Freedomnomics

Article published Thursday, June 21, 2012, at National Review Online.

The Obama Debacle

By John R. Lott, Jr.

John R. Lott Jr. and Grover G. Norquist are the authors of Debacle: Obama’s War on Jobs and Growth and What We Can Do Now to Regain Our Future. Lott, a former colleague of the president’s at the University of Chicago Law School, answers some questions about the depth of the debacle and the way out from National Review Online’s Kathryn Jean Lopez.

KATHRYN JEAN LOPEZ: John, you say that when you were a faculty colleague of Barack Obama, he tagged you as “the gun guy” and announced that “I don’t believe people should be able to own guns.” That can’t possibly be true. Why should we believe you?

JOHN R. LOTT JR.: Well, don’t just take my word for his views on guns, look at the positions Obama took on guns during his time in Chicago. Obama supported a ban on handguns in 1996, and a ban on the sale of all semiautomatic guns in 1998 (a ban that would have encompassed the vast majority of guns sold in the U.S.). In 2004, he advocated banning gun sales within five miles of a school or park (essentially a ban on virtually all gun stores), and he has worked in other ways to support bans. He was on the board of directors for the Joyce Foundation, the largest private funder of research to ban gun ownership in the U.S.

When Jodi Kantor of the New York Times was writing an article on Obama’s time at the University of Chicago Law School, she heard that I might have some stories about Obama. She interviewed me during the summer of 2008, and I provided her with the different accounts that I provided in Debacle. But these examples were not included in her final article. Ms. Kantor said in an e-mail correspondence that “the Obama people denied that the conversation ever took place.” In a follow-up conversation with her, I kept asking what exactly they were denying. That I ever talked to Obama? That we ever talked about guns? That we knew each other at Chicago? But the only statement she ever received back from the Obama camp was that they “denied that the conversation ever took place.” It seems pretty clear that if the Obama people hadn’t denied the story, the New York Times would have run my quotes.

A key point of my stories was how different Obama was from academics in his unwillingness to discuss things with those who held opposing views. In my own case, Obama would just turn his back and walk away from conversations. Kantor noted that others had told her similar things. That was another reason my anecdotes were not crucial: “There was, frankly, a fair amount of other evidence, independent of the incident you told me about, that Sen. Obama did not engage much with conservatives/libertarians.”

LOPEZ: “Debacle” — isn’t that a wee bit of an exaggeration?

LOTT: This recovery has been the equivalent of a “dead-cat bounce.” Thirty-five months into the recovery and the unemployment rate is still above 8 percent. But what is worse, the drop in unemployment has largely been from people giving up looking for work and leaving the labor force. People can stop being counted as unemployed either because they get a job or because they give up looking for work. Unfortunately, while 1.9 million jobs have been added during the recovery, 7.7 million more Americans are now classified as “not in the labor force.”

But are Obama’s policies responsible? That is the main issue of our book. We provide a lot of evidence on this, but compare Canada and the United States. Canadian and U.S. unemployment rates increased in lockstep from August 2008 until six months later, in February 2009, when the stimulus was passed in the United States. During those six months, the U.S. unemployment rate rose by 2.1 percentage points, from 6.1 percent to 8.2 percent, the Canadian by 1.9 percentage points, from 5.1 percent to 7 percent (using the Bureau of Labor Statistics measure to make the Canadian measure of unemployment comparable with the U.S. rate).

The graph that we have showing how much worse our economy performed after that is striking. Right after the U.S. enacted the $825 billion stimulus, the unemployment rates quickly diverged. While the U.S. unemployment rate soared, the Canadian unemployment rate leveled off and then began to fall. By contrast, today, our rate has not returned to what it was when Obama became president.

This didn’t have to be. Government doesn’t just create new spending. The money has to come from someplace. When you move spending from where you or I or companies would have spent their money to where the government thinks that the money should go, you not only move around these resources, you move around the jobs associated with them. The problem is that people don’t instantly move from one job to another. That chaos created by the stimulus temporarily increases unemployment.

Not only has the stimulus made the economy worse, it has left us with a huge debt. The publicly held U.S. federal debt was $3.4 trillion by the end of 2000, shortly before George W. Bush became president, and by the end of his tenure eight years later, it had risen to $5.8 trillion. Publicly held debt excludes the money that the government owes to itself. Today, the publicly held debt has reached about $11 trillion. Obama has almost succeeded in doubling it during just three years. For a family of four, that means their share of the federal debt went from $87,000 to $140,000. If Obama remains president for a second term, assuming no new pet projects or other changes, Obama’s own projections from this year’s budget predict that each family’s share of the debt will reach a whopping $186,000 by October 2016.

LOPEZ: Is the “debacle” partially President Bush’s fault?

LOTT: Yes, as we mention in the book, Bush and Republicans share some of the blame. Just as Bill Clinton had done before him, Bush put pressure on mortgage lenders to make loans that made no sense. For example, in 2003, Bush said: “This administration will constantly strive to promote an ownership society in America. We want more people owning their own home. It is in our national interest that more people own their own home. After all, if you own your own home, you have a vital stake in the future of our country.” Although he did not enact a lot of new programs, he also surely didn’t work to remove existing ones. Other Republicans, such as Larry Lindsey, were instrumental in putting pressure on the banks.

But just as bad, Bush overreacted to the financial crisis in 2008. The bailout was harmful, and it provided the funds that Obama then used to create massive wealth transfers to the United Auto Workers. Bush’s push to force financial institutions to take bailout money opened the door for Obama to force those companies to give up their rights as bondholders in the General Motors and Chrysler bankruptcies.

That said, the criticisms that Obama raised against Bush back in 2008 look laughable today — that government spending had grown too quickly and that the large deficits were responsible for the economic crisis. Obama also appears to have learned nothing from the mortgage meltdown.

Just days before Christmas of 2011, the Obama administration gave Bank of America a big lump of coal, levying a hefty $335 million fine on the company for discriminating against minorities in its lending practices. Supposedly Countrywide, a mortgage company bought by Bank of America in 2008, had not given enough low-interest-rate loans to minorities from 2004 to 2008.

But what the president sees as discrimination in awarding a mortgage, lenders saw as wise business decisions. If a borrower can’t afford a down payment, Obama appears to view charging a higher interest rate as discrimination. Lenders also think that they shouldn’t treat borrowers whose sole source of income is welfare or unemployment insurance the same as those applicants who have a job. But Obama, again, appears to view this as discrimination.

There is obviously a problem with no down payments: If the price of the house falls, so that it is worth less than the loan, people will default and walk away. Similarly, when unemployment insurance or welfare runs out, borrowers might find they can’t keep paying their mortgage. Just as with Clinton and Bush before him, Obama may want to have everyone own a home, but there are real problems with forcing mortgage lenders to pay for his altruism.

LOPEZ: Just how bad is President Obama’s economic record?

LOTT: This has been the worst recovery on record. It has been the slowest GDP growth in a recovery, including the recovery following the Great Depression in the 1930s. Growth last year was less than half what the Obama administration promised.

If you look at job growth, the picture is even worse. During the first 35 months during this recovery, actual job growth using the Bureau of Labor Statistics Household Survey has been less than 1 percent. The six other recoveries since 1970 have enjoyed an average growth of 7 percent (a 9 percent increase in jobs after severe recessions and just a 3 percent increase after mild ones).

LOPEZ: How has it been harmful to states?

LOTT: When President Obama signed his economic-stimulus plan into law on February 17, 2009, he promised that it “includes help for those hardest hit by our economic crisis” and that “as a whole, this plan will help poor and working Americans.”

But the newest data on how the stimulus money was given out across the 50 states and the District of Columbia show a perverse pattern: The states hardest hit by the recession actually received the least money. States with higher bankruptcy, foreclosure, and unemployment rates got less money. Lower-income states also received less.

Rather than helping out those in the toughest shape, the government sent the most money to more heavily unionized states.

According to the Obama administration’s website Recovery.gov, a total of $504 billion of federal contracts, grants, and loans to states and territories was awarded between February 17, 2009, and December 31, 2011. The amounts vary a lot across states, with the very lowest at $978 per capita in Virginia and the highest at $2,495 per capita in Alaska. The District of Columbia is the real winner at a whopping $7,603.

The transfers to the states having the least economic problems were large. The following relationships were statistically significant:

– Each additional $1,000 in a state’s per capita income resulted, on average, in the state’s getting $86 more per capita in stimulus funds.

– States with higher bankruptcy rates got less, not more, money — roughly $67 less per person for each percentage-point increase in the state’s bankruptcy rate.

– For each one-percentage-point fewer people suffering foreclosures, the state gained $59 more per person.

– Each one-percentage-point reduction in a state’s poverty rate was associated with $30 more per person.

– Right-to-work states got about $270 less per capita, and each ten-percentage-point reduction in the percent of a state’s workforce represented by unions saw a $1.6 billion drop in stimulus dollars given the average state.

On the other hand, states that had higher unemployment rates got almost exactly the same amount of money as states with lower rates.

The stimulus money may have failed to go to the states the president promised, but a clear pattern does emerge. Stimulus dollars were highly correlated to which political party controlled the state: Having an entirely Democratic congressional delegation in 2009, when the bill passed, increases the per capita stimulus that the state receives per person by $460. In addition, the states that Obama won by the largest margin in 2008 got the most money.

LOPEZ: Should stimulus be hung around this Democratic ticket’s neck?

LOTT: Congressional Democrats voted for it and the president fought for it and signed it. They held the press conferences to take credit for the money being given out. Of course they are responsible.

LOPEZ: How do we communicate that?

LOTT: People know that Obama’s repeated promises to grow the economy have been broken time and time again. People know that Obama promised that the stimulus would keep unemployment below 8 percent, but what is missing is an explanation for why the stimulus raised unemployment and made this the worst recovery on record.

I think that people understand that the money the government spends has to come from someplace. They also can easily understand that when you move resources from certain companies to others that the government favors, you move jobs between those companies and that people won’t instantly move from one company to another.

The false claims by the president and others, such as Nancy Pelosi, that unemployment insurance and food stamps are stimulative can also be easily explained. The argument is that poor people spend all their money but wealthier individuals don’t. But everyone really spends his money directly or indirectly. You put your pay check in the bank and spend some on food, housing, car payments. The rest, though, really doesn’t just sit there in the bank. Banks buy bonds or lend the money out to people. The government’s redirecting of money doesn’t increase spending, it just changes who is doing the spending.

There is always some excuse. That they made these predictions before they knew how bad the economy really was (false). That the Japanese earthquake or the economic crisis in Europe was at fault (though the economy had slowed long before those things took place). The list of claims is quite long.

We wanted to put together a book that explained how the stimulus made the economy worse, provide evidence for that claim, and explain what could be done to increase growth.

LOPEZ: “Regulatory thuggery”: Isn’t that more unnecessary rhetorical thuggery on your part?

LOTT: No, it is not just journalistic hyperbole. The government has strong-armed companies to get what the president wants. Financial institutions were forced to take bailout money, then the Obama administration used that leverage to make these financial institutions give up their rights as bondholders in General Motors and Chrysler. These bondholders should have been at the front of the line to get their investments back but ended up getting just pennies on the dollar.

There were the threats of firing CEOs who had the audacity to oppose government plans. When those threats didn’t work, there were threats to use “the full force of the White House Press Corps [to] destroy [the firm Perella Weinberg’s] reputation” if it resisted the government’s stealing of its money, according to Thomas Lauria, who previously represented the firm. ABC News’s Jake Tapper reports that Steven Rattner, Obama’s car czar, made the threat.

The White House pushed hard to nationalize the automobile companies. While bondholders and the government had lent similar amounts to GM and Chrysler, the White House felt that the government should get 70 percent ownership of GM and the creditors only about 10 percent. If a company was worth less than what creditors had lent it, the creditors would normally get 100 percent, not 10 percent, of the company.

Politically favored unions received stock and other benefits that should have gone to the creditors. For GM, that amounted to $6.5 billion in preferred stock paying a 9 percent dividend, $2.5 billion in debt, 17.5 percent of the new company, and future warrants allowing purchase of another 2.5 percent. The United Auto Workers was originally going to get GM stock, but it decided that GM’s future was simply too risky. In Chrysler’s case, the UAW ended up owning 63.5 percent.

Quite a deal for the unions, given that the alternative, bankruptcy, would have normally meant that the unions wouldn’t have gotten all these payouts, and their labor contracts also would have been invalidated. As the Washington Post noted at the time, for workers already at GM, “union concessions were ‘painful’ only by the peculiar standards of Big Three labor relations: At a time when some American workers are facing stiff pay cuts, UAW workers gave up their customary paid holiday on Easter Monday and their right to overtime pay after less than 40 hours per week. They still get health benefits that are far better than those received by many American families upon whose tax money GM jobs now depend. Ditto for UAW hourly wages. . . . Cumbersome UAW work rules have only been tweaked.”

LOPEZ: You guys want a president to “never raise taxes (ever).” That’s not responsible, is it?

LOTT: The Taxpayer Protection Pledge is a simple written commitment by a candidate for office that he will oppose and vote against any and all efforts to increase taxes. No net tax hikes. Tax reform that is revenue-neutral, say, eliminating deductions or credits and reducing marginal tax rates on a dollar-for-dollar basis, is fine.

Americans currently face the highest corporate-income-tax rates in the world. Our tax rates are almost twice the average rate in the EU. If a company invests in Canada, it gets to keep 14 cents more of every dollar that it earns than if it invests in the United States. We also have one of the higher individual-income-tax rates.

There are hundreds of trillions of dollars in international capital markets trying to find where they can get the highest rate of return. If you want to attract some of that, reduce our tax rates so that they are more competitive. More investments will increase worker productivity and raise wages.

If you want to control the deficit, cut government spending. When Obama ran for president in 2008, one promise that he made over and over again was to make government smaller. He blamed the problems that we faced in 2008 on the deficits and he said that they were a result of the large increases in government spending. It is hard to believe, but, during the third presidential debate, less than three weeks before the election, Obama promised: “But there is no doubt that we’ve been living beyond our means and we’re going to have to make some adjustments. Now, what I’ve done throughout this campaign is to propose a net spending cut.”

But instead of cutting spending, he took a hard left turn: overseeing a massive 21 percent increase in federal-government spending from 2008 to 2011 and creating the largest deficits that the United States has ever seen. If instead he had kept his promise and cut 2008 spending levels back to, say, 2007 levels, there would have been almost no deficit this last year.

LOPEZ: Is there anything in your twelve steps the Occupy movement can get behind?

LOTT: Probably not. The Occupy movement wants even more government spending, more regulations, and an increase in taxes. They also want the taxes to be even more progressive.

LOPEZ: Is there a “war on women” in economic policy today?

LOTT: There is no “war on women” being waged by Republicans. The assertion that there is is a cynical ploy, one that can work only if women and the Catholic bishops don’t understand really basic economics. Obama claims that mandating free coverage for abortions and contraception would lower health-care costs — a sort of win-win. But there is an obvious problem here: If offering free abortions and contraception really did lower health-care costs, why would government have to mandate such coverage? Insurance companies would all try hard to sell coverage that would both lower their costs and give patients more services at the same time.

There is a simple reason for the fact that a $10 pack of condoms isn’t covered 100 percent by insurance. Suppose the $10 were completely reimbursed; the cost of insurance would then go up by more than $10. The $10 increase is obvious, since if the insurance has to pay out $10, they have to charge $10 more for insurance. More paperwork means even higher costs. Someone has to check the forms to make sure that there is no fraud and give the reimbursement approval. It doesn’t make any sense for insurance to cover low-cost items.

Nor does it make any sense for insurance to cover something that everyone is going to use. If everyone buys contraceptives, there is no risk. People give the money to the insurance company only to get it back and have to reimburse the insurance companies for handling the paperwork.

Everyone wants free everything. Offering free contraceptives is an obvious ploy for female voters, but for it to work, women have to believe that they can get something for nothing. This has been Obama’s strategy for Obamacare all along. He’s always promised lower insurance costs while mandating all sorts of new coverage.

Yet, even if Americans don’t understand economics, they need only look at Obama’s broken promises to lower insurance costs.

LOPEZ: Are Americans ready for entitlement reform?

LOTT: We have already mentioned the huge increase in debt over just the last few years. But what lies ahead is even scarier: Some economists estimate that, at their current value, our obligations are about $200 trillion. The longer we put off dealing with this problem, the worse things will get.

Interest rates right now are at historical lows. Each one-percentage-point increase in interest rates adds over $110 billion to the deficit. What is a huge deficit right now can quickly spiral out of control. Just look at Greece and Portugal. Too much debt makes lenders worried. That increases the interest rate, which in turn makes the debt even harder to pay off. A vicious circle can easily get started.

LOPEZ: Isn’t the economy inevitably going to get better this year and the president will get reelected?

LOTT: The economy will undoubtedly continue to grow slowly this year. And you are probably right that Obama will claim that that will justify his reelection.

John R. Lott Jr. is a FOXNews.com contributor. He is an economist and the author of "More Guns, Less Crime." He is co-author of the just released "Debacle: Obama's War on Jobs and Growth and What We Can Do Now to Regain Our Future” (John Wiley & Sons, March 2012). Follow him on Twitter@johnrlottjr.

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