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Fixing the economy

By Peter Morici
web posted August 16, 2010

To accomplish robust growth and lower unemployment to pre-recession levels, President Obama must temper his impulse to tax and regulate, and stop appeasing China and Wall Street.

The Bush years were better than he admits, and a lot better than his policies promise.

The 24 months prior to the financial crisis, unemployment was less than 5 percent.

Now, Treasury Secretary Geithner and liberal intellectuals advising the President say 10 percent unemployment is the new normal, tutelage to China is inevitable, and Wall Street financiers deserve obscene bonuses for engineering it all.

The pre-crisis prosperity was created by bipartisan policies that empowered Americans to create wealth.

Freer trade championed by Presidents since Kennedy, and deregulation begun by Carter with the airlines were critical. So were cutting excessively high taxes on middle and upper-income Americans, initiated by Ronald Reagan, interrupted by Bill Clinton, and reinstated by Mr. Bush.

Now, Barack Obama threatens to intrude into every dimension of private enterprise—not just in health care and banking. Large non-financial corporations have almost $2 trillion dollars in idle cash, because CEOs can't identify profitable opportunities and worry ever higher taxes and regulators on steroids will destroy their businesses.

Raising taxes on families earning more than $250,000—as President Obama obsesses to do—would sink the recovery. Increasing marginal rates to about 50 percent on half the income earned by proprietorships would leave small and medium sized businesses with too few resources and incentives to invest and create new jobs.

Treasury Secretary Timothy Geithner states repeatedly the growth of the past several decades was unstable and riddled with crises. Yet, economists refer to the mid-1980s through 2007 as the "Great Moderation." Fluctuations in GDP, industrial production and employment were mild, and inflation ceased to be a problem.

Now, President Obama tells us we must endure higher taxes, higher health insurance premiums and more expensive energy to enjoy the stability of crippling unemployment, as he socializes large chunks of the economy and expands federally-sponsored welfare to compensate the victims.

President Barack Obama's impulse for broader state control, higher taxes and more federal largess are wrongheaded, because problems in only two areas instigated the financial crisis and destroyed the recent prosperity.

China and the big banks abused the opportunities created by free trade agreements and repeal of Glass-Steagall, both crafted by the Clinton Administration.

China undervalues its currency, blocks U.S. exports and otherwise subsidizes its exports into the United States. Banks made reckless loans and hid risks in arcane mortgage backed securities and structured investment vehicles to create huge executive bonuses.

The trade deficit deflated demand for what Americans make, and the credit crunch made business expansion impossible. Voila, the Great Recession!

The Bush tax cuts and deregulation in other industries did little to encourage those abuses.

Mr. Obama continues the Bush policy of negotiating with China, obtaining few meaningful results. The Obama's bank reforms leave the big banks bigger than before (still too big to fail), ineffectively regulates mortgage-backed securities, and handicaps the 8,000 regional banks that do most of the lending to small and medium-sized businesses.

Systemic ills unaddressed, the economy is mired in a weak recovery and may soon double dip. Housing is depressed, consumers correctly distrust banks and are fearful to use credit cards even for good purposes, and more than 450 thousand Americans file for first-time unemployment benefits each week.

Anemic growth causes big deficits. And like the death bed physicians that bled President Washington twice, President Obama wants to double down on higher spending and taxes. Speaker Nancy Pelosi has put a national sales tax on the table.

In 2007, federal spending was 19.6 percent of GDP and the federal deficit was a quite manageable $161 billion. For 2011, President Obama projects spending at 25.1 percent of GDP and the deficit at $1.3 trillion.

President Obama should dust off President Bush's 2007 budget and spend less, finally fix trade with China, craft policies that permit regional banks to compete, and bust up the big banks that thrust the global economy into the abyss. ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.

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