Obama Fails Economics 101

Three reality checks on Obama’s Monday presser.

President Barack Obama’s weekend proposal to raise $1 trillion in new taxes over ten years in the wake of a spike in the unemployment rate illustrates why the American economy won’t arise from its three-year rut anytime soon. Present leadership is incapable of leading us out of the morass because present leadership doesn’t understand basic economics.

With the American people against both massive tax increases and raising the debt ceiling as solutions to the debt problem, President Obama faces an impasse in budget negotiations that has as much to do with his Republican bargaining partners as it does with the electorate he will face next year. The president’s economic illiteracy is matched by a political tin-ear.


If the 9.2 unemployment rate or the dubious record of deficits for every month of the Obama presidency isn’t compelling enough evidence of the administration’s ineptitude, then Monday’s presidential press conference provided damning proof of it. Therein, the president mouthed several economic clichés that underscore that he lacks a fundamental understanding of how markets work.

What did the president specifically say in Monday’s press conference that merits a reality check?

Myth # 3 The Stimulus Worked

“I’m absolutely convinced,” the president maintained Monday, “and the vast majority of economists are convinced, that the steps we took in the Recovery Act saved millions of people their jobs or created a whole bunch of jobs.” Alas, there is no economic formula that can accurately gauge whether a particular bill “saved” a “whole bunch” of jobs. Yet, the “saved or created” language persists, with the “saved” verbiage a tacit admission that the government hasn’t created very many jobs. Regarding the jobs the Recovery Act actually created, they cost the government almost $250,000 per, according to a number crunch of Congressional Budget Office statistics. Infamously, the administration warned that the unemployment rate would eclipse 8 percent if Congress rejected its stimulus package. The bill passed—and unemployment surpassed 10 percent.

Myth #2 A Revenue Problem Caused the Debt Problem

The president spoke of “deficits and the debt” caused by “the recession and the crisis.” But the decline in economic activity explains only a small part of the debt’s story. Federal revenues peaked in 2007 at nearly $2.6 trillion. The estimate for revenues in 2011 is about $2.2 trillion. Though the revenue difference isn’t paltry, the missing $400 billion doesn’t go far to explain a deficit that is about $1.5 trillion more than it was in 2007. This period, which coincided with bailouts, the sedative stimulus, and ObamaCare, witnessed a massive spending increase of about $1.1 trillion.

Myth #1 The U.S. Will Default If the Debt Ceiling Isn’t Raised

President Obama warned Monday that “it is not acceptable for us not to raise the debt ceiling and to allow the U.S. government to default.” But the latter doesn’t follow from the former. Failure to raise the debt ceiling prevents additional borrowing. It doesn’t mean that the government runs out of revenue to pay its creditors. As the Cato Institute’s Michael Tanner points out, the federal government expects tax revenue to exceed $200 billion in August—enough to fully fund Medicare, make Social Security payments, provide military salaries, and service the debt. Failure to raise the debt ceiling will undoubtedly force politicians to make some tough choices. One presumably easy decision should Congress fail to raise the debt ceiling would be that $29 billion of August’s roughly $200 billion in revenue should pay the government’s creditors to avoid default.

The delusions are not just economic but political. “And part of what the Republican caucus generally needs to recognize is that American democracy works when people listen to each other, we’re willing to give each other the benefit of the doubt, we assume the patriotism and good intentions of the other side, and we’re willing to make some sensible compromises to solve big problems,” the president lectured Monday. “And I think that there are members of that caucus who haven’t fully arrived at that realization yet.” The words “sensible compromise” coming from the president who shut the opposition party out of the Recovery Act and the Affordable Care Act doesn’t seem credible.

Barack Obama doesn’t get it. He doesn’t get it politically despite the aftermath of a mid-term drubbing the likes of which a party hadn’t experienced in his lifetime. He doesn’t get it economically despite the three-year hangover that has followed a profligate spending binge.

If you don’t understand the problem, your chances of finding a solution aren’t going to be very high. Put another way, the man attempting an ill-thought-out “solution” becomes the problem, too.

Daniel J. Flynn is the author of Blue Collar Intellectuals: When the Everyman and the Enlightened Elevated America, forthcoming this fall from ISI Books. He writes a Monday column for Human Events and blogs at www.flynnfiles.com.