From the July 10, 2009 edition of the Washington Examiner
July 10, 2009
by Irwin Stelzer
Say "I'm sorry", do nothing, or double down. Those are the choices facing President Obama as he focuses on the economy after apologizing to the Russians for our share in perpetuating the Cold War and hobnobbing with Silvio Berlusconi and friends at the G-8.
We've already been treated to what passes for an apology from this administration. Both the president and the vice president have said how sorry they are for not realizing just how bad an economic mess they had inherited from President Bush.
It was that mistake, made before they had full access to all the facts about the economy, that led them to predict that the $787 billion stimulus package they pushed through Congress would cause the unemployment rate to peak at around 8%, instead of the current 9.5 percent, and rising. Precisely what information was not available from CNBC -- Fox Business News would have been out of the question -- is unclear.
What is clear is that the administration ignored warnings that the so-called stimulus money would take a good while to hit the pockets of consumers and businessmen. Only 11 percent of the $308 billion allocated to infrastructure will be spent by the end of this fiscal year on September 30, and only half by the end of fiscal 2010. The so-called "shovel ready" projects turn out to have been in rather an earlier stage of development than the administration believed.
Which some in the administration are arguing is a reason to do nothing. The "Don't just do something, stand there" crowd wants to wait until the stimulus money hits the streets. Among other things, they are nervous that the rising tide of red ink will trigger inflation, a further increase in recovery-stifling interest rates, and a flight from the dollar.
Economists among the president's double-down advisers are convinced that we were lulled into premature euphoria by the so-called green shoots, which seem to have withered. The stock market is down and banks still have loads of toxic assets on their books.
The government's program to buy this dicey paper has little chance of succeeding: the banks don't want to sell because they would then have to mark down the unsold bad paper remaining on their books, and buyers don't want to buy lest the profits they make result in congressional investigations and another round of name-calling by the president.
Delinquency rates on consumer loans and highly rated mortgages are rising, house prices continue to fall. All in all, say these economists, the economy needs another shot in the arm.
Obama's political advisers, but so far not many Democratic congressmen, add an "amen." They are focused on the 2010 congressional elections, and don't want to go into the campaign with unemployment continuing to rise. That another stimulus might not produce an upturn in jobs is of no concern -- they are of a mind that there is nothing to lose by trying, which would permit Democratic candidates to contend that their spending is a reflection of their compassion for the average working man and woman.
But they have a problem. By the time the congressional elections roll around, the administration will have supported several measures that just might murder any recovery in its crib.
The minimum wage is scheduled to rise on July 24 from $6.55 per hour to $7.25 -- about $8.00 if you count Medicare, Social Security, unemployment insurance and workers' compensation insurance, reckons my Hudson Institute colleague, Diana Furchtgott-Roth.
That will directly effect employers of the 2.5 million workers whose wages are scheduled to rise, and these are primarily the young, unskilled, black and Hispanic workers whose unemployment rates are already between 15 and 24 percent.
In all likelihood the economy will also be burdened with the drag from very significant new taxes. The energy bill, consideration of which the Senate yesterday pushed off until September, will raise the cost of energy. The estimated $1+ trillion cost of the Obama health-care plan will almost certainly result in new taxes, if not on all employer-provided health care benefits, then on those geese that the administration thinks it can pluck without reducing their production of golden eggs.
Add to that the expiration of the Bush tax cuts, new taxes on corporations doing business overseas, a variety of state tax increases, and you have strong headwinds impeding the progress of a nascent recovery. Not the sort of wind power that the president favors.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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