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November 09, 2010


Gelman writes:
Why, in early 2009, seeing the economy sink, did Obama and congressional Democrats not do more?

I would ask the opposite question: Why didn't they do less? I believe most of what they did made the economy worse. E.g.:

1. Giving ownership of bailed-out auto companies to labor unions, rather than senior bond-holders. This political payoff made all investments riskier. An invester now must worry whether the Dems will take a business away from its rightful owners and give it to their friends.

2. Handling of TARP bailouts. Relief was given mostly to those who had contributed to the Dems. Again this showed that political connectedness is now key.

3. Stimulus. Stimulus has historically not worked. Furthermore, this one was handled as a way to give money to Democratic constituencies, not to shovel-ready projects.

4. Deficit spending. People expect that taxes will be raised to pay for the deficit. The likelihood of higher taxes discourages investment and business expansion.

5. Health Reform. There's enormous uncertainly as to how this will operate. The uncertainty discourges businesses from adding employees.

6. Generally anti-business administrators discourage business expansion.

7. Support for trial lawyers makes it likely that tort costs will rise, which discourages business.

8. QE2. I suppose this could work in the short run to goose the economy. However, there's a huge risk that inflation will take off. Inflation would not only destroy peoples' savings, it would discourage business, since they don't know what a future dollar will be worth.

9. Irresponsible failure to enact a budget and failure to decide what to do about the Bush tax cuts. Leaving these vital items hanging causes uncertainty, which discourages investment and business expansion.

Just imagine a world where the government didn't try to grow, balanced its budget, didn't try to raise taxes, kept the dollar strong and stable, and stayed out of the way. That was the situation in the late 1990's. It worked.

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