Where Obamanomics Went Wrong

SUPPOSE you are a liberal and you are wondering, after the truly dismal June jobs report, what went wrong. All right, you don’t wonder. If you are Jonathan Cohn, you merely parrot Paul Krugman about the insanity of trying to balance the budget right now and try to gum the following unchewable morsel:

Addressing the government’s long-term budget problem is important. But putting people back to work is also important. It’s possible to do the two things simultaneously. In fact, an agreement to increase short-term deficits in ways that boost growth and then reduce long-term deficits through structural economic policy changes would be pretty close to ideal. But the chances of that happening seem awfully slim right now.

This is rubbish, because the two political parties are diametrically opposed on recession-fighting policy. The Republican recipe to “boost growth” is to lower tax rates and regulation, and the Democratic recipe is to “invest” in stimulus spending. For Republicans, “structural economic policy changes” means reform Social Security and Medicare; for Democrats it means raise taxes.

There is no “agreement.” There is only a game of chicken to see who blinks first before August 2.

But we are conservatives. We do not just want to “win;” we want to do the right thing. How do we get out of the recession?

The best way to understand a recession is this: It is a period of adjustment during which the malinvestments of the previous boom are liquidated. Usually, in our era, booms are ignited by cheap money injected into the credit system by government. Cheap money seduces people into borrowing too much.

In the 2000s boom the malinvestments were the homes that millions of people bought with cheap credit, courtesy of Fannie, Freddie and CRA. Homebuilders expanded and sucked a ton of workers and capital goods into homebuilding. Everything looked good until interests rates rose and home prices started to decline.

You know what happened next. “Malinvestment” became nightmare investment, as the greedy bankers foreclosed on millions of homes, and home prices cratered.

But at some point the foreclosures will ease up, bottom-feeders will buy up the flood of houses, and home construction will resume.

The logic of Democratic “stimulus” is that if government shovels out enough money it will tide the economy over the crater. Home prices will recover, businesses will revive, and growth will resume. But what if home prices don’t recover before the stimulus runs out?

Back in 2009, the Obama administration made a judgment, implicit or explicit, that the housing crisis would be over in a couple of years, and that cheap money (QE1 and QE2) and a trillion dollar stimulus program would tide the economy over till then. But they were wrong. The housing market still hasn’t bottomed out, and the economy hasn’t snapped back, as this chart demonstrates.

The Obama mistake was bad enough but the Obamis made a second error. Assuming that the economy would revive in accordance with Baldrick’s cunning plan, they went ahead with their plans for expanding government spending and regulation, spraying money at their deserving supporters. They thought that the economy would soon be strong enough to increase the weight of government. With ObamaCare they increased the weight of government in health care. With regulation, spending, and subsidies pushing green energy they increased the weight of government in energy production.

That’s where the slick assumptions in Cohn’s “increase short-term deficits in ways that boost growth” kicks in. Suppose your “short-term deficit” doesn’t boost growth? Suppose it is just another wasteful government program that increases the weight of government, and postpones the day when happy days are here again?

That’s where the Obamis are sitting right now. They have shot their bolt with cheap money and stimulus spending and cranked up the National Debt by 40 percent. But here we are in Summer 2011 and there is still no light at the end of the tunnel.

To fix things the Obamis would have to adopt the Republican agenda and reduce the weight of government. They would have to repeal ObamaCare, reverse their green energy boondoggle, lower tax rates, and cut wasteful government spending.

You can see the problem. For the last 40 years, ever since the “unexpected” success of Reaganomics, liberals have been telling themselves and everyone else that supply-side economics is a mirage. Now they have to admit that everything they believe is wrong.

I’m with Paul Krugman:

[T]he truth about our slump — that we know how to fix it, that we could fix it in a year if we had the political will, but that bad ideas and worse politicians are standing in the way — makes people uncomfortable.

Couldn’t agree more, old chap. Only, Dr. Krugman, bless your heart, it’s your bad ideas, your worse politicians, and the $100 trillion in unredeemable liberal entitlement promises that makes people like me “uncomfortable.”

Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.

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