The President Is Sure to Find Good Solutions

During Barack Obama’s second term, we can expect attempts to be made to continue current economic policies. It is not known, however, whether or not these attempts will be successful.

The implementation of bad ideas may, in fact, force the president to revise them. However, it is worth noticing some of the positive steps that Obama took during his first term.

Contrary to His Own Paradigm

In 2008, the Democratic candidate for the White House declared that he would limit the scope of free trade agreements with Mexico and Canada (NAFTA). He did not, however, live up to his promise; this is one of those cases in which inconsistency should be commended. Trade liberalization, according to some schools of economics, can lead to a loss in jobs in the national economy. Trade unions, perceived to be the Democratic electorate, protest against agreements aiming to eliminate the tariffs. In fact, reducing import tariffs may make moving factories to countries with lower labor costs more profitable.

Obama, however, not only destroyed NAFTA, but also pushed through free trade agreements with Colombia, South Korea and several other countries. The head of the White House realized that losing part of the federal electorate allowed him to gain the other electorate, that is, the consumers who buy goods from China and other countries at lower prices because of free trade. It has been said that in the last 30 years, America has lost several million jobs, thanks to free trade and the division of labor. However, at the same time, new branches of industry and services have been created.

At the beginning of next year, the U.S. will face the problem tentatively called a “fiscal cliff,” with the end of the period of tax credits implemented during the first term of George W. Bush. In other words, it means increasing taxes and budget cuts. The dispute between Obama and the Republicans in the House of Representatives, where Paul Ryan is chairman of the Budget Committee, will revolve around the balance between tax burden increases and savings in expenditures.

Republicans oppose raising taxes and will push for budget savings. America has already exceeded the limit of an acceptable level of debt, a problem which cannot be ignored. All of the tools to stimulate the economy have already been used and now it is time to pay the bills.

In the 90s, Clinton was in a similar situation to Obama. With a Republican majority in Congress, with whom he had to cooperate, Clinton co-founded the social policy reforms that resulted in a radical reduction of public debt. We should bear in mind that, before the reforms, similar measures were implemented at the state level. Today, Republican governors, seeing the negative consequences of Democratic policies at the federal level, want to reduce public spending and lower taxes. I hope that history will repeat itself and that Obama will listen to Republican advice.

As a result of high public spending, a number of jobs created in the public sector. These jobs are taxed at a lower rate than those in the open market, leaving more money for citizens and businesses. This is because in the public sector, the mechanism that informs prices based on what people need does not work. Meanwhile, politicians and officials know better. According to Democrats, jobs in the public sector and the renewable energy sector have become necessary.

Such logic guided Obama through his past term. Let us look at two examples of its effects: creating government jobs appeared wasteful and public investments were unsuccessful, causing companies to collapse. We will see that in the end, jobs created by the government won’t last. This is because such a solution requires the repayment of the debt.

Working Out of Debt

Higher education has become a way of getting an office job. This is closely related to the growth of a speculative bubble in the market for higher education. The market for education is governed by the same factors as the housing market. The value of an education can be manipulated in the same way that the value of a house can be manipulated. Supporting students actually constitutes making them false promises. Graduates expect prestigious jobs and office work is seen as such. Because these jobs are not being created (because of high taxes), the state has responded to the expectations of society by creating more offices (of course there are other reasons for the growth of the country). Offices, however, are not the place where wealth is created. Wealth is actually created through the sharing of resources created in the private sector. Obama needs to understand the logic of the labor market and he needs to stop overestimating the role of the state in the economy. After all, the new workplaces were created because of the debt. The need to pay off the debt will force many of these offices to be close. The bubble will burst once people are fired. They will leave feeling that education has a low value.

Unprofitable Technologies

Another example is the support of renewable energy technologies. Obama supports this trend. Unfortunately, the market indicates that this technology is too expensive and it needs to be subsidized by the country. An unpleasant consequence of such an approach is the collapse of companies that produce mass energy from renewable sources. Maintaining the energy infrastructure is beyond the capabilities of the initially subsidized companies, which would never have been created, had not been for federal action. Perhaps, as far as the economy is concerned, we do not have the resources to alter the ways we access energy.

All in all, the next Democratic government will be strongly constrained by the prevailing system of balance. First, the president will have to compromise with Republicans, who have a majority in the House of Representatives. Second, most states are ruled by Republican governors. The prevalence of Republicans will force Obama to abandon some elements of his economic program. This bodes well for America.