Obama's Plan Is Debt Disaster

Throughout America, unemployment is high and rising, and an activist president wants to do something about it, also using economic decline as an opportunity to advance a radical expansion of the welfare state. Am I speaking of President Barack Obama? Yes, but also of Franklin D. Roosevelt. As hard as Roosevelt tried, unemployment rates in mid-1938, more than five years after he took office, still approached 20 percent. New Deal activism did not bring recovery. If Obama gets his way, I fear history might repeat itself, albeit perhaps in a milder form. In Roosevelt's case, more than three years of ineffective activist policies by his predecessor, Herbert Hoover, had put the economy in a far more desperate shape than we are in today.

The Obama/Federal Reserve plan has at least seven parts.

  • Strengthen financial institutions with the Bush administration's TARP program, along with additional assistance, such as the Fed buying $1 trillion worth of assets of mortgage giants Fannie Mae and Freddie Mac, and additional bailouts for insurers such as AIG.
  • Extend the bailout principle to individual citizens by helping them avoid mortgage foreclosures, and to large corporations such, as General Motors.
  • Have the Fed vastly expand the money supply, lower interest rates and more generally engage in unprecedented monetary growth.
  • Launch a massive (nearly $800 billion) so-called stimulus program that includes some tax cuts, some infrastructure spending and lots of new social spending (e.g., green initiatives).
  • Implement a health-care system, hugely affecting nearly 15 percent of national output.
  • Enact a large "carbon tax" as part of Obama's cap-and-trade scheme to reduce global warming.
  • Revive stagnant labor unionism by having a card-check law doing away with union representation elections.

In short, Obama wants an economic transformation at least the equal of Lyndon B. Johnson's Great Society, if not Roosevelt's New Deal.

We have the prospects of high inflation and high unemployment--1970s-style stagflation on a bigger scale.

History and economic theory suggest this will lead to stagnation and inflation. How do we pay for all the commitments? The idea that the rich can pay for much of it through higher taxes is fantasy. Until recently, the government never had borrowed $500 billion in a single year. The Congressional Budget Office estimates the Obama plan will increase deficits to well over $1 trillion annually for the next decade, well over doubling the national debt.

Who will buy trillions of dollars of IOU's from the government? Asian investors? Their economies are reeling. The oil-rich Arab countries? Oil prices have plummeted. To sell all the debt, interest rates likely will have to rise--perhaps substantially. To deal with that problem, the Fed might agree to buy most of the debt, roughly equivalent to printing money, which almost always sets off inflation. That could devastate the world economy dependent on the dollar. We have the prospects of high inflation and high unemployment--1970s-style stagflation on a bigger scale.

But that is not all. Since Obama's election, national wealth declined more than $2 trillion as investors became scared by his trashing of business leaders, promise of higher taxes on the rich and irresponsible monetary and fiscal policy. Although the president is cooling the rhetoric as markets tank, investors still are cautious about making commitments, given the anti-capitalist tendencies of the nation's political leaders.

Big federal spending seldom works to improve economic conditions. The massive Works Progress Administration of the 1930s employed 3.3 million (the equivalent of 10 million today) at its 1939 peak doing infrastructure projects, but unemployment remained in the double digits. In the 1990s, the Japanese dealt with economic sluggishness by moving from budget surpluses to a decade of massive budget deficits, going on a spending spree, and had the lowest growth rate in 50 years. Just over a year ago, a bipartisan $150 billion stimulus package passed Congress, designed to forestall downturn. Result? Unemployment has soared, the stock market has fallen and a financial crisis ensued. Stimulus packages don't work.

What to do? Ideally, nothing. Markets have remarkable self-correcting powers, and this recession originally induced largely from imprudent Fed and other government policies can reverse, probably by year's end. Unfortunately, government policies have muted market signals that point the way to recovery. Tragically, inaction is not a political option. More realistically, Congress should work to moderate and delay the potentially harmful shocks arising from Obama's proposed fiscal excesses and dangerous social engineering. This is a moral issue as well: the staggering debt from this dangerous experimentation will burden our children and grandchildren for decades to come.

Richard Vedder is a visiting scholar at AEI.

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