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Change We Can’t Believe Is Happening Right Before Our Eyes

by Conn Carroll and Alex Adrianson
December 01, 2009

Speaking to the United Nations General Assembly on September 24, 2009—the day after President Barack Obama had addressed the same audience—Venezuelan President Hugo Chávez took a break from giving a diatribe against capitalism and asked: “Doesn’t it seem like there are two Obamas?”

Ten months into the Obama presidency, the American people probably have the very same question on their minds. On the eve of the 2008 elections, 75 percent of Americans told NBC News that the United States was on the wrong track. The American people clearly wanted change, and then-candidate Barack Obama was famously promising “change we can believe in.” But what kind of change? For those on the Left, Obama promised government-run health care, massive new taxes on fossil fuels, massive new subsidies for “clean energy,” and a rejection of President Bush’s unilateralism in foreign policy.

But the liberal Obama was not the only Obama who won votes on November 4, 2008. Another Obama won over millions of independent voters by promising to “cut taxes for 95 percent of workers and their families,” fully fund missile defense that is “pragmatic and cost effective,” and enact “a net spending cut” for the federal government. Lower taxes, strong defense, and shrinking the size of government—those are all core conservative priorities.

The Obama record, however, is much less ambiguous than the President’s rhetoric. The Obama administration has governed from the Left. He has launched new spending initiatives that have vastly increased the size and scope of government. These programs have done nothing to save jobs; but by draining resources from the private sector, they will yield a slower recovery. The administration has also injected politics into areas that should remain the province of free enterprise: The administration has made taxpayers the co-owners of General Motors, which only sets the stage for further political meddling down the road, and it has interfered with Chrysler’s bankruptcy process in order to preserve union power. In foreign policy, the Obama administration dreams of a nuclear-free world but seeks to weaken America’s defenses against ballistic missiles. And Obama’s main priority seems to be apologizing for his country to foreign audiences.


Spending Up, Jobs Down

When Barack Obama became President, he faced an extraordinary set of economic difficulties. In January 2009, the United States was already well into an economic contraction that economists across the spectrum projected would last at least the first half of the year. The troubles had started as a rising tide of house foreclosures in late 2006, had metastasized through the financial sector’s overexposure to mortgage-backed securities, and had spilled over into “the real economy” in 2008. The process of unwinding the bad assets had already produced much high drama on Wall Street and in Washington, D.C., and by the end of 2008, numerous big-name firms had been nationalized, bailed out, forced to sell, or had gone the way of the dodo bird. These included the world’s biggest insurer, AIG; investment banks Bear Sterns, Lehman Brothers, and Merrill Lynch; and the giant mortgage guarantors, Fannie Mae and Freddie Mac. The Fed, meanwhile, had begun injecting massive liquidity (it would end up being about $2 trillion by September 2009) into the banking system, and Congress had given the Department of the Treasury unprecedented authority (through the Troubled Asset Relief Program, or TARP) to prop up private banks with $700 billion of taxpayer money—a power which it then used to prop up failing automakers.

Obama’s proposed fix for the economy was to add to the flood tide of red ink. He lobbied Congress even before he was sworn in as President to release the second tranche ($350 billion) of spending authority under TARP. Further, the Obama administration promised that a massive program of public works spending would jump-start the economy by boosting aggregate demand, John Maynard Keynes-style. Congress readily agreed to the idea of spending a lot more money, though in the final bill it included a number of priorities other than infrastructure, such as bailouts for states with irresponsible budget makers.

Jobs? The stimulus bill spends $789 billion over a 10-year period. So far, $159 billion of that funding has gone out the door; and so far, it hasn’t worked. As of November, according to the Bureau of Labor Statistics, there were 2.7 million fewer Americans employed than were employed when the stimulus bill was passed.

The Obama administration claims that the stimulus spending has so far helped create or save 640,000 jobs. Numerous news reports have found that this data is suspect because of misreporting by recipients, but the main flaw with the figure is that it is simply the number of jobs funded directly by the stimulus. It does not take into account the number of jobs that will be lost because a higher level of government spending must eventually crowd out private sector investment through higher taxes or higher interest rates or inflation. Using a more sophisticated model that considers the long-run tradeoffs between private sector spending and government spending, economists John Cogan, John Taylor, and Volker Wieland estimate that the most optimistic projections show the stimulus bill “saving or creating” only half a million jobs by the end of 2010—or only about one month’s worth of job losses that have been suffered so far.

Using the term “jobs saved” allows the administration to claim that the economy would have deteriorated even more had the stimulus not passed—a claim which, like all counterfactuals, is difficult to disprove. But such non-results are not what the administration promised when it proposed the bill. The administration originally estimated that without a stimulus bill unemployment would top out at 8.8 percent by the end of 2010. With the stimulus, the administration said, unemployment would peak at less than 8 percent by the end of 2009.

Yet according to the Bureau of Labor Statistics, unemployment reached a whopping 10 percent in November 2009. (See figure at right.)

Record Spending and Debt. While claims of jobs “created or saved” are dubious, the impact of the stimulus program on the federal budget is not in doubt. The United States is drowning in red ink. The federal government will increase spending by 18 percent this year to a peacetime record of 26 percent of GDP. That 18 percent spending increase represents the largest one-year expansion of government since the height of the Korean War. Under President Bush, federal spending per household reached $25,000. Under President Obama, that number will reach $30,958 in 2009.

This record spending has produced record budget deficits. In fiscal year 2009, which ended October 30, the United States recorded an all-time high budget deficit of $1.42 trillion—the first ever trillion-dollar budget deficit. The 2009 deficit rings in at 9.9 percent of GDP, which is a new post-war record. The 2009 budget deficit will be larger than all budget deficits from 2002 through 2007 combined. More than 40 cents of every dollar Washington spends in 2009 will have been borrowed.

True, most of the 2009 budget deficit is the responsibility of President Bush and Congress, who set the budget the previous year. But Obama’s stimulus spending and other items added nearly $200 billion to the budget deficit. And over the next 10 years, the Obama budgets keep annual spending $5,000–$8,000 higher per household than it had been under Bush, spending $33,000 per household by 2019. Despite $1.4 trillion in tax increases over the next decade, the administration’s spending increases will send the national debt held by the public from $5.8 trillion to $9.4 trillion in 2010 and to $17.1 trillion in 2019. In other words, Obama’s 10-year budget almost triples the national debt by 2019. That increase in government debt exceeds the debt accumulated under every other President in American history from George Washington to George W. Bush combined.


Undercutting Future Growth

Massively increasing government spending is likely to hurt the economy in the long run—if not the short run, too—because such increases will crowd out private sector investment. And private sector investment, because it must meet a market test, tends to be more efficient than government spending.

In the free market, if a firm fails to make a product or service that people want, it will go out of business. Failure, in fact, is the mechanism by which resources are shifted from less-valued economic activities to those that are higher-valued. But more than that, failure or success in the marketplace is a mechanism for discovering which economic activities are valuable in the first place. When the government bails out or nationalizes a firm, it short-circuits this process of discovery. Such policies may prevent job losses in the short run, but in the long run, trying to make sure no business ever fails is a recipe for preventing change and innovation. Imagine, for example, if the government had decided to prop up failing typewriter manufacturers. If that had been the case, then today there would be lots of people employed making products for which nobody has any use—a pure loss to the economy. In this sense, trying to prop up the economy by increasing government spending is not a program of change at all but is, rather, aimed at preventing change.

Even the best-designed stimulus plan in the world would still have to deal with the reality of politics. The danger is that the stimulus program will create permanent constituencies for spending that is supposed to be temporary. If politics prevents stimulus spending from being withdrawn in a timely fashion—and that seems likely—then in the long run it will hurt economic growth.

As noted above, economists John Cogan, John Taylor, and Volker Wieland have employed a model that uses realistic assumptions about the long-run trade-offs  between government spending and private sector investment to estimate the effect of the stimulus on the economy. Their estimates show that the crowd-out effect that the stimulus has on private sector investment increases every year and by 2013 the overall impact on the economy becomes negative. In other words, by year four of a 10-year stimulus, we’ll have less GDP growth than we would have had without the stimulus.

The bailouts started by President Bush are another source of the politicization of economic life. The Obama administration has furthered this process, particularly with regard to the automakers. Remember, Congress created TARP to prop up banks with “troubled assets.” The Bush administration, however, decided that “troubled assets” was not quite enough of a loser. So it roped the Detroit automakers, who had never learned to say “no” to their unions, into the bailouts, too. Treasury defined them as financial institutions by virtue of the fact that both GM and Chrysler have divisions offering financing to their customers.

Preserving the Detroit model of high-labor-cost car making for a few extra months—at the expense of taxpayers who on average make far less than union wages--—was bad enough. But since taking office, the Obama administration has used the automaker bailouts and the inevitable bankruptcies to meddle in the business of making automobiles. On March 29, the Obama administration asked General Motors CEO Rick Wagoner to resign, making it clear that he had to go before any more taxpayer dollars would be coming GM’s way. Wagoner, of course, resigned, and several days later, his successor, Fritz Henderson, appeared with Obama in the Rose Garden to endorse the President’s plan for new fuel efficiency standards. With his company still awaiting word on its request for billions more in taxpayer money, Henderson could hardly have done other than sing the government’s tune. 

In July 2009, as part of a pre-packaged bankruptcy deal, U.S. taxpayers became 60 percent owners of General Motors. What will the government do as a shareholder? Will it decide what kind of cars GM should make? Will it decide where they should make them? Obama has said he does not want to run the auto companies. But in July, Detroit Mayor Dave Bing was reported to have said that Obama personally assured him that GM would not move its headquarters out of the Motor City to nearby Warren. Meanwhile, Ron Gettelfinger, president of the United Auto Workers (UAW), claimed to have successfully pressured the administration to prevent General Motors from importing cars that GM makes overseas so that more of GM’s plants in the United States would be spared closing.

One thing is certain: The taxpayers will now have less information about the company’s operations than they had before they owned 60 percent of the company. That’s because after the GM bankruptcy, the administration filed to make GM a privately held company!

Chrysler’s bankruptcy was an even greater intrusion of politics into markets. The Obama administration eviscerated the sanctity of contracts in order to give the UAW an ownership stake in the company. Instead of allowing Chrysler to go through the country’s long-tested bankruptcy process, the administration forced its own plan for reorganization on stockholders. Specifically, the Obama plan honored only 29 cents for every dollar of debt held by Chysler’s secured creditors while giving the UAW a 55 percent controlling stake in the company. By contrast, GM’s secured creditors received 100 percent of the money they were owed, just as almost all secured creditors of bankrupt companies do.

The government’s treatment of Chrysler’s creditors served only a very narrow interest. Because the rights of secured creditors were violated, lenders will now be wary of providing credit to companies with strong unions. If non-union companies now have an advantage in obtaining credit, then the Chrysler shakeout will surely have backfired against other union workers. Moreover, Chrysler’s bankruptcy treats the unions as if they were merely the innocent bystanders of Chrysler’s troubles when, in fact, union success in securing overly generous compensation significantly contributed to the company’s downfall. Failure to address the power of the unions sets the automakers up for another failure down the road.

All in all, the Obama administration has demonstrated a very expansive notion of how it should use its authority to distribute bailout funds. Austan Goolsbee of the Council of Economic Advisers explained the thinking: “It is totally clear that if the government is saving your bacon and giving you money, that they have some input on whether you are wasting the money or what you are doing with the operation.” But if government experts can foresee with certainty what investments are a waste, then why did the government encourage Fannie Mae and Freddie Mac to increase their holdings of subprime loans in the decade just before those assets helped cause the biggest financial meltdown in over 60 years? Closer to the topic, if the government knows what is a wasteful practice for the automakers, then why did it pull out all the stops to preserve Detroit’s high-labor-cost model of car manufacturing?

Free markets punish wasteful companies; politics protects them. The political interference that has accompanied the bailouts sends the message that investors better beware of putting their money behind ventures that challenge established corporations with political influence. That’s a sure way to discourage the innovation that drives economic growth.

Ultimately, the lesson to draw from Goolsbee’s comment is that giving the government a blank check to prop up whatever companies it wants so long as it “promotes financial market stability” is a bad idea; it’s an open invitation to decide winners and losers in the marketplace based on politics rather than what’s good for the economy. That lesson, if it were learned, would be one positive aspect of this administration’s legacy on the economy.


The Narcissist Doctrine

The United States, while not perfect, continues to be the most successful experiment in constitutional self-government the world has ever known. By its example and by its leadership, the United States has also been the world’s greatest benefactor to the causes of democracy, to human rights, and to economic prosperity. And today the United States remains one of the freest, most tolerant, and most prosperous places in the world. One would not learn these things about the United States, however, from listening to President Obama talk to foreign audiences. On the contrary, one would think that the United States has a lot to apologize for. One might also think that apologizing for your country is what foreign policy is all about, because the President has spent so much time doing it.

On January 27, 2009, the President told the newspaper Al Arabiya: “My job to the Muslim world is to communicate that the Americans are not your enemy. We sometimes make mistakes. We have not been perfect.”

On April 2, 2009, to a meeting of the G-20 in London, Obama said: “I would like to think that with my election and the early decisions that we’ve made, that you’re starting to see some restoration of America’s standing in the world.”

On April 3, 2009, the President told an audience in Strasbourg, France: “So we must be honest with ourselves. In recent years we’ve allowed our Alliance to drift. I know that there have been honest disagreements over policy, but we also know that there’s something more that has crept into our relationship. In America, there’s a failure to appreciate Europe’s leading role in the world. Instead of celebrating your dynamic union and seeking to partner with you to meet common challenges, there have been times where America has shown arrogance and been dismissive, even derisive.

Speaking to the Turkish Parliament on April 6, 2009, Obama said: “The United States is still working through some of our own darker periods in our history. … Our country still struggles with the legacies of slavery and segregation, the past treatment of Native Americans.”

The President penned an op-ed that appeared on April 16, 2009, in newspapers in Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay, and Venezuela: “Too often, the United States has not pursued and sustained engagement with our neighbors. We have been too easily distracted by other priorities, and have failed to see that our own progress is tied directly to progress throughout the Americas. My Administration is committed to the promise of a new day. We will renew and sustain a broader partnership between the United States and the hemisphere on behalf of our common prosperity and our common security.”

That’s just a sampling. What has the United States received in exchange for all these apologies? Sanctions against Iran? More troops to fight the Taliban in Afghanistan? Moderation from Russia? Hardly!

Apologies miss the point of the foreign policy challenges facing the United States. The United States has adversaries not because it sometimes fails to live up to its ideals, but because its ideals threaten governments and ideologies that maintain power by denying people freedom. Nile Gardiner, Director of the Heritage Foundation’s Margaret Thatcher Center for Freedom, points out that the administration’s strategy of unconditional engagement with America’s enemies and relentless apology-making has created a situation in which the “U.S. is increasingly viewed as a soft touch internationally, which has encouraged rogue regimes such as North Korea and Iran to accelerate their nuclear and missile programs.” Gardiner is referring to the fact that this year, Iran has put a satellite into orbit, test-fired short-range missiles, and test-fired a solid-fueled two-stage ballistic missile. North Korea, meanwhile, has test-fired a three-stage rocket (which successfully completed two stages, flying more than halfway to Hawaii) and detonated a nuclear device. It is an exercise in reality denial to suppose that more apologies could have prevented those developments.

Responding to the threat of nuclear proliferation, the administration has cut missile defense spending by 16 percent, cancelled the siting of long-range missile defenses in Poland and the Czech Republic, cancelled the F-22 fighter, and slashed the Pentagon’s five-year defense budget plan. The Obama administration favors a lot of government spending—as long as it’s not defense spending.

Afghanistan might be where the Obama administration has made its biggest foreign policy stumble. The renewed Taliban insurgency there threatens to return an intolerant, extremist regime to power—one that would benefit neither the Afghan people nor U.S. interests. President Obama correctly decided that preventing Afghanistan from again becoming a safe haven for al-Qaeda or other terrorist organizations calls for a U.S. commitment to defeating the Taliban. However, the President has nickel-and-dimed the problem by approving only 30,000 additional troops to support an anti-insurgency effort. That’s 10,000 less than the medium-risk option outlined by the Commander of U.S. forces in Afghanistan, Gen. Stanley McChrystal. Even worse, the administration has placed a deadline of 18 months for U.S. forces to achieve their mission. Most observers believe it will take three to four years to fully train the Afghan National Army to engage the Taliban forces. The imposition of an arbitrary deadline sends the message that the United States wants success only if it comes cheaply. Knowing this, why would our allies be willing to commit more troops to the cause? And why wouldn’t the Taliban be willing to hang around until July 2011, when the administration intends to begin drawing down the U.S. troop levels?

Columnist Michael Gerson aptly sums up Obama’s approach to foreign policy:

Obama’s rhetorical method in international contexts — given supreme expression at the United Nations … — is a moral dialectic. The thesis: pre-Obama America is a nation of many flaws and failures. The antithesis: The world responds with understandable but misguided prejudice. The synthesis: Me. Me, at all costs; me, in spite of all terrors; me, however long and hard the road may be. How great a world we all should see, if only all were more like…me.

It’s a strategy that seems to have worked with some audiences. This October, the Norwegian Nobel Committee awarded President Obama the Nobel Peace Prize, not for any tangible diplomatic accomplishment—such as those achieved by past U.S. Presidents who have won Nobel Peace Prizes—but for having a vision of a nuclear-free world and for inspiring hope. As the committee put it: “Only very rarely has a person to the same extent as Obama captured the world’s attention and given its people hope for a better future.”

What most Americans hope is that Barack Obama understands that his job is to be President of the United States. It’s a job that requires dealing with a world in which many people have hopes and visions that conflict with the interests of the United States. Being President means that you must occasionally take actions that displease some people. It means making Hugo Chávez, for one, understand that there is only one Obama—and not the one who makes him feel warm and fuzzy.


Still to Come

Unlike the Norwegian Nobel Committee, we’ve talked so far only about what President Obama has actually done. But the Obama administration has proposed much that has not yet been enacted, and these proposals, too, would bring more and more areas of American life under the direct control of government. The administration wants a health care overhaul, for instance, that would tax people who don’t buy the kind of health insurance that government bureaucrats think they should have (and will throw those people in jail if they don’t pay those taxes). The administration has called on Congress to address global warming by imposing what amounts to a huge new tax on energy consumers. And it wants to create a brand new agency to make sure nobody is ever defrauded in an investment.

The question that needs to be posed about this agenda is: “If the people aren’t competent enough to discern a financial charlatan on their own, then how will they know when the charlatans have taken over the government?”


Mr. Carroll is Assistant Director of Strategic Communications for The Heritage Foundation and editor of The Foundry, The Heritage Foundation’s public policy blog. Mr. Adrianson is editor of the The Insider.

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