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Obamanomics: Creating a Suboptimal Economy

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PostPosted: Mon Feb 02, 2009 4:15 am    Post subject: Obamanomics: Creating a Suboptimal Economy Reply with quote

In the 2000s, it was wonderful to see uneducated Third World immigrants, who would have earned a few dollars a day in their home countries, if they could get a job, living in big houses, driving in almost new minivans or trucks, able to buy goods cheaply, etc. in the U.S., while 20% of U.S. households earned over $100,000 a year, e.g. in the high-tech industry. The U.S. created enormous capital (e.g. a record 20 consecutive quarters of double-digit U.S. corporate earnings growth) and there were massive foreign capital inflows. The U.S. had a virtuous cycle of consumption and investment. Cheaper goods and cheaper capital induced demand. Currently, Americans are stocked-up with real assets and goods to weather this recession better than any other country.

However, big change is coming. The new adminstration wants China to trade its goods for U.S. goods rather than for worth less paper. Also, the cost of domestic production will rise, because of hostile anti-business policies, which will raise prices and create less capital, resulting in less real output. Moreover, government will become a larger proportion of the U.S. economy, e.g. through the creation of "green-collar" jobs, and many other high-cost jobs. So, Americans will work harder and longer for fewer and smaller real assets and goods. The cost of living will rise in many ways, including through disincentives for productive workers and incentives for less productive workers or unproductive non-workers. The government is now micromanaging the economy, since the free market has been a complete failure.

$646,214 Per Government Job
by Alan Reynolds
The Wall Street Journal on January 28, 2009.

House Democrats propose to spend $550 billion of their two-year, $825 billion "stimulus bill" (the rest of it being tax cuts). Most of the spending is unlikely to be timely or temporary.

39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education. Another 22.5% of the $550 billion would go to social programs, such as expanding food stamps and extending benefits for the unemployed and subsidizing their health insurance.

After subtracting what House Democrats hope to spend on government payrolls, health, education and welfare, only a fifth of the original $550 billion is left for notoriously slow infrastructure projects, such as rebuilding highways and the electricity grid.

The Obama administration claims the stimulus bill will "create or save three or four million jobs over the next two years . . . with over 90% [of those jobs] in the private sector." To prove it, they issued a report from Christina Romer, chairman of the Council of Economic Advisers, and Jared Bernstein, chief economic adviser to Vice President Joe Biden. Its key estimates, however, were simply lifted from an outdated paper by Mark Zandi of Moody's

Mr. Zandi's current estimates have government employment growing by 330,400 over two years as a result of the House bill (compared with 244,000 in Bernstein-Romer paper). Yet even that updated figure still amounts to only 8.3% of total jobs added, even though state and local governments are to receive 39% of the funds ($214.5 billion). Spending $214.5 billion to create or save 330,400 government jobs implies that taxpayers are being asked to spend $646,214 per job.

In the March 2006 IMF Research Bulletin, economist Giovanni Ganelli summarized recent International Monetary Fund research on fiscal policy. Several studies find that reductions in government spending "can have expansionary effects, since they can contribute to a consumption and investment boom owing to altered expectations regarding future taxation."

A 2002 study of U.S. data by Roberto Perotti of Università Bocconi did find that the effect of debt-financed spending increases was somewhat positive, but the multiplier effect was much less than one. A 2004 IMF study of recessions in advanced economies likewise found that "multipliers are unlikely to exceed unity." A 2006 study of U.S. data by IMF economist Magda Kandil found the effect of "fiscal expansion appears insignificant on aggregate demand and economic activity."

In December 2008, the National Bureau of Economic Research published "What are the Effects of Fiscal Policy Shocks?" by Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago. "The best fiscal policy to stimulate the economy," they report, "is a deficit-financed tax cut," and "the long term costs of fiscal expansion through government spending are probably greater than the short term gains."

That's because "government spending shocks crowd out both residential and non-residential investment," while "the [positive] response of consumption is small and only significantly different from zero on impact" (i.e., temporarily). But suppose all of these recent studies were mistaken, and the House Democrats' spending spree worked as advertised. We're still left with three million jobs added or saved at a cost of $825 billion -- $275,000 per job.

In short, a growing body of evidence suggests that a dollar of extra spending is likely to lift nominal income by less than a dollar, arguably much less. Several studies suggest the multiplier may be less than zero after a couple of years, because private investment (including housing) eventually falls by more than government spending rises.

Trade Lessons of the 1930s Unheeded

WASHINGTON POST -- The stimulus bill passed by the House Wednesday contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package. A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

Proponents of expanding the "Buy American" provisions enacted during the Great Depression, including steel and iron manufacturers and labor unions, argue that it is the only way to ensure that the stimulus creates jobs at home and not overseas. Opponents, including some of the biggest blue-chip names in American industry, say it amounts to a declaration of war against free trade. That, they say, could spark retaliation from abroad against U.S. companies and exacerbate the global financial crisis.

CATO INSTITUTE (Dan Ikenson) -- For all practical purposes there is no difference between the Smoot-Hawley tariff bill of 1930 and the “Buy American” provisions in the $819 billion spending bill that passed the House Wednesday.

Smoot-Hawley was the catalyst for a pandemic of tit-for-tat protectionism around the world, which helped deepen and prolong the global depression in the 1930s. “Buy American” provisions will no doubt inspire similar trade barriers abroad and will have the same effect of reducing global trade—and therefore prospects for economic recovery. It is not unreasonable to say that U.S. policymakers are on the verge of taking us down that same disastrous path.

More economists rejecting Obama's stimulus plan.

This appeared last week as a full-page in the New York Times and Washington Post, and is scheduled to appear in the Los Angeles Times, Chicago Tribune, and Washington Times. 200 economists (including Nobel laureates) signed the statement. Here's another version, with an additional 100 economists:

Obama has repeatedly stated he doesn't want to go back to the failed policy of tax cuts. However, the reality is:

Bush's timely tax cut in 2001, after the end of a spectacular structural bull market from 1982-00, over the worst stock market crash since the Great Depression, and during a quick and massive Creative-Destruction process turned a potentially severe recession into a mild recession.

Bush's timely tax cut in 2008, after the biggest global economic boom in history, a huge U.S. housing boom, severe global imbalances, and after the S&P 500 hit an all-time high turned a potentially severe recession into a soft-landing, until September 2008 (when Lehman was allowed to fail freezing the credit market). The tax cut allowed the Fed to catch-up easing the money supply.

A tax cut will have an immediate and powerful effect stimulating the economy, unlike Obama's spending programs, which are slow, inefficient, and unfair.


In 1990, GHW Bush made a deal with Congress to raise taxes and cut spending at the tail end of an eight year expansion. Carter was most fiscally conservative, since the national debt shrunk to the smallest proportion of GDP since WWII, in 1979, before the 1979-80 recession. The U.S. has never had a 10 year period without a recession.
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