Obama’s Policies Hurt the Working Class

September 4, 2010

Upon taking office President Obama proclaimed that if his $800 billion stimulus package passed into law the unemployment rate would not surpass 8.5 percent.  The measure passed and so did the unemployment rate – past 8.5 and all the way to almost 10 percent unemployment.  One could argue that government spending to stimulate the economy has done more harm than good.    After all, in total Uncle Sam has “invested” over $3 trillion! into the economy in an attempt to grow jobs only to see the unemployment rate continue to rise.  It’s as if all the spending has actually done more harm to workers than good.

Now, I am sure that Bush, Paulson, Bernanke, Obama, Geithner, and all the members of Congress who have supported the government’s spending spree had the best of intentions in mind.  It seems logical that if you put more money in peoples’ pockets, they would spend it on consumer goods, and this in turn would lead to more jobs and an end to the recession.  Right?  Not so fast.  What usually seems like a logical government intervention is not necessarily the case.  Most of the time, these schemes contain many unintended consequences.

Take Obama’s “Cash for Clunkers” program for example.  The scheme used cash incentives of up to $4,500 to get folks with old cars to trade them in for a new, fuel efficient model.  Dealers accepting the trade-ins were required to scrap them. The boondoggle was meant to stimulate car sales, benefit Detroit’s unionized workers and take energy inefficient cars off the road.  Everybody was supposed to win – automakers, workers, and our environment.

Did that really happen?  Automakers did make money during the program, but are still struggling.  The jury is out on whether the environment benefitted since it is very possible that more fuel efficient cars encouraged their new owners to actually drive more miles.  And as far as workers are concerned – it seems like they were the biggest loser in the “Cash for Clunkers” government giveaway.  Because of Cash for Clunkers nearly 700,000 used cars were traded in and subsequently destroyed.  This has led to a used car shortage in America and the statistics bear the facts.  According to Edmunds.com data, used car buyers paid $1800 more for their cars in July than they paid a year earlier at this time.  That represented a 10.3 percent increase year over year.  With lower demand caused by a sluggish economy you would expect prices for all cars to be falling.  But, the shortage in used vehicles caused by Obama’s program was actually big enough to not only cancel out price drops but increase prices substantially.  Of course those hurt the most by this development are college students, the elderly on fixed budgets, and the working class because these folks rely on the availability of cheaper used cars as an alternative to higher priced new models.  Obviously, Obama didn’t intend for this to happen.  But, the fact remains that his program has put many people in a financial bind.

Another Obama backed government intervention that is exhibiting unintended consequences is the Credit Card Accountability, Responsibility and Disclosure Act of 2009.  Heralded by Obama as necessary legislation to protect consumers (workers) against abusive credit card company practices, the act caps late fees, eliminates inactivity fees, and requires credit card companies to jump through more hoops when raising interest rates.

Again, this all sounds good on the surface, but like any law there is a lag between the legislative process and when the law actually goes into effect.  Consequently, credit card issuers prepared ahead of time for the new law by raising interest rates to nine year highs of about 15 percent.  Additionally, they cut average lines of credit by 11 percent overall.  Again, at a time when Americans are not borrowing, you would think lenders would be dropping rates and expanding credit limits to entice consumers to spend.  But, Obama has found a way to actually make it financially harder for consumers to use their credit cards.  And again the working class is the most negatively affected since it can least afford to pay higher rates on credit card balances and will find it harder to make ends meet with lower lines of credit.

Statist always claim that the reason small government proponents loath government programs is because they are cold-hearted, hateful, racist, or just plain selfish.  Naturally, that is a gross oversimplification of their motives.  One reason libertarians and to be fair some conservatives object to government programs is because they usually favor some groups over others and because all have unintended consequences.  At an emotional level it is easy to support government help for the dispossessed.  But when you clear away the name-calling and look below the surface, and apply rational thought to proposals, the old saying, “if something seems too good to be true, it is” comes shining through.  After having spent $3 trillion on this recession with little to show for it, you’d think Washington would figure that out.

Article first published as Obama’s Policies Hurt the Working Class on Blogcritics

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Stimulus Spenders and Their Silly Excuses

August 28, 2010

This past week the government announced that existing home sales plunged 27.2 percent in July while new home sales were down 12.4 percent.  The numbers surprised most “mainstream” economists who expected more modest losses.  Of course, with the housing market still in shambles the value of homes is expected to drop further than the $6 trillion already lost by American homeowners.  This development coupled with continuing high unemployment and low consumer confidence is making many economists predict we are headed for a double-dip recession.

Now, naturally, proponents of the government’s failed stimulus policies have their excuses for why it didn’t work all lined up.  They are not even waiting for the double-dip to officially hit.  They are already claiming that the stimulus wasn’t spent on the right things and was simply “too small” to actually make any difference in “stimulating” the economy.

Here are the facts.  First to address the issue of sinking home sales, no one should be surprised by the numbers.  Home sales are way down for several reasons.  First of all, Obama’s first-time home buyer’s tax credit expired in April.  Folks are now waiting to see if Congress will enact a new credit before they buy.  Second, all the signs are there that housing prices will continue to drop, so why rush into purchasing a property that in a few months might be gotten at an additional discount?  Lastly, given the number of people in America who are unemployed, underemployed, and just downright broke it is no wonder that a huge expense like homeownership is not high on many people’s minds.

So the massive drop in home sales in July should not be surprising.  Anyone who understands human behavior and even the most basic fundamentals of economics knows the president’s housing stimulus program was doomed to failure.  During the time it was effective there was an increase in home sales and a leveling off of home prices, but once the program ended the bottom fell out.  No lasting growth ensued. Additionally, many first time buyers who took advantage of the tax credit used it for a down payment.  Essentially, the government was once again encouraging folks to buy houses who didn’t have the ability to save for a down payment.  This probably represents a misallocation of scarce resources and we can expect to see many of these homebuyers on a list of foreclosures in the future.

But, the president’s homebuyer tax credit is just a small part of the overall massive stimulus Washington has injected into the economy since 2008.  The entire stimulus “invested” by the feds has had a similar effect on the whole economy.  It stabilized things for a while and then wore off.  Because economic priorities are determined by politics and not the free market, we are left with a whole lot of mal-investments and possibly new bubbles.  So when stimulus proponents say the money was not spent on the right things they are technically correct.  After all, stimulus money has been spent on things like converting an abandoned train station into a museum, the development of interactive dance software, new windows for a visitor’s center that closed 3 years ago, and a study to determine the effects of cocaine on monkeys.   If these expenditures are not mal-investments, I don’t know what is.

But this is one reason why government stimuli never work.   Bureaucrats and elected officials don’t operate in a world of profit motives, competition, and the consequences of failure.  Ultimately, the allocation of taxpayer funds is doled out based on what they think is needed and to feather their own nests with the folks back home.  This is obvious given the aforementioned stimulus expenditures.

Besides the stimulus wasn’t spent on the right things argument, proponents of the policy are also saying the government’s effort was not big enough thus rationalizing its failure.  They always only point to the president’s $850 billion program passed by Congress shortly after he took office.  But, there is a lot more that has been “invested” in the economy since the depression began.  Federal spending has included everything from the Troubled Asset Relief Program (TARP) to Cash for Clunkers to GSE mortgage-backed securities purchases by the Fed.  The total of all federal stimulus spending as of December 2009, exceeded $3 trillion!  This represents more than 20 percent of annual gross domestic product.  $3 trillion actually spent and all we have to show for it is sustained high unemployment, sinking home sales, low consumer confidence, foreclosures through the roof, food stamp expenditures at all time highs, and a looming sovereign debt crisis.  The problem is not that we haven’t spent enough.  The problem is that we spent the money in the first place.

At the end of the day, government spending, quantitative easing or whatever the political establishment wants to call it simply doesn’t work.  As economist Robert P. Murphy has written we have a great comparison between the depression of 1920-1921 and the Great Depression of the 1930s to prove this point.  In the former, government cut its budget and the Fed raised interest rates.  The crisis was over within two years.  In the latter, Hoover increased government spending and the Fed slashed rates to all time lows at the time.  The result was the beginning of 15 years of economic misery.  Given the amount we have spent this time, get ready for a long rocky economic ride. 

Article first published as Stimulus Spenders and Their Silly Excuses on Blogcritics.