Obama’s top 10 job killers
The Financial Post published today an abridged version of an article written by Jim Powell, a senior fellow at the Cato Institute. The article is entitled “Barack Obama’s to 10 job killers.”
The Cato Institute is a right-wing “think tank” with strong connections to the Republican Party. Setting aside the obvious bias in this article, anyone who buys into Powell’s arguments also will believe that President Obama has been personally responsible for every natural disaster in the past 19 months.
Let’s take a look at several of Powell’s arguments.
Minimum wage laws: Powell points out that the federal minimum has been increased three times in the past four years. Two of the increases were implemented during the Bush presidency. Can’t blame Obama for that. While the simple economic theory of minimum wages is unequivocal in predicting job losses when the rate is increased, the reality likely is much different.
Expiration of the Bush tax cuts: This hasn’t even happened yet!
Obama’s runaway spending: Powell spews the standard neo-classic economic argument that “Investors know that ultimately higher spending must be paid for with higher taxes that will reduce the after-tax return on investment”, and so they have cut back on their investment spending. The math works, the logic doesn’t.
Companies are sitting on record amounts of cash at this time because of the uncertainty regarding the future direction of the economy. With talk of deflation and double dips, and with even the Chair of the Federal Reserve expressing concern about the sustainability and robustness of the recovery, most US-based companies are reluctant to make major investment commitments. Future tax policies are largely irrelevant, as they should be in such decisions. The risk-averse behavior of major US companies was reasonable during the depths of the recession when very few of their foreign competitors were investing. The competitive landscape has changed, and by delaying investment decisions, US companies risk falling behind their foreign competitors, and the repercussions will be much more dramatic than paying a few percent more in taxes.
Moratorium on offshore oil drilling: Powell suggests that a “permanent stoppage of offshore drilling could destroy as many as 400,000 jobs.” I have no idea where he comes up with this number. But while a carbon tax likely would destroy even more jobs in the oil and gas industry, it would significantly shift incentives towards developing alternative energy sources. Moreover, some of the proceeds could be used for massive investments in public transportation. Drilling for oil does neither. The job creation potential of the tax might far exceed the negative effects on the oil and gas industry.
Obama’s forced restructuring of GM: Powell argued: “The administration trashed established principles of bankruptcy law to give the United Auto Workers a sweetheart deal and subvert the rights of bondholders…The administration’s abuse of power discourages investors from making capital available to companies that might be targeted for government intervention.” Citigroup has not had any difficulty in attracting capital, and there seems to be sufficient investor appetite for GM to proceed with its IPO.
While there are a number of problems with his arguments, I will focus on the following. The autoworkers have an enormous investment of their human capital in GM. This investment does not show up on GM’s balance sheet. A liquidation of GM, which would have yielded the highest returns for some classes of bond-holders, would have destroyed the enormous investment in human capital. Liquidation also would have had substantial negative ripple (tidal wave?) effects throughout the economy leading to many other bankruptcies and losses for bondholders. Some of these bondholders likely would have been bondholders of GM.
Executive orders and regulations promoting compulsory unionism: Are unions really the cause of the decline of the competitiveness of some US companies? Did the UAW destroy GM? Not likely. Indeed, poor management was the problem with GM and most other unionized companies in the US.
Unions can play a useful role as a partner, but only if they have confidence in the leadership of their companies. Southwest Airlines has done very well with unionized pilots. German companies with unionized workforces are successful around the world. In the case of GM, senior management has not been able to figure out in over 25 years how to produce a small car profitably.
American Recovery and Reinvestment Act of 2009: If the government had not spent $800 billion to stimulate the economy, the US likely would still be in a recession with rising unemployment and continuing net job losses. Contrary to what Powell believes, fiscal stimulus did work and did stimulate private-sector employment.
Restoring American Financial Stability Act of 2010: This act is far from perfect. But it is not responsible for US banks sitting on over $1 trillion in excess reserves. The same issues that have kept US companies sitting on their cash hoards have made banks reluctant to start lending on a larger scale.
Pessimism never builds confidence. If Powell were truly concerned about the state of the US economy, he would point out the blue patches in the dark skies and so try to build confidence. Yes there are flaws with all of the policies introduced by the Obama administration, but no president and his policies have been perfect. With the recovery still tentative, boosting confidence is what is needed. There will be plenty of time for a thorough post-mortem.
The Cato Institute is not interested in the US economy doing well at this time. Instead, they are interested in the Democrats losing this November, and Obama losing in 2012.
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.