First Economic Moves – Obama & the Democrats

You have to wonder that if this is the answer, then what was the question.

The freshly empowered Democratic barons of Capitol Hill have crafted a gargantuan $800 billion spending bill, ostensibly to enable U.S. economic recovery.

To understand the shear scale of ambition here consider that all US spending on the Iraq war, a source of Democratic indignation for years, amounted to $550 billion since 2003.1

That government action is necessary to forestall additional economic hardship is axiomatic. Simply doing nothing, as some conservatives have insisted, will not trigger recovery. Unfortunately, passing the Democratic bill won’t bring recovery either.

Instead of addressing the root causes for our economic maladies, the Democratic package serves only as an umbrella for an aimless assortment of liberal “wish list” spending, and fig leaf tax cuts that will increase our national debt without fixing our national economy.

Consider that while the Wall Street crisis has proliferated into a global economic downturn, the root cause has remained the same; a credit crunch forced by financial portfolios of toxic debt that have choked access to capital for consumers and businesses.

Without the confidence to borrow and the ability to lend, demand will continue to languish and suppliers will necessarily retrench, a virtue-less cycle that will add to bankruptcies, unemployment and negative growth.

Evidence? The Commerce Department reported today that consumer spending is at a 47 year low. Consumer spending accounts for more than two thirds of the nation’s GDP.2 The lack of spending is the lack of demand needed to trigger recovery.  Unfortunately little if any of the proposed $800 billion directly addresses this core problem.

Consider the various components.

The bill includes $89 billion in (temporary) increases in federal medical assistance, $85 billion for unemployment benefits, including a new health insurance benefit for the unemployed, $46 billion for education programs and student financial aid, $40 billion for health insurance for the unemployed and $20 billion for food stamps.3Whatever the social merit of this spending, these government transfer payments do not address the underlying cause of the downturn.

And in a political season where accountability and transparency again enjoy status and prominence, the Stimulus package fails the standard.

Consider that Democrats have been highly critical of reported waste and abuse in the $50 billion in reconstruction funds spent in Iraq since 2003.  In this Stimulus bill, the same Democrats propose a one-year $79 billion no-strings-attached transfer grant to states for use at their discretion.4  Where is the accountability and transparency?  Where is the purpose?  Most importantly, where is the core economic impact?

Other components of the package have merit if less logic for immediate stimulus, including the $46 billion for infrastructure improvements and $17 billion for modernization of the nation’s electrical grid. To its benefit, the package does include $82 billion in tax credit payments, representing $500 per person and $1,000 per family, but these amounts have proven too small in the past to drive sustained demand.

No, to have impact, a fundamentally different approach is required. The stimulus needs to spur demand in a manner that is immediate, significant and direct. And in this respect, there is no shortage of realistic and pragmatic ideas.

Addressing the core issue, many officials have proposed creation of a government bank to hold, assess, valuate and dispose of toxic debt, physically removing the debt from bank balance sheets, and freeing banks to lend. It would be the next logical step and evolution of the existing TARP program in Treasury.

Regarding demand, economist Lawrence Lindsay has recommended a 3% Social Security payroll tax cut, which would immediately put cash into consumer pockets and provide tax relief to businesses, which would then have the option to hire more workers or make capital investments for expansion.

Indeed, as the payroll tax is regressive, phasing out at upper incomes, it will have its biggest impact on middle class Americans, but will affect all taxpayers. The Social Security Trust Fund is in surplus through 2017, thus up to a one-year “tax holiday” would not threaten current retirees.

In addition, economist Milton Freidman has recommended providing targeted economic incentives such as rebates for those who buy new cars, durable goods or invest in home improvements, sectors hard hit by the downturn.

Each of these measures empowers citizens and businesses to make spending decisions that make sense individually. Collectively, it will trigger renewed, private sector economic activity by channeling the money directly to those who can use it best.

Milton Friedman has also usefully called for increased spending on national defense. This fits neatly with President Obama’s promise to “rebuild” American defenses depleted by seven years of war. The absence of such spending in the current bill is surprising as a result. Such funds would replace worn-out equipment, focusing on manufacturing and services in the US through a pre-existing logistical network of companies and subcontractors that can take advantage of underutilized manufacturing capacity.

But will any of this see the light of day?  The House vote on the bill was not encouraging, with Republicans closed out of meaningful dialogue on the package’s substance, resulting in a party-line vote that had all Republicans and 11 Democrats vote against the bill.

And what of the Obama administration?  Strangely, Obama seems like an almost curious by-standard to the bill’s passage. He has made the legislation his own and called for its passage, but any detailed review would quickly reveal the architecture of long-held Pelosi liberal orthodoxy with only the trappings of Obama-ism promised on the campaign trail. How can the same tired ideas be the first installment of “Change We Can Believe In?”

Moving to Senate consideration, each of the players in the process has a policy/political role that will be defining in the years ahead:

Senate GOP: old and tested arguments about the size of the spending package will not carry the day for Republicans in this economic climate. If the Republican narrative is about nothing more than cutting the size of the stimulus, the GOP will be branded as out-of-touch and disruptive – falling into a ready-made Democratic trap that the Mainstreams are only too happy to flack.

Instead of talking about size, Republicans need to talk about relevance and impact. The question here is not whether we need to spend, but rather, on the effectiveness of the spending. Instead of simply cutting the Democratic plan, Republicans need to talk about GOP alternatives that more effectively achieve the same stated objectives. The proposals listed above are a very good start. Savvy taxpayers will understand the difference to them between an $80 billion blank check to states versus a cut in the payroll tax that is real and tangible.

Also, savvy Republicans will continue to refer to the stimulus bill as a “Congressional Democrat bill.” It is fruitless to take on a president with a 65% approval rating, and further, by associating the legislation with Democratic leadership in Congress and not the President, Republicans stand the best chance of negotiating changes with Obama.

The President: he constantly called for post-partisanship during the campaign and hope springs eternal after an accommodation with Republicans removed $335 million in funds for sex education programs that was considered “stimulus” in the House bill.

During the campaign, Senator McCain tirelessly pointed out that Senator Obama had never taken a position at odds with Party in the name of national interest, as McCain himself has done. Even the much derided President Bush supported drastic action at odds with his core principles when confronted with the unprecedented events last autumn, proposing what under any other circumstance would have been a Democratic initiative.

As President, we will now see if Obama is a genuine unifier, willing to take heat from his own Party for necessary concessions in the national interest, or if post-partisanship rhetoric is nothing more than window dressing for expanded Democratic majorities that can carry partisan legislation on its own.

Senate Democrats: the SCHIP health care bill that the Senate passed last week was a worrisome indicator of potential hardball partisan politics to come that would complicate any genuine effort at compromise.

Instead of passing bipartisan SCHIP legislation that had been vetoed by President Bush last year, Democrats went back to an early Democratic version that provided coverage for illegal aliens and passed it on a party-line vote. This is the unfortunate environment that the stimulus bill will be considered in.

Today we stand on the precipice of  utilizing liberal social dogma as an economic tool to end recession. This would be laughable but for the gargantuan amounts of money contemplated in the experiment, which pose enormous fiscal risks.

Over the horizon we have a debate on reforming national health care that involves 1/7th of the US economy. After that, the under-funded mandates for Medicare/Medicaid and the retirement of the Boomers. Annual deficits that were the source of indignation when they were in the hundreds of billions are now projected to be in the trillions in the next several years.

Start adding the trillions together and suddenly we are talking about real money here.

Team Obama has unaccustomed political running room here. The President enjoys the trust and good will of the American people, formidable majorities in Congress and a fawning and compliant media. It is a unique moment of reckoning where he can reach for statesmanship or rely on ideology.

Who is Barack Obama?  We’re about to find out.