- The Washington Times - Thursday, February 11, 2010


The Labor Department on Friday announced another 20,000 jobs lost in January. The economy may have bottomed out, but it remains very weak. Washington could help the recovery, but it seems intent on keeping job growth to a minimum.

As President Obama likes to point out, he inherited a global recession and a huge budget deficit. Swift action was needed, and no half measures. He took his shot, pushing Congress to pass a mountainous $862 billion “stimulus” bill. It failed.

The president promised to create 3.5 million jobs, bringing total U.S. employment to 138.6 million jobs by the end of this year. According to the Labor Department, employment stood at 129.5 million in January a huge 9.1 million jobs shortcoming. The administration’s own rosy forecast predicts the unemployment rate will remain about 10 percent through 2011.

The Obama stimulus did not fail because it had the wrong mix of tax cuts and spending (the reason the Bush stimulus failed). Nor did it fail because it was too small. According to Keynesian theory, fiscal stimulus is measured as the change in the budget deficit from one year to the next as a percent of gross domestic product. The 2009 stimulus nearly $1 trillion was about 6.7 percent of GDP, an amount that dwarfs all previous efforts to stimulate growth. If Keynesian stimulus worked, the worry today would be an overheating economy, not high unemployment.

Mr. Obama’s failed stimulus reflects a Washington-centric, half-baked understanding of our economy: the belief that total demand in the economy can be manipulated by the government’s aggregate fiscal policies. With this erroneous theory at its core, the Obama stimulus was doomed to fail from the outset.

The economy creates jobs when the private sector, especially small business, sees opportunity, not because government pours in hundreds of billions of borrowed dollars. (The latter is the half-baked part of the theory.)

Neither tax cuts nor more spending can create jobs by boosting total demand. Why? Because government must finance that “investment” by first “borrowing” that money either by taxing the private sector or securing capital from investors. When government borrows these funds, they are withdrawn from the private sector for consumption or investment. So as government demand goes up, private demand goes down.

The administration now projects a 2010 budget deficit of $1.6 trillion, a perilous fiscal position that triggered a warning from the Moody’s credit rating agency. Having blown his honeymoon-period chance to make “the big fix,” Mr. Obama may think it impossible to take another bold run at jump-starting the economy. His budget conveys that impression lots of “bling” proposals surrounded with “big talk” talking points.

Thankfully, we are not without real options. Yes, another trillion-dollar gambit is out of the question. But not everything Washington does has to cost big money.

The private sector creates jobs when conditions are right for growth, and government policy can make those conditions better (or worse). To get the private-sector job generator cranking, we need to turn off the government threat machine.

For example, the president has taken to praising small businesses, yet his legislative proposals threaten them with higher taxes and more. No business owner is going to invest in expanding operations when threatened with higher taxes if they succeed. If the president really wants small business to start creating jobs, he should announce that he will not even consider allowing tax rates to increase until the unemployment rate falls below 7 percent.

Uncertainty about expensive, burdensome regulation also casts a pall on business investment. The apparent demise of Obamacare should ease some of that foreboding, but we still need to get major health care reform done right. The uncertainties surrounding the issue have abated, but health care worries remain a drain on business confidence.

Likewise cap and trade. Likewise the various onerous environmental and labor regulations percolating through the bureaucracies. Likewise the preposterous tax on banks.

Mr. Obama wants banks to make more loans, and he wants them to rebuild their capital, all while threatening the financial system with massive budget deficits. Then, to top it off, he proposes a huge new tax on banks. In the face of such nonsense, small-business owners can only hunker down and wonder, “What are they thinking in Washington?”

Washington still could take the bold fiscal approach, but this would require truly historic cuts in spending to make some room for marginal rate cuts that would make a real difference to growth. That’s not likely from this Congress or this president. But a practical Plan B is simply to do no more harm. At least then businesses could concentrate more on business and less on threats from Washington.

J.D. Foster is the Norman B. Ture senior fellow in the Heritage Foundation’s Thomas A. Roe Institute for Economic Policy Studies.

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