Obama and the economy

I have to hand it to President-elect Obama, he has appointed what most observers are hailing as a very good economic team, full of people more interested in serious analysis than left-wing ideology. Indeed, it's interesting to note that some of the left are slamming Obama for his picks while Larry Kudlow says that the new chief of the Council of Economic Advisers Christine Romer "easily could serve as CEA head in a Republican administration" and that incoming Treasury Secretary Tim Geithner "could have been McCain's Treasury man." Meanwhile, there are increasing signs that Obama is shelving plans to undo the Bush tax cuts in 2009.

All of this is undeniably good and encouraging. Still, I keep waiting for the other shoe to drop.

The first bad omen is talk of a stimulus package being quickly passed to the tune of $700 billion amidst promises by Obama to "jolt" the economy. This is absolutely the last thing that is needed, that will do little to stimulate the economy in the long-run while driving us deeper into debt.

Many people I imagine think of the economy kind of like a bicycle. If you are at a dead stop the first few pedals are the most difficult and but after sufficient momentum has been built up the pedaling becomes steadily easier until you are moving along without too much effort at all. Federal money, the thinking goes, can provide those first few pedals that will push the economy until it can move along with its own momentum.

This is false. Right now the economy isn't moving not because it needs a few revolutions of the pedals, but because it has sticks stuck through its spokes, the tire is flat and the chain is loose. You can still expend some energy peddle a bit and get some forward progress but as soon as you let off you're right back to a dead stop. Like the bicycle, the economy needs to resolve its issues and fix a few things, then it will take off on its own. Unlike a bicycle, however, the economy is infinitely more complicated and the solutions aren't obvious. Only harnessing the collective knowledge of millions of people through the marketplace will resolve the current slowdown.

This isn't just theory. Stimulus packages have an extremely poor record. They were tried twice by the Bush Administration to little avail and Japan had a similarly bad experience with them during the 1990s. They inevitably stall, leaving behind new piles of debt along with unneeded infrastructure projects and other monuments to government waste. You simply don't spend yourself into prosperity.

That said, the stimulus package is not my deepest concern. What really scares me is the notion that this is just the warm-up act to a complete reorganization of the U.S. economy. As Obamaphile EJ Dionne writes in his latest column:

President-elect Barack Obama has now made three things clear about his plans to bring the economy back: He wants his actions to be big and bold. He sees economic recovery as intimately linked with economic and social reform. And he is bringing in a gifted brain trust to get the job done.

Just three weeks after Election Day, Obama has already expanded his authority by seizing on "an economic crisis of historic proportions," as he described it on Monday, to call for a stimulus package that will dwarf in size anything ever attempted by the federal government.

But Obama is also using the crisis to make the case for larger structural reforms in health care, energy and education -- "to lay the groundwork for long-term, sustained economic growth," as he put it. Obama clearly views the economic downturn not as an impediment to the broadly progressive program he outlined during the campaign but as an opportunity for a round of unprecedented social legislation.

"He feels very strongly that this is not just a short-term fix but a long-term retooling of the American economy," said one of Obama's closest advisers. "Obama has a holistic view of the economy. Health care is going to be part of it," the lieutenant told me, and so will green energy investments, education reform and a new approach to regulating financial markets.

I've already addressed the folly of green energy spending before so I will dispense with that issue. More worrisome are moves to reform health care, which are likely to take the form of increased government involvement. Once we get government health care, brought to you by the same people that have done such a bang-up job with education, welfare and public housing, it's never going away. Believe that. As for financial markets, I still have yet to read a convincing case that either deregulation is to blame for the current mess or a list of regulations that could have prevented it.

Equally scary are invocations of the New Deal by elected officials such as Sen. Chuck Schumer, which would seem to imply that they believe we are facing a depression. As Thomas Sowell notes, however, the New Deal didn't do a particularly good job of addressing that particular economic calamity:

Many of those who have, over the years, praised the fact that this was the first time that the federal government took responsibility for trying to get the country out of a depression do not ask what seems like the logical follow-up question: Did this depression therefore end faster than other depressions where the government stood by and did nothing?

The Great Depression of the 1930s was in fact the longest-lasting of all our depressions.

I think what is happening here is that officials badly want to be seen as doing something, anything, to address the current difficulties. That is unfortunate, with all of this intervention likely to only make things worse, not better.