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Mr. President, Let’s Not Piddle Around

DURING HIS SOARING INAUGURATION speech President Barack Obama said it’s not the size of government that matters but whether it’s …

DURING HIS SOARING INAUGURATION speech President Barack Obama said it’s not the size of government that matters but whether it’s effective. He also added that “The state of the economy calls for action, bold and swift, and we will act.” Fair enough, but what kind of action can we expect?

With his party controlling both the House and the Senate, Obama is likely to push for spending package that will total $1 trillion over two years. With the Congressional Budget Office projecting that the federal deficit for fiscal 2009 will jump from $455 billion to $1.2 trillion, the deficit will represent 8.3 percent of GDP, the highest share of the economy since World War II.

Have we learned nothing? Spending our way out of a financial mess has been the U.S. track record of both political parties since the New Deal. The last thing this administration should want is an economic replay of policies that didn’t work then and are unlikely to do so now. Remember the “shovelready” infrastructure projects of the 1930s like WPA (aka “we piddle around”) where holes were dug only to be filled in again? Just for the record when FDR took office unemployment was over 23 percent and at the start of World War II it was still a troublesome 15 percent. In addition, the accumulated burden of government programs, farm subsidies, increase in taxes brought the dead weight of government’s share of gdp from 16.4 percent to 21.5 percent. Not a track record a promising President who pledges to create or save three million jobs should want to emulate. Yet, in an effort to cleanse our economy of its problems, the incoming administration and Congress plans to rinse and repeat.

The core weakness of the economy is the lack of private investment and risk taking. Mr. President, if you want real growth then heed the words of Richard Wagner, an economist at George Mason University where you recently spoke: “Private spending is generally more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people’s money.” If government spending truly promoted true growth Sweden would be a superpower.

There are more effective steps that can legitimately foster growth. These include permanently extending current tax laws and drop tax increases. This would serve as a de facto tax cut, increasing the after-tax rate of return on investment and unlocking billions in private, capital. Better still, offer a temporary cut in the corporate income tax rate –already the second highest in the world—to zero. This would also reduce incentives to shift business operations abroad and would create jobs at home. Amend Clinton’s famous aphorism; It’s the private economy, stupid.

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