As the economy continues to teeter on the precipice of a double‐dip recession, there is a growing demand for the president and Congress to rush back from their vacations and do something. But why?
What is it that we really think the president can do?
While the president’s latest economic plan remains a deeply held secret until after his vacation, pretty much everyone in Washington expects him to call for … drumroll please … a stimulus plan.
Now why haven’t we thought of that before? Oh, that’s right. We have.
In fact, we have now had at least five — or is it six? — stimulus plans since this recession started.
The first of these came back in February 2008 under the Bush administration: a $152 billion measure, featuring a $600 tax rebate, several incentives for businesses, and loan guarantees for the housing industry. Then, as the recession picked up steam in September 2008, Congress passed the $61 billion Job Creation and Unemployment Relief Act of 2008. This bill pumped money into federal “infrastructure projects” and extended unemployment insurance.
And of course, immediately after taking office, President Obama pushed through the giant $787 billion stimulus. He followed that up with an additional $26 billion bill in August of 2010, aimed at helping states retain teachers and make Medicaid payments. On top of that, in September 2010, Congress created a $30 billion fund to provide small businesses with low‐interest loans. Finally, the December compromise that extended the Bush tax cuts included another extension of unemployment benefits and a reduction in the Social Security payroll tax, both heralded at the time as stimulus measures.
We’re not the first country to rely on this stale brew of Keynesian economics. When Japan’s asset bubble collapsed in the late 1980s, its economy went into freefall. In response, Japan pursued three major fiscal‐stimulus packages, totaling 6 percent of GDP, between August 1992 and September 1993. When those failed, Japan tried still more stimulus, a total of eight different packages over eight years. The Japanese government has spent $6.3 trillion on construction‐related projects alone. It also increased subsidies and social‐welfare payments.
Japan began the 1990s with a budget surplus. A decade later it had a budget deficit equal to 7.9 percent of GDP. Today, its budget deficit is 8.3 percent, and its debt exceeds 200 percent of GDP. The result has been minimal economic growth. For all this spending, Japan’s industrial production in 2008 was only 2.9 percent larger than it had been in 1991. Over the past decade, Japan’s economy has grown by less than a quarter of one percent.
Now President Obama prepares to call for another extension of unemployment benefits, more infrastructure spending, and an extension of the payroll‐tax cut.
The real drags on our economy have nothing to do with the failure of government to spend enough. The federal government is now spending roughly 24 percent of GDP. State and local governments are spending another 10 to 15 percent, meaning government at all levels is spending around 40 percent of GDP. If government spending brought about prosperity, we should be experiencing a golden age.
The reasons we are not growing are simple and clear:
Debt: Several studies show that high levels of government debt slow economic growth. The seminal study by Carmen Reinhardt of the University of Maryland and Kenneth Rogoff of Harvard concluded that countries with a debt totaling more than 90 percent of GDP have median growth rates 1 percent lower than countries with a lower debt, and average growth rates nearly 4 percent lower. Our national debt now tops 102 percent of GDP.
Taxes: Businesses are forward‐looking. They hear the president and congressional Democrats calling for tax hikes, and they become worried about taking the risks inherent in investing, expanding, and hiring. Even if the president doesn’t sock them with any new taxes, they are facing some $569 billion in new taxes by the end of the decade as a result of Obamacare. And virtually everyone acknowledges that our corporate tax rates, the second highest in the developed world, are putting American businesses at a competitive disadvantage.
Regulation: Obamacare is coming, including a mandate for businesses to provide workers with health insurance. Making hiring more expensive is not an inducement to increased employment. The EPA is planning new carbon‐emission regulations. The NLRB is telling Boeing where to locate its plants. This is not a pro‐jobs agenda.
Here’s a different idea. More than two centuries ago, Adam Smith wrote that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”
President Obama could try that approach — and he wouldn’t even have to come back from vacation.