Obama’s Economic Policies have Failed because they’re Keynesian Economic Policies

Posted by PITHOCRATES - September 2nd, 2011

Government Spending and Easy Monetary Policy haven’t created any Jobs 

The new jobs report is in.  It’s not good.  Surprise, surprise (see ‘No confidence’ sparks rush to safety by Blake Ellis posted 9/2/2011 on CNNMoney).

The Labor Department reported that the economy added no jobs in August, while the unemployment rate remained at 9.1%. That was the worst reading since September 2010, when the economy lost 27,000 jobs.

Economists had been expecting a weak report given the recent debt ceiling gridlock, plunging consumer confidence and the downgrade of the United States’ credit rating in August. But what they got was even worse than expected.

These Keynesian economists have been predicting every kind of wonderful they could with every new Keynesian policy.  But government spending and easy monetary policy haven’t created any jobs.  If they did we’d have them.  Jobs.  But we don’t have them.  After close to 3 years of trying.  I mean, the economy is so bad that oil prices are falling.

Since a healthy economy typically spurs demand for oil, fears that another recession is around the corner are causing traders to worry about waning demand, said Flynn.

“Crude oil is looking at demand destruction right now,” he said. “With a lack of people going back to work and economic data as a whole as it is, it’s just not a supportive environment for higher prices.”

So the Obama administration has spent the U.S. to record deficits.  And record debt.  But because so many people are unemployed demand for oil is destructing.  What a terrible tradeoff for cheaper oil.

Oil is the lifeblood of a healthy economy.  So you know an economy is not healthy when people aren’t buying oil.  In a country where chronically insufficient domestic supplies once raised the price of gasoline to over $4/gallon.  Now any spikes in gas prices seem to have more to do with a depreciating dollar (thanks to all that easy monetary policy) than demand.

Keynesians see no Downside to Excessive Government Spending or Inflation

Still there are some who say the problem is not excessive spending.  But spending that was not excessive enough (see Fatal Distraction by Paul Krugman posted 9/2/2011 on The New York Times).

Zero job growth, with unemployment still at nosebleed levels. Meanwhile, the interest rate on 10-year US bonds is down to 2.04%, and it’s negative on inflation-protected securities.

Aren’t you glad we pivoted from jobs to deficits a year and a half ago?

Krugman is a Keynesian.  So by ‘jobs’ he means government spending.  And by ‘deficits’ he means responsible government.  He sees no downside to excessive government spending.  Or inflation.  As if the 1970s never happened.

A lot of People hate the Rich and Successful, especially Ivy League Elitists

But the 1970s did happen.  And we had double-digit inflation at the end of that decade.  Didn’t help.  It didn’t make a dent in the unemployment numbers.  Yet there are those who want to take that very dangerous road again (see View: Inflation Is Easy to Free, Hard to Control by the Editors posted 9/1/2011 on Bloomberg).

…But now, a growing number of voices, mainly on the left wing of the Democratic Party but also in the Federal Reserve, are calling for what is in effect default in slow motion. It goes by the name of inflation.

Inflation decreases the value of debts, like the $14 trillion owed by the federal government to lenders such as the government of China (and a lot of ordinary American savers, too), and it increases the value of assets, like houses. Thus it helps all debtors, from the federal government to individual homeowners who can’t pay their mortgages. Inflation has been running at an average of 2.4 percent over the past decade. After a couple of years of, say, 6 percent inflation, that $14 trillion would be worth closer to $12 trillion in current dollars. A $400,000 mortgage would be worth about $350,000.

Some may say, shrinks debt?  Increases asset value?  Well where’s the problem with that? 

We call it class warfare.  Of the worse kind.  Creditors versus debtors.  The poor versus the rich.  The poor hate the rich because they have to borrow from them to buy a house.  And they would love to not pay them back.  But if you start doing this eventually the rich won’t loan their money anymore.  So there will eventually be no more home ownership.  Except for the rich. 

It’s a story as old as time.  And the U.S.  The states were passing debtor laws.  Favoring debtors.  Harming creditors.  And destroying legal contracts in the process.   Which a nation built on the rule of law could not have.  For if there are no contracts there is only force.  Where the most powerful get what they want.  And those not powerful enough to fight them off simply lose what they have. 

This is one of the reasons why the Founding Fathers called for the Philadelphia Convention in 1787.  To save what they just fought 8 years to get.  A nation where no man is above the law.  And contracts are legal binding.  Still, there are a lot of people who hate the rich and successful.  Who think contracts are merely suggestions.  Especially Ivy League elitists who have no ability but arrogance and condescension.  Who could never become rich and successful on their own.  Preferring privilege over hard work.  And have no problem trampling over people’s contract rights.  Or Constitutional rights, for that matter.  But that’s another story.  For another time.

As it happens, a couple of years of 6 percent inflation is exactly what the leading economist advocating this approach — Kenneth Rogoff at Harvard — recommends. He is joined by Paul Krugman and by a growing number of economic journalists and commentators. Some of these people have been saying that inflation is no threat worth worrying about, because it has not appeared despite circumstances that ordinarily would have produced it. Now they say inflation is no threat because a little of it would actually be a good thing.

At Bloomberg View, we think that doing anything to encourage increased inflation is a very bad idea. People who advocate it are either too young or too old to remember our last adventure with inflation, in 1979 and 1980…

You can’t easily pencil in two years of 6 percent inflation and then go on your merry way. Inflation is self-feeding and takes on a life of its own. And it works only by surprise. If lenders all know that the government is going to induce or at least tolerate something like 6 percent inflation, they will demand something like 8 percent interest from borrowers. There goes the grease on the wheels. And it’s not just lenders: Labor negotiators will have their backs stiffened if they know that any dollar figure they negotiate will buy less and less. Manufacturers who know their inputs are going to be getting more expensive, in dollar terms, will raise their prices in anticipation, thus making inflation a self-fulfilling prophecy. Long-term planning becomes difficult to impossible.

This is what happened in the Seventies.  It’s why there were double-digit interest rates.  Inflation was depreciating the dollar so fast that it took near usury rates before anyone would loan money.  It was great for people with money to loan.  But horrible for people who had to borrow.

There is no Record of increasing Taxation and Regulation increasing Economic Activity

This is not just a condemnation of the Obama economic policies.  This is a condemnation of Keynesian economics as a whole.  They only lead to a bloated federal government.  That grows at the expense of the job-producing private sector (see Needed: A Reagan Moment To Stop Our Decline by Lawrence Kudlow posted 9/2/2011 on Investors).

During the Bush years, the federal government increased from 18% of GDP to 21%. The debt went up $2.5 trillion, from roughly 32% of GDP to 40%. And now, during the Obama period, spending has moved even higher to at least 24% of the economy, while total federal debt has ballooned near 100% of GDP.

It’s almost a mirror image: The expansion of the public sector and the decline of the private sector. This is completely inimical to the American peacetime experience…

And all while jobs, the economy and stocks slumped over the past 10 years, the dollar dropped 37% and gold increased by nearly 500%, from $250 to nearly $1,900 an ounce.

We don’t have the kind of inflation today that we experienced in the 1970s. But it is certainly worth noting that a collapsing currency and a skyrocketing gold price are key barometers of a loss of confidence in the American economic story.

But the Keynesians aren’t worried.  Mr. Paul Krugman belittles those ‘responsible’ people who worry about phantom demons like inflation.  When it comes to spending, their constant refrain is to flame on.  And only worry when inflation is burning white hot.  Then they can simply tap their monetary breaks and make everything good again.  Or so they think.

But there is a bigger problem.  This ‘limited’ government of the Founding Fathers is growing into a leviathan. 

My key thought is that the U.S. in the last decade has adopted a wrongheaded policy of government expansion — primarily spending and regulating — financed by ultra-easy monetary policy and rock-bottom interest rates.

Tax rates haven’t moved much. But the whole tax system is badly in need of pro-growth flat-tax reform and simplification. However, the expansion of spending and regulating is robbing the private sector of its entrepreneurial vitality. Here’s the new fear: More big-government spending stimulus from Obama’s jobs plan. More EPA. More NLRB. More Dodd-Frank. More ObamaCare.

And as the policy mantle for growth has swung to Federal Reserve stimulus, we are learning once again what Milton Friedman taught us 40 years ago: The central bank can produce new money, but there is no permanent production of jobs and growth from that pump-priming.

Big government financed by easy money is a lethal economic combination. It must be reversed. We should be reducing the regulatory and spending state while keeping money predictably stable (and even re-linked to gold).

The supply-side nostrum that worked so well for 20 years, beginning with Ronald Reagan, was low tax rates, light regulation, limited government, and a hard dollar. Gold collapsed between 1980 and 2000 as stocks, jobs, and the economy roared. The last ten years? We’ve gotten the policy mix completely backwards. The results show it.

And that’s something that the Keynesians can’t point to.  When they had full legislative power (as they had since the Democrats won the House and Senate back in 2006), they can’t point to a historical record of success.  Like the tax-cutting supply-siders can. 

JFK cut taxes and saw economic growth.  Reagan cut taxes and saw economic growth.  George W. Bush cut taxes and saw economic growth.  But there is no record of increasing taxation and regulation increasing economic activity.  You know why?  Because it doesn’t.  If it did the economy would be booming now because the government has never spent or regulated more.

Let’s hope the Keynesians Concede Failure while there is still an Economy to Save

How many bad economic reports will it take before the Keynesians will finally concede failure?  When will the Ivy League elitists stop hating people who are more talented and successful than they are?  And when will the people that put them into power see that it’s only the power they’re interested in?  Not the economy.  Or our well being?

I hope these people come to their senses soon.  While there is still an economy to save.

www.PITHOCRATES.com

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LESSONS LEARNED #74: “When negotiating it’s important to understand the ‘time value’ of promises. The longer out in time something is promised the less likely that promise will be kept.” -Old Pithy

Posted by PITHOCRATES - July 14th, 2011

Slaying the Inflation Beast

In Washington promises would make a poor currency.  Because they’re very inflationary.  Politicians make a lot of promises.  And they break almost as many as they make.  Promises just don’t hold their value over time.  Especially when it comes to spending cuts.  Any promise for future spending cuts will be worthless by the time that ‘future’ arrives.  Because things change.  The economic picture may change.  And they’ll write new legislation to eliminate those spending cuts.  To adjust for these unforeseen changes in the economy.  Just as those promising those spending cuts knew they would.  That’s why politicians (i.e., Democrats) can be generous when offering future spending cuts in any budget debate.  Because they have no intention of ever keeping those promises.  So Democrats can be very generous in offering ‘future’ spending cuts.  In exchange for tax hikes in the here and now.  It’s a con.  And one of the biggest such cons was the Tax Equity and Fiscal Responsibility Act of 1982 that Ronald Reagan fell for.

Reagan’s poor economy had its roots in the Sixties and LBJ‘s Great Society.  LBJ was a tax, borrow, print and spend liberal.  And he spent.  He exploded government spending for his Great Society.  On top of the massive war spending for Vietnam.  The economy limped into the Seventies.  A bad economy and high taxes left few options to pay for that spending.  So the Fed just printed money.  Which devalued the dollar.  The dollar then was still convertible to gold at $35/ounce.  With the depreciation of their dollar assets, foreign nations converted their dollars to gold, depleting U.S. gold reserves.  To stem this loss of gold Nixon suspended the dollar’s convertibility into gold (the Nixon Shock).  Free from the restraint of a quasi gold standard, Nixon turned the printing presses on high.  Devaluing the U.S. dollar in the process, giving us high inflation. Then the 1973 oil embargo came and made everything worse.

Gerald Ford did little to change things.  Or Jimmy Carter.  They were little more than Keynesians themselves.  And believed in the power of government spending to stimulate the economy out of recession.  So their policies remained Keynesian.  Tax rates were high.  As was government spending.  And then another oil crisis came thanks to the Iranian Revolution.  Things just went from bad to worse for Carter.  Inflation was killing the economy.  Until Paul Volcker came on board after a cabinet shakeup.  He slew the beast.  Eventually.  Starting in the Carter administration.  And finishing the job in the Reagan administration.  For one of the tenants of Reaganomics was a sound currency.  Which Volcker gave him by slaying the inflation beast.

Reagan was not a Keynesian

Inflation is the great big bad side affect of Keynesian economics.  For it’s the only economics system that tells governments that counterfeiting money is a good thing.  So governments do.  And find justification for their actions by the sweet nothings Ivy League economists whisper in their ears.  But once the inflation beast is unleashed it is not easily subdued.  Because the only true antidote for runaway inflation is a good, deep recession.  And a bit of a deflationary spiral to put prices back to normal.  So this was where the economy was in 1982.  In deep recession.  With high unemployment.  And double digit interest rates (reaching as high as 20% on occasion).

Tax receipts fell.  As you would expect them to during a deep recession.  Which increased the deficit.  And this was just a calamity.  The country was facing economic ruin.  They just had to raise taxes.  For it was the only cure.  And the Democrats demanded that Reagan do just that.  Raise taxes.  But being that it went against another tenant of Reaganomics, Reagan refused.  He was not a Keynesian.  His Reaganomics was more of the Austrian School variety.  Low taxes.  Less regulation.  Sound money.  And little government spending.  He believed that the massive government spending was the problem.  And you didn’t fix that problem by giving the government more money to spend.  No, Reagan wasn’t going to abandon principles easily.  They needed something to sweeten the deal.  To make him abandon his principles more easily.  And they came up with a pretty sweet lie.

“Okay,” they said to Reagan.  “You’re right.  We need to cut spending.  We’re all in agreement here.  But the recession is hurting the people.  We can’t hit them with spending cuts now.  We’ll have to ease them in over time.  To make it easier on the people.  So we’ll give you your spending cuts.  A lot of them.  Just not right now.  In the future.  When the people are back on their feet.  You win.  All we ask for in return is that we increase taxes now before this deficit causes some damage that we won’t be able to walk away from.”

Democrats are Liars

And they made a deal.  Tax hikes now.  For spending cuts later.  And a lot of them.  For every new dollar in taxes they would cut $3 of spending.  It was some unprecedented spending cuts.  So Reagan accepted the deal.  Tax hikes now for spending cuts later.  He signed the Tax Equity and Fiscal Responsibility Act of 1982 into law.  He only made one mistake.  He trusted the Democrats.  And didn’t see them twisting their evil mustaches while they were making their deal.  Nor did he see them rub their hands together as they made a sinister laugh.

A Democrat’s promise to cut taxes isn’t worth the paper it’s written on.  For it starts to depreciate before the ink even dries.  And the numbers prove this.  According to CBO, tax revenue in 1982 (the year of the tax hikes) was $617.8 billion dollars.  At the end of Reagan’s second term in 1988, tax revenue rose to 909.1 billion.  For an increase of $291.5 billion.  Supply-siders (of the Austrian School) will say it was Reagan’s massive tax cuts in 1981 (Economic Recovery Tax Act of 1981) and 1986 (Tax Reform Act of 1986) that that generated this tax revenue by creating more taxpayers.  Keynesians will say it was the Tax Equity and Fiscal Responsibility Act of 1982 that generated this revenue by taking more from each taxpayer.  For the sake of argument, let’s say the Keynesians are right.  And all that new tax revenue is from the higher taxes.  So, according to the deal he made with Democrats to get this tax increase, government spending for the same period should have gone down by three times this amount, bringing total outlays at the end of that period to a negative $128.8 billion. 

Now we know that didn’t happen.  Government spending didn’t go to less than zero.  So if they didn’t honor their 3-1 pledge, how much did they cut spending?  Well, in 1982 government outlays were $745.7 billion.  In 1988 that increased to $1.06 trillion.  For an increase in spending of $318.8 billion.  Clearly something is amiss here.  For this is not spending reduction.  It’s a spending increase.  For every new tax dollar Congress collected they increased spending by $1.10.  That’s not the promised spending reduction.  It’s quite the opposite.  More spending.  A lot more spending.  That $3 gain in spending cuts turned out to be a $4.10 loss.  The Democrats lied.  And Reagan would never fall for this trick again.  For he learned the hard way that there are no such things as future spending cuts with Democrats.  And that Democrats are liars.

Don’t trust Democrats when they Promise to make Spending Cuts 

Of course, we could say that the supply-siders were right in regards to that increase in tax revenue.  The reason the Democrats failed to follow through on their promise was due to the success of Reagan’s tax cuts.  It just created so much money above and beyond what the tax hikes brought in.  They may have delivered their promised cuts but you can’t see them looking at the aggregate numbers.  Because Reaganomics created such great economic activity that it showered Washington with dollars.

It is an interesting choice.  Either the Democrats are liars and renege on their promises.  Or they are incompetent and follow failed Keynesian economic policies.  Perhaps it’s a little of both.  They’re both liars.  And incompetent.  For it would explain a lot.  Such as how their policies never make the economy any better.

Either way the lesson learned is for certain.  Don’t trust Democrats.  Especially when they promise to make spending cuts.  Because whatever may happen, one thing is clear.  What won’t happen are the spending cuts.

www.PITHOCRATES.com

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