The current debate over the debt ceiling is obscuring the scale of the jobs crisis facing America.
Many commentators have drawn comparisons to the budget negotiations between President Clinton and Republicans in Congress when I was Speaker in 1996.
But the situations are radically different.
In 1996 the economy was growing.
Today the economy is in deep trouble and may be on the verge of getting much worse.
Our economy is not the economy of 1996. In fact, it is not even close.
Former Clinton Secretary of Labor Robert Reich noted in the Wall Street Journal recently that in the spring of 1995 the economy was adding about 200,000 jobs a month. By February of 1996, we added 434,000 jobs in just one month. Unemployment was 5.5 percent and declining. (It dropped to 4.2 percent by the time I left the Speakership).
That is far healthier than the 18,000 jobs added last month, when the unemployment rate rose to 9.2 percent.
Comparisons between the negotiations during our booming economy in the 1990s and those taking place in the Obama Depression today ignore one of the most important factors. After taking a bad economy and making it worse while adding trillions to the debt, President Obama’s radical ideology, hostility to financial success, and bureaucratic micro-management combine to virtually guarantee he will not fix the economy.
An Unfortunate Anniversary
If anyone needs reminding of just how bad the President’s record is, July 21, 2011 provides an occasion.
The President signed some of his most damaging policies into law one year ago tomorrow in one 850 page behemoth, the Dodd-Frank Act. Every House Republican voted against it, as did all but three Senate Republicans.
Two factors were clearly inhibiting economic recovery last summer in the wake of ObamaCare and an offshore drilling moratorium which threatened to raise the price of gasoline: consumers were not spending, and businesses, amid historic uncertainty, were not hiring.
The Dodd-Frank Act made both of those problems much worse.
Its ostensible goal was to “reform” another gigantically complex sector of the U.S. economy, the financial services industry.
The Act codified “too-big-to-fail” by allowing the government to guarantee “systemically important” banks, created the Consumer Financial Protection Bureau (headed by a single regulator and given sweeping, unchecked authority), and imposed hundreds of new regulations which make compliance very costly for small community banks.
Dodd-Frank plunged these banks and the small businesses that depend on them into even greater uncertainty, authorizing bureaucrats to write the details of over 300 new rules and inviting them to study over 100 more. The House Financial Services Committee reported this month that even a year later just 21 of these rules have been written; 62 percent have yet even to be proposed.
That kind of uncertainty about costs makes companies hesitant to hire and to loan money. Meanwhile, Dodd-Frank attacked them from the demand side as well.
One big reason consumers are not spending is that they have seen much of their savings wiped out in the form of their home values.
In large part because of the housing crisis, household debt has hit alarming levels. Reich writes that household debt is today about 115 percent of personal disposable income, down from a pre-crash high of 130 percent. The average between 1975 and 2000 was 75 percent, so to get back to comfortable levels consumers will need to shed another 30 percent.
We should not expect consumer spending to come back anytime soon. Too many Americans are struggling just to pay off mortgages worth more than their houses.
Dodd-Frank is crippling any recovery in the housing market with overly strict requirements on lenders combined with uncertainty for community banks.
By cementing the two main roadblocks to recovery, uncertainty and low consumer spending, Dodd-Frank has done exactly what Republicans predicted it would.
The day President Obama signed the bill into law, Congressman Spencer Bachus (who has since become chairman of the Financial Services Committee) predicted: “The President and Democrats today gave financial regulators the power to create years’ worth of financial uncertainty, which will only lead to more struggling businesses and fewer jobs.”
Then-Minority Leader John Boehner argued in July 2010 that it was “just another big-government power grab that will make it even harder to create jobs.” “It provides for permanent bailouts to President Obama’s Wall Street allies,” he said, “at the expense of small businesses and community banks across our country.”
Repeal and Replace
The solution to the catastrophic Dodd-Frank Act is the same as that for ObamaCare: repeal it and replace it.
Before the economic crisis, there was a general consensus about financial regulatory reform. Former Treasury Secretary Henry Paulson and others recommended consolidating regulators and moving towards a principles-based rather than a rules-based system.
In the wake of the housing collapse and the credit crisis, legislation that actually sought solutions would have aimed at the source of the problem. Where informational issues made it impossible to properly evaluate risks, a real solution would have sought to increase transparency. Where patchwork regulations and government-backed lenders Fannie Mae and Freddie Mac distorted the home loan market, these issues would have been straightforwardly resolved.
Dodd-Frank does not even attempt these common-sense solutions, so our economy buckles under the weight of its new regulations while the causes of the collapse go unaddressed.
The answer is to repeal it now to enable people to start creating jobs again while housing prices rise.
House Republicans were right to unanimously vote against Dodd-Frank a year ago. They will be right to repeal it now.
P.S. – Tomorrow is the 42nd anniversary of the Neil Armstrong’s first steps on the Moon. In honor of the occasion, Ellis Has Landed.