The Obama Recovery Plan: Carter Redux?

The big-spending massive pork barrel bill known as the stimulus package has been signed into law.  Richard Rahn reflects back on the economic crisis three decades ago and finds that the Obama plan looks a lot more like the Carter than the Reagan plans.  And we know which one of those worked best.

Writes Rahn:

President Jimmy Carter inherited a growing economy but one with relatively high inflation and high unemployment. He left office with the economy in a recession, high unemployment, and a record high inflation and interest rates (the prime rate at one point had reached 21 percent). Mr. Carter’s policies were to maintain the very high marginal income tax rates in effect at that time, coupled with a small expansion in the relative size of government.

Mr. Carter had appointed G. William Miller as Federal Reserve chairman, who proceeded to engage in a very rapid monetary expansion. The inflation disaster caused by the excessive monetary expansion caused Mr. Carter to replace Mr. Miller with Paul Volcker at the very end of his administration.

President Reagan inherited an economic situation even worse than the one President Obama has. When Reagan took office, the economy had been in recession for about a year, the unemployment rate was almost identical to today’s, but the labor force participation rate was smaller, and inflation was out of control. At the time, the newspapers were filled with stories about the “worst economy since the Great Depression” - which, unlike today, was true, and the economic establishment seemed to be bereft of ideas of what to do.

Credit markets were in a mess, and both businesses and consumers were not borrowing because they could not afford the interest rates. President Reagan, unlike his critics, had a clear plan to revive the economy, which included: monetary restraint to stop inflation; large reductions in marginal tax rates to renew the incentives to work, save and invest; and a reduction in nondefense spending as a percentage of gross domestic product (GDP).

Unlike other recent presidents, Reagan actually kept and delivered on his promises, which resulted in high growth (7.2 percent in 1984 alone) and large reductions in the unemployment rate - particularly, inflation. He stuck with Mr. Volcker and his monetary restraint because he understood inflation had to be brought under control, even though he also knew it would necessarily prolong the recession. How many of today’s politicians would be willing to take the heat for the long run good?

It is hard not to ask:  do the supporters of the “stimulus” bill really think it will work?  Or did they decide long ago that policy effectiveness was irrelevant to their political success?

Deeper into Afghanistan

President Obama yesterday announced his decision to send 17,000 extra troops (two brigades and support troops) to Afghanistan in the coming months, bringing the total American troop presence there to over 50,000. This has been in the works for some time. It comes as the administration conducts several reviews on Afghan policy.

You might say we are putting the cart before the horse, sending troops at a problem just as we reconsider our strategy for confronting it. On the other hand, our existing strategy, which is to prop up the Afghan state with US firepower, seems unlikely to change under Obama. Despite recent sensible comments about the limits of what we can accomplish in Afghanistan, Obama’s team likely remains committed to state-building there. Given that goal, it is hard to see why we should stop at two brigades. We could send five and still have a low force-to-population ratio, judging by historical ratios for counter-insurgency campaigns.

A stable Afghanistan is neither necessary to US security nor obviously possible at reasonable cost, as I have periodically written. It is not evident that Al Qaeda types would again find haven in Afghanistan should we go. But assuming that they would, there remains an alternative to trying to overcome Afghanistan’s anarchic history. We could attack only the remaining jihadists, their allies, and insurgents who will not settle for local power. That would require only a small U.S. ground presence, airstrikes and local allies.

Pundits tend to assume that counterinsurgency and state-building are identical — foreigners enforce the state’s claim to a monopoly on violence to gain it support and crowd out alternative authority structures. But there is another counterinsurgency strategy out there, which is to allow the insurgency local power, to appease it as part of a bargain. The key tactic that brought lowered violence in the Sunni part of Iraq – bribing insurgent militia leaders to cooperate with us — undermines the Iraqi state, sacrificing our stated goal for a simpler one.

While we’re on the subject, I see Matt Yglesias supports the troop increase because it will lessen the need for airstrikes, which too often kill civilians. That seems backwards. Even with 12,000 new combat troops, our forces will remain a relatively small force in a large mountainous region. That means operating in dispersed contingents with limited firepower and therefore depending on air support in firefights. The new troops will likely provoke more combat and more supporting airstrikes, at least in the short term.

New Podcast: Obama’s Shock Doctrine

Naomi Klein, author of The Shock Doctrine: The Rise of Disaster Capitalism, says free-market advocates spend their careers stockpiling free-market ideas waiting for a crisis that could be used as a springboard for implementing those ideas. But, as David Boaz asks, what about Obama’s policy proposals amid recession and financial crisis?

In today’s Cato Daily Podcast, Boaz exposes Obama’s Shock Doctrine:

We know from history that, while there are a few examples of free-market or somehow right-wing programs coming about after a crisis, usually what happens in a crisis is government seizes more money and power. And you can see that in the New Deal; the Great Depression led to the New Deal. You can see it after Kennedy’s assassination led to Lyndon Johnson and his 100 days of legislation. You can see it in practically every communist government that ever came to power, was in the devastation of war….

We had a financial crisis and what happened? Did the incumbent Republican administration say, now’s our chance to implement Milton Friedman’s program and privatize and deregulate? No, they did what governments always do: they expanded their own powers at the expense of civil society, and so in that sense, Obama’s just doing the same thing that Bush did. We could call this the Bush-Obama era.

It was, after all, Rahm Emmanuel who said, “You never want a serious crisis to go to waste. This crisis provides the opportunity for us to do things that you could not do before.”


Events This Week at Cato

Wednesday, February 18

12:00 PM (Luncheon to Follow)

BOOK FORUM: Falling Behind: Explaining the Development Gap between Latin American and the United States by Francis Fukuyama (editor)

Featuring the editor Francis Fukuyama, professor of International Political Economy, School of Advanced International Studies, Johns Hopkins University; with comments by Norman Loayza, lead economist, Research Department, World Bank; moderated by Ian Vásquez, director, Center for Global Liberty and Prosperity, Cato Institute

Due to overwhelming response to this event, registration is closed, but it will be simulcast live on

Thursday, February 19

11:00 am (Luncheon to Follow)

POLICY FORUM: “Mexico’s Drug War: The Growing Crisis on Our Southern Border”

Featuring Ted Galen Carpenter, vice president for Defense and Foreign Policy Studies, Cato Institute; Ethan Nadelmann, executive director of the Drug Policy Alliance; Vanda Felbab-Brown, foreign policy fellow at the Brookings Institution; and Daniel T. Griswold, Director of the Center for Trade Policy Studies, Cato Institute.

Register to attend this free event, or watch live online.

Friday, February 20

12:00 PM (Lunch Included)

CAPITOL HILL BRIEFING: “Why Markets Are the Key to Quality, Coordinated Medical Care”

Featuring Arnold Kling, author of Crisis of Abundance, Under the Radar: Starting Your Internet Business Without Venture Capital and Learning Economics and adjunct scholar, Cato Institute.

Briefing will be held in room B-340 of the Rayburn House Office Building. Register here for this free event.

Expect the Worst

Yesterday, American Federation of Teachers’ President Randi Weingarten had an op-ed in the Washington Post calling for national academic standards. Of course, union support for national standards is itself almost reason enough to fight any such move to the death, but over at The Corner Ramesh Ponnuru asks a critical question, wondering “why we should expect federal standards to resemble the best state standards rather than the worst ones.”

As I’ve pointed out on numerous occasions, especially to the standards zealots on the right, there is no good reason to expect quality to prevail. The people who would be held to high standards, such as teachers and school administrators, have huge incentives and political power to fight rigor, and given their political heft would almost certainly prevail. Indeed, based on what’s happened with standards to date, the odds seem hugely in favor of wimpiness. As I wrote in response to Michael Petrilli of the Thomas B. Fordham Foundation a couple of years ago:

Given history and political reality, Petrilli and other like-minded conservatives have very few government standards successes to hang their hats on. Indeed, that’s why they’ve had to ask the country to play 6 percent roulette: “Of course, getting national standards and tests right is no small feat,” Petrilli acknowledges. “But McCluskey is wrong to insist that it cannot be done. After all, California, Massachusetts, and Indiana managed to develop excellent standards over the past decade. If it can happen in Sacramento or Boston, it could happen in Washington, D.C., too.”

So, because three out of fifty states have gotten standards right, we should gamble on the feds getting them right, too, and give Washington the authority to set the standards for every public school in America? That’s crazy.

Maybe if we tweak Petrilli’s statement, its insanity will be more clear: “Getting national standards and tests right is no small feat. And McCluskey is right to insist that it almost certainly can’t be done. After all, Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas – and the list goes on - haven’t managed to develop excellent standards over the past decade. If it can’t happen in Montgomery or Juneau, it probably won’t happen in D.C., either.”

I Believe in Non-Political Government Comparative-Effectiveness Research (and in the Tooth Fairy, Santa Claus…)

My colleague Michael Cannon has been writing about the folly of government-sponsored comparative effectiveness research. Now, in an article in the Journal of the American Medical Association (subscription required), John Kraemer and Lawrence Gostin add another cautionary note for those who believe that the government’s decisions will be based on science and not on politics. In particular, the authors discussed how the Connecticut Attorney General has attacked the Infectious Disease Society of America (IDSA) for recommending against the use of long-term antibiotics to treat “Chronic Lyme Disease.” Although the IDSA based its non-binding recommendation on the overwhelming scientific evidence, the International Lyme and Associated Diseases Society (ILADS), a well connected and media-savvy advocacy group for those with Lyme disease protested, taking its case to the Connecticut political establishment. As a result, Connecticut Attorney General, Richard Blumenthal sued the IDSA under the state’s anti-trust laws.

Political institutions are by definition political. A government body deciding on the comparative-effectiveness or cost-effectiveness of medical treatments will inevitably base its decisions as much on politics as on science.