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An Obama Economy. David R. Henderson Research Fellow, Hoover Institution Associate Professor of Economics, Naval Postgraduate School. My Topics. One I was given: “The Obama economic path and what it means to consumers.”
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An Obama Economy David R. Henderson Research Fellow, Hoover Institution Associate Professor of Economics, Naval Postgraduate School
My Topics • One I was given: “The Obama economic path and what it means to consumers.” . One on web site: “Will there be a push to overcome gridlock, and will leaders take action to develop solutions to long-term challenges facing the economy?” . One in the program: “An Obama Economy.” I’ll do all three, in reverse order
Outline • The state of the economy. • Why Such an Anemic Recovery? • Short-term prospects • Effects of Obama’s Policies on Consumers • Long-term prospects
State of the Economy: Not Good • Average Annual Growth of real GDP since bottom of the recession in June 2009: 2.1% • Unemployment rate: 7.8% • Employment/Population Ratio: 58.7%. (Slightly below the 59.4% it hit in June 2009)
Why Such an Anemic Recovery? • Let’s Check the Usual Suspects: • 1. Aggregate Demand (Keynesian view) • 2. Structural Unemployment • 3. Rigid Wages
Caution: Expiration Date • Problem with all three explanations: The longer you go, the less plausible each of these explanations becomes. Keynes’s theory was not, as he labeled it, a General Theory. It was a short-run theory.
Unemployment: Two Big Policy Negatives • Minimum wage increase • .European-size extension of Unemployment Insurance Benefits
Minimum Wage • Minimum wage until July 2007: $5.15 • Minimum wage after July 2009: $7.25 • Inflation-adjusted increase in minimum wage, 2007 to 2012: 26%.
Effect of Minimum Wage on Employment • Paul Samuelson, 1973: • “What good does it do a black youth to know that an employer must pay him $2.00 per hour if the fact that he must be paid that amount is what keeps him from getting a job?” (Paul Samuelson, Economics, 9th ed. (New York: McGraw-Hill, 1973), pp. 393–394. • Estimated reduction in employment: 470,000 jobs or 0.3 percentage points
Unemployment Insurance Extension • Typically up to 26 weeks. • Extended benefits during recession, typically to 39 or 52 weeks. • This recession: 99 weeks. • Me on John Stossel: “That’s positively French.”
Effect of UI • 0.8 to 1.5 percentage points. • So, with minimum wage estimate of 0.3 points, the total is 1.1 to 1.8 percentage points. • Even assuming low end, the unemployment rate now would be 6.7 percent.
Regime Uncertainty Robert Higgs: What It Means Evidence: . Obamacare . Tax Policy . Dodd-Frank Also, “Certainty that it will be bad.”
The Short-Run Future Under Obama • Bleak. Unlike Clinton, Obama not good at schmoozing and not good at compromising. • Tax “the rich” more. Difference between rich and high-income. “High income taxes are not so much a tax on being rich as they are a tax on getting rich.” David R. Henderson But, Gridlock.
Gridlock Gridlock is usually good: Prevents more bad stuff. Good news: Obama won’t get his tax increase solely on high-income people, whom he mistakenly labels “the rich.” Bad News: Increasing Use of Executive Power. • Welfare Reform • HHS Secretary Sebelius: IPAB • Lybia
Dishwashers: Get Them before May 2013 • There’s a pretty good chance that your current dishwasher using 6.5. gallons in a load. In the future, only 5 gallons of water can be used in the course of washing dishes. Maybe the manufacturers can ramp up the intensity of spray? Think again: new “energy efficiency” standards require that they use even less energy. Less energy plus less water equals dirty dishes. Plus, the new energy standards will substantially increase the cost of the appliance, taking it out of the affordability range for elderly people and the poor. • Jeffrey Tucker, October 9, 2012
The Coming CAFE Average MPG Required by Year and Vehicle Type 2011 2012 2013 2014 2015 2016 Cars 30.4 33.3 34.2 34.9 36.2 37.8 Trucks 24.4 25.4 26.0 26.6 27.5 28.8
Trade with China • Trade is not war. • Both sides gain from trade.
Krugman on Trade If the rhetoric that portrays international trade as a struggle continues to dominate the discourse, . . . trade will be treated as war, and the current system of relatively open world markets will disintegrate because nobody but a few professors believes in the ideology of free trade. And that will be a shame, because for all their faults the professors are right. The conflict among nations that so many policy intellectuals imagine prevails is an illusion; but it is an illusion that can destroy the reality of mutual gains from trade. Krugman, Pop Internationalism, 1996.
Trade Creates Peace “Peace is the natural effect of trade.” Baron de Montesquieu , 1750 The higher the gains from trade between two trading partners, the lower the level of conflict between them. A doubling of trade leads to a 20 percent decrease in belligerence. In short, trading nations cooperate more and fight less. Solomon W. Polachek ”and Carlos Seiglie, “An Analysis of Dyadic Dispute.” 2006.
Effect of 1 Percentage Point Increase in Interest on Federal Debt • 1% times $10 trillion: $100 billion (2/3 of 1% of GDP)
Something’s Gotta Give • Spending • Taxes • Inflation • Default • My best guess: spending and default
How to Prepare • If I’m right. Save and small % of net worth in bonds. • If I’m only partly right. Save and somewhat larger % of net worth in bonds. • If I’m dead wrong: Diversify (which you should do anyway)
