Tuesday, March 17, 2009

Does Obama Deserve An "F" Grade For His Economic Policies?

There has been a lot of criticism lately of President Obama's economic policies, but are they really so bad to deserve the "F" grade recently given to them by the Wall Street Journal? Obviously a good deal of economists think so, but economics professor Mark Thoma has a different view. For more on this, read the following post from Mark Thoma.

I was asked about the grade of "F" the WSJ gave to the economic policies of Obama and Geithner:

Grading Obama on the economy, by Mark Thoma, Comment is Free, UK Guardian: Obama hasn't received high marks for his handling of the financial crisis. Does he deserve a failing grade?

The Obama administration's economic policies received a low average rating from 54 economists participating in a recent poll appearing in the Wall Street Journal, low enough to allow the paper to award an "F" grade to the president and US Treasury secretary Timothy Geithner. (Ben Bernanke fared a bit better.)

However, there was considerable variation across the 54 responses, perhaps because the question was too broad. In particular, when assessing the administration's policy successes or failures to date, it's important to separate the stimulus package from the bailout package, and to separate the economics from the politics.

Though they are often confused, the stimulus package is intended to jump-start the economy and is largely independent of Geithner and the Treasury, while the bailout policies are directed at repairing the financial sector and are, to a large extent, a direct product of the Treasury's efforts.

The economic policies underlying the stimulus package do not, in my opinion, deserve a failing grade, or anything close to that. The policies the administration would have liked to have implemented were based upon solid principles. But I was disappointed with the actual legislation.

The problem was the politics, not the economics. The administration did not get out in front and dominate the political message. Instead, the framing was left to the opposition, and that forced compromises in the stimulus legislation that limited its potential effectiveness, perhaps to the point of falling below the critical threshold needed to get the economy moving.

For example, the bill that actually emerged slanted too much toward tax cuts that are likely to be saved rather than spent, thus reducing the impact on aggregate demand. There was not enough help for state and local governments, and there was not enough help for struggling households who have taken big balance sheet and employment hits as the crisis has unfolded. So while I would give the policy design decent marks, the actual implementation has fallen short, largely due to a tendency to compromise instead of taking control of the political battlefield.

The financial bailout suffers from a similar problem, but here the economics have been problematic as well. The plan has been slow to develop, and does not seem to recognise the nature of the problem. However, this may be due to fear of the politics associated with nationalisation rather than a lack of understanding of the problem and then potential solutions to it. Or it could be from a genuine belief that nationalisation ought to be a last resort.

But all of the false steps, the hesitation, the lack of a firm commitment to a particular course of action look to me like they have been driven by a desire to find some way, any way, of avoiding the political consequences of doing what they know needs to be done in their heart of hearts: take temporary control of the banks, separate the good assets from the bad, recapitalise the banks as necessary, then sell the reconstituted banks back to the private sector.

But instead of leading the political argument, they have allowed the opposition to dominate the political landscape and that has forced the administration's hand in terms of the policies they are able to pursue. In the case of the financial sector, it's time to stop hoping that muddling along until the economy recovers will somehow solve the problem, and to get out in front and lead. As for the stimulus package, the message is the same. Given that the first package may not be enough due to the lack of a proper political foundation, and therefore that a second round may be needed, it would be helpful to begin paving the political path forward here as well.

This post can also be viewed on economistsview.typepad.com.

1 comment:

crytopean said...

Are you kidding? Opposition? What opposition? Obama let Pelosi design the spending package that was virtually unchanged by the time it got slammed through the Senate without even being read by Congress. They did manage to remove one of the only things that would have help the housing industry. They dropped the $15,000 tax credit to ANYONE for the purchase of a primary residence and instead, now only first time buyers can take advantage of an $8,000 credit. Ooooh, big opposition. Now today, new reports are that the administration has grossly underestimated the cost of the plan.

Add to the ramrod "Spendulous" package and it looks like the Appropriations Committee is considering using "reconciliation" to jam the Cap & Trade Tax Program down American's throats without congressional debate, thwarting the vetting of the legislative process.

A Cap & Trade Tax Policy will wipe out the $800 middle-class tax cut many times over. Every household will see the equivalent of a 1% to 3% permanent increase in tax, plus they will be penalized for everything they consume. Electric cost alone is projected to increase by $1800 for the average 5-room, 1200 sf home. Gasoline will be penalized by $0.50 (on the low side) up to $2.58 per gallon. And we all know that the 2008 rapid rise in gasoline was the catalyst that sent the economy over the edge.

I think an "F" was being gracious. There are too many examples around the world to show us that creating an uncompetitive environment for investment and entrepreneurship drives investment and business to countries with the lowest tax rates. Ireland was the worst producing European economy until it reduced its corporate tax rate to 12.5% - now it's the second highest producing country in the EU.

Elimination of the capital gains tax for everyone will result in the government receiving more tax revenues, not less. Investors will place their money in building new businesses, new innovation, job creation and all the things that generate taxable income and products.