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5 Ways Obama is Wrecking the US Economy

by Darwin on August 24, 2010

I know, I know, you think this is some sort of political rant from a righty wingnut.  No, this is a basic outline of how the administration’s policies have completely obliterated any chance of a meaningful recovery and why we are likely to see sluggish economic activity and double digit unemployment for years to come.  This is a purely economic/financial discussion, so if you voted for “hope and change” and you actually think you got what you voted for, stop kidding yourself, you’re not being objective – especially if you’re part of the young crowd.  Your future was sold out from under your feet.  If you’re at least objective about how the current policies are impacting the nation’s business outlook, you’ll surely agree with some of the blunders here and how we should learn from these mistakes lest we repeat them again.  Today’s dismal housing numbers and the stock market follow through further underscore the complete lack of confidence in the administration and confirm our fears – there is no economic recovery…we may be headed for Depression.

Healthcare Reform

We get it, there are millions of Americans that don’t enjoy the same health care benefits that the rest of the country does, and arguably, much of the developed world.  This issue needed to be addressed.  It should have been addressed in a well thought-out way in the context of the world we live in though.  While the administration could have opted for a prolonged bi-partisan panel approach to addressing the problem, there was this constant urgency to enact something…anything before each recess and what we ended up with was a complete sham – as Pelosi reinforced, we needed to vote for the Bill so that we could read it and understand it.  Smart.

The program claims to be revenue neutral over the first decade but it pays for itself for 4 years up front before the heavy costs even start to be incurred.  Additionally, revenues to fund the program are basically derived from completely unrelated sources and cuts to other entitlements that have nothing to do with any “benefits” of the healthcare portion of the bill itself.  Taxing tanning salons, turning the IRS into big brother to funnel more funds to this entitlement (if we’ve been missing so much tax revenue for years, we could have revamped the IRS system outside of this bill – what do IRS reciepts have to do with healthcare funding? Nothing!), cutting out what I can deduct in my flex spending account (no more OTC meds, lowering my FSA limit and more)?  None of these had anything to do with the “program paying for itself” as it was billed.  We essentially raised taxes and cut elsewhere to funnel funds into this program and it’s still going to implode from 2020 onward.

Healthcare Reform does not fund itself.  It never will.  It is a sham.

From a humanitarian standpoint, any benefits above and beyond what the uninsured get now is a positive.  Financially, this bill is a disaster.  It will burden our young people and future generations with debt they will never be able to repay.  This has implications for everything from future interest rates and the standing of the US on the global stage to a declining standard of living and the eventual cuts to services that will be required inevitably (Canada can’t help itself, nor can the UK [Axe falls on NHS services] no matter how many movies Michael Moore makes about socialized medicine).

At a time when other western nations figured out socialized medicine is bankrupting them…The US decides it’s a great idea.

With regard to current businesses, it’s a huge net negative.  Instead of working on helping the economy recover last year, Obama spent all his time and political capital on an issue which is vastly anti-business.  As noted by massive Billion dollar writeoffs from the likes of AT&T and Caterpillar and many other large companies, just think about this mandate from the perspective of a small business owner.  If you’re at 23 employees and a new requirement kicks in at 25, are you going to grow you’re business?  No, you’re going to maintain constant employment in the 23-24 range and continue to add automation, outsource, contract, exit low margin businesses, or do whatever you have to do to balance continued profit growth while avoiding that bullet.

What a stupid system that punishes a small business for growing.

Summary: Improving access to health care is important.  Destroying our country in the process and lying to the American people about the taxes and future insolvency of the program is wrong.

Tax Hikes

Sure, sure, those rich fatcat bankers can afford to pay more taxes so we can spread the wealth around.  I know, we’ve heard it over and over again.  The problem is many of those rich folks are small business owners with passthrough S corporations, so when their taxes go up and they want to maintain the same income, what are they going to do?  Cut costs.  Cut employees.  Many things in business are gray areas, not black and white.  Sure, some businesses will just do business as usual and pay higher taxes.  But others will cut their headcount or put their money to use elsewhere in more tax advantaged vehicles other than their business.  It’s these marginal changes that will crimp new job creation.  Don’t forget that rich people buy stuff too.  When they have less money to spend, that consumer part of GDP declines.  That means jobs.  I know, there are studies out there showing that the rich tend to invest and hoard their money on a higher percentage basis than the general population (that’s why some of them are wealthy to begin with), but again, it’s a directional issue.  Certainly, there will be that fewer swimming pools, new cars and trips to Hawaii when the rich have less money to spend.  While they may seem like excesses to you, that IS money that goes back into our economy though…

Summary: Taxes will have to go up inevitably.  Taxing the rich only will decrease job creation and GDP.  In the future, lower tax brackets will require tax increases to pay for health care and other entitlements anyway.  Just be honest about it.

Small Biz Taking a Back Seat to Unions and Special Interests

Incredibly, while the overall unemployment picture has been in a continual state of decline, there’s one industry that’s really booming – big government!  Government worker payrolls have surged (Govt Worker Payroll Surge – Washington Times).  Sure, one could argue that this is a form of stimulus and it’s keeping people working…but government doesn’t PRODUCE anything.  There is no net benefit to each increase in headcount.  Sure, you need regulation and enforcement of laws.  But society does not benefit when the only segment of the workforce that continues to grow and usurp public tax dollars is the bureaucratic base.  We need to grow private industry jobs – you know, the ones that create things and drive tax revenues by way to sales of new innovative products like iPads.

In order to ensure that America continues to lose ground to our overseas competitors on both competitiveness and flexibility, Obama has continued to pull shenanigans to grow union ranks and provide payback for those November votes at the expense of the rest of the country.  Why unions should have been allowed a pass on healthcare plan taxes while the same guy doing the same job down the street is beyond me.  The claim is that unions have accepted lower wage increases in recent years to account for increasing healthcare costs is ludicrous.  Union workers have bloated salaries and benefits (plus bloated pensions) compared to private sector equivalent jobs in EVERY segment of the economy!  It’s called free market competition for labor.  When you don’t have practical guaranteed lifetime employment and the ability to cripple a plant with a strike, you’re going to work for the going rate.  When you join up with the local, you enjoy above market wages and benefits and carry the bravado that no matter how bad you screw up or loaf around, it’s really a pain to fire you.  That’s just the way it goes.

To add insult to injury, the administration sought to enact Card Check legislation which would essentially remove the secret ballot from the unionization vote for business that were currently non-union.  This is America right? Do I have to tell the guy at the election poll if I’m voting Democrat or Republican?  No.  Should a union organizer know if I, as a content employee in a non-union shop, voted for or against unionization?  It’s ridiculous.  For anyone that’s ever worked with a union, you know full-well the fear and intimidation tactics employed against anyone that isn’t “with the program”.  Card Check would ensure that nobody voted against, because you’d be public enemy #1 once the vote when through.  What this would do is essentially force a sea change in unionization throughout the country…which in turn, means more votes for Dems, higher costs to business, and higher costs for all goods and services throughout the entire economy.  Now, that’s business-friendly?

Summary: Focusing all energy on boosting unions and ignoring small business leaders does nothing to help grow jobs.  In fact, quite the contrary.

Bailouts Gallore – No Moral Hazard

Our government’s done a series of bailouts, with Bush kicking off the festivities, followed by Obama coming in and going medieval on the Bush spending trajectory. (10 Dumbest Uses of Stimulus Dollars)

We bailed out homeowners who had no business owning a home to begin with since they couldn’t afford it and lied about their income.  We then bailed out the loan officers, banks and homebuilders who were culpable in the fraud as well (while prosecuting exactly ZERO people for fraud).  After bailing them out with Billions in taxpayer funds, they stopped paying their mortgages anyway and now live in their homes for free for up to 2 years while banks try to navigate the regulation and legal obstacles to repossess their homes.

We bailed out GM. First, we continued to throw money down a rat hole when bankruptcy was inevitable.  Obama claimed if GM declared bankruptcy, it would push supplies in the Midwest out of business causing a huge ripple effect.  So we continued to bail them out.  When it became painfully obvious that the gig was up, the did declare bankruptcy.  And the Midwest didn’t crumble.  The union sure got a sweet deal though – the government mediator saw to that.  Following the bailout, GM made TV spots saying they paid back taxpayer funds in full…even though they didn’t.  When buying a car, you can pat yourself on the back for making GM’s survival possible – but it didn’t have to come at such a high cost to taxpayers; it should have folded sooner and bondholders should have taken a haircut.

We did cash for clunkers. Because I traded in my SUV for a more fuel efficient car years ago, I got no bailout.  But plenty of people who continued to drive gas guzzling cars for years did when they were likely to buy a more fuel efficient car.  These are people who eventually would have bought a new car anyway, just like I did.  But they got thousands of dollars in taxpayer subsidies to do so.

We continue to extend unemployment benefits forever. There is no end in sight.  Just when you thought 99 weeks of unemployment insurance sounded ridiculous, it was increased to 119 weeks.  And it will be extended again.  Sure, there are arguments that the long-term unemployed just end up on other government programs anyway when their benefits expire, there are also studies showing that applicants are much more willing to accept a job in the weeks leading up the expiration of benefits (wouldn’t you be?).  Well, as long as we keep extending the benefits, people will be that much less inclined to take a position on the margin.  What is on the margin?  It means that perhaps it pays better than UI, but not enough to go to work.  I know, there are millions of unemployed who are legitimately looking for work and would take anything that came their way.  I’m not painting everyone with the same brush.  But there are also millions of scammers (I know of a few personally, and surely you do too) who are laughing all the way to the bank because they either work for cash, they’re stay at home moms anyway, or they basically have no intention of returning to the workforce for other reasons – but they’re collecting Billions per month from taxpayers.

While extended UI in this environment was appropriate, there are no longer any rules.  99 weeks, 119 weeks, what’s the limit?  When does it end?  And who pays?

Summary: We bail out losers.  Over and over.  We reward incompetency and bad decision making and punish success and prudence.

Uncertainty is the Killer

This is the biggest and worst offender of them all from a business sentiment standpoint.  Business just doesn’t know what the administration is going to do next.  Whatever populist pet project comes along next will come under fire and business leaders are constantly wondering if their industry is next.  What sort of new regulation, scrutiny and paperwork are they going to be bombarded with.  It’s a vicious cycle in which smart business types know that unemployment is going to remain sluggishly high and/or rise for years to come thus crimping revenues and it’s going to become MORE burdensome to increase payroll, so what’s the optimal business solution?  Either increase automation to replace humans (note business productivity has gone through the roof during the current Recession/Recovery) or do nothing – but not grow payroll.

What’s going to happen to Fannie and Freddie?  Will a Value Added Tax be added to the already increasing tax base?  What types of quantitative easing and other tools will the Fed employ next?  They’re running out of options.

Summary: Nobody knows the rules.  Business hates uncertainty.  Because the administration is intent on continuously tinkering with the rules, growing their ranks and diverting public ire and blame to the private sector to distract from the real problem, businesses are simply standing firm until the dust settles.  And it may not settle for a long time.  That has serious implications for the economy.

I know I missed a few.  And there will surely be some back and forth on facts and figures and fringe benefits of some of these programs.  But it is undeniable that business is in the tank, and it’s not getting any better.  Business is getting no help from the administration and we can’t tax our way to prosperity.

Am I Off Base Here?

{ 16 comments… read them below or add one }

Investor Junkie August 24, 2010 at 10:19 pm

A very good summary!

Regarding uncertainty with businesses. It comes down to no one knows what their profit will be. It’s hard enough to estimate profits during normal business cycle, add the economy itself and THEN add all of these new regulations and taxes it becomes a big unknown.

On the flip side (I’m trying think of some positives), can anyone say anything going good about the economy? (this is a serious question)

Quickly I thought of:
- Companies have more cash than ever
- Savings rate is at 6% and people are pairing down their debt (could also be looked at as negative)
- Hmm anything else?

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Darwin August 24, 2010 at 10:29 pm

Positive?
- well, one could point to productivity which is through the roof. That bodes well for business long-term, but for now, it means no hiring.
- savings rate isn’t that great for the econ, it just means people are de-leveraging, but they’re not spending.
- companies with tons of cash – that means lots of acquisitions since they can’t earn anything on their cash. acquisitions means more layoffs. the cycle continues…

I think we’re kinda screwed. I wish the administration would admit as much and start enacting some business-friendly legislation rather vilifying them.

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MoneyEnergy August 25, 2010 at 1:03 am

How about just raising taxes on private equity and hedge funds? They currently pay well below standard and for adding no real value to the real economy. They just flip businesses and rake in “management” fees. Raising taxes there, on hedge fund structures, etc. wouldn’t hurt Main St.

@InvestorJunkie, those two “positives” are sort of the same point, and like you say, both can be seen as negatives. Companies sitting on excess cash seems like a good thing, but they’re not using that cash for hiring, they’re doing things like acquisitions – another financial move that doesn’t add to the real economy. The real economy is still slumping – while money continues to be made at the level of finance.

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Darwin August 25, 2010 at 8:43 pm

Hi Money Energy,
I agree it wouldn’t hurt main street, and they are actually switching the tax code from 15% cap gains to Fed Tax Rate if I recall, so most of these guys could then see high 30s. The controversy there is that they consider their returns to be “at risk” capital as opposed to steady income, like say, someone working a 9-5 job. The other piece is that the revenue anticipated from that tax increase is quite small, a couple billion, which doesn’t even move the dial on the Trillion + we take on each year in debt. So, if I recall, I think it’s a done deal already, but it seemed to be more punitive than anything, it didn’t do much to help the real issue, which IMHO is spending.
Thanks for your comment!

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Kevin@InvestItWisely August 25, 2010 at 11:27 am

Hey Darwin,

Do you think that the US is becoming more corporatist, especially in regards to point #1? It seems that insurance companies already had far too much power (and much of it due to regulations such as the inability to purchase insurance across state lines) and expenses were far too high due to using insurance for every little thing. I believe in free market approaches, but corporatism != free market.

I’m surprised that nobody has yet set up a small cruise ship converted into a floating hospital 12 miles off the coast of say, LA…

Tax hikes at a time when everything is still deleveraging seems ill-advised. Even the leftist MMT guys are against tax hikes, though they don’t advocate reducing spending…

I agree with you that small business is getting killed, but I prefer not using statements like “government doesn’t produce anything”. They sound partisan and they play into the arguments of your opponents. The government actually does produce; it just produces less than the private sector would, and it destroys more often. It’s better to state that there is an opportunity cost to government production, and that it’s better to leave those resources in the private sector where they can be more efficiently used. I’m also perfectly OK with unions, so long as it’s a voluntary arrangement and not forced on the employer through law and force (just like corporations used the police and military to beat up strikers decades ago, which was also wrong).

The bailouts and uncertainty are getting ridiculous. I don’t quite subscribe to the Austrian notion of letting everything burn to the ground after the boom collapses, because that’s how you get socialist revolutions, but the current path isn’t so great, either. There surely are 1000 different ways that the crisis could have been handled better!

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Darwin August 25, 2010 at 8:48 pm

Hi Kevin,
Insurance companies have to make a profit to stay in business, but it is undeniable that there were and still are, very unethical business practices like denying coverage AFTER someone is ill and a litany of other injustices. The problem isn’t the insurers though. It’s the culmination of people living much longer, consuming 6 figures in medical care in the final 6 months of life, and demanding the newest state of the art (and costliest) treatments even if they work no better than standard of care, placebo or nothing. Until Americans come to grips with perhaps dying a respectable death in their home rather than using 40 specialists and 9 weeks in the hospital to prolong a miserable life, the costs are going to just continue to spiral. And any politician suggesting this will be labeled a “death panel” advocate. So, insurers or government, whoever’s calling the shots, this is the underlying cost problem.

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Kevin@InvestItWisely August 26, 2010 at 9:28 am

Is it really due to old people refusing to die when it’s their time?

I did some more research on the Korean system, and it seems to be a public-private partnership. Care is provided privately, and paid for via payroll taxes + copays. Elective procedures still require private insurance, so can be very expensive without it. Nonetheless, I remember how efficient the care was there, and “very expensive” is still quite cheap compared to the USA. Koreans love going to visit the doctor, because it’s so efficient. They go see the doctor whenever they are sick, and they actually have a better chance of catching a serious disease at the early stages due to these frequent visits.

I just don’t understand why Americans are so afraid of change. There is something seriously wrong when it costs $10,000 to deliver a baby. There is something messed up with a so-called “private solution” is among the most expensive in the world, not only in absolute costs, but also in terms of GDP. They are giving a really bad name to the ‘free market’.

If a good free-market solution could be found, I would be for that, but I think that at this point anything which reduces red tape and improves access to care will be an improvement (and I don’t think the health care bill is that).

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NumberA1Patriot August 25, 2010 at 12:02 pm

It is a rant, but I agree with “Uncertainty is a killer” and “Small businesses are taking a back-seat” especially to public sector unions.

It is a tremendous shame that healthcare was not passed on bi-partisan support which would have controlled cost better, but both sides needed to be a bit more flexible. For the record, most other countries with universal health care are not going bust over it, certainly not any more than the US is going bust without universal health care. They have other budgetary problems, too, just like we do here in the US.

As for letting the tax cut expire for the rich, let me ask you how many jobs these cuts have created since the tax cuts were enacted? What good have these cuts done anywhere in the US economy? These cuts squandered a budget surplus and pushed the federal budget against the wall at the exact time when we should have been able to expand the federal deficit.

Bailouts are always problematic, but the Bush administration already knew that they had to be done. There was no way around it unless you accept another depression rather than just a recession. On second thoughts, we may still face a depression anyway. So, we should have just faced it sooner than later and rebuild the economy from its rubbles.

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Darwin August 25, 2010 at 8:53 pm

Hi Patriot,
OK, a bit of a rant. But it’s tough to criticize “policy” without taking on the “politics” that put the policy in place. But purely economically speaking, to your point on health care, while that isn’t solely to blame for the fall of the West, the articles I pointed to demonstrate the lack of sustainability. At a time when they’re finally realizing the programs are hemorrhaging money and they are cutting back, we’re just embarking on the most expensive one. And we’ll do the same. But it will be a decade or two out after you and I paid into the system for 20 years, just like social security. It’s generational theft, and it will happen.
Tax cuts during wartime are certainly rare in our history – had Bush done Afghanistan quickly and didn’t do Iraq at all, we’d likely be in a much better situation.
And as far as bailouts, some of the actions from the Fed and Treasury were necessary, but housing should have been allowed to clear. By not letting markets clear and slapping a new bandaid on every 6 months, it’s just prolonging the whole situation and creating a lot of pain and injustice along the way. This housing situation may go on for years as a result. And when the revisions to GDP come in, it may actually show that we never actually left the recession – we’re still there…and headed to a Depression.
We have tens of millions on food stamps now. This doesn’t get press, but it’s a fact.

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NumberA1Patriot August 26, 2010 at 10:27 am

Right. It is generational theft. Any pay-as-you-go system is.
I also agree with your views on bail-outs. The distortions in the real estate market are silly. Freddie, Fannie, FHA, mortgage interest tax write off, etc. are enough distortions as far as I am concerned.
And yes, we need to issue way too many food stamps these days. Maybe it does not get so much press because this is really sad, if you think about it, isn’t it?

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Joe Plemon August 25, 2010 at 12:30 pm

How about the underlying theme that our nation has unlimited supplies of money? If an individual or a family truly believes that the route to recovery is through more and more debt, they are only prolonging the inevitable. Our nation is the exactly the same. Unsustainable national debt will wreck our economy all by itself.

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Khaleef @ KNS Financial August 25, 2010 at 1:28 pm

You are dead on with your comments on Healthcare. They created such a sense of urgency that they were able to ram this ridiculous bill down our throats in a matter of months! This is something that should take years of Health Economists and others studying and debating options, but instead we got something that doesn’t come close to addressing the problem.

All of Obama’s initiatives are completely destroying small business, because he has everyone out on a witch hunt against the “rich”! They are the real engine of this economy and he is stifling any chance of a recovery! As long as only the “rich” are targeted, people will be okay with borrowing against the future (because they don’t think they’ll foot the bill).

You are definitely right about the end to moral hazard and everyone now expecting to be bailed out for their idiotic financial decisions!

I’m just hoping that people will wake up before he completely destroys the future of this country!

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Darwin August 25, 2010 at 8:55 pm

Well, depending on the message voters send at mid-terms, perhaps some Dems will break with the party line and get a little more fiscally conservative. Many Republicans have no legitimacy in this regard either though given their spendthrift ways as well. It’s a mess. People can’t even trust what their favorite candidate is telling them, because they’re pretty much platitudes, lies and anything to get a vote – on both sides of the aisle.

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Financial Samurai August 25, 2010 at 10:02 pm

Do you think the right strategy is to just join the government? I think I’ll write a post on that.

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Kevin@InvestItWisely August 26, 2010 at 9:34 am

In places like France, the ambition of the young is to get a sweet padded government job with nice benefits and a pension.

The problem with government is that it’s a knowledge and coordination problem. Everyone would be better off with less government, but while the situation exists, each individual can find himself better off by joining the government, even if it makes others worse off. At the very extreme, you end up with situations like North Korea.

I think technology and the free market is really the only force fighting against this. In say, Roman times, joining the military/government and joining in the plunder was pretty profitable — if not for those being plundered. However, with the free market, it becomes more profitable to engage in trade and production. Plunder still works, but to a lesser degree. As technology continues to advance and the speed of dissemination of information increases, we will probably continue to see the trend move in that direction, albeit with some stumbles along the way (like what we’re going through right now). These stumbles, however, provide the justification and the impetus for the trend to continue over the long run.

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Financial Samurai August 29, 2010 at 4:10 am

Ok, sat down to skim the whole thing finally. Well said. Your last point is true about business hating uncertainty, which is why my friend Zach would rather certainly reduce expenses by 85K and fire his employee than face an unknown revenue future!

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