashing all kinds of important investments in education and research and our military. All the things that are needed to make this country a magnet for good middle class jobs.”
But jobs and middle class prosperity are not created by government spending, which just takes more productive jobs and spending out of the private economy. In a capitalist economy, economic growth, jobs, middle class prosperity, and opportunity for the poor are created by capital investment driven by decentralized markets, which aggregate the choices and revealed preferences made by hundreds of millions of consumers and workers, to increase production of the goods and services desired by those consumers, most efficiently as driven by decentralized market competition. The effective knowledge aggregated by decentralized markets is far greater than any centralized collection of so-called experts can even conceive.
So the modest sequester cuts are not losing jobs, they are freeing resources to the private sector, where the good, middle class jobs that drive traditional American economic growth and prosperity are created.
But Obama’s speech was all about the government bringing together all the smart people to direct supposed economic growth and prosperity through their centralized wisdom. Obama said, “We want to create not just 15 manufacturing institutes that connect businesses and universities and federal agencies to help communities left behind by global competition to become centers of high-tech jobs. Today, I’m asking Congress to build on this bipartisan support and triple that number from 15 to 45….” Whatever number, this is not how America became the richest and most prosperous country in world history.
But Obama continued, “And this October, I’m going to bring business leaders from around the world, and I’m going to connect them to state leaders and local leaders like your mayor who are ready to prove there’s no better place to do business than right here in the United States of America.” Like business leaders from around the world don’t know where the best place to invest is until Obama brings them together and explains it to them.
The whole speech is just an untutored, outdated paean to such central economic planning as the means to prosperity for the middle class, and opportunity for the poor. But the lesson of the whole 20th century is that decentralized free markets with productive incentives and real competition is what creates robust economic growth and prosperity.
Obama’s failure to learn that lesson is the real reason why America has suffered the worst economic recovery since the Great Depression under his economic mis-leadership. As a result of the same “thinking” displayed in Obama’s speech, every economic policy pursued by Obama has been anti-growth. The President has proposed, promoted and enacted increases in the top tax rates of every major tax, except the federal corporate tax, which already imposes the highest rates in the world. He has imposed costly regulatory burdens and restrictions that preventgood, middle class jobs, and economic growth, as in his foolishness over the Keystone pipeline, where he displays that his career as a street agitator and left wing academic leaves him with no understanding of how the economy works in the real world.
He has increased government spending, deficits and debt, which only drains the private sector of the resources to create good middle class jobs, and economic growth and prosperity. And he has cheerled a weak dollar Fed monetary policy that only chases off investors who don’t want to invest in dollars that the Fed is depreciating over time.
In every instance, these anti-growth economic policies have been the exact opposite of President Reagan’s pro-growth policies, which produced the greatest economic boom in world history. The dramatic contrast between the results of those policies and the results of Obama’s policies have already resolved the debate Obama is having talking to himself. As the Bible advises us, “By their fruits, ye shall know them.”
[First Published by Forbes.com]