The intensity of the recession has been slowing since the second quarter with the exception of mountainous job losses, which can trail the beginning of a recovery by 18-21 months. Credit market spreads are narrowing, building permits are rising, the velocity of jobless claims is slowing, and the stock market is stable and growing. These indicators are beacons of light in an economy that went dark after the worst credit crisis since the famed Great Depression.
I attribute the improvements in our economy to an aggressive Federal Reserve that responded with a myriad of programs and schemes. However, a new threat is emerging that could derail the economic recovery and create an unprecedented set of challenges in the future. The economy is now facing the peril of government expansion and bad fiscal policy.
Undoubtedly, President Obama is remarkably intelligent and pragmatic, but his policy proposals lack detail and substance. Mr. Obama routinely outsources the formation of policy to House and Senate Democrats and this introduces politics into critical issues that affect the American people. For example, Obama pressed Congress to pass a fiscal stimulus bill saying “we could not afford to wait”, but unfortunately Obama left the drafting of the bill to his Democrat colleagues. The bill is failing to stimulate anything more than excess paperwork and frustration. Obama’s promise that his stimulus bill would prevent unemployment from rising above 8% has turned out to be erroneous. The President now says that unemployment will exceed 10% this year. Nevertheless, the long-term cost of a $787 Billion spending bill will linger in the national budget for several years to come.
Mr. Obama is once again pressuring Congress saying that “we cannot afford to wait” when it comes to reforming the healthcare system. President Obama is back on the campaign trail and he is selling “affordable and quality healthcare for everyone.” A very noble idea, but as usual for Obama, his proposal lacks clarity and carries a high cost.
For over 15 years Massachusetts has required insurers to cover anyone who applies, regardless of health or pre-existing conditions, and charge everyone the same premium. Undoubtedly, this requirement allowed people to wait until they were sick before they bought insurance. The new program championed by Governor Romney in 2006 imposed an individual mandate, which required everyone to purchase coverage or pay a penalty.
This program closely resembles what Democrats are debating in Washington. However, the program has been widely unsuccessful in Massachusetts, because consumers are gaming the system by taking on coverage when they need to use the insurance while paying the penalty when they are not sick. In a logical world, the administration would take a hard look at the evidence coming out of Massachusetts before implementing a policy that will have a ramification on this country long after Obama leaves office. However, Vice President Biden recently stated “we must spend more to avoid bankrupting the country.” Is that a sensible concept?
House Democrats propose that we pay a portion of the $1 Trillion cost to reform healthcare by raising taxes on the wealthy, taxing individual healthcare plans, and requiring small businesses that choose not to provide coverage to pay an 8% payroll tax. These proposals transfer wealth from individuals and businesses to the government, which creates negative consequences for the long-term health of our economy.
Obama demonstrated that he cannot be trusted when he rammed his stimulus bill through Congress on the idea that our economy would crumble without more spending. Obama assured that most of the appropriated stimulus money “will go out the door immediately”. Now his administration is waiting to spend the money. Little of the bill was aimed at true stimulus and more of the money will be spent in 2010 and 2011 than will be spent this fiscal year.
Sustainable improvements in the economy will come from job creation and consumption through the private sector. Entrepreneurs and investors see uncertainty and higher costs coming from Obama’s ambitious domestic agenda to reform healthcare, reduce emissions with cap-and-trade legislation, impose new limits on credit card and financial companies, easier labor unionization, and possibly another stimulus bill in the fall. What will Obama propose next?
