President Obama is a slow learner. For all his brainpower, he’s saddled himself with three ideas about the economy and job creation that aren’t working, either substantively or politically. And he appears to be too ideologically rigid or stubborn to consider the evidence and jettison the failed ideas.
Instead, he puts himself in embarrassing situations. On the day the Labor Department announced the unemployment rate was stuck at 10 percent and 85,000 jobs had been lost in December, Obama insisted he continues “to explore every avenue to accelerate the return to hiring.” So what did he propose? Tax credits totaling $2.3 billion to create “green jobs” and a second stimulus package of $150 billion (the first one, enacted 11 months ago, cost $787 billion). This is more of the same.
Cristina Romer, the chairman of Obama’s Council of Economic Advisers, managed to out-embarrass the president. Last week, she sandwiched her highly improbable claim that the administration’s stimulus had created or “saved” 1.5 million to 2 million jobs between an Associated Press finding that $20 billion in stimulus funds for roads and bridges had failed to reduce the unemployment rate anywhere and a Labor Department announcement of a rise in new claims for jobless benefits.
The first of Obama’s failed ideas is that government spending is the most effective method of stimulating the economy, spurring strong growth, and generating new jobs. The president needs to chat with Harvard economists Alberto Alesina and Silvia Ardagna on this subject. They studied dozens of examples of economic stimulation between 1970 and 2007 in 21 countries, including the United States.
Their findings are unequivocal. “Fiscal stimuli based upon tax cuts are more likely to increase growth than those based on spending increases,” they wrote in a paper revised and published last October. “We would argue that the current stimulus package in the U.S. is too much tilted in the direction of spending rather than tax cuts.” Indeed it is, and Obama’s paltry tax cuts aren’t the kind of across-the-board reductions in individual and corporate income tax rates that have revived sluggish economies by incentivizing private investment and stirring job creation.
Another finding by the economists bears on a separate aspect of Obama-nomics, deficit reduction. “Spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns,” they said. “In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”
This, too, would probably be news to Obama. Spending cuts, like tax cuts, aren’t his strength. He plans to let Bush tax cuts on personal income, dividends, and capital gains expire in 2011 for individuals making more than $250,000 annually—that is, for those most likely to invest. Their taxes will increase. And Obama favors other tax hikes: on banks, medical device manufacturers, health insurers, high-cost health insurance plans.
What Obama would learn from a chat with Alesina and Ardagna is pretty simple: Do the opposite of what you’re doing now. You want to stimulate economic growth and job creation, then cut tax rates across the board. You want to reduce the budget deficit and slow growth of the national debt, then cut spending. The economists have empirical evidence to support the effectiveness of this approach.
In her heart of hearts, Romer might agree. The two economists note that as an academic before she joined the Obama administration, Romer had found in her own research that “tax increases are contractionary.” They impede economic growth.
The second fizzling idea involves clean energy and green jobs. Obama is passionate about them. They dominate his economic thinking. He has promised to produce 5 million green jobs—building wind turbines and solar panels, weatherizing buildings, manufacturing batteries for hybrid cars, and so on. The new $2.3 billion tax credit “will likely generate 17,000 jobs,” Obama said, “and the roughly $5 billion more that we’ll leverage in the private sector investments could help create tens of thousands of additional jobs.” On top of that, the stimulus is already pouring billions into green jobs.
Yes, it’s true the government can create jobs. But the billions spent on subsidized jobs is money that can’t be invested in sectors of the economy that are productive (and job-creating) without government assistance. In Spain, an economist found that for every green job created by the government, 2.2 jobs have been lost in the private economy.