Obama’s Reasoning

Seems a lot of folks are getting riled up over a column I just penned comparing and contrasting “Obamanomics” and “Reaganomics.” The gist of the negative sentiments is that Obama’s plan will produce a federal budget deficit that may never be repaid and government’s excessive involvement will be unduly harmful.

I understand. Recognize that I am a Tulane University-trained MBA – a program that teaches that the private sector is a better guide to economic prosperity than the public sector and one that professes that wealth cannot be multiplied by dividing it. But such teachings certainly do not preclude the need for government intervention during economic distress or when free markets unfairly tip the balance of power.

Reagan and Obama ostensibly have two different approaches during recessionary times. Reagan touted tax cuts while Obama is now pushing a mix of monetary stimulus (65 percent) and tax cuts (35 percent.) To be clear, President Reagan also injected billions into the economy during the 1982 recession – money that went to the defense sector. Obama, by comparison, is sending federal funds to infrastructure projects.

The critical question is this: Which pursuit will matriculate quicker throughout the very sick economy — a government infusion or deep tax cuts? During recessions, people save. Hence, the Obama administration’s thinking is that people will pocket their tax cuts whereas the stimulus must be immediately spent under the rules.

If you disagree with this thinking, you are not alone. One Energy Central colleague, Mike Smith, expressed to me that Reagan’s goal was to win the Cold War. “He believed in the power of the U.S. economy and on that basis felt that if we invested enough in defense programs that the Soviets would have to try to keep up with us, destroying their own economy in the process. Score one for capitalism and freedom.

“Today we see a program that is based on blind ‘hope’ in a process that has been tried twice in history: in the U.S. in the 1930s and in Japan in the 1990s – the effect of both efforts was somewhere between ineffective and disastrous.” Smith, head of the Sierra Group, is concerned that Obama’s approach will make millions of people dependent on the government. It’s a model that he says has failed around the world throughout history.

Relax Mike. The U.S. won’t become a socialist country. Just the other day, Obama said that his administration would begin immediately to address the huge deficit by cutting some government programs and by eliminating earlier tax breaks for those making more than $250,000 a year. The president furthermore underscores the logic behind the recently enacted stimulus by saying that the federal government is on the only entity with the resources necessary to invest during such troubled times. We’ll see – in four years.

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