The 'New York Times' Votes Big for Obama Economics

An 8,000 word story concludes that Obama is right on the economy and that McCain and Reagan are wrong.

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As economist Arthur Laffer told me a while back, Obamanomics "should be a fascinating economic experiment." To see just how fascinating, you should check out the big (nearly 8,000 words) New York Times Magazine story on Obama's economic agenda, though in the end I am not sure if it tells us more about Barack Obama or admirer and reporter David Leonhardt. From the comments of both gentlemen, one could easily draw the conclusion that, in the 21st century, it is up to government to create good-paying jobs and increase our standard of living. It is an amazing distillation of the inside-the-beltway/mainstream-media economic consensus. Let me try to fact-check this magnus opus the best I can:

1) During our conversation, Obama made it clear that he considered the deficit to be only one of the long-term problems requiring immediate attention, and he sounded more worried about the others, like global warming, health care, and the economic hangover that could follow the housing bust. Tellingly, he said that while he admired what Clinton did, he might have been more open to Reich's argument—even in 1993. "I still would have probably made a slightly different choice than Clinton did," Obama said. "I probably wouldn't have been as obsessed with deficit reduction."

Me: Obama and Leonhardt seem to be saying, "Sure the '90s were great, but they could have been even better had we done something completely different." (An Obama adviser recently said this to me almost word for word.) They are siding with Robert "Human Capital and Infrastructure Are Key" Reich and not Robert "Get the Deficit Down" Rubin. Indeed, the core of Obamanomics is a fascinating attempt to replay the 1990s, but following the Reichian path not taken by Bill Clinton. The first term of Obama will attempt to be the "Putting People First" Clinton term that never was because Clinton chose to cut the deficit instead.

2) [Democratic policy experts] agree that deficit reduction did an enormous amount of good. It helped usher in the 1990s boom and the only period of strong, broad-based income growth in a generation.

Me: When Clinton took office, the economy had already been growing for seven-straight quarters. In 1992, the economy grew 3.3 percent. And for Clinton's entire first term, the economy grew by 3.2 percent annually. It was after the 1997 capital gains tax cut—which Leonhardt does not mention and Clinton only reluctantly signed—that the five-year-old expansion accelerated into a boom at a time when history would argue it should have been losing steam. From 1997 through 2000, GDP grew 4.2 percent annually. As for the impact of Clinton's deficit reduction plan on interest rates, the whole "bond market strategy" didn't work. Interest rates fell at first on recession worries but then started to climb again. Long-term rates were 5.78 percent in October 1993 and moved steadily higher until Nov. 7, 1994, the day of the midterm congressional election, when they peaked at 8.16 percent.

3) But that boom also depended on a technology bubble and historically low oil prices.

Me: So the keys to the '90s expansion were lower deficits, a technology bubble, and cheap oil. Let me toss in another factor: Lower taxes in the 1980s, particularly those on capital gains, which led to an explosion of entrepreneurial activity. Look at just a few of the companies founded in the 1980s: Cisco Systems, Sun Microsystems, Adobe Systems, Dell. Others, like Microsoft, Oracle, and Apple, kicked into gear during that decade. And while there was a bubble in technology stocks, there was not a technology-led bubble in productivity, which increased by more than 2 percent a year from 1998-2004.

4) In the current decade, the economy has continued to grow at a decent pace, yet most families have seen little benefit.... From today's vantage point, inequality looks likes a bigger problem than economic growth; fiscal discipline seems necessary but not sufficient.

Me: A lack of economic growth is precisely the problem. During the 1980s, the economy notched 19 quarters of 3.5 percent GDP growth or better. In the 1990s, the economy also notched 19 quarters of 3.5 percent growth or better. So far this decade? Just eight. Or look at the number of quarters of "hypergrowth"—5 percent or better. There were 12 in the '80s, eight in the '90s. So far this decade? Just a single quarter: the third quarter of 2003.

5) Most families are still making less, after accounting for inflation, than they were in 2000.... Americans have still been buying such things, but they have been doing so with debt. A big chunk of that debt will never be repaid, which is the most basic explanation for the financial crisis. Even after the crisis has passed, the larger problem of income stagnation will remain.

Me: The year 2000 was the peak of a boom that Leonhardt partially dismisses as the result of one-off factors such as cheap oil and a stock market bubble. So I'm not sure why that is the proper baseline year for comparison purposes. More important, real incomes started rising briskly in 2003 after we shook of the effects of the post-bubble slowdown and business pessimism during the run-up to the liberation of Iraq. I also remember hearing something about a capital gains tax cut in 2003. Here is what real disposable personal income did from the first quarter of 2003 through the first quarter of 2007: 1.7%, 5.0%, 6.3%, 1.7%, 3.7%, 2.4%, 2.9%, 7.5%, (-4.7%), 2.5%, (-1.3%), 7.5%, 5.1%, 1.3%, 2.3%, 5.8%, 4.4%. Then the credit crunch hit the economy, an event that was the fault of government—the Federal Reserve.

6) The second criticism is that Obama's tax increases would send an already-weak economy into a tailspin. The problem with this argument is that it's been made before, fairly recently, and it proved to be spectacularly wrong. When Bill Clinton raised taxes on upper-income families in 1993, his supply-side critics insisted that he would ruin the economy. As we now know, Clinton presided over the longest economic expansion on record, the fastest income growth most workers had experienced in a generation and the disappearance of the federal-budget deficit.

Me: See answer No. 2 above.

7) History has shown that free markets aren't so good at, say, preventing pollution or the issuance of fantastically unrealistic mortgages.

Me: Actually, the environment is worse in places where markets and property rights don't exist. Anyone remember the Soviet Union?

8) Yet laissez-faire capitalism hasn't delivered nearly what its proponents promised. It has created big budget deficits, the most pronounced income inequality since the 1920s and the current financial crisis. As Lawrence Summers, the former Treasury secretary and Rubin ally from the Clinton administration, says: "We've probably done a better job of the last 20 years on the problems the market can solve than the problems the market can't solve. We're doing pretty well on the size of people's houses and televisions and the like. We're not looking so good on infrastructure and education."

Me: Amazing. We have a mostly government-run education system in this country, yet it's free markets and not government that are to blame for what Summers believes are lousy schools. I would also add that for all the criticism of U.S. education, we have somehow managed to end up with the most competitive and innovative economy on the planet. Of course, that is to the credit of the higher education system, which is more subject to market pressures.

Obamanomics. A fascinating experiment, indeed.