In a letter to the leaders of the world’s 20 most economically developed nations last week, President Obama called on the group to “reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong.”
He then arrived at the group’s summit in Toronto and lobbied for more stimulus spending in industrialized countries, including European nations who have recently begun to impose budget cuts and other measures aimed at trimming their deficits.
Yes, the Obama spending binge has gone global. No longer satisfied with running up our own national debt, the president is now encouraging other world leaders to continue adding to their own deficits, writing, “I am committed to the restoration of fiscal sustainability, but it is critical that the timing and pace of consolidation in each economy suit the needs of the global economy, the momentum of private sector demand and national circumstances.”
As Obama travelled to Toronto, his Democratic allies on Capitol Hill tried unsuccessfully to advance yet more stimulus spending. This after the $862 billion stimulus bill they enacted last year failed to spur employment growth and left the economy staggering.
Administration officials say they “misread” the economy last year, “underestimating” the magnitude of the recession they “inherited” from Obama’s predecessor. The problem, they say, is that the stimulus wasn’t big enough.
The problem is the stimulus.
Research done by Harvard economists Alberto Alesina and Silvia Ardagna, released last fall, shows stimulus plans based on tax cuts are more likely to increase growth than plans based on government spending. The pair arrived at this conclusion after analyzing every major stimulus plan enacted in developed economies between 1970 and 2007.
The stimulus program Obama signed into law last year included little in the way of tax cuts. The tax cuts Democrats did include were mostly temporary tax credits, not the type of marginal reductions in tax rates that spur economic growth.
Far from using tax cuts to stimulate growth, the Democrats have instead opted to let the Bush tax cuts expire at the end of the year, leading to higher tax rates on capital gains, dividends and income.
Additionally, the health care plan enacted earlier this year imposed an array of new taxes and regulations that will be levied on everything from medical devices to tanning beds.
Health care, an issue the Democrats foolishly endeavored to take on in the midst of a sagging economy, has only added uncertainty to the economic environment. Businesses, still unsure as to what the costs of complying with the bill’s requirements will be, are much more reluctant to hire new employees for whom they are now legally mandated to provide government-approved insurance plans.
Adding to this uncertainty is the possibility of a cap-and-trade program to ration the use and increase the costs of energy. The president continues to entertain the possibility of enacting such a scheme despite the enormous costs it would impose on families and businesses.
European governments, to their credit, have largely ignored Obama’s advice. Times have indeed changed when normally free-spending European governments are reining in their budgets against the wishes of the U.S. president.
The European leaders know, from the ongoing turmoil in Greece, that a broader financial crisis much worse than the one we have just survived lingers if markets lose confidence in the ability of governments to service their debts.
European governments have already had to pool their resources to bail Greece out, and are imposing austerity measures in order to reduce market uncertainty and fuel confidence in their ability to manage their budgets.
These lessons are lost on our president, who in his letter wrote that global governments “need to commit to adjustments that stabilize debt-to-GDP ratios at appropriate levels over the medium term.” Gone is any ambition of eventually balancing the budget, and the pretense of even trying.
Rather, the president touts his administration’s plan to halve the deficit by 2013, which is a farce for two reasons. First, because the administration, through discretionary and stimulus spending, has so increased the budget deficit that even halving it by 2013 would still mean a larger deficit that year than in any year during the Bush presidency. Secondly, because government projections show the deficit increasing again after 2013 as a result of mandatory increases in entitlement obligations.
If the president were serious about reducing spending in the “medium-term,” he would propose a serious solution to rein in those obligations even as he urges for more “temporary” stimulus measures. That work has instead been handed off to a committee, which will conveniently not report its findings until after the November elections.
What the economy needs now is confidence that the government is aware of its perilous fiscal situation and is willing to take actions to correct it. Until then, the economy will remain stagnant as businesses and consumers restrain their economic activity under the daunting prospect of ever more taxes and debt.
