The political timing for Debacle is not coincidental, and Grover Norquist and John Lott’s book may well become the most important arrow striking President Obama’s economic policy. They have written an eminently accessible book that lays out clearly and concisely why Obama’s economic policies have failed and why more of the same won’t reset the U.S. economy. The book adds little that is original to the public debate — virtually all the material in it can be found in online and print versions of the leading free-market publications — but Norquist and Lott have done something important: They have pulled the most important arguments and data together in one place, providing a well-organized polemic against Obama’s economic policies, and they have laid out a cogent and detailed set of alternative proposals.
The story of the Obama administration’s failed policies doesn’t start with the stimulus package. Rather, the seeds of the debacle were sown nearly two decades earlier, in the Clinton administration. Back then, many of the people who were to devise Obama’s economic policies were working with Congress to fundamentally shift economic policy to promote homeownership — by relaxing lending standards and pressuring private financial companies to lend to a broader range of households that also presented higher risks of default. A key component of this strategy was using the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to guarantee the mortgage-backed securities that included these riskier mortgages, so they could be sold on the secondary mortgage market.
Virtually everyone — except, apparently, the Obama administration — recognizes in hindsight that these policies helped create the conditions that allowed the housing bubble, by fueling demand for housing, expanding the use of exotic financing (such as balloon payments, interest-only mortgages, and other subprime instruments), and, most important, obscuring the inherent risk associated with these assets in mortgage-backed securities (which were themselves an innovation introduced by the GSEs).
The book’s opening chapter lays out this story. Norquist and Lott effectively show that the same policymakers who created the crisis are the ones responsible for designing and implementing economic policy for the recovery. And their thinking hasn’t changed much, despite the collapse of the housing market and the financial industry: The problem, in their view, was that the wrong people, with the wrong motives and incentives, were running the housing market and financial industry, and they believed that putting the right people in key positions would make the economy run properly again.
The rest of the book systematically tears this view apart, while also laying bare the utter empirical failure of Obama’s economic policies. Norquist and Lott present compelling evidence that the so-called recovery is not much of a recovery at all; in fact, it may well be the worst in modern history. While the Obama administration claims that the recession was the “worst” since the Great Depression — a plausible-sounding but dubious claim — the reality is that the recovery has been a policy disaster. Long-term unemployment has been higher, job creation more anemic, and economic growth more sporadic than in any of the recoveries in recent history. In fact, deep recessions are historically known for their quick recoveries. Not so with the current recovery, and understanding why is crucial to developing a policy framework for getting the economy back on track.
Oddly enough, the failure of Obama’s economic policies might not have become the political Achilles’ heel of his presidency if he and his advisers hadn’t been so arrogant and duplicitous in the crafting, passage, and implementation of the stimulus program. The administration infamously trotted out half-baked economic models predicting that an $800 billion federal-government spending spree would create more than 5 million jobs. Administration economists predicted that unemployment would peak at 7.9 percent in the summer of 2009. Without the stimulus, they said, the economy’s unemployment rate would stay at about 9 percent throughout 2009 and over 6 percent through 2012. Of course, unemployment peaked at 10 percent in October 2009 even with the stimulus (and subsequent mini-stimulus programs) and has stayed over 8 percent through most of 2012. Many states found their unemployment peaking over or near 10 percent. Norquist and Lott do an admirable job of dissecting how miserable the administration’s track record is, noting that at best the economy may have added about 840,000 jobs (on net).
#page#The administration’s response to these dismal numbers is that it underestimated the depth and breadth of the recession. This lament is not altogether without merit. Although Norquist and Lott don’t delve into the broader issue of the reliability of economic forecasting, virtually all macroeconomists and economic modelers missed the timing, underlying causes, and severity of the recession. The fact that the top economic forecasters misjudged the economy on such a grand scale, however, doesn’t justify the massive deficit spending promoted by Obama’s policies. If anything, the failure of the world’s best experts would seem to argue for caution and circumspection.
A particularly compelling series of charts demonstrates the stunning lack of correlation between stimulus dollars and standard measures of economic distress such as unemployment, bankruptcy, and foreclosure rates. Ultimately, the stimulus dollars were allocated politically, and not on the basis of a professional analysis of the costs and benefits of projects. The authors correctly point out the statistical fiction and politically self-serving nature of differentiating between jobs “created” versus jobs “saved,” which allowed the administration to claim much higher benefits from the stimulus than could be warranted by reports of real jobs created.
Norquist and Lott also properly criticize Obama’s advisers for sticking to a strikingly unnuanced and simplistic Keynesian prescription that focuses on boosting aggregate demand — irrespective of how the money is spent, where, or by whom — as the economic rescue plan. In the end, despite the campaign rhetoric positioning Obama as a pragmatic candidate who would let policy be led by sober analysis of “what works,” the reality has been an ideologically driven economic policy that centralizes federal-government economic power and consciously increases the size of government on all levels.
And Norquist and Lott don’t focus just on spending. A chapter titled “Regulatory Thuggery” at first seems to be a nod to conservatives who seem to rail ideologically against government of any kind, but soon reveals a troubling pattern of legislating social and economic policies through the administrative labyrinth of government agencies. They delve specifically into the case of health-care regulation to show how the administration has artfully used the regulatory state to restrain and direct private behavior and initiative. The health-care legislation, they note, created 159 new agencies, commissions, panels, and other implementing bodies. In another example of the political use of statistics, they note that the administration and its supporters selectively cited data to undermine the notion that health-insurance markets are competitive: Supporters of Obamacare will point out that several states have just a handful of retail providers, such as the nonprofit Blue Cross/Blue Shield insurers, but in fact more than 900 third-party providers compete nationwide to provide health-care service to employers. These providers create a competitive insurance market for most of the nation.
The final chapter provides readers with a way out. Norquist and Lott outline a twelve-step program for getting America back on track. Most conservatives will find few of these proposals new: eliminating the death tax, selling off unused government assets, adopting a flat income tax, block-granting means-tested programs, reforming Social Security, adopting a balanced-budget amendment, and so on. The value of Norquist and Lott’s book is in pulling these proposals together in one place.
While chronicling the highly politicized and ideological nature of the Obama administration’s policymaking, the authors have forsaken the kind of economic analysis that would show why centrally directed economic policy is doomed to fail: The simplistic aggregate-demand approach to stimulating the economy doesn’t take into account the dynamics and complexity of market prices and their role in allocating resources to the most productive uses. Simply dumping more money into the economy assumes that all consumers will spend a certain number of dollars, when in fact, particularly in highly uncertain times, their preferences are fundamentally changed. To have explained this might have taken their book beyond its initial purpose: It’s unlikely that people on the left, who desperately need to be taught that particular truth, will pick up a book by Grover Norquist, president of Americans for Tax Reform, or John Lott, author of More Guns, Less Crime. In any case, the authors have done an admirable service, by providing a unified and accessible sourcebook on the failure of Obamanomics and the stimulus.
– Mr. Staley is managing director of the DeVoe L. Moore Center at Florida State University.