Why Obama's Economic Policies Are Failing

The $789 billion stimulus doesn’t fix what ails the economy and is doomed to fail.

Since 2007, the private sector has shed 6.6 million jobs—half in manufacturing and construction. Governments added 185 thousand employees, hired teachers, and no change in those trends can be detected since the stimulus began.

During the economic boom, a huge structural international trade deficit emerged. Imports exceeded exports by about $700 billion annually from 2005 to 2008. By the end of the boom, nearly all was manufactured goods from China and oil.

The failure to pay for imported consumer goods and gasoline with exports creates a huge shortage of demand for U.S.-made products. Money spent on imports that does not return as payment for exports can’t be spent on U.S. made products. Inventories pile up and layoffs result.

Americans solved that problem, temporarily, by borrowing against homes, cars and credit cards to spend more than they earned. Banks got the cash from China and Middle East oil exporters, stuck with dollars from selling to Americans but not buying U.S. exports.

A bubble resulted in home construction, housing prices and stocks that inevitably burst.

Voila, the Great Recession.

To lift the economy, President Obama must resurrect manufacturing, which requires exporting more and importing less, and shift idle construction workers from housing, which is in oversupply, to rebuilding schools, roads, hospitals, and factories.

Of the $789 billion stimulus, only about $100 billion is infrastructure. About $280 billion is tax cuts for individuals and businesses who are too scared to spend. The remaining, $400 billion mostly rewards Democratic Party constituencies—for example, huge increases in the Department of Education budget and grants to state and local governments are not laying off teachers and policemen as President Obama often asserts.

Cap and trade will only make matters worse—economically and environmentally. It will raise the cost of manufacturing in the United States and send jobs to China, where CO2 emissions are unregulated and higher.

Proposed changes in health care would increase the cost of insurance to businesses instead of lowering prices for drugs, doctor’s visits and malpractice insurance, as true reform would accomplish. That may reward yet other Democratic Party constituencies but it will further disadvantage Americans competing in global markets.

Real alternatives are available to failed Bush-era policies.

Recalibrate trade policy to promote exports, balance trade with China and develop domestic oil and gas. Abandon cap and trade until China and India sign on to the same disciplines, require drug companies and doctors to charge no more than they are paid in Canada, and find honest work for malpractice lawyers.

All would require Mr. Obama to think outside the box and abandon the conventional wisdom of the left.

Just as President Bush’s blind adherence to conservative ideology threw America into crisis, Obama must unshackle his policies from liberal group think to succeed.

Comments

[bigbaboon57:]

Bush was no conservative, but Obama is literally many times worse (as measured by the deficit he is running up). The root of the problem is excessive government spending and the hollowing out of our manufacturing sector. No other country is as open to being merely the consumer of other's manufactured goods, no other country would allow their good jobs to be shifted as we have. The tax system in this country (with the horrible cap and trade just an extension of already bad policies) vs. other countries explains the hanicap manufacturer's suffer under. It also doesn't help that we've been effectively paying the defense budget of the entire Western World for the last 60 years, keeping sea lanes protected for free and spending trillions supporting the defense of other countries, again for free to them.

Jul 14 03:44 AM

[SteveB/Colo...:]

The author wrote: "develop domestic oil & gas...." This is easier said than done. As of June, 2008, before the recession hit, energy companies were sitting on over 67 million acres of undeveloped oil/gas leases; onshore, mostly in the West, and offshore (source: Republicans for Environmental Protection). In the last year, many wells have been capped and drill rigs idled due to the recession-caused drop in demand.

Out here, we also continue to hear the "siren song" that developing oil share will solve all our energy problems. There is also the criticism of the Interior Department for not doing more leasing of shale lands. However, there is no economically feasible way to develop that resource. Companies have tens of thousands of shale acres already in hand, between leased R & D acres & their own private land in Colo., Wy., and Utah. The companies are doing little to develop this land and Shell Oil had admitted it will be several years before they know if their current experiments will work.

In short, it's easy to say "drill, baby, drill." But not so easy to make it happen. Perhaps Dr. Morici should have done some additional background research.

Jul 14 08:16 AM

[Steve in Gr...:]

Thanks, Mr. Morici, for the interesting note. I agree with most of what you say, but I have to quibble with your comment that "...President Bush’s blind adherence to conservative ideology threw America into crisis..."

Bush was no conservative, as demonstrated by his expansion of Medicare to include a drug benefit, his Federalization of education (the abominable "No Child Left Behind"). Bush was a moderate, not a conservative.

And the primary thing that "threw America into crisis" was the massive money supply inflation by Greenspan in response to the bursting of the dot.com bubble, which in its turn created a bubble in U.S. home prices, U.S. equities and oil which burst in 2007-2008.

Jul 14 08:37 AM

[fireball:]

sir you give many good ideas. like the other posters say, bush was no conservative and notnow points out neither was mccain. hopefully a constitutionally aligned party can grow from this. hopefully mr. audacity won't be able to finish off the u.s. in 4 years. is that audacity, that i try to keep a little hope?

Jul 14 09:23 AM

[keithfeather:]

If, before bashing drug companies for profiteering, writers would actually look at the return shareholders have received from owning drug company shares over the last 20 years, they might rethink looking for medical cost reductions from those companies.

Jul 14 09:56 AM

[W.E. Heasley:]

When Deploying Keynesian Government Deficit Spending, at the very least base the spending on Political-Economy rather than Political-Political. The stimulus plan needs Recalled purely due to design. The design is so flawed it is doomed to fail on multiple levels. Even worse, the pork barrel political pay offs in the stimulus are financed with Tax Payer Dollars.

Further, if you are going to deploy Keynesian Deficit Spending, be sure to read the entire theory Keynes put forth. That Deficit Spending is temporary until the Private Sector recovers. There is absolutely no incentives for Private Capital Formation leading to Private Sector Jobs.

Hence the ill conceived design of the stimulus will produce dismal results. When the dismal results wear off (spending ends) no arrangements have been made for Private Capital Formation leading to Private Sector jobs. The final result is a stagnant economy with high persistent unemployment.

Welcome back to the 1970’s.

Jul 14 10:37 AM

[sod:]

Typical facile neocon approach to economic and social problems. This piece by Peter Morici, is more a screed then an analysis of our current problems.

As for thinking out of the box, we would have to look beyond the suggestions proposed by the author of this diatribe. This "out of the box" thinking has been around since Ronald Reagan. It is the kind of economic philosophy that has finally brought us to our present predicament.

Jul 14 10:52 AM

[Mike10613:]

I read Obama is putting a lot of government money into wind farms. I checked out the big maker of turbines this morning Clipper. The search is still in my Google box - CWPR.L share price - the price on the LSE AIM market looks good if the rumours are true. But is Wind power a good investment for the US government to get in to? I even heard our head of State HM The Queen was buying into it.

Jul 14 11:56 AM

[delta 777:]

fascinating how you discuss the causes of bubble/bust/recession without mention of of CDOs/SIVs/credit default swaps and other assorted off-the-books financial instruments

Jul 14 12:30 PM

[Jimbo:]

How can we get President Obama to read this article??

Jul 14 12:48 PM

[Gregman2:]

Dr. Morici, excellent points re: trade, exports and U.S. manufacturing. I agree that nuclear is better at this time than Cap & Trade. But we do need serious health care reform that radically drives down costs by reorganizing the entire private physician delivery overhead structure.
See: www.alexander.senate.gov.

Jul 14 12:50 PM

[Northstar10000:]

The problem is too much spending and we elected Obama.
Too much America, a triumph of political correctness over the
health, safety and economy of our country. Guess who voted in droves for the guy. College grads who can't find work, poor people who have lost both jobs and homes and of course crack house occupants. Bet if they allowed voting in prison the guy would win in a landslide.

Jul 14 09:11 PM

[User 450732:]

Thanks for Good, Honest Journalism. We may not always agree with all points presented but we do seem to agree on the basics. There have been many Good Americans who gave their all to preserve the freedoms that have been contorted by selfish misguided leaders. "Now is the time for all Good Americans to come to the aid of their country.", to stand in peaceful solidarity, not in passive silence, to secure those freedoms in their original intent.

Jul 19 07:07 AM