The President’s Incoherent Economic ‘Philosophy’

National Review Online | Published on

By James C. Capretta

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Once upon a time, President Obama was a traditional Keynesian. When he came into office, he favored a massive injection of new government spending into the economy in the name of “stimulus”—counter-cyclical federal activity aimed at offsetting depressed consumer demand emanating from a recession-battered private sector.

Unfortunately for the president, that approach to economic revival has now been thoroughly discredited in the public’s mind. The problem with Keynesianism isn’t the theory; it’s the practice. What happens in the real world—that is, the world in which Congress drafts and passes legislation—isn’t a series of tidy, one-time, highly valuable public investments that would not have occurred were it not for the legislation.

No, when Congress writes stimulus spending bills, what we get are narrow-purpose pet projects, large federal bureaucracies, ideological hobbyhorses, and spending that simply displaces what otherwise would have occurred anyway, especially at the state level. The net result provides little if any boost to aggregate demand because the states—and to some extent private citizens—simply pocket the federal money and reduce their deficits and debts. Meanwhile, what federal taxpayers get is a permanent increase in the size of government—because almost nothing in politics is ever “one-time”—as well as a massive increase in the national debt.

Of course, it didn’t help that the president and his advisers claimed that the $800 billion stimulus bill that Congress passed in early 2009 would keep the unemployment rate below 8 percent. Because unemployment soared passed 8 percent in early 2009, and even now, more than three years after passage of the stimulus bill, it still has not fallen back below that level even once.

So the president has abandoned any pretense of defending the signature economic initiative of his term in office. Indeed, like his health-care plan, the stimulus is something he pretty much never mentions. That has put him in a difficult position, because the economy continues to be the top concern of voters, with just six months to go to the November election.

To fill the void, the president has taken to articulating a different kind of economic “philosophy” in a series of high-profile speeches over the last year. It began with his denunciation of House Budget Committee chairman Paul Ryan’s 2011 budget plan last April, and continued with his address to a joint session of Congress last September, his speech in Osawatomie, Kan., in December, and the sequel to his Ryan-denouncing tirade delivered earlier this month, now known with special fondness as the “social Darwinism” speech.

From these speeches, we learn that the president believes that the way to confront the central challenge of our time and restore an era of robust economic growth in the United States in the years ahead is…what exactly?

It isn’t clear. For one thing, the president has chosen to define his “plan” (if it can be called that) mainly by saying what it isn’t: He wants it known that his approach to the economy most definitely bears no resemblance to the plan he claims his GOP adversaries favor. Indeed, the primary purpose of these speeches has quite clearly been to tear down the straw man of a plan the president says the GOP supports in the hopes that the public will look more favorably on the president’s miserable economic record.

And so we hear from the president that the GOP favors creating a “you’re-on-your-own economy,” wants to “end Medicare as we know it,” seeks to revert to “social Darwinism,” and plans to eviscerate the social safety net to pay for a tax cut for the rich. None of this is true. No matter. The president has decided that the only path to electoral victory is to become attack-dog-in-chief.

But what about the actual substance? Is there anything at all to what the president is saying?

When you strip out all of the excessive and grandiose rhetoric, what the president is attempting to argue in these speeches is that the keys to higher economic growth in the United States are higher marginal tax rates on the successful, no reforms to entitlement programs, and more government spending on selected “investments.” To say that this is a pathetic plan for growth would be to give it too much credit.

It is important to note here that the president is not arguing at this point that we need more government spending for stimulus reasons. His budget plan is to raise taxes sufficiently to cover additional spending, with only a modest increase in the deficit in 2013 compared to current law.

No, his argument at this point is that the government spending he has in mind is so essential that the American economy simply can’t live without it. This is absurd.

In a telling exchange, the president recently argued that, by gosh, even behemoths Google and Facebook wouldn’t exist today if it weren’t for “investments” that “we” made in basic science. Presumably, the president is referring to the early research the Defense Department conducted on an information network that morphed into the Internet. But there’s a little problem with this argument. The president’s budget cuts defense spending—drastically—and far below the levels called for in the GOP plan. If any budget plan is harming this kind of innovation, it’s the president’s plan, not the GOP’s.

Further, the president’s budget freezes funding for the National Institutes of Health. This is by far the largest source of resources that the federal government provides for basic scientific research. This freeze on NIH simply doesn’t square with the president’s contention that somehow his plan is far superior to the GOP budget with respect to research and development.

And it gets worse.

The president in these speeches has argued over and over that a key ingredient to growth is more federal spending on education and workforce training. This argument runs counter to five decades of experience. The federal government has steadily become more and more involved in elementary and secondary education since 1965. There’s not a shred of evidence that it has helped raise educational performance by students. On the contrary, the steady encroachment of federal regulations and spending in education has coincided with an erosion of the nation’s standing relative to that of our peers around the world.

And, with respect to workforce training, the federal government has conducted countless studies on the effectiveness of the many existing workforce-training programs going back at least 30 years. These programs—run mainly by the Department of Labor—have been shown time and again to produce mediocre results, at best, in terms of gains in future earnings for workers. The idea that somehow the Obama administration has a formula for doing this better in the future than it has been done in the past is simply not credible, to put it mildly.

Finally, on taxes, there’s no dispute among economists that, ot
her things being equal, higher marginal rates are worse than lower marginal rates for economic growth. Indeed, every bipartisan budget plan offered over the past three years has had as a central pillar tax reform with lower marginal rates and a broader base. The only one calling for raising marginal rates is President Obama. He is the outlier.

The formula for long-term growth in the United States is not a secret or a mystery. It’s the same formula that economists preach to countries that have very little track record of economic progress. The key is to embrace a strong free-market economy with stable monetary policy, free trade, low marginal tax rates, a tight rein on government entitlement promises and regulations, and narrow deficits.

The president’s plan touches on none of this. He has proposed no serious tax reform or deficit-reduction package. He is, at best, reluctant to promote free trade, for fear of offending his union base. And, on entitlements, he has taken the largest expansion in a generation and piled that on top of the unaffordable programs already on the books.

Meanwhile, the GOP plan, put together by House Budget Committee chairman Paul Ryan, takes on all of the serious challenges holding back the American economy. It removes trillions of dollars in unfunded liabilities from the U.S. balance sheet, puts the government on a path to balanced budgets, and reforms both the individual and the corporate income-tax systems to lower rates and broaden the bases—without any reduction in revenue. And there’s still plenty of funding in the Ryan budget for worthwhile federal spending on infrastructure and other programs, including reformed education and workforce-training efforts.

The president would have been better off sticking to a Keynesian defense of his original stimulus plan. It would have been a more plausible story. Because now that he has abandoned defending that, he basically has nothing left to say. Which is why he is resorting to pumping up trivialities and calling them a plan.

James C. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director of the Office of Management and Budget from 2001 to 2004.