Yes, Obama is to Blame
David Frum has challenged conservatives to identify which of President Obama’s policies have prolonged and worsened the recession. David focuses on what has happened, or not happened, without considering that people in the real economy (beyond the federal government and Washington punditry) base their decisions on what they expect to happen.
Take President Obama’s tax policies, for example. David correctly points out that corporate and individual income tax rates under President Obama remain unchanged from the last decade. Indeed, when President Bush’s 2003 tax rates were due to expire at the end of 2010, President Obama agreed to extend them, but only after a game of brinksmanship not unlike the recent debt-ceiling increase debate, and only until the end of 2012.
Taxpayers, especially investors and business owners looking to allocate capital, understand there is a significant probability that those rates will expire and taxes will increase. President Obama has made clear that he believes millionaires and billionaires are not paying their fair share of taxes. He has also proposed spending priorities that will require tax increases on not just millionaires and billionaires to pay for.
In those circumstances, it is not unexpected that taxpayers are making economic decisions based on President Obama’s articulation of a policy preference for higher taxes, which creates a disincentive to invest in capital and employees in the medium-to-long term. No one can blame investors and business owners for taking at face value what President Obama says about what he intends to do.
Regulation is a similar matter. David points out that pages in the Federal Register have only increased 5% since President Obama took office. But this ignores the pages President Obama and Congress have added to the U.S. Code, especially the Affordable Care Act and Dodd-Frank, which will require thousands of new regulations in healthcare, banking, finance, consumer protection and other areas of the economy. Especially since those statutes grant broad powers of interpretation and discretion to federal agencies, the regulatory effects on individuals and businesses may be transformative. Investors and business owners see this and react accordingly to the uncertainty.
And these are in addition to the activist bent of President Obama’s appointees at other federal agencies. The Environmental Protection Agency is liberally re-interpreting its regulatory authority, and the Department of Labor and the National Labor Relations Board have proposed numerous changes welcomed by President Obama’s union allies but likely to harm businesses. Federal officials challenging the right of a company to relocate production facilities to a lower-cost, right-to-work state, as the NLRB has done with Boeing Co., creates a negative business climate and discourages economic recovery and growth.
President Obama’s spending initiatives also create a drag on the economy. Only in Washington could a failed $787-billion stimulus package be regarded merely as something that could have been done differently. Taxpayers recognize that the wasted $787 billion is gone for good, and it will come out of their pockets and the pockets of their children and grandchildren. This is $787 billion in wealth that the nation will have to create, and pay in taxes, with little if anything to show for it.
David may be optimistic that the record postwar spending levels during the first two years of President Obama’s presidency are temporary as a result of the recession, but the size and scope of the stimulus package, as well as the Affordable Care Act and other legislation President Obama favors, indicate an inclination to permanently expand federal outlays, and particularly transfer payments. The people who have to pay for all this, the taxpayers, see the writing on the wall. To them, this is not just a political game. It affects their real-world return on investment and how much of the fruits of their labor they give to the government and how much they get to keep. It is irrational to assume this has no bearing on economic recovery and growth.
There is also the opportunity cost of the $787 billion. It could have stayed in private hands and been spent by businesses on new capital and employees. It could have been spent by consumers on whatever they thought best. Or it even could have been put into David’s preferred policies for combating unemployment, such as a payroll tax holiday, income support and infrastructure. Simply saying that maybe President Obama could have spent it better is ignoring the real economic of results of it not having been spent better, or not spent at all.
There is also the most direct cause of the recession, which is the housing and financial crisis. The housing boom that led to the housing crisis was awash in government subsidies in the form of artificially low interest rates, government-backed mortgage guarantees and policies that encouraged home ownership even among borrowers with high-risk profiles. Private parties took advantage of these subsidies and in many cases disregarded prudent risk management practices, common sense and even the law.
But neither President Bush nor President Obama nor the Congresses they have worked with have allowed the housing market to reach its natural bottom. Indeed, there are still federal government programs keeping people in their homes who cannot pay their mortgages and continuing to encourage risky lending with government-backed mortgage guarantees. Until the bad loans are finally written off and the books cleaned up, the housing depression will persist, and the recovery will continue to be weak.
Many of President Obama’s mistakes are related to or are extensions of President Bush’s mistakes. President Bush and the GOP-controlled Congress were foolish to enact tax cuts that automatically expired, rather than making them permanent, and they spent carelessly through much of the decade. They also failed to propose meaningful healthcare and financial reform when they had the chance, leaving it to the Democrats and their heavy-handed approach. The Republicans were in charge during much of the housing boom that led to the crisis.
But it is denying reality to pretend that President Obama’s policy preferences for higher taxes, expansive regulation and greater spending are not having a drag on expectations of taxpayers in the real economy and therefore a dampening effect on economic recovery and growth.
