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Obama Is Clueless on the Economy

Politics / Government Intervention Sep 12, 2010 - 10:17 AM GMT

By: Dian_L_Chu

On Labor Day, President Obama announced a new $50-billion infrastructure plan next year as a way of a second stimulus for job creations as well as for the faltering economic recovery. However, the plan is expected to be met with strong opposition in the midst of a mid-term election, while many economists are skeptical as to any swift effect it could have on America's $14.3 trillion economy, as well as the troubling labor market. 

So, in light of the fact that the Democrats are losing a bunch of congressional seats, and their majority, this new plan would seem more of a last-ditch effort with little substance.   

Clueless on the Economy

So far, the Obama administration has demonstrated very little understanding of the economy, markets, and business. In fact, one could say that the policies the Administration implemented are probably close to the worst medicines to help a sick economy recover from a devastating illness.

Much of the legislation passed by the Administration is essentially anti-business, while painting a negative image of corporations. This is further playing a debilitating role for stalling an economic recovery due to the added uncertainty for businesses--“What is coming at us next, cap and trade, drilling ban?" All this does is further undermining the business confidence that is needed to start hiring again on a large enough scale to really make a dent in the unemployment rate.

Hierarchy of Needs

During the passing of the first $800 billion stimulus plan, many recommended that a larger percentage needed to be allocated to infrastructure projects due to the add-on effect of job creation. But they fell on deaf ears of the Administration and the Democratic Party.
Now all of a sudden, they finally came to realize what’s really important-- having a job and a roof over your head, whereas healthcare and financial reforms are on the next level up the hierarchy of needs. So, here comes a new infrastructure spending plan to create jobs, taking a page from President Roosevelt’s New Deal and China’s infrastructure-focused 2-year, $586 billion stimulus package started in 2008.

No Second Chance

Unfortunately, the Administration basically messed up and squandered away the first stimulus package--the only chance to get it right with a proper infrastructure package and real job creation. Cue to the Greek and European debt crisis, there’s no second chance.

Although President Obama indicated the plan would not add to the budget deficit, senior administration officials suggest it could come from closing tax credits used by oil and gas companies and multi-national corporations. So, it is just robbing Peter to pay Paul—a zero-sum game. And 50 billion dollars?? It is definitely a case of too little and too late.

Debunk the Policy-Induced Recovery

The Administration also has pointed to the fact that when they took office we were losing 750,000 jobs a month, vs. the current loss of 100,000 jobs a month, and things would be much worse without their creative solutions.

Well, the numbers were greatly skewed with companies running scared and cutting costs to the bone in the middle of the financial crisis. However, almost 2 years since the Great Recession, most companies have reached a point where they can no longer cut costs and/or personnel. Moreover, if the economy stabilizes due to an inventory rebuilding cycle, and the world isn`t coming to an end, then there will be a natural reduction in the rate of job loss, which has nothing to do with the Obama Administration`s legislative policies.

So, yes, things are better, attributed partly to the natural business cycle, but also because the worst didn`t come to fruition, the stock market assets needed to be reacquired by fund managers who over liquidated their portfolios. In addition, manufacturing was also boosted by the inventory restocking phase, and even failed stimulus packages would provide some sort of floor for the economy.

Nevertheless, none of this can be taken credit for by the Obama administration. It is a natural law of economics, and relative preparedness. That is, if everyone is prepared for the sky to fall off, and the sun still comes out the next morning, the economy will experience a slight recovery all on its own, relatively speaking. But this is nothing to write home about.

Legislative Wins – Don’t Mean Much

One thing that President Obama and the Democratic Party has accomplished is that they have gotten more legislation through Congress, and passed into law than most administrations ever dream of accomplishing.

However, it is more emblematic of having a complete majority in the legislative branch--Republicans were emasculated due to the economic crash happening during their watch, and a literal blank check of unprecedented nature to just fix things that went wrong.

As we have witnessed in the past two years, achieving a lot of legislative wins has not done a whole lot of good for the nation.

On Health Care & Financial Reform 

I agree that the health care system in the US needs some major overhauling, but was this accomplished with the latest health care legislation? No, I do not believe this to be the case. But one thing I do know is that it is entirely counterproductive to push through a health care reform bill that is going to create more costs for business coming out of a recession. 

Adding more costs is bad for business even in a booming economy (that`s why it has been so hard to get passed all these years,) but it is a complete suicide mission during a tentative recovery phase.

I also agree that to some degree there needs to be some regulatory changes to the banking system, and how Wall Street and the SEC operate. But all this financial regulation, post financial crisis, will only cause major disruptions to the financial industry, and hinder any type of job creation, at a time when the industry is still on shaky ground and worried about building up their capital reserves.

And you see what happened to the financial stocks since the passing of the financial regulation bill after investors realize the implications of this policy change. If financial stock prices are going down, then so are the number of financial jobs, in a sector that is one of the major employers in the economy.

Again, an argument may be made for financial reform, but there is a time and place for this type of sweeping legislation, and it is after the economy has recovered, when unemployment is under 6%, and business confidence has returned enough to sustain this type of exhaustive financial overhaul.

Markets and Business Tend to Self-Correct

I actually think legislation to address problems which already occurred is a little backward looking, and gets you all the extra costs, but little, real bang for your buck. Businesses and markets tend to be self-correcting as nothing hurts business and professionals more and changes behavior faster than losing money.

Nobody, be it bank, insurer, mortgage underwriter, or rating agency is going to continue the same business practices such as sub-prime after losing that type of capital during the financial crisis. 

Changes in business practices are already taking place without the business-disrupting new regulations. After all, companies are in the business of making money first and foremost, and nothing changes behavior faster than losing 15 billion in a quarter.

Political Irony

The funny thing is that President Obama`s policies were better suited for the good times, as they might have actually tempered some of the growth enthusiasm, and help check and balance some of the insane leverage utilized by businesses during the Bush era.

Nevertheless, when a country is trying to works its way out of a recession, policy makers need to be pro business to foster a strong business climate, instills business certainty and confidence, and leads to large scale job creation. In the end, the last two administrations were better suited for each other`s tenure, and if we could just go back and switch the two, we would be so much better off today.

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

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