Obama's Economic Fish Stories

Obama's Economic Fish Stories

Excerpts:

President Obama says "every economist who's looked at it says that the Recovery Act has done its job"—i.e., the stimulus bill has turned the economy around. That's nonsense. Opinions differ widely and many leading economists believe that its impact has been small. Why? The expectation of future spending and future tax hikes to pay for the stimulus and Mr. Obama's vast expansion of government are offsetting the direct short-run expansionary effect. That is standard in all macroeconomic theories.

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The president does not say that economists agree that the high future taxes to finance the stimulus will hurt the economy. (The University of Chicago's Harald Uhlig estimates $3.40 of lost output for every dollar of government spending.) Either the president is not being told of serious alternative viewpoints, or serious viewpoints are defined as only those that support his position. In either case, he is being ill-served by his staff.

Mr. Obama's economic statements are increasingly divorced not only from competing viewpoints but from those of his own economic advisers. It is surprising how many numerically challenged pronouncements come from this most scripted and political of White Houses. One slip is eventually forgiven, but when a pattern emerges, no one believes it is an accident.

For example, on the anniversary of the stimulus bill, Mr. Obama declared, "It is largely thanks to the Recovery Act that a second Depression is no longer a possibility." Yet his Council of Economic Advisers just estimated the stimulus bill's effect on GDP at its trough was 1%-2%.

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On his recent "Recovery Tour," Mr. Obama boasted, "The stimulus bill prevented the unemployment rate from "getting up to . . . 15%." But the president's own chief economic adviser, Christina Romer, has estimated that the stimulus bill reduced peak unemployment by one percentage point—i.e., since the unemployment rate peaked at 10.1%, it prevented the unemployment rate from rising to just over 11%. So Mr. Obama claims that the stimulus bill was several times more potent than his chief economic adviser estimates.

Perhaps the most serious disconnect concerns the impending expiration of the 2001 and 2003 tax cuts, which will raise the top two income tax rates and the rates on dividends and capital gains. If these growth inhibiting tax increases occur—about $75 billion in tax increases next year, $1.4 trillion over 10 years—there will be serious economic damage.

In the most recent issue of the American Economic Review, Ms. Romer (and her husband David H. Romer) conclude that "tax increases are highly contractionary . . . tax cuts have very large and persistent positive output effects." Their estimates imply the tax increases would depress GDP by roughly half the growth rate in this so-far-anemic recovery.

If Mr. Obama is really serious about a second stimulus, by far the best thing he can do is have Congress quickly extend the expiring Bush tax cuts, combined with real spending cuts set to take effect as the economy improves.

The president badly needs to make more realistic pronouncements. No one expects him to say his policies have failed (although most have delivered far less than claimed at large cost). A little candor about the results of experimentation in uncharted waters would go a long way. But at the very least, his staff needs to avoid putting these exaggerations on the teleprompter. It undermines confidence and raises concerns about competence. It's doing nobody any good—not the economy and certainly not Mr. Obama

Comment: On "raises concerns about competence" .... that's an understatement!

Truth is mighty and will prevail. There is nothing the matter with this, except that it ain't so. ~Mark Twain, Notebook, 1935