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Obama Legacy: Too Much Debt, Too Little Growth?

12:00 AM, Jul 16, 2011 • By IRWIN M. STELZER
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Although Bernanke and the politicians are focused on the second half of this year and the first half of next year, by which time voters’ views as to the state of the economy and the ownership of the deficit and unemployment problems will be fully formed, some economists are more worried about the long-run effects of President Obama’s “transformation” of the American economy. One such is University of Chicago economics professor and Nobel laureate Robert Lucas. In a lecture at the University of Washington, Professor Lucas argues that the 1930 depression was prolonged by the “demonization of business,” among other mistaken policies, and that the current recession has been prolonged by the likelihood of higher taxes on “the rich,” medical legislation that increases the role of government, and “financial legislation that assigns vast, poorly defined responsibilities to [the] Fed, [and] others”.

Worse still, the normal 3 percent growth trend that has characterized the American economy for over a century might be a thing of the past. Lucas notes that Europe’s economies assign a larger role to government than has the U.S., and have 20-30 percent lower incomes than America. He asks, “Is it possible that by imitating European policies on labor markets, welfare, and taxes, [the] U.S. has chosen a new, lower GDP trend? If so, it may be that the weak recovery we have had so far is all the recovery we will get.”

In response to Lucas’s indictment of Obama’s attempt to make America more like a social democratic European state, most liberals would whip out their dog-eared copies of the works of John Maynard Keynes. They point out that retail sales are barely holding their own, after showing some growth earlier in the year, and spending on business equipment dropped last month. It seems clear to them that government spending and investment are needed to fill the gap. Experience in euroland proves, they say, that spending cuts in a weak economy shrink growth rates and make deficits larger relative to the shrunken GDP.

Confused? Don’t be embarrassed—as fine an economist as Ben Bernanke confesses, “We don’t know where the economy is going to go.”

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