The Magazine

Don't Know Much About Economics

Obama's blind spot.

Jan 5, 2009, Vol. 14, No. 16 • By FRED BARNES
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Barack Obama is an awfully good politician but not much of an economist. His model for lifting America out of its economic slump is President Franklin Roosevelt's New Deal. The trouble with FDR's policy, however, is that it didn't come close to reviving the economy and restoring it to pre-Depression vigor. But FDR did use the New Deal quite successfully in another regard: to build a coalition that kept Democrats in the majority for a half century.

Obama's plan for invigorating the economy, as he describes it, consists almost entirely of government spending "to spur demand and create new jobs." His aim is to generate 2.5 million jobs, funded by a $750 billion to $1 trillion "stimulus" package. He favors tax cuts for the middle class and tax rebates for the tens of millions who pay no federal income tax.

Those tax cuts aren't designed to promote investment. If Obama also wants tax incentives for private investment, he's kept that a secret. But there's no reason to think he does. He rarely mentions the private sector. And investment incentives would involve tax cuts for the wealthy, a no-no in the ideology of liberal Democrats like Obama.

As president-elect, Obama has talked frequently about the economy but practically never in the language of free markets. Incentives? He's mentioned "incentives for fuel-efficient cars" and "economic incentives that would be helpful" to Iran to improve relations, but not for capital investment. "Across-the-board tax cuts" or "corporate tax cuts" or "tax cuts to increase investment"? Those phrases haven't crossed Obama's lips.

The contrast here--and not only in language--is with President Reagan's economic stimulus in 1981. To generate investment, Reagan relied on a 25 percent, across-the-board tax cut on individual income--including the income of the rich--and accelerated depreciation for business. It worked, aided by monetary easing by the Federal Reserve. By early 1983, both the economy and employment were growing rapidly.

The difference between Reagan's and Obama's policies is striking. Reagan stressed private investment. With Obama, as with FDR, it's public investment. Reagan cut spending in the worst days of the recession in 1981. Obama favors radically increased spending. Reagan sought to boost employment in general. Obama has particular jobs in mind.

What kind of jobs? "We get an immediate jumpstart to the economy and jobs that are immediately being created on things like a smart [electrical] grid or working to make our buildings more energy efficient," Obama said last week. "We've got shovel-ready projects all across the country that governors and mayors are pleading to fund. And the minute we can get those investments to the state level, jobs are going to be created."

That's not all. Obama has an obsession with public financing of "green" jobs. "We can create millions of jobs, starting with a 21st century economic recovery plan that puts Americans to work building wind farms, solar panels, and fuel-efficient cars," he said. "We can spark the dynamism of our economy" by investing in "renewable energy that will give life to new businesses and industries with good jobs that pay well and can't be outsourced." The "we" is the Obama administration, not the public.

Obama has his own yardstick for gauging how the economy is doing. And it includes neither economic growth nor a rising stock market. "My answer is simple: jobs and wages," he said.

In the short run, Obama's recovery plan should increase the number of jobs and increase wages--on government-funded projects anyway. So he may be able to claim at least temporary success. Producing a new era of economic growth is another matter. Reagan achieved it. If he sticks to the New Deal model, Obama is unlikely to.

Assuming his plan is enacted, Obama will surely satisfy the policy desires of liberal interest groups, organized labor especially. Labor relishes infrastructure jobs with high wages. The environmental lobby will be thrilled by the creation of green jobs. Governors and mayors, predominantly Democrats, will jump for joy at Obama's plan to include a bailout for them.

That Obama has no interest in the Reagan recovery model is hardly a surprise. He has some unusual ideas about the economy. "The American economy has worked in large part," he said last week, "because we've guided the market's invisible hand with a higher principle: that America prospers when all Americans can prosper." That's not exactly the way Adam Smith described the invisible hand of free markets.