Smith Faculty Opinion Article

By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

February 1, 2010

Obama's Polemics Versus the Economic Facts

In politics, whatever the President can get voters to believe becomes the truth, but in economics the numbers establish the facts.

Unfortunately for President Obama, Americans can add, and their sums are destroying fantasies the President would hoist upon a more gullible public.

Despite claims that the $787 billion stimulus package and bank bailout averted calamity, the U.S. economy is in shambles.

The Commerce Department reported GDP grew 5.7 percent in the fourth quarter, but 60 percent of that was an accounting adjustment. Businesses ran down inventories at a slower pace, but in the arcane world of GDP accounting, that scores an increase in investment and growth.

Domestic consumption and real investment, which define the sustainable pace of economic expansion, contributed a paltry 1.8 percent to growth. That's less than half of productivity growth, indicating more pink slips are coming.

Fifteen million Americans are unemployed, more than 450,000 register for new jobless benefits each week, and factoring in folks relegated to part time work but preferring full-time employment and those too discouraged to seek jobs, the unemployment rate is much closer to 20 percent than 10.

Campaigning for president, Obama promised to create five million jobs in green industries. Newly-elected President Obama purported his stimulus package would create 3.5 million jobs, 90 percent in the private sector, and now the President's Council of Economic Advisors professes stimulus spending has created or saved 1.5 to 2 million jobs.

Yet, the White House can tally only 599 thousand paychecks that can be traced to stimulus spending. It touts all the government employees whose jobs have been saved.

Businesses need customers and capital to create jobs. They don't have enough of either, because Americans spend much more on imports than they export, and after receiving more than $2 trillion in federal aid, the banks simply won't lend to most worthy businesses.

In his State of the Union, the President pledged to double U.S. exports in five years and create two million jobs. Though exports are up a bit, thanks to a weaker dollar against the euro, China is where the big opportunities lie.

China exports about $330 billion annually to the United States but purchases less than $90 billion here. Simply, China suppresses the value of the yuan to make its products artificially cheap in U.S. stores and imposes protectionist obstacles to American exports.

Buicks are top sellers in China, but a 40 percent subsidy from an undervalued yuan and a 25 percent tariff on cars compels General Motors to produce there instead of Michigan.

Treasury Secretary Timothy Geithner and Manufacturing Czar Ron Bloom refuse to even discuss Chinese protectionism.

Factoring out the inventory adjustment, GDP grew a paltry $176 billion the second half of 2009, and the banks paid out nearly $150 billion in bonuses on new profits more than double that.

It is easy to see who is benefiting from Obama's growth policies, and why most Americans feel a bit poorer each day.

Yet, the President wants another stimulus package, rebranded as a jobs initiative, and he plans to fix the banks by prohibiting them from sponsoring hedge or private equity funds, investing their own capital through proprietary trading operations, and imposing a tax on bank capital.

Of the more than 8,000 banks, only a small handful sponsor such funds, very few invest through their own trading operations, and the bank tax will raise only about $10 billion annually but will drive financial activities offshore.

Until the President ceases grand promises and outlandish claims, wells up the courage to confront China and reins in abuses on Wall Street, Americans will see everything from their health care costs to their cable TV rates rise, except their paychecks. If they are lucky enough to still have job.

If the President does not change strategies soon, the Democrats will take a shellacking in November even their statisticians cannot deny.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.