Obama's Economic Push: The Good, the Bad & the Ugly

With President-elect Barack Obama's dramatic speech today, he is sounding the economic alarm that the Bush administration needed to sound long ago. While Bloomberg News [1] reports that Bush "is using the waning days of his presidency to implement a raft" of corporate giveaways, Obama plans to use the first days of his term to confront this crisis head-on - and that's critically important because as any psychologist might tell you, the first step in solving a massive problem is to admit that it exists. But, as always, the devil will be in the details. So without further ado, here's the good, bad and ugly of what we know about Obama's economic recovery proposal.

The Good: Understanding the Scope of the Problem

As evidenced by this passage in his speech, Obama clearly understands how big a crisis we face:

"If nothing is done, this recession could linger for years. The unemployment rate could reach double digits. Our economy could fall $1 trillion short of its full capacity, which translates into more than $12,000 in lost income for a family of four. We could lose a generation of potential and promise, as more young Americans are forced to forgo dreams of college or the chance to train for the jobs of the future. And our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world. In short, a bad situation could become dramatically worse."

Obama also seems ready to reassert the government's role in the marketplace and the economy, saying "Only government can break the vicious cycles that are crippling our economy." That rhetoric will translate into proposals to spend billions on public infrastructure and re-regulate the financial industry.

In that sense, he is embracing the lessons of Franklin Roosevelt, and rejecting conservatives' increasingly loud claims that the New Deal "prolonged the Great Depression" - claims that are demonstrably false. As Census data shows [2], the pre-WWII New Deal spending and regulatory agenda resulted both in robust GDP growth rates and the single biggest decline in the unemployment rate in American history. Unbelievably, conservative think tanks have resorted to quite literally lying about government data, claiming, as the Heritage Foundation has, that the "New Deal never drove unemployment below 20 percent." [3] As you can see from the Census Bureau's verifiable data from 1936 and 1937 [4], that claim is a patent lie - and it's great that Obama and his economic team seems to understand that.

The Bad: Embracing the Old Tax Cut Fallacy

Earlier this week [5], Obama aides suggested that up to 40 percent of the economic recovery plan could be comprised of tax cuts. The problem with that is three-fold.

First, it undermines Obama's promises to push the policies that will most immediately and most effectively boost the economy. As Economy.com's Mark Zandi [6] (himself a Republican and a top adviser to John McCain's presidential campaign) recently showed, historical data proves that spending on public infrastructure provides a 25 percent bigger boost to GDP than tax cuts. The Economic Policy Institute [7] explains why, reporting that tax cuts are often "saved rather than spent, thus blunting its stimulative benefit - by comparison, other options such as infrastructure spending, aid to states, food stamps, and unemployment insurance (UI) benefits are much more cost-effective because they target the needs most likely to channel money back into the economy." It makes perfect sense.

Conservatives counter with a macro-argument that Obama seems to be embracing: namely, that lower taxes is the path to higher GDP growth, and higher taxes hurt GDP growth. But again, actual, verifiable data shows that's false - and not just data from the early 1990s when Bill Clinton raised taxes and the economy boomed, but data over the last century. In a Boston Review essay entitled "No New Tax Cuts," [8] Center for Economic and Policy Research economist Jeff Madrick reports:

"In recent years, Peter H. Lindert, a leading economic historian from the University of California, Davis, has comprehensively analyzed the literature. One argument against government is that public spending is unproductive and crowds out private spending. But, time and again, he found that studies claiming that high taxes reduce economic growth simply did not hold up. Lindert’s exhaustive statistical analyses were based on eighteen countries over ninety years. No matter how he juggled the data, he found no relationship between the growth of GDP per capita and productivity and the level of taxes or the extent of social spending."

Second, while some of the tax cuts Obama is championing are targeted at the middle-class, the Washington Post [9] reports that others are corporate giveaways that economists and lawmakers of both parties have previously derided as wholly ineffective, or worse - a reward to the very economic actors that created the current crisis.

For instance, there's Obama's proposal to let huge corporations use an accounting change to dramatically increase their tax write-offs - a privilege that the average tax filer does not have. As economist Dean Baker notes [10], this proposal seems specifically crafted to provide a stealth windfall to politically-connected Wall Streeters, who have already received roughly a trillion-dollars in bailout largesse:

"The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal. According to the Washington Post, the proposal will allow companies to write off current losses against taxes paid over the last 4-5 years, not just 2 years, as in current law. There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against. But, really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007."

Congressional Quarterly [11] notes that Obama's corporate tax proposals are so inappropriate, they have already been twice rejected by Congress in 2008, with Ways and Means Committee Chairman Charlie Rangel (D) saying, "We need to provide relief to the [home] buyers and families themselves, not just the banks." (A bit of good news: The Washington Post [9] reports that Congress is not about to rubber-stamp these tax cuts, with Senate Finance Committee Chairman Max Baucus saying his "preference is to invest a bigger share of the roughly $775 billion package in domestic energy programs." Meanwhile, the Politico [12] reports that House Speaker Nancy Pelosi is urging Obama to back an immediate repeal of Bush's upper-income tax cuts, rather than waiting for them to expire).

The last major problem with Obama's tax cut proposals is how they are being put forward in competition with public spending, potentially creating a "rob Peter to pay Paul" quandary. Specifically, news reports suggest that Obama is linking the two - and that the public spending component of the economic recovery package (clearly the most reliable stimulus policy) could be ultimately contingent on the size of the tax cuts (at best, a questionably stimulative policy) at a time when many economists believe Obama's spending proposals are already too small [13]. In a Beltway political culture still scorched by 30+ years of conservatives' anti-tax paradigms, it's entirely possible that congressional legislative negotiations will expand the tax cuts at the expense of the public spending, especially with Obama effectively validating the anti-tax mantra with his focus on tax cuts.

The Ugly: Now Is Not the Time To Talk About Slashing Social Security

A day before his major economic speech, Obama delivered a separate speech saying "We are beginning consultations with members of Congress around how we expect to approach the deficit," adding, "We expect that discussion around entitlements will be a part, a central part, of those plans." As the New York Times [14] points out, that's coded politicalspeak for an effort to "reform" Social Security and Medicare, which history has shown is often itself politicalspeak for cuts to those programs.*

It goes without saying that simultaneously proposing new tax cuts and backing Wall Street bailouts [15] while even vaguely floating the possibility of Social Security and Medicare reductions is the kind of regressive "let them eat cake"-ism one might expect from George W. Bush himself - not Obama. But even beyond the immorality of such reverse Robin Hood paradigms are the empirical problems. For a new administration that supposedly prides itself on "pragmatism," there would be absolutely nothing "pragmatic" - and absolutely everything "ideological" - about using slashing Social Security and Medicare to finance new tax cuts during this economic crisis.

Social Security and Medicare are among the most effective and efficient stimulus programs in America. The overhead costs of Social Security, for instance, are famously miniscule - the program simply provides direct stimulus checks to a segment of the population that needs the money the most (and spends that money fast). Likewise, as I noted in my first book, Hostile Takeover [16], the World Health Organization reports that just four cents of every health care dollar spent on Medicare goes to administrative expenses - far lower than the 15 cents of every health care dollar that goes to administrative expenses in private insurance.

Certainly, the two entitlement programs have their share of problems - but this crisis moment is not the time to even consider cutting them. Let's hope Obama's suggestion about entitlement "reform" wasn't code for cuts.

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Though Obama will inherits huge challenges upon entering office, he is in an enviable political position, having more political capital than any incoming president since at least Ronald Reagan - and the progressive broad strokes of his economic agenda imply he is ready to take advantage of an unprecedented legislative opportunity.

But the difference between transformative economic policies and half-measures will be the difference between a progressive movement that forces him to champion a progressive agenda and a progressive movement that either deferentially backs down and/or allows him to be bullied by a conservative movement that was resoundingly rejected in the 2008 election.

The dynamics are clearly in progressives' favor - and the arguments for conservative appeasement are extremely weak. Indeed, it is absurd to claim that with huge Democratic congressional majorities and a decidedly progressive election mandate, the new president still must appease Republicans by embracing conservative policies. But as the shifting economic politics shows, turning "hope" into "yes we can" into "yes we did" will take sustained movement pressure, both backing up Obama on his best policies and challenging him on his worst.

* UPDATE: Dean Baker [17] doesn't think Obama's declaration on Social Security and Medicare automatically means he's looking to cut those programs. I agree that it doesn't automatically mean that - but I disagree with Dean that Obama's statement "does not indicate any intention to cut Social Security." Obama explicitly tied his goal of reducing the deficit to entitlement reform (not to tax increases, etc.) - which logically at least suggests the consideration of Social Security cuts to reducing the deficit. That is, unless someone can produce a magic pony and explain how alleviating the deficit mostly through Social Security "reform" (rather than tax increases) means not using money from Social Security to pay down the deficit (ie. a cut in Social Security).

** ADDITIONAL UPDATE FOR OPTIMISTIC THINKING: For the optimists out there (which includes me), I should note that it is also possible the Social Security "reform" may mean Obama fulfilling his campaign promise [18] to raise the payroll tax cap so that it applies to income over $100,000. I don't think he was referring to that, especially considering his current focus on talking about tax cuts rather than tax increases (which is what the elimination of the payroll tax cap would be). But it is certainly possible, considering he promised to lift the cap when he ran for president.