More Lessons from History: How Obamanomics May Play Out

The grand lesson of the 20th century is that Big Government retards economic progress. The evidence of this lesson goes beyond the socialist countries and their dramatic economic failures.

Several decades ago, as a young economist, I encountered repeated studies that showed a high correlation between two macroeconomic phenomena: The larger the government’s share of a country’s GDP, the slower the rate of economic growth tended to be. Conversely, economic growth flourished where government was relatively small.

Many Americans seemed, and still seem, impervious to this lesson despite our own history. The same correlation was evident in the 1920s, when President Harding cut the size of federal spending in half, leading to a decade of prosperity, and in the 1930s, when the economy tanked under Presidents Hoover and Roosevelt and their huge expansions of government.

Despite this clear historical evidence, President Obama is committed to growing government. He has increased federal spending to over 27 percent of GDP, up from 20.5 percent when George W. Bush left office.

Obama indisputably favors the public sector over the private. When Michelle Obama gave her famous speech a couple of years ago, urging young people to avoid working for profit-seeking (i.e., private) companies, she was doing more than simply expressing an opinion: She articulated her husband’s agenda.

It started on day one, when Obama staffed his cabinet and other top positions in his administration with a record-low percentage of people with private-sector experience—fewer than 10 percent (the historical average is near 40 percent).

Since then, he has consistently worked to bring more and more people onto the government payroll. He increased the number of paid positions in Americorps by 224 percent; Teach for America by 94 percent; Peace Corps, 24 percent. The health-insurance bill created dozens of new agencies. The just-passed financial reform bill creates a new bureaucracy with an initial budget of nearly a billion dollars per year. One source recently reported that Team Obama is revoking contracts with private firms and transferring the work to government employees. The government even hires former employees of the private contractors, giving them significant pay-and-benefit hikes. That may be good for them, but at a time of record budget deficits, finding ways to increase the costs of government doesn’t make economic sense. In his compact 1944 classic, Bureaucracy, economist Ludwig von Mises explained why bureaucracies are inherently uneconomical. Whether under socialist or democratic governments, bureaucracies are not disciplined by the profit-loss calculus. Insulated from the competitive marketplace, they become bloated and inefficient.

When private businesses serve customers poorly, their revenues decline. If their losses are severe enough, they fold. Exactly the opposite happens with bureaucracies. If they fail to get the job done, Congress typically appropriates more funds for them. We saw this with FEMA after Hurricane Katrina, and the same dynamic will play out with Obamacare, too, unless it is repealed. It’s the nature of the beast. No society can afford to bear the costs of many bureaucracies. As much as Obama prefers government workers, most people need to be in the private sector generating the wealth that government appropriates for bureaucratic functions.

This implies that Obama has veered down a dead-end detour. He wants government agencies to be in charge of this, that, and the other thing, but how can we pay for it all? A bureau-centric policy agenda inevitably impedes economic growth.

Obamanomics, in short, ignores two economic truths: Expanding government’s share of GDP cripples economic growth. So does a proliferation of new government bureaucracies. From this we may predict that Obama’s policies will saddle us with continuing economic sluggishness.

Given that Americans tend to replace presidents when the economy is struggling, can we predict that Obama will be a one-term president? I don’t think so. The presidential campaign of 2012 could be a repeat of 1936 (FDR’s first run for re-election). The historical record shows that many voters in 1936 were disappointed about the terrible shape of the overall economy after four years of New Deal programs.

Many who were unhappy about the economy voted for Roosevelt anyhow. Why? Because they were benefiting personally from his massive spending programs. Obama’s stimulus plan has been and will continue to be spent in ways that benefit targeted groups. His recent request for another $50 billion to give to teachers, firefighters, and police (traditionally, these have been locally funded public employees, and therefore independent of Washington) is just one example of Obama’s politically strategic spending.

Obama has ignored the economic lessons of history, but he has taken to heart the political lesson of FDR’s formula for electoral success. It would be prudent and timely for us citizens to grasp both the economic and political lessons of our history.