What Can Obama Do to Fix the Economy?
With the U.S. economy spinning its wheels, demands are growing for President Obama to “do something.” But considering the nature of the slump and the political dynamics in Washington, there may be very little he can do to get the economy out of the ditch.
Obama doesn’t make his life any easier when he makes speeches that include no important initiatives, as he did on Aug. 8. Note to president: If you are going to go on TV, you better have something to say.
Instead, Obama announced one new program—a tax credit for businesses that hire unemployed veterans. My Tax Policy Center colleague Bob Williams figures the plan would subsidize the hiring of 12,000 to 50,000 vets. Companies would happily take the credit for hiring somebody they would have hired anyway, or for hiring a vet instead of a non-vet. But, either way, the number of new jobs created by this initiative would be tiny.
What could a more aggressive Obama do? Voices on the left, such as Paul Krugman, argue that the president should push for a major new stimulus package, including more public works spending. The right wants more tax cuts. Leaving aside the question of whether either could pass Congress (they couldn’t), is either the right cure for what ails the economy?
Growth in the U.S. has stalled for several reasons. Banks still are not lending to domestic borrowers. In part this is because they are stuck with billions of dollars in non-performing or troubled real estate loans and are terrified of taking on more bad credits. Big public companies are swimming in cash, but won’t invest in either new equipment or new workers until they see new customers. And construction remains dead in the water, with more than 4 million existing homes still on the market and millions more close to foreclosure.
These factors have been with us for a couple of years. What is new is a toxic wave of uncertainty driven partially by the U.S. fiscal mess and more so by deep troubles in the Eurozone.
What’s the cure? It is hard to see how more tax cuts would do the trick. Small businesses need orders and access to credit, not tax breaks. And there is no reason to believe that having even more cash sitting around will encourage big businesses to invest.
What about tax breaks for individuals? Obama wants to extend this year’s payroll tax holiday. That may help keep consumer demand afloat. But since we don’t know what households have been doing with the extra cash they got this year, it is hard to predict what will happen if the holiday is extended.
What about a big new stimulus plan? There is a good argument to be made that the U.S. needs an infrastructure upgrade and that such projects would provide a real boost to the construction industry. But we learned in 2009 and 2010 that there are just not enough “shovel-ready” projects out there to provide any kind of immediate boost to the economy. These projects will take years to roll out.
In 2009-2010, Obama made cash available to hard-pressed states in an attempt to keep state employment going. But a wave of GOP governors is enthusiastically laying off state workers. A check from Obama won’t change their minds.
So what can government do? It can work with banks to finally get all those bad mortgages off their books. Until those loans are written off, the absence of lending will continue to be a dead weight around the economy’s neck. The Obama administration has failed repeatedly to resolve this mess. But with banks again demanding more liquidity from the Fed, this may be a good time for a quid pro quo.
Government can also help reduce uncertainty by addressing its fiscal issues in a responsible way. You knew I’d say that.
But today’s biggest problem today may be the stability of Europe. And that crisis is far beyond the reach of the U.S. government. Bottom line: There are steps Obama can take, but they mostly have to do with the dirty work of bank regulation. And that just isn’t very sexy.
I strongly agree that there are both things the President can do and that he is limited, but I take strong exception to one suggestion: that there’s toxic uncertainty because of deficit reduction or that enacting deficit reduction will help the economy by getting rid of it.
May I offer you a one-two punch? Britain enacted an austerity plan, and the results haven’t been too pretty. Their growth is not projected to be better than ours.
I’ll quote Bill Gross,” It’s difficult to believe, however, that an American-based corporation, with profits as its primary focus, can somehow be wooed back to American soil with a feeble and historically unjustified assurance that Social Security will be now secure or that medical care inflation will disinflate. Admittedly, those are long-term requirements for a stable and healthy economy, but fiscal balance alone will not likely produce 20 million jobs over the next decade. The move towards it, in fact, if implemented too quickly, could stultify economic growth. Fed Chairman Bernanke has said as much, suggesting the urgency of a congressional medium-term plan to reduce the deficit but that immediate cuts are self-defeating if they were to undercut the still-fragile economy.”
This survey also shows that lending isn’t a big problem in the economy:
http://www.nfib.com/Portals/0/PDF/sbet/sbet201108.pdf
Weak demand resulting from the hangover of mortgage debt is.
If you boil down our real economic ills it is that we are encouraging companies to stop making stuff here and to import stuff from overseas. We do this in a variety of ways, but the most obvious is to increase costs and liabilities for producers (increased regulations, potential fines, mandated benefits, polution concerns, high unemployment and business taxes, etc). With the wage differential, it is no wonder why any business in the basic category will relocate and avoid these problems. In general the stuff can be imported for less money, and the quality is typically equal to US made stuff.
Previously, our tax collection was based on raising much of our income from our production. We have not honed our tax system to make up for this by increasing taxation of services or consumption. We need to start taxing consumption, and figure out how to tax service industries like finance. Possibly by a VAT. We may want to subsidize manufacturing in one way or another, so we can increase employment of our lower skilled people. This could be something like paying unemployment compensation or a base medical plan.
One thing we have to reduce is our payments that encourage bad actions. For example on unemployment, 2 years is enough. At a minimum we have to reduce the benefits by a percentage at some point. There are some people that are satisfied with this benefit. They may have side, under the table jobs, or perhaps they know that their union job wiseniority based prevfious wages are double what the new economy can pay. They have to start somewhere, even if it is at a partial of their previous rate.
To my thinking, almost all of Mr Obama’s actions have avoided the hard reality and increased payment to people who are not producing.
The reason cost cutting is pursed with such a vengence is because most of these cuts go to CEOs rather than shareholders, who merely get a “normal” rate of return. Tax policy rewards them with 85% of those gains – which in prior periods gave them only 10% or 30%, with the government confiscating the rest. I don’t think we will get back to those gains, at least not until labor demands repeal of provisions which prevent them from using pension fund investments to take over companies outside an ESOP framework.
If only Obama had selected Hillary Clinton as VP, he could resign. With Biden on deck, that’s not a good option.
Obama entered after the biggest bubble in decades, the real estate bubble, had burst. That was a huge challenge. His response, with the Fed, was to attempt to blow a bigger bubble of government debt. This has guaranteed a bad ending in our relatively near future.
Obama compounded the fiscal challenge by focusing like a laser on expanding entitlement promises, adding unaffordable health insurance subsidies to the already unaffordable combination of Medicare, Medicaid, and Social Security. He also increased regulatory constraints, undeterred by the weak state of the economy.
Given the current size of the government debt bubble, I doubt that anyone can keep it from bursting. Immediate and large reductions in promised government benefits might have some chance: Immediate means testing, immediate increase in eligibility ages, plus a formula to ratchet these restrictions tighter and tighter if revenues do not cover the cost of benefits. Government needs to act as if money is in very limited supply, cutting benefits to the non-poor.
Will this happen? Well, even Bachman puts cuts to current recipients off limits. So you might think it’s impossible.
But consider: If Obama were to move to the right of Bachman and advocate these cuts, which progressives can look at as tax increases on the non-poor if they prefer, it could happen. We could gradually deflate the government debt bubble. This would not be a $4T spending cut package over 10 years. It would be $20, $30, or $0 trillion.
This is what Obama can do to fix the economy. Nixon goes to China.
Actually, Bernanke started the Fed debt bubble under Bush. Geithner simply took over for Paulson, but policies remained the same. The only thing Clinton might have done differently is go after tax policy earlier – and maybe not – she’s not her husband. I also don’t believe for a moment that the Tea Partiers of the world would have been any easier on her than they are on Obama or were on her husband (or John Kerry, for that matter). The anti-anyone-Democratic attack group has been going strong since their days supporting the Viet Nam War and Richard Nixon.
Getting bad mortgages “off the books” may depress prices more – not a good plan. A large percentage of these loans are actually owned by taxpayers, not the banks. If Freddie and Fannie won’t start writing down balances and giving borrowers a break, they should be sold under TARP authority to the Federal Reserve, who will do so (indeed, they already have done so with the mortgage backed securities they bought in QE1).