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The problem for Obama is that America isn't working

Obama has kept the American rate stubbornly high, preferring to punish companies that want to escape.

Published: 07th June 2016 09:23 AM  |   Last Updated: 07th June 2016 09:23 AM   |  A+A-

Obama_AP

U.S. President Barack Obama |AP

Falling levels of unemployment. A return to growth. House prices recovering. And perhaps most significantly of all, a central bank that has felt so convinced the economy is on the mend that it has actually raised interest rates once in the past year and may do so again. The American president Barack Obama had some fair points to make as he defended his economic record over the last eight years.

As he prepares to start writing his memoirs, Obama has started what is usually the final lap of any term in the White House - securing his legacy, and doing what he can to make sure his own party keeps the keys to the Oval Office. And yet while Obama undoubtedly has steadied what was a very rocky ship, in reality his economic record has been dismal. Labour participation rates have been terrible, wages weak, corporate taxes have become ridiculously high compared with the rest of the world and, worst of all, the United States has lost much of the entrepreneurial drive that made it so rich in the first place.

With the fluency and intelligence that marks all his speeches, Obama made a powerful defence of his economic record in Elkhart, Indiana, last week. "America's economy is not just better than it was eight years ago - it is the strongest, most durable economy in the world," he said. He went on to argue that "we've seen the first sustained manufacturing growth since the 1990s" amid a broad-based recovery from the financial crisis.

Well, up to a point. The American economy is in better shape now than it was when Obama took office. It is growing at a respectable rate, wages are increasing, it has avoided deflation, and the stock market, while hardly exciting, has kept one of the longest bull markets in history going. The trouble is, when you dig into the detail, there are some long-term trends that suggest an alarming decline in competitiveness - and Obama has done nothing to reverse them.

Such as? First, the US has witnessed a terrifying drop in labour participation rates. In simple terms, it is not that unemployment is that high - it is that people don't bother looking for work. America used to lead the world in the numbers of people with jobs, but the overall participation rate has fallen from 67pc in 2000 to 62pc now. It is still two percentage points below where it was before the last recession. By contrast, in this country, the rate has climbed past 70pc to hit all-time highs. An economy can't grow without lots of people working - and that is not true of the US any more.

Next, wages have been stagnant under Obama. The shale boom has created a few centres of prosperity - indeed all of the 10 towns with fastest-growing earnings are energy producers, led by places such as Midland, Texas, and Bismarck, North Dakota. With the oil price under pressure, that probably won't keep going - and once you strip those cities out, wages have hardly grown at all under this presidency.

Thirdly, corporate tax rates have been allowed to drift upwards. As other countries have cut their tax rates, Obama has kept the American rate stubbornly high, preferring to punish companies that want to escape, rather than the rather more obvious solution of simply cutting it. In the US, the corporate tax rate is 35pc, and state taxes levied on top mean it is often closer to 40pc. By contrast, our rate is coming down to 17pc. Heck, even the French rate is lower than the American one. Globally, only the United Arab Emirates, at 55pc, and Chad, at 40pc, now levy more. The result? American companies have started to move abroad, even though Obama has threatened to slap extra taxes on them for doing so, and more and more are likely to follow suit.

Fourthly, he has presided over a mountain of new regulations. According to a Heritage Foundation study, new rules imposed on business last year cost $22bn (pounds 15bn), and the total since Obama became president has passed $100bn. A total of 20,000 regulations have been imposed since 2008. In the last year alone, there have been costly new rules micro-managing overtime, clean air, and financial advice. Even by European standards, the American economy is ridiculously bound up in red tape. In Tennessee, you now need a state licence, involving 300 hours of training, to shampoo hair in a barber shop. How will that help people start businesses or get jobs?

Finally, the US now has a lamentable rate of start-ups. The number of new companies every year barely exceeds the number that close and in several of the last eight years it has actually seen a net rate of closures. According to the Economic Innovation Group, this recovery has seen a net 165,000 new enterprises, compared with more than 400,000 in the 1990s and 2000s. By contrast, this country, even though it is only a fifth of the size, has a million more companies than it did before the crash, and the total has hit an all-time high. Our image of the US is shaped by its history, and by the huge success of Silicon Valley. But that is a unique economic ecosystem, and if you strip that out, the US is not a nation of entrepreneurs any more. In reality, the underlying trends show a relentless decline in competitiveness. It is too early to describe the US as the new France - but the comparison is not as ridiculous as it once would have been.

It has taken about four decades longer than it took Europe, but in many ways America has started to turn into a continental social democracy, with the slow growth that implies. With his emphasis on subsidies, health care and regulation, Obama has accelerated that process - and Hillary Clinton would do so even more. America may be losing global economic leadership because countries such as China are growing. But it is also losing it because it has abandoned many of the qualities that made it so prosperous in the first place - and Obama showed no sign of wanting to recover them.

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