Econ 101: Obama’s Keynesian Economy
Obama’s Keynesian Economy
There is major disagreement between two groups of economist on how the economy works. On one side, there are classical economists, championed from the Austrian School and the University of Chicago, who believe that unregulated markets are inherently self-stabilizing and that government intervention does more harm than good.
On the other side, is Keynesian economist, such as Nobel laureate and NYT’s columnist Paul Krugman, who believe that market systems needs a little help and intervention from government. A central tenet of the classical view, states, “supply creates its own demand”. A central tenet of the Keynesian economics propagates Government role in lifting demand.
Classical economics teaches that if there’s a downturn, the economy will eventually sort itself out. If people aren’t buying enough, prices will drop to a point where people start spending. The public doesn’t look to the government to prop up spending. Keynes’ believers insist that sometimes things don’t right themselves. The economy goes into a downward spiral. The usual dynamic of supply and demand breaks down, people don’t spend enough money, and there’s no way for the economy to automatically adjust. So, Keynesian prescription theorizes, that if all else fails, the government should spend the money.
In short, Keynesianism has two sides: increase government spending during a downturn to artificially stimulate demand and then save during the fat years so as to have money available to stimulate employment during the lean ones. Yet, the theoretical possibility of ‘saving for a rainy day’ never occurs in practice. Why? Because if the government is taking in exceeding tax receipts that it has a surplus, the right will argue for tax cuts, the left for more social spending.
The Keynesian formula is fairly straightforward. First, you estimate how much the economy ‘should be producing’ — given all the people, factories, and offices. Lets say $15 trillion. Then you look at what the economy is ‘actually producing’. Let’s say $14 trillion. The Keynesian theory is government shouldn’t have to spend the entire trillion-dollar shortfall. That’s because of something called the “Keynesian multiplier.” Every dollar the government spends produces more than a dollar in spending throughout the economy and, in turn, a greater increase in national income.
For example, if the government pays you to build a bridge, you spend your paycheck on rent and food and so on, and then your landlord and grocer have money, they spend it, etc, etc, etc. Using Keynesian math, you could pretty much estimate exactly how much the Obama administration would seek to spend in stimulus. And, Voila! Obama’s stimulus was $787 billion. The “Keynesian multiplier” makes up the difference towards the $1 Trillion plus dollars through economic ‘activity’.
But, the claimed additional economic benefit from government spending simply never materializes. And, Obama’s entire economic plan is grounded in the belief that massive new government spending is the key to economic recovery. But to spend, you have to tax small businesses, corporations, and all Americans. And, economies simply don’t recover while staring down the barrel of a 12-gauge tax hike.
Democrats and/or Progressives never figure into their calculations the decrease in activity of an increased tax on that activity. To note: Tax incentives (cuts) have a higher ‘multiplier’ than government spending (increases). What is multiplier? It is the amount of new economic activity generated by $1 of stimulus determined by either tax cuts or spending increases. A lower multiplier is bad. A higher multiplier is good.
Spending impacts die faster than tax cuts. Tax cuts impact growth and sustains them greater over a period of time. Because the stimulus package focused on spending and not tax relief the long-term stimulus multiplier will be much lower; resulting in a limited long-term impact on the economy; as we have witnessed.
There are no ‘controlled experiments’ when dealing with the economy. And Obama’s massive stimulus package was the first real world test. But in reality, the stimulus failed and massive government spending has produced higher deficits. If you tax, the dollar the government spends is a dollar some taxpayer couldn’t spend in the economy. If you borrow, the dollar the government spends is a dollar that wasn’t available for someone else to borrow.
Government spending does NOT “pump new money into the economy” because government must first ‘tax or borrow’ that money out of the economy. So, once it becomes clear that government spending only redistributes existing demand, the case for “stimulus“ spending collapses. All government stimulus spending requires first taxing or borrowing dollars that would have otherwise been applied elsewhere to the benefit of the economy.
If you “print money,” there’s more money chasing the same amount of goods, so prices go up (“inflation”) and the dollars are worth less. So people spend more “dollars” but they can’t actually buy more stuff, since prices are higher. So the increase in government spending is canceled out by a decrease in the purchasing power of all the money in circulation, so there is still no actual stimulus. There is no “Keynesian multiplier.”
Every dollar the government spends is a dollar someone else did not spend. But it’s actually worse than that, because taxation, borrowing, or inflation is itself costly. They distort incentives and complicate business and personal financial planning – so the spending reduction by taxpayers is actually MORE than the amount spent by the government… Still, the White House does believe in Keynesian economics. And to that, I say, welcome to Ferris Beuller’s day off as the leader of the free world.
The Keynesian model is flawed. The result is vicious inflation, a bloated government, economic contraction, and trillions of dollars in debt as a constraining burden on Americans’ children. Obama’s stimulus and massive spending has completely failed to create any jobs and prescribing Keynesianism to some politicians is like prescribing crack to a coke addict.
This entire deteriorating economic outlook has undermined business confidence. Fear of implementation of ObamaCare. New EPA rulings. Ban on oil drilling. Spiraling debt. Real Estate Foreclosures. Bank failures. Increase in oil and energy prices. Falling dollar. Higher shipping and transport cost. Consumer confidence down.
All of this has paralyzed economic recovery as business leaders hold off on ‘new investments’ and corporate leaders ‘wait and see’ what next mandate is handed down from Washington. It takes capital to produce, grow and create jobs and U.S. money managers alone are safeguarding over two Trillion dollars in investment capital as it sits on the sideline.
This government “activism,” including fiscal stimulus, unemployment payments, mandates and arbitrary regulations, housing subsidies, and stalled credit creation in the capital markets is holding back the economic recovery. Government debt is the only thing growing. Yet, it is mathematically impossible to get out of a credit recession with more debt.
All the while Obama’s government is “cooking the books” on the unemployment numbers and current inflation rates. They are making their own rules on how to determine inflation rates by leaving out essential information such as ‘food and fuel’ prices.
And, as inflation increases, the Fed will push interest rates up eventually, in order to keep oil and other commodity prices down since they are tied to the dollar. As the interest rates start to increase, the economy here in the U.S. will go even further into tailspin.
The same is being done with White House unemployment numbers (where even their revised numbers are outright lies) by simply leaving out those who have given up looking for jobs. Real unemployment is 17+%.
Modern-day Keynesianism allows them to look busy during a crisis and act as though they’re, well, acting. It also allows politicians to get their hands on a lot of redistributive cash — and that allows them to share the spoils with key backers and constituents. It’s practically built for pork. Perhaps even more seductively, it gives politicians the illusion of control over the economy, allowing them to pick winners and losers.
Unfortunately, that is just an illusion; as Hayek explains in ‘The Road to Serfdom,’ the economy is too complicated for central controllers to operate it, and those attempts to do so result in economic ruin. We are under attack by our federal government. Obama’s economic team of born-again Keynesian central planners has failed.
This is Obama’s Keynesian Economy.