What Can a President do for the Economy?

What can a President do for the economy? My own theory begins with the idea that government's positive effect upon the economy is minimal; however, bad government policies could do devastating damage to an economy. I have written on why there was no depression in the 1920’s. The answer was simple: Warren G. Harding rejected Keynesian economics while cutting taxes, cutting spending and balancing the budget. (The last years of the Wilson’s administration included double digit inflation and double digit unemployment and Harding's solutions led to a decade of growth.) The economy roared throughout the decade. It would take a moderate Republican who didn’t follow Harding’s prescription to jump start the Great Depression of the 1930’s.

Contrast the last years of the Bush Administration and the Obama years to the Reagan years and you can see how government policies affect economic growth. Reagan followed a policy of sound money, lowering marginal tax rates followed by tax reforms and by the end of the decade, reduced the budget deficits as a percentage of the GNP. Federal spending slowed down and a recovery ensued that lasted through four Presidents and was only interrupted by two minor recessions. The Reagan years led to America becoming the premier economic power in the world.

Since 2007, the Bush administration worked with the Democratic-controlled Congress to increase spending even more than the previously profligate Republican Congress. As the economy slowed down, the first stimulus plan was passed, but this did little to stall the coming recession and when the financial meltdown occurred due to past government policies that came to roost, the Bush administration bailed out the banks and then began to bail out GM.

Obama increased spending, and like Bush, set up a new entitlement program (Obamacare) and produced budget deficits worth trillions of dollars as far as the eyes could see. The conventional wisdom has Obama saving us from a Great Depression, but conventional wisdom is wrong. The Fed's easy money is what kept the economy going. This has proved to be the worst economic recovery on record since World War II, and now the economy is slowing down again while possibly marching to another recession. If Obama imitated Reagan-like policies or even followed Clinton's 1995-1998 policies, America would be roaring and Obama on his way to a massive re-election. For those who always promote Clinton's policies, in particular his raising marginal tax rates in 1993, fail to recognize that the first two years of the Clinton years were hardly world beater. After the defeat of Hillary care and Republicans takeover of Congress, Clinton retreated from his leftist path and moved to the center. If Obama truly wanted to imitate Clinton in 2011, he would have to repeal Obamacare, cut the budget deficits, which would have required massive spending cuts, cut capital gains, reform entitlements and expand free trade. He could keep the marginal tax rates on the rich but would have to reduce taxes on capital formation. And this could reduce the overall tax burden of the investing rich, and you will have a situation in which Warren Buffet would pay at a lower rate than his secretary. You may even have a roaring economy in which jobs are being created and not destroyed!

Obama has just scuttled Bill Clinton's welfare reform by allowing states to redefine work and go back to a system where one could get paid for not working. So much for entitlement reforms in a second Obama administration actually being passed. Obama's tax increases will be massive in a second Administration, and Obamacare alone has at least 21 taxes with many reaching into the pockets of the middle class and investment class. These middle class and investment class members will see their tax burdens rise and their future retirement funds reduced or simply disappear.

Obama has led the economy into a dead end and his policy has brought us to this point. Reagan and Harding showed that government policies properly applied will lead to growth if it includes a recognition that government polices need to be limited. Obama showed that government policies improperly applied will lead to slow growth and recession. In the case of Hoover in 1929 to 1932, government policies improperly applied could lead to an economic depression.

Government policies matter, and the number one things that a politician needs to understand is that there is a limit to the government's ability to produce economic growth. In an economy where billions of market exchanges occur every hour of the day, no government is capable of managing an economy that big. This is why Obamanomics is failing and will continue to fail for Obama policymakers do not recognize the limits of government programs to produce growth.