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Obama road show is all about politics, not economics   

By Peter Morici
web posted July 29, 2013

U.S. President Barack Obama is speaking around the country to sell his economic program directly to voters--over the head of a reluctant congress. But it's all about politics, not economics.

The recovery has been painfully slow. Through last fall, growth was only 2.1 percent and has since slowed to about half that pace.

Concerned about the durability of the expansion and pending ObamaCare mandate to fund heath insurance for full-time employees, businesses are replacing full-time workers with part-timers.  Since January, 833,000 additional Americans have reported working part-time, while 97,000 fewer say they have full time positions.

The president wants more infrastructure spending, publically-funded pre-kindergarten education and a higher minimum wage.  However, those will not substantially change the unemployment picture.

Improvements to roads and other public facilities are sorely needed but too many federal dollars are spent on materials from China, which often excludes U.S. products from its projects. The United States would be within its WTO rights to keep more of that money at home, but Obama refuses.

Whatever the benefits, funding pre-K with higher taxes only steals jobs from other industries, or requires more borrowing. And no one ever created a job by raising the cost of hiring workers.

Inadequate demand for what Americans make remains the primary drag on growth. Consumers are spending again and housing prices are recovering, but since the recovery began, imports and the trade deficit have zoomed.

China, Japan and Germany—the three largest economies after the United States—pursue cheap currencies and other protectionist strategies to amass trade surpluses with the United States, and prop up employment at the expense of American workers.

Along with imported oil, the $540 billion trade gap costs Americans about 8 million jobs—enough jobs to drive unemployment down to five percent.

Economists across the political spectrum have offered approaches for addressing mercantilism but Obama remains dismissive.

Lifting restrictions on petroleum development off shore and in Alaska, more intense use of natural gas in freight transportation, and accelerating the adoption of hybrids and more fuel efficient internal combustion vehicles would erase dependence on imported oil.

The president has another agenda.

Along with immigration reform, championing spending for infrastructure, pre-K and a higher minimum wage shores up support for Democrats among Hispanics, women and unions for the 2014 elections. However, all would require more government borrowing. For example, every time the minimum wage goes up, fewer people work and pay taxes.

Our federal system permits states to experiment with new approaches, and it seems the president is embracing strategies—government borrowing to win elections—that made the finances of California and Illinois so fragile, and put Detroit—once the nation’s fourth largest city—into bankruptcy.

If growth continues at 1, 2 or even 3 percent, then the weight of the baby boom retiring on federal entitlements will push federal deficits through the ceiling in the next decade.

Higher taxes won’t help much. If tax rates are too high, successful people work less and take their skills elsewhere. Technology companies and financial institutions—where the real fortunes are made these days—can park their patents and profits in Ireland or some other low-tax jurisdiction.

Sooner or later, Washington won’t be able to continue borrowing. Just as unions and banks will now tussle over whether pensioners or bondholders should have first claim on Detroit’s remaining revenues, Washington can dicker with Beijing over whether the social security checks should go out or the Middle Kingdom gets all the interest due on its holdings of U.S. bonds.

At that point, we can auction off the Grand Canyon and spend the Fourth of July remembering what a great civilization we spent away. ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and a widely published columnist.




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