Biden Must Avoid Obama’s Mistakes on the Economy
(Bloomberg Opinion) - Polls show Joe Biden is now the strong favorite to win the presidential election. If his lead continues until November 3, he will be on the right track to inherit an economic crisis similar to that he faced as Vice President 12 years ago. That said, he'll also come across the same trap that the Obama administration has caught - the danger of focusing on the immediate crisis but neglecting the recovery.
President Barack Obama's success - hand in hand with Fed chairman Ben Bernanke - in containing the damage caused by the global financial crisis has prompted many commentators to overestimate his record of coping with the following major recession. Under the leadership of Treasury Secretary Timothy Geithner, the Obama administration developed various measures to save the financial sector. Had this not happened, the Great Recession would have been as deep as the Great Depression.
As a result, however, the administration has done little to promote economic growth. The American Recovery and Reinvestment Act, whose main incentive effort, was arbitrary and small in design compared to the scale of the crisis. As part of TARP (the Troubled Asset Relief Program, passed under President George W. Bush but implemented by Obama), Congress wrote a $ 700 billion blank check to save the banking system, but the Obama- The government only asked for $ 787 billion in spending and tax cuts to rebuild the economy. Many of them were aimed at state and local governments, but were so narrowly defined that their recipients found it difficult to find qualified projects.
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Even worse, even though the US economy had been caught in the long-feared liquidity trap - a state in which short-term interest rates could not stimulate enough investment even at zero - the administration did little to boost private investment spending.
Geithner and Obama quickly turned to increasing taxes and regulations through extensive health care reforms and an aborted attempt at ceilings and trade. It is clear why they wanted to do these things: they had a narrow window with sky-high approval rates and a Filibus-proof congress; They didn't want to miss their opportunity. They wanted to achieve important political goals.
However, this policy had a negative economic impact. They increased the costs and uncertainties associated with new investments and made it difficult for the Federal Reserve to boost private business.
Then, in 2011, Obama turned to reducing the deficit prematurely. This could have been something he really wanted to do deeply, or he could have been motivated by the tea party movement. I guess it was both. In this case, he overestimated the impact of the Tea Party on the fundamental priorities of the Republican legislature.
The government took a tough brinkmanship with the Republican Congress. Again and again, as the clock slipped repeatedly to the debt ceiling, Obama insisted on exchanging spending cuts for tax increases. When it emerged that this strategy was not sufficiently stress-inducing to make good use of the deficit, a third artificial crisis in the form of the Sequester was evoked.
These efforts depressed economic demand directly by increasing taxes and cutting spending, and indirectly by bringing political uncertainty to an unprecedented level. As a result, the recovery was slower and more uneven than necessary.
If he becomes president next year, Biden will have to go in exactly the opposite direction. Big plans to restructure the economy must be put on hold. All further incentive efforts must focus on increasing long-term investment. Above all, since the US can borrow at a negative real interest rate for 30 years, Biden should recognize that the deficit can wait.
There will be no reason to raise taxes for Americans as they have trouble reconciling their lives after the coronavirus crisis wears off. Even efforts to cope with long-term spending increases that will ultimately have to be undertaken will inevitably lead to further slowdowns, peaks in uncertainty and declines in investment.
A decade ago, the Obama administration neglected the economic recovery in favor of long-standing priorities. This was a mistake that slowed the recovery and reduced the economic fate of a generation. Business cannot afford to have President Biden make the same mistake.
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president of federal policy at the Tax Foundation.
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