WASHINGTON, February 4, 2014 – The Congressional Budget Office (CBO), a nonpartisan federal agency that provides economic data to Congress, just released a report on the federal budget and the economic outlook for the U.S. It essentially says that the economy is in worse shape than forecasters thought, primarily because of expected slower growth. While the current administration continues to focus economic policy on income maintenance programs for the bottom 15 percent of income earners, most of the rest of us will experience economic difficulty. How bad is it?
Typically, after a recession, the primary focus of economic policy is on growing the economy. Under the current administration, economic policy focuses on providing health care for those who can’t afford it, extending unemployment benefits for up to 99 weeks for those who can’t find a job, raising the minimum wage for unskilled workers, increasing welfare payments to those who do not contribute to the economy, providing massive increases in food stamps, raising taxes on the wealthy which reduces new investment and adding more burdensome regulations.
The result of President Obama’s economic policy will likely linger for a decade. As such, the CBO estimated that budget deficits will total $7.3 trillion between 2014 and 2023, which is about $1 trillion higher than their last estimate. They further estimate that that the economy will grow at most by 2.1 percent annually over the next decade. This is the lowest growth rate since the 1950’s. That means we will not reach a full employment level at any time in the next ten years. Can we change this outcome?
History provides examples that could help us repair this situation. Economic policy today should be focused primarily on growth. Policy should be geared to encourage business expansion and new business formation. After the 1981 recession, economic policy did just that. By reducing burdensome regulations, allowing achievers to keep the majority of what they earned and by encouraging self-reliance, we were able to grow the economy. This expansion lead to new jobs being created which reduced unemployment, increased personal income and gave Americans the opportunity to be self-reliant. The end result was a 25 year expansion, except for minor slowdowns in 1991 and 2001.
The Affordable Care Act had good intentions when first conceived. About 50 million Americans did not have access to health care and we wanted to change that. But the legislated solution turned out to be counter-productive. New rules about employer mandates caused firms to reduce the number of employees. CBO estimates that more than 2 million jobs will be lost as a result of this act. The added cost to businesses will also slow their ability to expand. And about 30 million Americans will still not have health insurance even after the ACA is fully implemented.
Raising the minimum wage seems like a good idea too. The reality is that this will reduce the number of jobs available as many businesses will find that unskilled workers do not produce $10 worth of value, so if $10 was the minimum wage, many people would not be hired. Even today with a $7.25 per hour minimum wage, the unemployment rate for teenagers and other unskilled workers exceeds 20 percent.
Raising taxes on corporations and the very wealthy seemed like a good idea. The reality there is that higher tax rates reduce returns and therefore discourage investments that could expand the economy.
Extending unemployment benefits seems like a good idea too. The reality is that most unemployed workers do not seek jobs until about 30 days before their benefits expire, so that extending the benefits simply encourages longer term unemployment.
In fact, virtually all President Obama’s economic policy actions seem to help the bottom 15 percent of income earners while making things worse for the rest of us by reducing economic growth. The President’s focus should be growth, not income redistribution. The hope is that we can pivot in this direction as soon as possible, although that seems unlikely at present. Unfortunately, the CBO estimates will probably get worse as a result.