Deficits and Bailouts Pose a Threat

President Obama's economic plans are likely to have adverse economic and constitutional consequences. Like Franklin Roosevelt, Obama takes office during a time of economic crisis with ambitious plans to remake the American economy. However, Roosevelt's plans did little to abate the depression--unemployment remained high throughout the 1930s and enacting his plans came with a cost: the marshalling of executive power.

Visiting Fellow
John Yoo
The Hippocratic Oath says, "Do no harm." It cautions doctors not to try a cure that might be worse than the disease, as when a strong painkiller causes long-term drug addiction.

President-elect Barack Obama might heed this adage as he tackles the recession. Spending a trillion dollars might jump-start the economy--but at the price of damaging not only the nation's balance sheet, but also our constitutional system.

Government should limit its intervention to protect private enterprise and innovation, the true engines of wealth generation, without adding to our bloated public sector.

No one doubts that we are in an economic crisis. Gross domestic product is estimated to have nosedived a stunning 4 percent in the fourth quarter of 2008, and it is expected to fall an additional 2.5 percent in this quarter. The stock market has dropped one-third, destroying billions in private wealth.

Main Street has suffered, too. The unemployment rate jumped from 4.6 percent to 7.1 percent last year; 2.7 million Americans lost their jobs. Financial giants the Bear Stearns Cos. Inc. and Lehman Bros. Holdings Inc. have disappeared, while industrial companies including Alcoa Inc. and DuPont Co. have announced layoffs. Unemployment is expected to hit 8.1 percent by year's end. Only the recessions of 1974-75 and 1982-83 threw a higher percentage of postwar Americans out of work.

Obama's cure involves a dazzling array of direct aid, infrastructure projects and tax cuts. But running enormous deficits could waste money on unneeded projects, increase debts for future generations, and create 1970s-style stagflation. Government should limit its intervention to protect private enterprise and innovation, the true engines of wealth generation, without adding to our bloated public sector.

Washington's efforts to spend our way out of the recession so far have come to little. President Bush and Congress already have agreed to $700 billion for Wall Street, after an earlier $165 billion in tax rebates and spending failed to avert the downturn. The deficit has swollen to $1.2 trillion, or 8.3 percent of GDP, not including Obama's stimulus proposal of about $800 billion.

Meanwhile, the federal government has expanded its interference in the private sphere. Washington now owns stakes in the nation's largest companies. It is deciding which companies will survive on taxpayer dollars and which ones won't. It will bless companies that cater to its wishes on executive pay, corporate jets or labor relations. The discipline of the marketplace is giving way to lobbying Congress.

One of Obama's role models, Franklin D. Roosevelt, faced a far worse economic challenge. Between 1929 and 1933, the nation's economy shrank by one-half, aggravated by mistakes made by the federal government. More than 5,000 banks failed. About one-quarter of the workforce, 13 million Americans, remained consistently unemployed. The Dow Jones industrial average fell three-quarters.

Little that FDR and Congress tried worked, and much was counterproductive. They created new public-works projects, but also wanted a balanced budget and a deflationary monetary strategy. They supported industrial and farm cartels that reduced output and increased prices. The jobless rate would stay above 15 percent for the decade; only World War II rearmament would spark a true recovery.

The price? The New Deal burst the Constitution's careful limits on the federal government's power over society and the economy. Congress made a federal case out of New York City butchers selling an "unfit chicken." Federal agents took a farmer to court for growing 240 bushels of wheat for his own consumption. Washington's intrusions into everything from workplace rules to food labels to crime and education stem from FDR's revolution.

Critics of the modern presidency can thank the New Deal, too. FDR persuaded Congress to hand over its legislative power to armies of federal bureaucrats under the president's control. He turned to temporary powers available only during war and crisis (which he wisely used later to aid the Allies in World War II) to tackle the Depression. He closed the country's banks and took the nation off the gold standard unilaterally. The enlarged presidency and unaccountable bureaucracies became permanent features of U.S. politics.

The government can play an important role in alleviating the suffering of the unemployed, and in providing public goods such as national defense, highways and bridges, and energy and information networks. But trying to do more, as FDR did, risks hobbling the private market, the engine that has made the United States the wealthiest and most vibrant economy in the world.

John Yoo is a visiting fellow at AEI.

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