The Economy Is Worse Than You Think
Expect more bad news until someone
enacts a plan to bring deficits under control without raising taxes.
The policies of the Obama
administration have led to the weak condition of the American economy. Growth
during the coming year will be subpar at best, leaving high or rising levels of
unemployment and underemployment.
The drop in GDP growth to just 1.8% in
the first quarter of 2011, from 3.1% in the final quarter of last year,
understates the extent of the decline. Two-thirds of that 1.8% went into
business inventories rather than sales to consumers or other final buyers. This
means that final sales growth was at an annual rate of just 0.6% and the actual
quarterly increase was just 0.15%—dangerously close to no rise at all. A
sustained expansion cannot be built on inventory investment. It takes final
sales to induce businesses to hire and to invest.
The picture is even gloomier if we look
in more detail. Estimates of monthly GDP indicate that the only growth in the
first quarter of 2011 was from February to March. After a temporary rise in
March, the economy began sliding again in April, with declines in real wages,
in durable-goods orders and manufacturing production, in existing home sales,
and in real per-capita disposable incomes. It is not surprising that the index
of leading indicators fell in April, only the second decline since it began to
rise in the spring of 2009.
The data for May are beginning to
arrive and are even worse than April's. They are marked by a collapse in
payroll-employment gains; a higher unemployment rate; manufacturers' reports of
slower orders and production; weak chain-store sales; and a sharp drop in
How has the Obama administration
contributed to this failure to achieve a robust and sustainable recovery?
The administration's most obvious
failure was its misguided fiscal policies: the cash-for-clunkers subsidy for
car buyers, the tax credit for first-time home buyers, and the $830 billion
"stimulus" package. Cash-for-clunkers gave a temporary boost to
motor-vehicle production but had no lasting impact on the economy. The
home-buyer credit stimulated the demand for homes only temporarily.
As for the "stimulus"
package, both its size and structure were inadequate to offset the enormous
decline in aggregate demand. The fall in household wealth by the end of 2008
reduced the annual level of consumer spending by more than $500 billion. The
drop in home building subtracted another $200 billion from GDP. The total GDP
shortfall was therefore more than $700 billion. The Obama stimulus package that
started at less than $300 billion in 2009 and reached a maximum of $400 billion
in 2010 wouldn't have been big enough to fill the $700 billion annual GDP gap
even if every dollar of the stimulus raised GDP by a dollar.
In fact, each dollar of extra deficit
added much less than a dollar to GDP. Experience shows that the most
cost-effective form of temporary fiscal stimulus is direct government spending.
The most obvious way to achieve that in 2009 was to repair and replace the
military equipment used in Iraq
that would otherwise have to be done in the future. But the Obama stimulus had
nothing for the Defense Department. Instead, President Obama allowed the
Democratic leadership in Congress to design a hodgepodge package of transfers
to state and local governments, increased transfers to individuals, temporary
tax cuts for lower-income taxpayers, etc. So we got a bigger deficit without
A second cause of the continued
economic weakness is the president's emphasis on increasing tax rates. Although
Mr. Obama grudgingly agreed to continue the Bush tax cuts for 2011 and 2012,
his budget this year repeated his call for higher tax rates on upper-income
individuals and multinational corporations. With that higher-tax cloud hanging
over them, it is not surprising that individuals and businesses do not make the
entrepreneurial investments and business expansions that would cause a solid
而造成經濟持續疲弱的第二個原因在於總統強調提高稅率。雖然歐巴馬勉強同意布希政府的2011 ~ 2012年的減稅政策，但他今年的預算卻不斷地重申對高收入的個人及跨國企業要求較高的稅率。隨著高稅率的陰霾壟罩著他們，不令人意外，將使個人與企業不願意再投入會讓景氣復甦結實地復甦的投資與業務擴張
problem stems from the administration's lack of an explicit plan to deal with
future budget deficits and with the exploding national debt. This creates
uncertainty about future tax increases and interest rates that impedes spending
by households and investment by businesses. The national debt has jumped to 69%
of GDP this year, from 40% in 2008. It is projected by the Congressional Budget
Office to reach more than 85% by the end of the decade, and to keep rising
after that. The reality is even worse since ObamaCare alone will cost more than
$1 trillion in its first 10 years. The president's boast that his health
legislation would not "add a dime" to the national debt was possible
only by combining that increased spending with proposed new taxes and with
projected cuts in Medicare spending that will never occur.
Finally, there is the administration's
incoherent position on the international value of the dollar. The Treasury
repeats the slogan that "a strong dollar is good for America"
while watching the real value of the dollar fall by 7% over the past year, and
while urging the Chinese to allow the dollar to fall more quickly relative to
the yuan. The lack of a consistent dollar policy adds to the uncertainty that
limits business investment and hiring.
The economy will continue to suffer
until there is a coherent and favorable economic policy. That means bringing
long-term deficits under control without raising marginal tax rates—by cutting
government outlays and by limiting the tax expenditures that substitute for
direct government spending. It means lower tax rates on businesses and
individuals to spur entrepreneurship and investment. And it means reforming
Social Security and Medicare to protect the living standards of future retirees
while limiting the cost to future taxpayers.
All of these things are doable. But the
Obama administration has not done them and shows no inclination to do them in
Mr. Feldstein, chairman of the Council
of Economic Advisers under President Ronald Reagan, is a professor at Harvard
and a member of The Wall Street Journal's board of contributors.