Obamanomics

We are now just about one third of the way through President Obama's term in office, and I think it is important to review his economic policies both for consistency and impact. According to all the polls, the economy was the single most pressing issue in the minds of the voters in 2008, and it remains so today. So let's look at Obamanomics.

First, we need to understand the nature of the economic problems facing the nation. Unemployment is at unusually high levels and for a lengthy period not seen since the Great Depression. Second, the financial markets were in a state of panic when Obama was sworn in. Third, the USA runs enormous balanced of trade deficits. And fourth, the federal budget was in severe deficit when Obama took office (the projected deficit was between 400 and 500 billion dollars.)

On taking office, Obama offered his major solution to the economic problems, the emergency stimulus package that was rushed through Congress. Obama told the USA that passing the stimulus package was an emergency and could not wait for normal review in congress. Any delay would, in Obama's own words, allow unemployment to rise above 8%. Congress complied and rushed through a package of just under 800 billion dollars of spending and some tax cuts.

The stimulus package was sold as a keynesian measure designed to get the economy moving again. The administration said that not only would the 800 billion dollars grow the economy, but the keynesian multiplier would add an additional 1.5 times the spending to the economy as well. In other words, we would get two trillion dollars of growth from an expenditure of 800 billion dollars. this would be an immediate and much needed shot in the arm for the economy.

Unfortunately, it did not work. There are a number of reasons for this failure. First, much of the expenditure was for items that are one time spending with no lasting economic effect. For example, the biggest chunk of the stimulus went for funding local and state governments so as to avoid layoffs of state workers. While these moves delayed the inevitable reductions in state and local governments (which are hitting now), they did not do anything to increase the economic output of the USA. An extra clerk at the department of motor vehicles may make the lines slightly shorter, but it will not lead to any increase in production of anything. Similarly, many of the items for which expenditures were authorized were for grants to a favored constituency of the Democrats, university researchers. Thus, we have the famous grants for studies regarding salamanders, pigs, bats, and all nature of animals. These grants, for the most part function like the payments for state workers. They keep a few researchers employed but contribute nothing to the economy in the long run.

The second reason for the failure of the stimulus package was the inability to get the so called "shovel-ready jobs" under way. These construction projects, at least, were supposed to be infrastructure improvements that would improve the ability of the economy to function and therefore have a long lasting effect. Unfortunately, very few of the shovel ready jobs were able to be located quickly. this resulted in the stretching out of the expenditure to a point that we still have not spent half of the funds on these projects that were authorized. Beyond this, some of the projects approved were, like the bridge to nowhere, things that had no valid purpose. think of the millions spent on the Murtha Ariport near Johnstown, Pennsylvania. The late Jack Murtha was a powerful Democratic Congressman and got millions for his namesake airport, but the field serves only three half empty flights a day. There were many other political payoffs stashed in the shovel ready jobs, further diluting the impact of these items.

The third reason for the failure of the stimulus package is the budget environment in which it was passed. The high deficits left by Bush were multiplied by a factor of four under the Obama plans. This gave rise to fears of hyper inflation, soaring interest rates and a flight from the dollar. Whether or not these events take place is not the issue; rather, the fear of these events is sufficient to form a major drag on the economy. When people invest a significant portion of the savings in gold, it may be good for the price of gold and the few companies that mine gold, but it takes these funds away from those that could be invested in more productive assets. When businesses put some of their funds into foreign currency assets to hedge against a collapse of the dollar, it again takes investment assets out of the US market. When businesses attempt to forecast the profitability of an investment, fear of high interest rates makes any analysis look less favorable and thereby cuts the number of projects undertaken. All of these effects worked to push down economic growth, and all of these effects were directly increased by the Obama stimulus.

But the stimulus was just the first of Obama's economic actions. The second was his first proposed budget. This budget vastly increase spending by the federal government on all manner of programs. Here too, we heard from the administration about the multiplier effect of federal spending. This simplistic analysis, however, ignored the dampening effect of the incresed deficit discussed above, the fear that these actions induced.

Obama, however, ignored the fear of economic consequences to go ahead with his favored programs. He pushed cap and trade, a bill which was passed by the House and remains alive in the Senate today. This law would raise the cost of energy througghout the US by a high percentage. Again, even before the bill passes, the threat of passage is enough to discourage many companies from investing in energy intensive projects which might become uneconomic if passage is achieved. Obama also pushed through the healthcare bill. Obamcare is touted as a deficit recuction measure, but no sane person actually believes this. It depends on Congress actually cutting half a trillion dollars from Medicare, something no American has ever seen and likely will never see. In other words, since few, if any of the funding mechanisms are likely to remain in place, we will soon see an explosion of ever higher deficits which will further tamp down economic activity. A third maor action by Obama was his freeze of off shore drilling and his threatening of much natural gas drilling in the country. Offshore areas were opened up by Congress and President Bush in 2008 at the height of the oil price rise. Obama closed them again on taking office and has only recently reopened a small portion. Natural gas, a fuel where the USA has ample supplies, is being threatened by actions from the Democrats to stop drilling since it may contaminate ground water. This claim is nonsense, since there has been drilling for natural gas in this country for a century without such contamination. Nevertheless, Obamacrat Congressman Henry Waxman is holding hearings on the issue as part of a bill to stop drilling.

The net effect of all of this has been that Obama has made the economy worse not better. Unemployment soared way past the 8% maximum that Obama promised with the stimulus. The budget deficit has quadrupled. There has been no appreciable help to lower the trade deficit. the only bright spot has been the return of confidence to the financial markets. Of course, on that score Obama has just started a major push to demonize Wall Street and to "regulate" the markets. The proposal would losk in an advantage for the big Wall street firms like Goldman Sachs or Morgan Stanley by making it much harder for small firms to compete in the harsh regulatory environment. So, after demonizing the big boys of Wall Street, Obama would pass a bill that gives them more economic power, not less.

I think it safe to say that Obamanomics has been a failure thus far.