Obama's One Way Keynesianism

The economists of this administration hold Keynesian beliefs, but their belief is in one-way Keynesianism. The stimulus package has not produced its expected multiplier effects for several reasons, but one of them surely is its superimposition not on a previously balanced budget but upon enormous structural deficits. No credible proposal has been forthcoming for the phasing out of the Bush tax cuts, or some of them, or for a gradually rising gasoline tax, or for military base and naval reductions, or for curbs on unsustainable social security and federal pension programs. New health care entitlements are to be financed by reimbursement curbs which Congress has failed to enact and is known to be incapable of enacting.

Expectations of the future feed into the present; the prosperity of the Clinton years was due to a perception that a combination of Democratic tax increases and Republican budget cuts would provide price stability and predictability and a climate supporting employment and investment. No such climate exists now as a result of the Obama administration’s self-indulgence in protecting present benefits while deferring the measures needed to produce long-term stability, a course rejected by the British and German governments.

Another difficulty is the choice of beneficiaries for stimulus funds. The Obama administration, unlike that of Franklin Roosevelt, did not undertake to swiftly supply through a Works Progress Administration the maximum possible number of low-wage jobs at the earliest possible date. Nor did it address the possible social, political, and educational costs of 25% youth unemployment by a Civilian Conservation Corps to improve parks or construct a national network of footpaths or in the German manner by tax incentives to foster employment and vocational education of the young.

Instead, the recession was seized upon as an occasion to pay off political supporters and client groups. Nearly half the stimulus was allocated to public education, with the declared purpose of preventing lay-offs of the nation’s unionized teachers, whose ranks have multiplied as a result of recent campaigns to reduce class sizes which have produced few positive educational results. These are middle-class persons, many with mediocre skills thanks to state certification laws excluding more highly qualified liberal arts and science graduates from the teaching force. The stimulus allowed states to defer long-overdue changes in automatic seniority increases, Cadillac health care plans, and unsustainable pension and retiree health plans for teachers.

The stimulus’ undifferentiated transportation subsidies bail out governors like Maryland’s Martin O’Malley, who have balanced state budgets by deferring road maintenance and raiding transportation trust funds. Unlike the New Deal public works programs, these subventions yield no permanent residue. Wage-propping measures like the Davis-Bacon Act and administration-promoted ‘project labor’ agreements also ensure that ‘stimulus’ construction costs more than usual state and local construction, and much more than private-sector construction.

The approach to housing shares similar infirmities. The Hoover and Roosevelt administrations created a Home Owners’ Loan Corporation to acquire defaulted mortgages and hold them until they became sound by reason of re-employment of the borrower or increases in property values; it was ultimately closed out with a small profit to the government. The mortgages then prevalent were typically granted for at most two-thirds of value and ultimate soundness could be expected. Since today’s sub-prime mortgages should never have been granted and will never be sound, the former approach has been forsworn in favor of a program of exhortations accompanied by some subsidies to induce the writing-down of mortgages. Since lenders have incentives not to recognize losses and thereby impair reported earnings, this approach has been as effective as pushing spaghetti through a key-hole, it has produced an explosion of vacant, abandoned, or occupied but under-maintained residential properties. What might help is expanded availability of low-cost rental units, which requires a temporary tax credit for the creation of second kitchens in existing homes to foster creation of new accessory apartments and mother-in-law flats and related long-overdue zoning reforms. This approach would create jobs for small home-improvement contractors. But it relies on uniform laws, generates no political patronage, creates no ribbon-cutting opportunities, and is of little benefit to unions; its appeal to Democratic leaders in the House of Representatives is therefore non-existent.

This is also true of land readjustment, a Far Eastern device tailor-made for ruined cities which currently generate more Democratic congressmen than civic betterment. This is a developer-driven device which allows a specified majority of property-owners to cooperatively improve a city block. Owner-occupiers may opt out; other dissenters must be bought out at an appraised value. This involves much milder coercion than Kelo-style eminent domain, but is anathema both to statists and to property rights fanatics.

In the sphere of financial regulation, the administration has forsworn clear prohibitions and predictable rules in favor of a morass of exceptions and discretionary waivers resembling nothing so much as one of the less inspired N.R.A. codes. The prohibition of derivatives as gambling contracts has not been restored, nor have the clear barriers of the Glass-Steagall Act or the prohibitions which the New Deal banking legislation imposed on uses of insured deposits. For good measure, the Frank-Dodd Act confers a retroactive windfall on some hitherto uninsured bank depositors, while permanently elevating insurance limits, contrary to most foreign practice, to a level of $250,000, far above subsistence savings. For good measure, federal mortgage guarantees are now at the $800,000 level. While Hoover promised only “a chjcken in every pot”, Obama holds forth the promise of federally insured MacMansions for all.

After two years of failure, the approach to stimulus continues to be one of protecting unionized public employees and construction workers, while extending unemployment benefits to one year or even more. Public employee unions were anathema to the Roosevelt administration, as was a permanent dole of the sort that has created an huge white under-class in Britain. The Obama economic policy is that of John L.Lewis—protection of a limited class of union workers and a dole for the rest. If continued, it will convert the United States into a greater West Virginia. Foreign trade and immigration issues have been swept under the rug, at the behest of the unions, leaving South Korea, Colombia and Peru, and the American companies who trade with them, in limbo and leaving millions of Mexican and Central American migrants under threat of summary deportation in an economic never-never land in which they cannot borrow, invest, buy homes, or establish small businesses.

Roosevelt’s economic record was certainly inconstant and flawed. But it maintained public morale, left behind some impressive public works; workable systems of securities, banking, public utility and insurance regulation, now largely repudiated and not restored; a reciprocal trade agreements act, the foundation of postwar prosperity; an administrative procedure act imposing legal rules on an expanded state; federal rules of civil procedure which expanded discovery so as to allow private parties to curb corporate abuses (a system that worked well until the class action rules of the late 1960s); and a general preference, fostered by Justice Brandeis and his acolytes Felix Frankfurter, Dean Acheson, and Benjamin Cohen, for clearly stated and self-executing rules. This contrasts with the administrative principles of the current administration, which have converted Washington into a political gift shop. This is not even the system of the Court of Versailles, which had some regularity to it. It is that of the Ottoman Court, with similar effects on economic development.

George W. Liebmann, a Baltimore lawyer, is the volunteer executive director of the Calvert Institute for Policy Research in Baltimore and is the author of The Common Law Tradition: A Collective Portrait of Five Legal; Scholars (Transaction Books, 2005) among other works.