Magazine | May 4, 2009, Issue

The Cost of Audacity

Obamanomics means less growth

Addressing Congress in February, President Obama argued that the recession was no reason to hold off on his signature initiatives. It was, instead, all the more reason to act on them.

“The fact is, our economy did not fall into decline overnight,” said the president. “Nor did all of our problems begin when the housing market collapsed or the stock market sank. We have known for decades that our survival depends on finding new sources of energy. Yet we import more oil today than ever before. The cost of health care eats up more and more of our savings each year, yet we keep delaying reform. Our children will compete for jobs in a global economy that too many of our schools do not prepare them for.”

The good news he presented was that by finally taking on these challenges, America would “build a new foundation for lasting prosperity.” He added, “Now is the time to . . . invest in areas like energy, health care, and education that will grow our economy.” Not every lawmaker cheered, but none of them did the appropriate thing and laughed. It would be a remarkable coincidence if the appropriate response to the economic circumstances of 2009 happened to replicate the longstanding wish list of liberal activists.

In truth, Obama’s argument is, not to put too fine a point on it, absurd. European countries that have caps on carbon emissions and national health insurance have hardly been immune to the financial crisis. Some of them have suffered more than the U.S. And while Obama’s explanation of our economic difficulties fails, his prescriptions would reduce America’s long-term rate of economic growth.

Start with health care. Obama said that its “crushing cost” is “is one of the major reasons why small businesses close their doors and corporations ship jobs overseas.” Many businessmen have been persuaded that health-care reform would improve their bottom lines, which is one reason that the administration is optimistic it can get legislation passed this year. In the popular press it is common to run across claims that companies based in the U.S. are at a disadvantage because of health-care costs.

The Congressional Budget Office, run by Democrats since 2007, recently explained why this reasoning is fallacious. Health-care economists generally agree that companies’ health-care expenses come out of wages rather than profits. That’s what you would expect when a competitive labor market determines total compensation, however that compensation is divided between wages and benefits. “As a result,” the CBO concludes, “the costs of providing health insurance to their workers are not a source of competitive disadvantage for U.S.-based firms.” If employers paid less in health-care costs, they would pay more in wages.

It is true that most people would consider rising wages part of the definition of a strong economy. But cost control is taking a back seat to expanding coverage in the administration’s plans, as well as those of Congress. Cost control may be what Obama stresses, but expanded coverage is what pulls heartstrings. It is also politically easier to achieve: Cost control in a government-centered system would require rationing, which is not popular.

The administration claims that as it expands coverage, it will control costs by using the federal government’s bargaining power as a purchaser of health care to drive prices down. Medicare has used this strategy for decades. The results: As Medicare spending keeps growing, costs are shifted to the private sector in the form of higher insurance premiums. Philip Klein, a reporter at The American Spectator, recently asked Obama domestic-policy chief Melody Barnes to name a government that had saved money by expanding coverage. She had no answer.

Even more outlandish from an economic standpoint than Obama’s proposals for health-care reform is his energy plan — specifically, his assertion that placing a cap on carbon emissions will benefit the economy. Last year the Energy Information Administration, a division of the Department of Energy, estimated that an emissions-cap bill would cost the economy $444 billion through 2030 — and that estimate is based on heroic assumptions. (For example, that “key low-emissions technologies, including nuclear, fossil with carbon capture and sequestration . . . and various renewables, are developed and deployed in a timeframe consistent with the emissions reduction requirements without encountering any major obstacles.”) With other assumptions, the cost is $1.3 trillion.

Increasing the price and reducing the supply of energy, as an emissions cap would do, would necessarily decrease economic output. The argument for this legislation is that it would avert the costs associated with global warming — that is, it would help us avoid worse economic damage. But this net benefit may be illusory. In these pages, Jim Manzi, relying on the work of the United Nations’ Intergovernmental Panel on Climate Change and of Yale professor William Nordhaus (who is respected on all sides of the global-warming debate), has concluded that a worldwide program to reduce carbon emissions that was perfectly designed and implemented could be expected to yield a net benefit of “about 0.17 percent of the present value of global GDP over the next several centuries.” Most of that net benefit would not accrue to Americans. Assume that the program would not be perfect, perhaps because of side deals needed to keep coal-country senators or 2.5 billion Asians on board, and even that minuscule gain disappears.

#page#It is a little harder to analyze the economic effects of Obama’s planned education reforms, because they are the least fleshed-out of his three big initiatives. Obama’s health and energy plans really would be transformative, for good and ill, but his education agenda, as it has been described so far, is simply more of what we already have: additional money, plus unspecified reforms. The likelihood that Obama’s policies will improve K–12 education enough to have a measurable economic impact seems slight. Even after the No Child Left Behind Act, primary education remains a decentralized enterprise in which Washington has limited influence. His expansion of college funding will not increase the country’s skill level much, both because universities will simply raise tuition to absorb the extra money and because a larger number of diplomas does not necessarily mean a larger amount of learning.

Other items on the president’s agenda are no more promising. Obama wants to sign the Employee Free Choice Act to promote unionization. The bill would, among other things, make it possible for workforces to unionize without a secret-ballot vote of the employees. In an analysis of Canadian unionization rates with and without secret ballots, economist Susan Johnson has found that dispensing with secret ballots does indeed increase the success rate of unionization drives. But is larger union membership good for the economy? Lawrence Summers, the head of Obama’s National Economic Council, fingered unionization as a “cause of long-term unemployment” when he was an academic. Economists Harold Cole and Lee Ohanian argue that pro-union labor-law reforms made the Great Depression worse.

Obama also intends to raise both federal spending and federal taxes. In the short run, spending may stimulate the economy, particularly in a recession. Much of the debate over the stimulus concerned that question. But Obama has long-term spending plans as well.

Over the last 40 years, federal spending has amounted to, on average, 20.7 percent of the economy. The Congressional Budget Office estimates that by 2019, even with no major changes, that percentage will rise to 21.3 because of the aging of the population, rising health costs, and other factors. It further estimates that Obama’s agenda would boost it to 24.5. Kevin Hassett, the director of economic-policy studies at the American Enterprise Institute and a SMALLCAPSNational Review contributor, notes that “there is a really well-established literature on spending [that says that] it decreases growth in the long run.” If the government’s share of the economy rises by ten points — say from 20 to 30 — then growth drops 1 percentage point a year.

Obama wants to reverse Bush’s tax cuts for high incomes and capital gains, and partly reverse his tax cut for dividends. The top income-tax rate would thus revert to the level in effect during most of the Clinton administration. (It will be higher than that, however, if Obama follows through on his campaign pledge of raising upper-income taxes to address the Social Security shortfall, or if his spending leads him to go for additional tax increases.) While those rates can be compatible with robust economic growth, they make it less robust than it could be. The drag will be worse since Obama plans to use the added revenue to finance new spending rather than to reduce the deficit.

He also creates new tax credits that are unlikely to have any long-term stimulative effect. This may encourage some poor people to work more, but the credits are phased out as their beneficiaries gain income. Work effort may fall modestly over that phase-out range.

Then there’s trade. The last two presidents, one from each party, made moves to liberalize trade — dramatically, in the case of Bill Clinton. Obama appears to have little interest in passing new trade agreements, and even less leverage with Congress should he wish to do so. So nobody should expect a reduction of trade barriers that would boost the economy.

If the latest version of Obama’s financial-industry rescue plan works — and it is the least ideologically driven element of his domestic agenda — then the president will deserve credit for strengthening the economy. But most of the initiatives that he has touted as being key to an economic recovery would have either no effect or a negative one.

The president has repeatedly promised to “save or create” 2.5 million jobs. That pledge has come in for criticism from conservatives, who note that as long as the country still has at least 2.5 million jobs at the end of Obama’s term, it will be impossible to prove him wrong. Obama deserves a little sympathy for hedging his bets, since his policies will not determine the direction of the economy by themselves. Natural disasters, Federal Reserve actions, and technological revolutions can make good presidential policies seem mistaken and foolish policies seem wise. We cannot say with any confidence that the economy will be weaker after Obama than it was before him. But there is reason to think that Americans will be poorer than they would have been without him.

 

Ramesh Ponnuru — Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg View, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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