The New Pitch For Keynesian Obamanomics





Photo credit: terrellaftermath

Recently, President Obama vowed to focus on income inequality in the U.S while calling for an increase in the federal minimum wage. He reasserted his defense of government’s role in stimulating economic mobility. Mr. Obama also said that rising income inequality and decreased economic mobility “pose a fundamental threat” to American prosperity.

This may have been an appropriate pitch if it was made in 2008 during a campaign rally, but it has been 5 years of Obamanomics that was promised but failed to stimulate a sustained growing economy while enhancing economic mobility. As such, the fundamental threats to American prosperity are actually the President’s policies. President Obama, in his renewed focus on economic mobility and inequality, is now pitching that hiking the minimum wage is a means of achieving those goals. This only speaks volumes on how this administration has lowered the bar and dismissed what it actually takes to grow an economy.

The resurgence of populist chants of ‘inequality’ and hedging on the emotions of activists (some of which demand doubling the federal minimum wage from $7.25 to $15 per hour) only indicate that President Obama wants a platform to double down on the failed no-growth Keynesian Obamanomics of the last five years. In 2011, I wrote a detailed piece titled ‘Failed No Growth Keynesian Obamanomics versus the Reality on Taxes and Spending’. As I predicted then, 2013 would be the year for other attempts at a Keynesian binge; only this time, it is coupled with more coercive regulative attempts such as a drastic hike in the minimum wage.

The President again called for more ‘investment’ and stimulus supervised by government. This is just a precursor to justify calling for more tax hikes in future budget deals. So far, he and other liberals in Washington have proven inept in investing the money they have already collected from taxpayers or borrowed from other countries. Look for his plans to require more. They have failed to provide any return of vibrant economic growth. There is no shortage of capital or money in the private sector to invest in economic growth and ensure upward mobility. There is only a shortage of coherent government policies and leadership to motivate such investments, while reducing the economic uncertainties that hinder them.

Democrats, after President Obama came to office in 2009, had an advantage by also having both the House and Senate. They took the opportunity to unleash their ideological dreams with a barrage of hyper Keynesian spending experiments and massive growth in government. This included the almost $1 trillion in stimulus, a surge in temporary and targeted programs such as cash for clunkers, tax credits for home buyers, over 99 weeks of jobless benefits, clean energy grants, subsidies to states (which have already run out and caused budget shortfalls), and much more.

The Keynesian ‘theoretical multiplier’ supporters of stimulus programs said that every $1 of this spending would lead to $1.50 of economic output. Some liberals like Nancy Pelosi and newly elected NYC mayor Bill de Blasio think that unemployment benefits stimulate the economy, while denouncing reforms that require welfare recipients to actively look for jobs while receiving benefits. The results of this Keynesian spending binge have led to the hangover of fiscal consequences: temporary increases in demand, then a continuation to economic downturn when the funds dry up–leaving a higher national debt tab and limited mobility for citizens.

In addition, the other sobering reality is that Keynesian approaches normally fail because they do not provide permanent predictable incentives to save and invest in the long term. Predictable incentives, as opposed to tax hikes, are the key motivating factors that have been proven to spur economic growth, jobs, and increased mobility. This reinforces the earlier point of my predictions in 2011 about what to expect in this time period. The recent push by the President is setting America up for another Keynesian spending binge, and a hangover from which America may find it difficult to recover from.

Due to Keynesian Obamanomics, we still have an unemployment rate of 7%, the lowest labor participation rate in 35 years of 63%, and anemic economic growth. Going forward, the opportunities for growth will depend on how much capital will be controlled by a Keynesian driven government, versus allowing expanded economic freedom and the free movement of capital to areas where they will be most productive and create well paying jobs.

Pro-growth tax reform has been repeatedly shunned by the Obama administration. The Democratic Senate led by Harry Reid has not taken up for a vote over three dozen pro-growth and jobs bills passed by the Republican House, even though some had bi-partisan support. Not only does the U.S now have the highest corporate tax rate in the world at 39% (which encourages global companies to invest elsewhere); profits earned on subsidiaries overseas and already taxed there are also taxed again if repatriated back to the U.S. Thus, billions of dollars that could return and be invested in the U.S remains where it is generated. Most developed countries do not have this ‘double tax’ scenario for repatriated profits. The Obama administration has repeatedly said no to the Keystone Pipeline from Canada to the U.S, which would also have boosted jobs, tax revenue, and a safe source for more energy. Instead, the Canadian companies are preparing to build a pipeline to their west coast and export the oil to China. More recently, the effects of Obamacare are becoming more apparent on job creation due to the mandates and the increased costs it adds to hiring. In addition, the Fed has contributed to uncertainty with its shifting policy targets with quantitative easing, which in turn reduces business risk takings for investment and hiring.

The President’s inequality argument also aims to re-ignite the populist passion of class warfare to fuel and galvanize the efforts of his supporters to help his cause. The chants of ‘inequality’ implies that those who do well do so at the expense of keeping others down, so government efforts are needed to ‘close this gap’ through redistribution. However, demonizing success actually curtails it and the prosperity the nation can benefit from when the successful do strive. These populist rants of inequality also ignore the reality of economic facts that contradict the basis of their argument.

The more successful one is, or the more disposable personal wealth one has, the more likely a higher proportion of that wealth will be saved or invested in economic activity that further grows that wealth. Thus, the ‘richer’ one is, the more likely they will get ‘richer’ or be able to weather an economic downturn. The less wealth one has means that a higher proportion of that will be used for consumption and not investment. As such, they will be more susceptible to increases in cost of living, unforeseen circumstances, or limited mobility due to a slow growth economy–like we have now.

The minimum wage was never intended to be a living wage but the entry wage for a low skilled worker who eventually earns more as they acquire more experience. It is the first rung of moving up an economic ladder. If the President and his supporters are so adamant to make more people comfortable on this ‘first rung’ of the economic ladder, it does not instill confidence that his economic policies will give them the mobility for them to rise above that rung.

President Obama’s own Labor Department reports that only 2.9% of American workers paid by the hour and over the age of 25 are earning minimum wage. Most of them are not raising families on it. However, what is often ignored is that earning $15,000 per year is not their sole income. Food stamps, earned income tax credits, and Medicaid–which this income group may qualify for– actually means that their real income could be almost double that. Measuring economic inequality often leaves out such transfers of benefits, as Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor who directs e21 at the Manhattan Institute, recently explained in an article: The Income Inequality Problem is Overblown.

More so, an increase in the minimum wage means increasing the cost of low skilled labor, which means less people might actually be hired. As Jared Meyer of the Manhattan Institute explains in an article, ‘Minimum Wage is not a Win Win,’ low-skilled workers are disproportionately affected by increases in the minimum wage. The U.S teen jobless rate in October was 22.2%; and for black teens, it was 36%, which reinforces the observations in Mr. Meyer’s article.

The mantra by many liberals about ‘inequality’ and mobility often ignores how their actions to prevent school choice limits the educational opportunities that would enhance the income mobility of students, especially for those who are poor or are minorities. The most valuable capital is human capital, like maturing young students; and the best way to invest such capital is by young people being free to access the best educational opportunities for them. See my previous article: NYC de Blasio joins other Dems against a 21st century civil right, school choice.

If President Obama is serious about increasing economic mobility and preventing inequality, there is a lot of self-evaluation he will need to do about his own policies. First, he should face the reality that populist Keynesian and class warfare tactics are no substitutes for pro-growth economic policies. Unfortunately, President Obama’s ideological mandate to himself normally supersedes such rationale.

 

Photo credit: terrellaftermath





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