Wednesday, March 04, 2009

Genuine Trumps Gimmick

The failure of Barack Obama to comprehend the financial crisis, let alone deal with it effectively, is crumbling the façade of his competence as President. His minions, as a result, are going through the classic first stage of grief and loss, the stage of denial. That denial is performed through their ludicrous comparisons of Obama to Ronald Reagan, as if the blundering and desperate moves by the present President can be said to be reasonable and prudent, let alone considered the equal of Reagan’s leadership. To understand why the comparison is not valid in any sense, we must consider the nature and causes of the two presidents’ economic environments.

Ronald Reagan and Barack Obama each inherited a recession when they came to office. That’s not unusual, though – Presidents Kennedy, Ford, and Bush also inherited recessions when they arrived at the White House, and in fact Presidents Taft, Cleveland, Buchanan, Van Buren, and Washington were also greeted with recessions upon their arrival (in Cleveland’s case it was upon his return to the White House). Recessions are cyclical, and so far no one has been able to prevent them from happening, although a bad president can make things worse if he bungles the job. The point here, is that recessions are not ‘republican’ or ‘democrat’ in their cause per se, but should be examined in the specific causes of each and their conditions created upon the nation.

The recession which greeted Barack Obama was caused by three forces – the burst of the housing bubble, the credit crunch brought about by bank speculation, and the liquidity crisis in the domestic auto industry. The initial symptoms were an unemployment of 7.2% in December 2008 (7.6% in January 2009) and a 3.85% inflation rate.

When Ronald Reagan took office, the recession he faced was more profound, because of the heretofore unimagined combination of unemployment and inflation rising at the same time. The chief causes of that recession were the rising price of oil and instability in the Middle East. The initial symptoms were an unemployment rate of 7.2% in December 1980 (7.5% in January 1981) and a 15.81% inflation rate.

You cannot change what you cannot control. This is the essence of why Reagan’s economics were so radical. Reagan established four general goals he believed were essential to setting a sound economic course:

1 - Reduce the growth of government spending
2 - Reduce the marginal tax rates on income from both labor and capital
3 - Reduce regulation, and
4 - Reduce inflation by controlling the growth of the money supply.

While not perfect in its results, Reagan accomplished all four goals and established conditions for an unprecedented boom in business and prosperity.

Obama’s plan is far less complete, and in spirit opposes every one of Reagan’s goals, by massively increasing government spending, raising taxes on both individuals and corporations, drastically increasing regulation and driving inflation upward, deliberately so in the case of energy and finance costs. Essentially, President Obama is rolling the dice on some old notions of Keynes, hoping that simply spending massive amounts on his pet projects will renew economic prosperity by simply spending money. Any parent with a teenager knows the flaws in such thinking; spending is not desirable in itself, but only when it creates the necessary results. In the individual case, this means you pay the rent or mortgage and you buy your food, before you ever entertain the idea of buying that SUV or investing in that can’t-miss IPO. When a teenager wastes his money, he is depending on his parents to cover his needs, but the parents have to be responsible themselves for keeping sound priorities and enforcing discipline. In the case of the government, it’s necessary for government to be cautious about spending and to think through its goals and abilities before engaging on a new bout of projects. It’s catastrophic, nothing less, when a government becomes reckless in spending and in committing its resources without consideration of the critical needs. Obama’s “stimulus” package spent almost eight hundred billion dollars – before interest – without creating even one private-sector job, without addressing even one home foreclosure in process, and without even addressing consumer confidence. This is the government version of trying to justify spending mortgage money on a hooker.

Everything has to be paid for. That’s as basic as economics gets, yet somehow it gets ignored when government is putting together a budget. Literally trillions of dollars are being committed with no reasonable explanation of how it will be paid. When anyone, even the President, tells you that “only the rich” will see their taxes go up, do the math. There are simply not enough “rich” people to pay all these costs and bear these new taxes.

The historical record warns that the massive tax hikes envisioned by the Obama Administration will result in less revenue than they intend to collect. This is because what gets rewarded gets repeated, and what gets punished stops. And in practical terms, this means that when people and corporations are punished for succeeding financially under US tax law, they will find alternatives to paying taxes. They will move business off-shore, they will stop spending money on goodwill initiatives, they will hire fewer people and pay less to their employees, because the government is destroying their effective business models. Obama’s heavy-handed plan for tax and spending with government in control of every major initiative, has no successful model in practice in the world.

Comparing Barack Obama to Ronald Reagan is pathetic and arrogant, to say the least. While it must be admitted that Obama is a far better actor than Reagan ever was, he cannot hope to be even half the leader that Reagan was.