Freedomnomics

Article published Monday, January 26, 2009, at Fox News.

Democrats' Economic Plan: Blame The Republicans for Everything

By John R. Lott, Jr.

What do you expect Americans to do when President Obama tells us we are in “an unprecedented economic crisis”? Is any one surprised when consumers cut back on buying? When companies stop spending money?

Unfortunately, Obama’s statements aren’t new -- he made similar statements during the campaign last year. Democratic political consultants have been all over the media making the same claims about us being in “the most unprecedented economic crisis in history.” Of course, the media have been pounding away at this message also.

It isn’t just that the claim about the “unprecedented economic crisis” is false -- it is absurdly false. But by frightening Americans and causing them to change their behavior, they are causing the economic chaos they claim to want to solve.

Take a few numbers:

-- People might not remember it, but almost a third of all the months during the 1970s, 1980s, and 1990s had an unemployment rate as high or higher than it is now.

-- The inflation rate today is incredibly low. Over the last year, the inflation rate has been 0.1 percent. There is only one year since 1960 when the inflation rate was as low as 0.7 percent (1961).

-- GDP growth might have fallen slightly by 0.5 percent during the third quarter last year, but that is after it had grown at 2.8 percent the previous quarter. Americans were still wealthier than they were at the beginning of the year.

Given all the claims about disaster, it is a wonder that the economy isn’t in even worse shape. You would think that politicians would have understood the impact of their words. But if they didn't (and it is very hard to believe that they don’t understand this), they had plenty of chances to learn that lesson again last year.

Senator Chuck Schumer (D-N.Y.) publicly released a letter he had written to the Federal Deposit Insurance Corp (FDIC) and Office of Thrift Supervision (OTS) questioning the IndyMac Bancorp chances of surviving. He had no evidence of anything, just his suspicion that IndyMac had a weakened financial condition.

Depositors panicked and took their money out of the bank, driving it out of business.

The office of OTS concluded: “The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.”

Or take Senate Majority Leader Harry Reid’s claim: “One of the individuals in the caucus today talked about a major insurance company. A major insurance company — one with a name that everyone knows that’s on the verge of going bankrupt. That’s what this is all about.” No major insurance company was on the verge of bankruptcy, but all the insurance industry stock prices plunged the next day. No one knew which insurance company Reid might have had inside information about.

If these scare tactics about the economy weren’t enough, the threat of higher taxes or throwing out mortgage contracts or massive new regulations or the subsidies for people being unemployed just made things even worse. Why do the unemployment insurance benefit increases end long before next year’s elections?

My guess is that Democrats do understand the impact of their words. But these are just some of their claims about the economy. So why the conscious effort to drive down the economy?

The answer is simple: if things get worse in the economy, especially before the Democrats’ stimulus plan kicks in, Democrats think they will able to blame the Republicans for everything. Even though most Americans don’t know that the Democrats controlled both the House and the Senate for the last two years.

It might take a couple of years, but things will eventually right themselves in the economy, and Democrats will claim that it is their policies that fixed things. Unfortunately, these political gains will be made on the backs of Americans who are facing unnecessary suffering.

*John Lott is the author of Freedomnomics and a senior research scientist at the University of Maryland.

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