Five Economic Mistakes Obama is Making

To ensure long term prosperity, Obama needs to be smarter about tax cuts, stimulus spending, and his rhetoric towards business.

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3. Failure to Liberalize Markets

Before the financial panic of 2008-2009, the United States had less unemployment than most of the developed world. Many economists believe that this was because of the flexibility of U.S. labor markets. Flexibility means employers are free to fire workers without penalties, wages are not heavily regulated, tax rates are moderate, unions do not dictate work rules or hiring practices, and unemployment benefits are low.

[Check out the U.S. News Economic Intelligence blog.]

A consequence of flexibility is that unemployment rises during economic downturns. The U.S. unemployment rate briefly exceeded that of the European Union in 2009, but is now back below the European Union rate. While painful in the short run, labor market flexibility keeps employment high over the long run. Flexibility is also important in financial, product, and housing markets.

European countries are proposing significant deregulation of labor and other markets. Instead of stimulus, they hope that structural reform of their economies will produce growth. The U.S. economy has plenty of structural issues that could be addressed, such as the increasing number of occupations that require licensing, frivolous lawsuits, and red tape discouraging household employment.

Instead of structural reform, the Obama administration has proposed new restrictions on employers and has helped unions to reduce employer flexibility. At a time when many countries are improving their scores on indices of economic freedom, the United States is losing ground.

4. Demonizing Business

Nobel Prize winning economist Robert Lucas recently suggested that Franklin Roosevelt's demonization of business contributed in part to the long duration of the Great Depression. Anti-business rhetoric from the White House causes business to worry about future taxes and regulations, and to cut back on investment plans.

While Obama's rhetoric is less harsh than FDR's, he has given business cause to worry. He has talked of "fat cat bankers," wealthy people and Wall Street executives "makin' out like bandits," the "unchecked power" of insurance companies, suggested that "now's not that time" to make profits and bonuses, and said that his goal after the BP oil spill was learning "whose ass to kick."

Combined with new regulations on the healthcare and financial industries and constant talk of higher taxes on "the wealthiest," this rhetoric convinces businesspeople that if they invest and succeed, their profits might be taxed or regulated away.

[Check out our editorial cartoons on President Obama.]

5. No Long Term Plan

Probably the most serious shortcoming in Obama's economic strategy is the lack of a long term plan to reduce government debt. In his 2013 budget, the president claims to lay out a strategy to put "the nation on a sustainable fiscal path" but that same budget proposal contains supplemental materials forecasting that federal debt will eventually rise to nearly 200 percent of GDP, not including shortfalls in Social Security and Medicare which are even larger, according to the Treasury Department's own financial statement. Testifying before Congress, the president's Treasury secretary said, "You are right to say we're not coming before you today to say 'we have a definitive solution to that long term problem.' What we do know is, we don't like yours." Not only is there no long term plan, but the Senate, controlled by the president's party, hasn't passed an annual budget since 2009.

Businesses are understandably reluctant to invest at the moment, knowing that if debt isn't reigned in there must eventually be dramatic spending reductions, tax increases, inflation, or a default on federal obligations. If they at least knew which to expect, they would invest more.

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