Obama's wrong moves on the economy

With Congressional Democrats facing a November shellacking, President Obama is floating new programs to aid troubled homeowners and create jobs that will prove costly and ineffective.

Despite rock bottom interest rates, residential sales are at historic lows, and 2 million families face foreclosure this year because Americans need decent jobs to buy homes and pay mortgages.

With President Obama's $787 billion stimulus package at maximum force, his health care reforms inexorably socializing 19 percent of the U.S. economy and Wall Street revamping to met new financial regulations, the economy lost 54,000 jobs in August, the private sector added a mere 67,000 jobs, and unemployment rose to 9.6 percent.

Of new private sector jobs, 40,000 were in health care and social assistance — largely financed by government largess and federal mandates — while temporary services accounted for another 17,000.

Morici's index of core private sector employment — a measure I developed based on private sector jobs less health care, social assistance and temp services — was up a paltry 10,000. On an annual basis, that would be less than 5 percent of new high school and college graduates.

Now the president wants another $50 billion in infrastructure spending, stretched over six years and funded by cuts elsewhere. Though adding to construction and supply industry employment, cutting other spending would subtract jobs elsewhere.

Also, the president proposes repealing the Bush tax cuts for families earning more than $250,000 and using the money to create temporary tax credits for business investment.

What the President does not reveal is his policy would hike to 50 percent the marginal tax rates on enterprises that account for more than half of all small business profits — the very mom and pop enterprises he wants to hire the unemployed.

Restaurants and machine shops are not hiring because they don't have enough diners and factory orders. A modest temporary investment tax credit won't solve that problem, but new taxes and health care mandates could persuade small businesses to close shop altogether.

The history of investment and employment tax credits is that they only have modest immediate effects; then several months later, enterprises spend less — much like recent experience with cash for clunkers and auto sales and tax credits for first time homebuyers.

In the end, businesses build and staff with workers only as much capacity as the demand for what they sell will justify.

Demand for what Americans make is tanking thanks to a growing trade deficit with China instigated by trade agreements negotiated by President Clinton, and fear instilled by the Nancy Pelosi-era Democratic Party's obsession with taxes and regulations for businesses and personal behavior.

The president already has in place programs to help distressed homeowners behind on mortgages. Those aid too few families because banks can't rework mortgages for underemployed workers with low incomes, and the federal bureaucracy is so ineffective at implementing presidential policy.

Now the White House proposes that for homeowners who are up-to-date on payments but whose mortgages exceed value of their homes, banks and investors would forgive the equity gap and the Federal Housing Administration would back up new mortgages on the market values of those homes.

Wisely, banks and investors are reluctant to write off debt on performing loans — they may actually get out what they are owed in the long run. Banks are likely to hoist on to the FHA — and the taxpayer — only those homeowners they believe are likely to fall behind on payments soon.

It's another election year ploy that will blow up later because those new loans will fail and will result in much higher fees for honest FHA mortgages.

When Republicans point out the shortcomings of those proposed jobs and mortgage initiatives, President Obama will cast them as cynical defenders of the rich.

President Obama likes to claim conditions are better now than when he took over from President Bush, but things are getting worse, and this November voters elect a Congress (and potentially a new House speaker), not a president.

When House Speaker Nancy Pelosi and Democrats took control of Congress in January 2007, the federal deficit was $161 billion, and unemployment was 4.6 percent. Subsequently, Wall Street, with help from President Clinton's repeal of New Deal-era regulations, threw the economy into the Great Recession, and Speaker Pelosi and President Obama have since spent and regulated recklessly with few positive results.

If President Obama insists on teaching Americans economic history, his syllabus should give adequate attention to all the contributors to the catastrophe we now endure.

Peter Morici is a professor at the Smith School of Business at the University of Maryland and former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.

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