State of the Union, Part 3—Obama’s grossly inadequate economic proposals

In Part 1, I pointed to the disconnect between the President's vivid and dystopian description or our economic problems and his timid proposals to fix them. In Part 2, I quoted from his State of the Union address and then posted some charts and graphs to show that he does not overstate our problems, which are deep and structural as well as cyclical. However, there is nothing extraordinary, either in type or scale, about the proposed action plan in the State of the Union address. Every one of his proposals is one that has been proposed and/or adopted in response to prior "ordinary" recessions or just as preferred polices in the absence of a recession.

Furthermore, some of Obama's proposals are inconsistent with each other. For example, he wants to spend federal money to promote basic research, infrastructure construction, and education, and increase tax credits and deductions for various things while freezing for three years discretionary federal spending. Some of his proposals are mere goals that seem unattainable, for example the goal of doubling exports in five years, which trade experts say would require doing things that we have been unable to accomplish for decades—things like getting China to float its currency exchange rate.

Here's the President's full list. I challenge readers to explain how any part of this program—or the whole program—can be an adequate response to the problems he described and which do actually exist. To me it seems the President is just unwilling to make a break with past economic policies. He wants us to keep doing the same things that led to our problems and hope the outcomes will be different on his watch.

• Help (in some unspecified way) community banks increase lending to small businesses
• Give a tax credit to any of one million small businesses that hire new workers or raise wages
• Eliminated capital gains taxation on small business investment
• Provide an investment tax credit to any business for investments in new plant and equipment
• Undertake modern infrastructure projects like high-speed rail
• Build clean energy facilities
• Give rebates to Americans who make their homes more energy efficient
• Slash tax breaks for companies that ship our jobs overseas, and give tax breaks to companies that create jobs here
• "Lay a new foundation for long-term economic growth"
• "Serious financial reform," including making sure consumers and middle-class families have the information they need to make financial decisions and preventing financial institutions from taking excessive risks
• Increase government funding of basic research in clean energy, cures for disease, and other fields ripe for innovation
• Build a new generation of nuclear power plants
• Open new areas for offshore oil and gas development
• Invest in biofuels and clean coal technologies
• Adopt legislation that makes clean energy more profitable and dirty energy less profitable
• Set a goal of doubling exports over the next five years by launching a National Export Initiative that will help farmers and small businesses increase their exports and loosen national security-based export controls over high-tech products
• Enforce existing trade agreements when trading partners cheat
• Press forward with the Doha Round and other trade liberalization agreements, particularly with South Korea, Panama, and Columbia
• Invest in the skills and education of our people by targeting federal funds to reform primary and secondary schools to raise achievement levels, "revitalize" community colleges, increase Pell Grants and provide tax credits for the families of college students, and forgive part of the student loans of those that go into public service
• Increase the child care tax credit
• Make it easier for middle-class people to start retirement accounts with expanded tax credits
• Push up housing prices by making it easier for to finance and refinance at lower rates
• Adopt the pending healthcare reform legislation
• Freeze "non-essential" discretionary federal government spending for three years, starting in 2011
• Create a bi-partisan commission to make recommendations for balancing the federal budget over the long term
• Congress should re-adopt the pay-as-you-go rules it had in the 1990s
• Congress should do more "earmark reform"

Update on Tuesday, February 9, 2010 at 11:20AM by Skeptic

In this WaPo op ed two McKinsey Global Institute leaders debunk some of the myths underlying the new economic recovery program announced in Obama's State of the Union address. Neither the small business sector, the high tech sector (green jobs for example), nor increases in exports can have a big impact on our gaping unemployment problem. They foresee a fundamental restructuring of economic activity continuing to destroy existing jobs.

History shows that recessions – particularly those following a financial crisis – accelerate the growth or decline already underway in industries. In this recession, for example, the auto, financial services and residential real estate industries have contracted significantly and won't regain their peak employment anytime soon.

An increase in exports may stem – but will not reverse – the multidecade decline in manufacturing employment. In today's developed economies, net growth in new jobs doesn't come from manufacturing; it comes from service industries. Fortunately, boosting exports creates jobs in supporting service industries, such as design, trucking, shipping and logistics.