The ritual of sound-bite economics
It is a ritual as predictable as the tides. With every election, we descend into sound-bite economics. Rhetorical claims grow more partisan and self-serving. We are now deep in this process. President Obama's policies either averted another Great Depression -- or have crippled the recovery. These debates confirm the dreary state of economic discourse. The right rejects the idea that sometimes government must rescue the economy from panic; the left sees salvation only in ever-larger government. The first is an invitation to anarchy; the second threatens long-term economic growth through higher taxes, regulations or budget deficits.
When Obama took office in early 2009, the economy and financial markets were in virtual free-fall. By summer, they were not. Only a rabid partisan can think that Obama's policies had nothing to do with the reversal. His forcefulness helped calmed the prevailing hysteria.
True, many recovery policies came from the Federal Reserve, and others -- notably, the unpopular Troubled Assets Relief Program (TARP) -- began under the Bush administration. Obama's contributions included the "stimulus program," a rescue of the auto industry and a "stress test" for 19 large banks. The stress test explored whether banks needed big infusions of capital. Most didn't.
The process was messy, and, although many details can be questioned, the overall impact was huge. Without government's aggressive response, gross domestic product would have dropped 12 percent instead of 4 percent and 16.6 million jobs would have been lost instead of 8.4 million, estimate economists Alan Blinder of Princeton and Mark Zandi of Moody's Analytics. Unemployment would have hit 16 percent. These numbers, too, can be disputed (they seem high to me), but the direction is certainly correct.
Up to a point, blaming Obama for the sluggish recovery is also unfair. Millions of Americans were over-borrowed. Paying down debts was bound to crimp the $10 trillion of annual consumer spending. Could anyone have realistically neutralized this? Nope. Nor could the housing collapse be quickly reversed. The right's sweeping indictment of Obama is wildly exaggerated. It is not, however, entirely misplaced.
Confidence is crucial to stimulating consumer spending and business investment, and Obama constantly subverts confidence. In the past year, he's undone some of the good of his first months. He loves to pick fights with Wall Street bankers, oil companies, multinational firms, health insurers and others. He thinks that he can separate policies that claim to promote recovery from those that appeal to his liberal "base," even when the partisan policies raise business costs, stymie job creation or augment uncertainty -- and, thereby, undermine recovery. His health-care "reform" will make hiring more expensive to employers by mandating insurance coverage. The moratorium on deep-water oil drilling kills jobs; the administration's estimate of employment loss is up to 12,000.
Obama's proposal to increase taxes on personal incomes exceeding $250,000 ($200,000 for singles) is the latest example of his delusional approach. It satisfies the liberal itch to "get the rich." Well, the rich and most other taxpayers will ultimately have to pay higher taxes to help close budget deficits. But not now.
Raising taxes in a weak economy doesn't make sense. Just consider this astonishing fact: These affluent households represent almost a quarter of all consumer spending, according to Zandi. Increasing their taxes, he estimates, would cost 770,000 jobs by mid-2012. Richard Curtin, director of the University of Michigan's Survey of Consumers, says his data suggest that uncertainty about the extension of the Bush tax cuts has already caused affluent buyers to cut their spending.
Some small businesses would also be affected, because many (sole proprietorships, partnerships and subchapter S corporations) file their taxes on personal returns. Higher taxes would discourage hiring and expansion. No one knows by how much, but the Tax Policy Center estimates that higher business taxes would affect 725,000 returns with about $400 billion of business income. Some of these are partnerships of doctors, lawyers and accountants. Others are contractors, restaurant owners, florists and plumbers.
All the partisan rhetoric can be ascribed to "politics as usual." True. That's the point. In an election dominated by the economy, the campaign discourse is strangely disconnected from underlying economic realities. The simplicities of the right collide with the simplicities of the left.
In textbooks, elections clarify complex issues and help resolve social conflicts. In practice, they often sow confusion and create unrealistic expectations, as politicians peddle phony solutions and make unattainable promises. Americans face crucial economic choices. How to cut long-term budget deficits without threatening the present recovery? How to control health spending without damaging health care? How to adjust to an aging society and still retain a powerful economy? On these and other hard questions, the silence is deafening.