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2012 Election

Mythbusters #4: A Rebuttal


I’m always hoping for intelligent and challenging feedback to my articles, and I received an email from a good friend of mine who was happy to oblige me. This is not the first debate we’ve carried on by email – the one around the health care reform debate could have filled a small book – but it is the first one that I have the pleasure of including in Common Sense.

My friend, who describes himself as an independent libertarian and supports Mitt Romney, calls me out on a number of points:

This one is, how shall I say it, fairly biased and unfair. In fact, it’s actually incorrect and inconsistent.  Most notably by focusing on the Presidents in general and not which party controlled Congress during their terms, which is a fairly important.

It’s very difficult to give Obama the excuse of “inheriting an economy that was the worst since the Great Depression” and then not go and give Reagan the same credit for his first term from inheriting the worst financial crisis since the Great Depression at that time.

What’s more, it took Volcker and a supply side spend program to reverse the ridiculous inflationary spend policies of the Carter Administration that don’t get fixed in 1 year, as you have indicated is Obama’s 4 year excuse and continues to be an excuse we can expect for another 4 years.

Another issue with the article I found is that Obama is not like any other Democrat and definitely not like Clinton, who presided over a primarily Republican Congress most of his term and in fact even in Bush’s last year when the chaos hit the Dems were in control of Congress. But as I pointed out, these messes don’t occur in this short of a period.

Obama has built up vast infrastructures of governmental workers and departments that are where his new jobs have been created, not in the private sector but the public sector.  That is a much more dangerous SPEND than just merely giving it away to foreigners, which gets misconstrued in the Liberal biased media.  You can’t just stop the Government job structured spend overnight, it’s much more painful to cut that than to stop giving it to Israel or whoever.  I’m not promoting either, but wanted to point out it’s not just WHAT you spend; it’s HOW you spend it that can be damaging to the economy in the long-term.

Obama buys GM and even the company knows it must discard the government control ASAP. 25% of the GDP that he’s taking credit for has more to do with redistributing wealth than promoting business growth.  And spending $5T in 3 years and increasing this nation’s historical debt by 50% can’t continue to be blamed on the last 8 years of Bush, where the spend was $4T in those 8 years with economic growth.

In fact, if you take the borrowed spending out of the GDP numbers we would have very drastic REAL GDP reductions today suggesting we are still in the Great Depression 2. Even if I wanted to give Obama the bye on the current ridiculous state of the Economy we are all in now (just because it hasn’t collapsed doesn’t make it a recovery since I can spend $100k on a credit card and my neighbors will think I am wealthier than I am) nothing in his policies suggest he has a plan to fix it.  

And if you are one of the many getting giveaways, why in the world would you not vote for the guy that gave it to you?   They may not believe Obama is better for the country but he is better for them. So if buying the vote is seen as good, well then we have a President that has bought votes by taking the money from those that built the country.

Fair enough. There’s plenty of meat in this rebuttal and I’d like to go through it thoroughly. To summarize the points being made:

  1. Focusing on the link between the Executive and economic performance is biased, it should include the consideration of which party controls Congress;
  2. The parallel between the 2008-2009 Great Recession and the 1981-1982 recession, and the fact that Reagan and Volcker solved it in one year vs. four years and going for Obama;
  3. Obama has built up a vast structure of government jobs, rather than creating private jobs;
  4. Buying GM;
  5. Obama can’t continue to blame the Bush legacy;
  6. No Obama plan to fix the budget deficit or economy;
  7. Obama is buying votes through government spending on his social policies.

By the way, before publishing this portion of the article, I sent it to my friend for his approval. Although the phrasing of the summation is mine, it has all been reviewed and approved.

Common Sense’s reply

First of all, let me clear up a possible misunderstanding from the Mythbusters article. My point there was specifically to refute the fact that having a Democrat in the White House was bad for business or the economy by any objective measure NOT that Democrats were better for business or the economy the Republicans. The evidence doesn’t support either assertion over the time period studied (1976 to 2012).

I think that my analysis was both fair and objective precisely because Mitt Romney has chosen to run his campaign on the premise that having a Democrat in the White House is bad for business and bad for the economy. Furthermore, this has been a constant theme in Republican campaigns since Teddy Roosevelt’s time and before. So again, it is valid to demonstrate whether that myth is true or not.

1.   That being said, I do agree that who controls Congress during any given Presidential term will have a major impact on economic policy, particularly the House. So I went back and looked at the same data, and compared economic performance under the combinations of Executive and House that have resulted in the past 36 years. These are:

 There still doesn’t seem to be much evidence to suggest any superiority of one party over another in terms of gross economic performance. The best that can be said is that the country has historically performed better when different parties controlled the White House and House of Representatives, but only by the slenderest of margins, which I would argue, is not statistically significant and ascribable completely or almost completely to exogenous factors.

Thus the differentially good performance of the Democratic President/ Republican House combination can be mostly explained to President Clinton’s good fortune in presiding over a period of sharply falling energy prices and the take-off phase of the Third Industrial Revolution in the US. Although Vice President Gore unsuccessfully attempted to claim ownership of the internet, the fact is that these great waves in society are the fruit of long gestation periods and involve thousands if not millions of actors making tiny incremental changes to the economy. It is too vast and dynamic a system to be easily swayed by a single President or Congress.

2.    This segues nicely with the next point, which is to compare the Reagan and Obama – or should I say W Bush – recessions. All recessions are not created equal, so it is more than disingenuous to claim that Reagan solved his in a year, ergo Obama should have been able to solve his in a year too; otherwise he is incompetent.

For one thing, Reagan did not “solve” his recession. It was created by Paul Volcker, the independent Chairman of the Federal Reserve at the time, in order to combat the high inflation caused by the 1979 oil shock and an over-regulated domestic energy market that limited production and caused a three-fold increase in the price of oil,[1] and solved when he reduced rates again the following year.

Mr. Volcker raised the Federal funds rate from 8% in 1978 to a peak of 21% in 1981. The economy immediately nose-dived, as could be expected, contracting by more than 1% in 4th quarter 1981 and 1st quarter 1982. However, inflation also fell sharply, and by December 1982, the Fed Funds rate was back below 9%. The next four quarters saw annualized GDP growth between 5% and 9%.

President Reagan played his part in the recovery. The President famously cut taxes, which stimulated consumption at the same time that businesses were expanding their activities thanks to the steep fall in interest rates. Less famously, President Reagan presided over one of the largest expansions in Federal spending in history, surpassed only by the Second World War and the Great Recession. Federal spending averaged 20.8% of GDP during the Carter Administration. It surged to 22.8% of GDP under President Reagan’s first term (and average 22.1% during his second term).

To put things in perspective, President Obama’s “stimulus”[2] was composed of approximately $350 billion in tax cuts and credits, and $350 billion in new Federal spending over two years. President Reagan’s “stimulus” consisted of approximately $300 billion in tax cuts and credits and $600 billion in new Federal spending over a similar period, though the spending surge began before the tax cuts. It seems that Mr. Reagan was a much better Keynesian than Mr. Obama. President Reagan also created the biggest peacetime federal deficits in history until the Great Recession. So much for fiscal prudence.

To continue the parallel between the two recessions, not only was President Reagan’s stimulus larger than the 2009 ARRA, the Federal funds rate was already at 0.15% in January 2009 when President Obama was inaugurated. Contrast this with the situation in 1983, when the Fed was able to drop interest rates by more than 10% over the course of a year.

Finally, it is important to differentiate between the natures of the two crises. In 1981, President Reagan and Chairman Volcker were facing a deep recession which was deliberately provoked by the Fed to combat inflation. A highly contractionary monetary policy was in place; when it eased, business investment and growth resumed. Furthermore, neither government, businesses nor consumers were overburdened by debt: the nation’s debt to GDP ratio was 32% when Reagan took office (and 51% when he left it). This meant that government had the means to apply fiscal expansion without “crowding out” private investment[3], while both consumers and businesses were able to borrow and spend freely in response to the stimuli applied.

In 2009, President Obama inherited a vastly different situation. The nation’s debt to GDP ratio was 80% (having been 57% when President W Bush took office). Also, the recession was not caused by a contractionary monetary policy – quite the opposite. One of the factors fueling the credit bubble had been the low interest rates during much of President Bush’s term. Consumer and business debt had risen to historic levels, thanks to this cheap money, and the bursting of the bubble left consumers with extraordinarily high levels of debt and a sharp decline in the net worth of the underlying assets (mainly residential properties).


Under these circumstances, it is clear that the first priority of both consumers and businesses was to deleverage and reduce their debt overhang. For this reason, the traditional policy response of tax cuts was sure to fail: rather than go towards consumption or investment, the additional money went to debt repayment, which had no effect on economic growth.

Clearly comparing these two recessions is an apples to oranges exercise. It would be far more appropriate to compare 2008 with 1929, given that the Great Depression also began as a speculative real estate bubble.

3.    The claim that President Obama’s Administration has been compensating for the poor performance of the private sector to create jobs by a vast expansion of the federal bureaucracy is not only false, but so grotesquely false as to be unbelievable. The data is so stark and obvious on this point that it is hard to believe that it can continue to exist and be given credence.

The Federal Government hired 70,000 new workers in 2009 while the private sector shed 5 million jobs. That’s less than 1% of the jobs lost, hardly what can be considered a “vast expansion” of anything, much less an attempt to compensate for the private sector. In 2010, government hiring increased to 145,000,  but almost all of these jobs were temporary positions related to the decennial census. It happened in 2000, in 1990, in 1980, etc… It was not an Obama phenomenon. In the same year, the private sector created 8 times as many jobs as the Federal government, over 1 million. In 2011, the Federal government shed 119,000 employees. Government got smaller. Contrast this with 1.8 million new private sector jobs.[4]

As of May 2012, Federal employment has contracted by another 17,000 employees while the private sector added 832,000 new jobs.

It is hard to understand how this myth is perpetuated other than to reflect upon the statement of Joseph Goebbels, Minister of Propaganda under the Third Reich: “If you tell a lie big enough and keep repeating it, people will eventually come to believe it.”




4.    The government’s decision to nationalize General Motors was certainly a debatable one from the point of view of economic theory and laissez faire orthodoxy, but from the CBO’s point of view, the decision saved over a million American jobs. Given that the Bush Administration had already bailed out most large US financial institutions, it becomes highly hypocritical to blame the Obama Administration for bailing out the auto industry. Either blame both or neither.

Just to put things in perspective, the Obama Administration’s decision to bailout GM and Chrysler involved approximately $80.1 billion out of $85.1 billion authorized, with about $2.3 billion paid back (mostly from Chrysler). President Bush bailed out AIG with $70 billion; direct capital purchase of failing banks amounted to 294 institutions and $205 billion; another $45 billion to Citigroup and Bank of America in addition to the $40 billion received in the aforementioned capital purchases. And all of that was only through the TARP act. It doesn’t include actions by the Federal Reserve or FDIC. Here’s a list of the US financial institutions that received over a billion dollars in capital infusions (which is the same as nationalization once the percentage of public capital exceeds that of private capital)[5]:

5.      Another key tactic of the GOP is to deflect criticism of the awful Bush Administration from their party by trying to wrap it in the mists of time, as if it were closer to the Ulysses Grant Administration than our own times. It is a clever and reasonably strategy, since most Americans would rather judge each Administration on its own merits, but it is nevertheless deceptive.  What exactly are the Bush Administration’s legacies?

 a.     When President Bush entered office, he inherited a fiscal primary surplus and a national debt-to-GDP ratio of 57%. When he left office eight years later, years of budget deficits had turned the surplus into over $4 trillion in deficits (yes, that’s trillions, not billions) and ballooned the national debt-to-GDP ratio to 80%. Part of those deficits came from off-budget expenditures, such as the wars in Iraq and Afghanistan which were funded by borrowing money (from China, which apparently Mitt Romney detests) almost $1.5 trillion;

b.    Just the 2001 and 2002 tax cuts themselves cost the government $1.7 trillion between 2001 and 2008. At the start of his Administration, President Obama did not consider it wise to raise taxes while the country was still deep in recession. The decision to keep the Bush tax cuts in place until 2010 cost the government another $711 billion. After the mid-term elections, the House Republicans would make no budget deal that raised tax rates, which has cost the government and additional $1.0 trillion. So the Bush legacy of tax cuts perpetuated by the GOP, even after the President recommended raising rates on the wealthiest families, has added $3.4 trillion to the national debt;


c.     Another $1.4 trillion came from the wars in Iraq and Afghanistan, mostly Iraq (about 63%)[6]. President Bush invaded Iraq on a highly debated pretext of “weapons of mass destruction” and non-existent links to Al Qaeda: both charges were proven to be utterly false. Far from being a 60 day campaign of “Shock and Awe”, the Iraq fiasco turned into a quagmire of urban warfare, sectarian violence, police actions, garrison duty and ambuscades for which the US military is not designed and which largely negate the inherent advantages in technology and communications enjoyed by our forces. Much of this was predictable and had been predicted by experts and allies. The misguided focus on Iraq was passed on to President Obama, who was only finally able to extract the United States from the country in 2011.

Furthermore, the ripple effects of the Bush Administration’s decision to disregard international law and prudent counsel are incalculable. For one, the decision to focus on Iraq rather than Afghanistan almost certainly allowed Osama bin Laden to escape from Tora Bora and allowed the Taliban years of breathing room to recuperate in the tribal regions of Pakistan. The destruction of Iraq also created a huge power vacuum in the Persian Gulf into which naturally stepped the region’s most powerful state, Iran. President Bush’s blatant disregard for international law, his loudly stated intention to “pre-empt” threats to the United States (even non-existent ones) and his early and persistent identification of Iran as part of the “Axis of Evil” which would be cleaned up by the US in due course, also undoubtedly contributed to the Iranian decision to accelerate what was a then slowly moving nuclear program.

d.     Finally, the financial crisis itself was exacerbated by Bush Administration policies, both in the years before the crisis and during 2008. The much lauded tax cuts of 2001 and 2003 did very little to create jobs or revitalize an anemic economy, but they did increase the pool of money pursuing ever more speculative opportunities in real estate and asset backed derivative securities. This combined with the “cheap money”  policies of Federal Reserve Chairman Alan Greenspan and with expansionary spending policies from the Bush Administration to create the largest bubble in our economy since 1929 and drive consumer and business  indebtedness to new heights.

6.     To the charge that Obama has no plan for “fixing” the economy, I will only respond by observing how ironic it is that the most vehemently laissez faire and monetarist people should talk about government not doing enough to “fix” the economy. Isn’t the economy supposed to “fix itself” according to their theories? If Obama has no plan, then he must be a die-hard free market supporter, which is precisely what Republicans want…isn’t it?

I’m not, of course, suggesting that he has no plan. You can look at the White House websitefor all the details. Mr. Obama’s plan revolves around:

  1. Boosting manufacturing through tax credits, more free trade agreements coupled with stricter trade enforcement and infrastructure investments to enhance competitiveness;
  2. Pursuing energy independence and energy jobs through an “all of the above” strategy which supports all sources of domestic energy including natural gas, oil, and renewables as well as investing in improved energy infrastructure and improving energy efficiency;
  3. Improving work force competitiveness and productivity through enhancement of education, including a reform of federal student aid efforts, and initiatives and incentives for top-performing institutions aswell asprograms to move successful innovations across institutions.

Whether these reforms and initiatives are the right ones, in the right priority or even enough to get the job done is open to debate. But they exist, they are budgeted for and they are being implemented, which is more than can be said for Mr. Romney’s slash-and-burn tax proposals, which use ample amounts of “magic numbers” that defy the laws of arithmetic to balance the proposed tax cuts with the announced deficit reduction goals.[7]

7.      Obama is buying votes with his social programs. Well, every politician has a constituency and every politician caters to that constituency in order to perpetuate themselves in power. Mr. Romney has a constituency that includes very wealthy American families, so he “buys” their votes by promising them additional tax cuts that the country can’t afford while accusing the current President of fiscal profligacy.

Disregarding for the moment the accusation of vote buying, which is a criminal offense and a gross exaggeration, I am nevertheless in complete agreement that campaign finance and general electoral reform are vitally important issues to our democracy. Treating for profit and not for profit corporations or groups as having political personhood makes no sense whatsoever, and has no Constitutional basis that I can find[8]. To the right’s charge that corporations should be allowed to donate and spend money in campaigns if unions are allowed to, I would answer that unions should not be allowed to do so either. I provide more detail on this issue in my article “Building Support for the 28th Amendment.”

Total spending by outside groups (regular PACs, “Super-PACs”, 501c corporations, individual expenditures-not contributions) has ballooned to $617 million, which is more than twice the amount spent in the 2008 general election ($280 million), which in turn was 1.5 times as much spent in the 2004 general election ($189 million).[9]


Additionally, the candidates have raised more than $865 million in funds for the Presidential race alone. The total cost of these elections is estimated to reach $5.8 billion between all political expenditures in Presidential and Congressional elections.[10]

It is very hard to believe that such impressive amounts of money come with “no strings attached” for either candidate. Such a flood of money when added to gerrymandered congressional districts, to offices without term limits, and to an increasingly distant and diffuse representation of the electorate[11] has important implications for the responsiveness of government and the opportunity for corruption. It is perhaps disconcerting that incumbents have been reelected at least 80% of the time since 1990 (my last data point)[12] even in years of “sweeping change” like 2010, 2006, 1992, and that the reelection rate is usually closer to 95% or more. This institutionalization of power is a key reason why glaciers move faster than Washington does on most issues.

Sources and notes

[1] Indeed, the rate of quarterly change in the Consumer Price Index, a key measure of inflation, had been increasing since 1968 in response to the large increase in government spending during the Vietnam War and again in 1973 in response to the First Oil Crisis during the Yom Kippur War. Inflation never really fell back to the pre-1968 levels when the Second Oil Crisis struck in 1979-1980, and caused it to surge to new heights (+4% in the first quarter of 1980 alone), prompting Chairman Volcker’s actions.
[2] The 2009 American Recovery and Reinvestment Act
[3] Many economists use a rule of thumb of 60% debt to GDP before government borrowing begins to crowd out private investment
[4] Bureau of Labor Statistics, extracted June 2012
[5] Goldman, David, “CNNMoney.com’s Bailout Tracker,” CNNMoney.com, as of 16 November 2009
[6] Belasco, Amy, “The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11,” Congressional Research Service, 29 March 2011
[7] To be fair, and I should emphasize that I’m not trying to be, most challengers resort to vagueness and opacity; incumbents are not as able to take advantage of this as they have already been in office and are supposed to know the numbers. That said, there is no reason why challengers shouldn’t know the numbers also, given the immense amount of publically available and reliable data that exists.
[8] Full disclosure: I’m not a lawyer and I’m not a Constitutional scholar, but I can read the document and Supreme Court opinions as well as the next concerned citizen. Corporate personhood has a long history and was invented to allow corporations to conduct vital business, such as owning property and representing their owners in court. Allowing corporations to have political personality is a very modern invention and has no basis in the Constitution, which is exclusively a compact between the individual citizens of this country to form a government and to determine which powers and rights to cede to the same. You can scan the Constitution, the Bill of Rights and the Declaration of Independence (our three Charters of Freedom) and you will not find “corporation” or “company” mentioned a single time.

The argument made in Citizens United v. FEC 2009 that corporate political speech is protected as freedom of speech in the First Amendment is utter rubbish. Patently so, since that Amendment reads:

“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

This is clearly an enumeration of individual rights. Do corporations have religion? No, only individuals do. The rights of peaceful assembly and petition for redress are specifically ascribed to the people. Freedom of speech, therefore, like every other right in this amendment, is ascribed to the people with the specific and named exception of the press. And there is an abundant body of federal court and Supreme Court precedent which established the corporate “right of free speech” as being lesser to and distinct from the individual right of free speech. In fact, corporate free speech was much more heavily constrained and was expected to be business-related, as in advertising of products and services, and business-related communications. All that went out the window with Citizens United v. FEC.
[9] Outside Spending, Center for Responsive Politics, extracted on 10 October 2012
[10] Historical Elections, Center for Responsive Politics, extracted on 10 October 2012
[11] The United States Constitution (Article 1, Section 2, Clause 3) establishes the apportionment of the House of Representatives as, at a minimum, one representative per state and not to exceed one per 30,000 voting citizens. The Congress itself decides the total number of House members within those two limits, and has been regularly done so over the years until 1911, when the number was fixed at 435 representatives (except for a brief increase to 437 between 1959 and 1963). That means that the proportion of voting citizens to their representatives has been steadily diluted from 1:30,000 to approximately 1:700,000 now. This has obvious implications for responsiveness and responsibility of congressional representatives to their constituents. It also has obvious implications for the power of each individual Representative in the House, which is undoubtedly a reason why that number has not changed in over 100 years.
[12] Election Stats, Historical Elections, Center for Responsive Politics, extracted on 10 October 2012

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