This seems spot on. Obama is on the wrong track and yet the opposition is likely even worse.
The theory behind Obama’s policies is Keynesian: that a temporary package of tax cuts and spending increases can provide a short-term boost while the economy returns to self-sustaining growth. Many economists agree with this logic, but the underlying economic theory is much weaker than supporters realize. It fails on two counts.
First, the US economy needs more than a temporary stimulus to return to self-sustaining growth and full employment. Our growth and employment problems are structural, and need a structural response. Second, the stimulus might not actually stimulate very much even in the short term.
The housing boom between 1998 and 2008 was an indirect reaction to the loss of manufacturing. As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition (so-called non-traded sectors). The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008.
Obama and his advisors have believed, in effect, that they can reignite the housing boom. Rather than reacting to the underlying problem — the loss of manufacturing competitiveness — they have acted as if a bit of pump priming and the passage of time will recreate consumer-led growth in housing, autos, and other sectors.
One of the common errors of our recent policy debate has been the belief that various studies of the Congressional Budget Office (CBO) "prove" that the stimulus measures have raised employment and output. Careful readers of the CBO reports know that the CBO has proved nothing of the sort. The CBO reports have assumed that the stimulus works, relying on multipliers found in its mathematical models of the US economy. The CBO hasn’t in fact re-examined its model for purposes of estimating the impacts of the stimulus policies.
This point is especially important to understand. The estimates that the stimulus created (or saved) jobs are based on models and equations that assume impacts from the stimulus. They don’t truly measure it.
Obviously the most simple criterion of if the stimulus worked is if it achieved the levels of employment expected. Clearly that hasn’t happened. You can argue that things would be worse without the stimulus, but ultimately that can never conclusively measured.
Obama is right that the Republican vision of relentless tax cuts, deregulation, and shrinking government is the road to ruin. Yet Obama’s alternative of short-term and shortsighted stimulus is only marginally better. Neither approach is getting America back on track.
America requires at least a decade of well-designed and well-executed national investments in people, infrastructure, and innovative technologies, in order to boost competitiveness and renovate the economy. Yet such an effort requires serious plans, careful deliberation, and higher taxation on deadbeat corporations and the super-rich. (Obama’s endorsement of lowering corporate tax rates in return for ending loopholes augers poorly once again, since it invites yet another gimmicky tax negotiation in the interests of the rich.)