If we all wear Groucho glasses and a big, fake mustache, can we fool our own economy? We can, says our president.
The Barack Obama Experiment may sound like a 70's lounge band, but it is not. It is, instead a breathtakingly bold, multi-trillion dollar wager on the power of government to arouse an economy. Stay tuned as a Democratic president and congress spend our way to prosperity. In the year ahead, federal spending will touch nearly $4 trillion, a whopping 28% of the all the goods and services produced within America's borders. The president who so often promises change from the failed economic policies of his predecessor is out-Bushing Bush; the Obama deficit will eclipse the last five Bush deficits together.
"Only government can provide the short-term boost necessary to lift us from a recession this deep and severe," Obama says.
Will it work? It has not in Japan, where a similar effort has failed to lift an economy mired in two decades of stagnation. Now, proponents of deficit-induced prosperity wear this fiasco like a flag, arguing the Japanese stimulus was working until the government temporarily abandoned stimulus spending to reduce the deficit in 1997, a full seven years into "The Lost Decade." So let's get this straight: Seven years of massive government borrowing and spending did not work but eight would have delivered?
Or is the lesson simply that when the government spending stops, as it eventually must, the economy stops, too? On this question, we are not in "unchartered waters," as Presidential Advisor David Axelrod suggests. The government stimulus argument has been made and exposed before. In the 1840's, Frédéric Bastiat, a French precursor to the Austrian-school economists, laid the spending-is-stimulus fallacy bare.
"If I throw a brick through my neighbor's window, have I created a job?" Bastiat asked. Democrats today would answer yes, that's a stimulus, because my neighbor has to spend money to pay a repairman to fix the window. That worker now has more money to buy other things, so we have created prosperity.
This newfound wealth, of course, is illusory. The broken window, once repaired, has produced no real increase in the nation's economic assets. For every penny the repairman makes, someone has to borrow or take money out of his pocket to pay for the repair. A dollar, when given to the repairman, has the same value as when taken from the homeowner or businessman with the shattered window. The repairman has more to spend but someone else, inevitably, has less. Yet this is the equation at the heart of the Obama Administration's stimulus package: Under the auspices of a beneficent government, we will break each other's windows until the economy hits escape velocity and we all enjoy greater wealth.
This alleged stimulus, with its false energies, may increase jobs in the short term but it does not increase wealth, no more than heroin cures a hangover. Remember how we got into this mess? We sold worthless mortgages and credit-default instruments to each other. We fooled ourselves for a while. We now propose to fool each other again.
As a Republican who has expressed his hopes that Barack Obama would be a new generation of Democrat, someone who would replace his party's old, industrial-age elitism with the bottom-up prosperity he promised, President Obama's first month in office is a disappointment beyond partisan politics. It displays a self-centered desire for control, an institutional mistrust of the American people and lack of faith in their ability to right this economy. This is just more old-fashioned, trickle-down prosperity from Washington. When it does not work, our president, with the noblest intentions, will pick up another brick and find another window. Without a single real businessman in his Cabinet, there is no one to tell him that our economy, elegant in its complexity, rich in subtle interactions, and abundant with incentives, does not respond well to such primitive manipulation, no matter how smart those throwing bricks.
Through the centuries, eccentric scientists have toiled to invent a perpetual motion machine, a contraption that creates more energy than it produces. In the 17th century, Johann Bessler's "over-balancing wheel," for example, promised to run forever. Bessler could not violate the laws of thermodynamics, however. It turns out we cannot get something for nothing, no matter how good our intentions or how we wish to delude ourselves. The device and its devisor were doomed by physics to fail.
Obama isn't destroying infrastructure in order to create jobs. As far as the stimulus applies to infrastructure spending, it is a matter of replacing depreciating public goods.
The stimulus will improve infrastructure- which increases wealth, and in the process creates jobs and puts more money into consumers' pockets, turning them into customers for companies.
And when it comes to Japan- it's not clear that government spending had anything to do with their stagnation. It may have staved off contraction, keeping it stagnant, and in 2nd place for strongest economy.
For two, those roads and bridges do in fact create value. Could we have the economy we have today if Eisenhower had not decided to build the interstate highway system?
Third, not all "pork" is a bad thing. For instance, part of the Stimulus money will be NIH research grant money. This money will help fund the creation of value in the medical field; perhaps a small software company will get a grant to create a device that helps move the field of medicine forward. This device just might help you in your time of need.
Perhaps you should quit arguing against federal spending in general, and instead argue against *wasteful* federal spending, in particular by supporting transparent government that allows us to audit how the government uses our tax money. No-bid cost-plus contracts to the company which used to have a high-level executive branch official as CEO are the kind of wasteful spending that you should be directing your energy toward.
You are right in this regard, but stimulus IS supposed to be a short term measure to increase wealth. Government spending is never meant to create sustainable wealth. Fiscal Policy is used to intercede in the economy when there is a need to use counter cyclical measures to stabilize the economy.
Monetary policy, another counter cyclical tool, can no longer be used because with discount rate being effectively at zero, we no longer have any traction in monetary policy.
Tax rate fine tuning will not work either because consumers are hording cash and if you give them any more it will not end up in the economy. The corporate tax reduction will not work either because that is the tool that should be used BEFORE running the discount rate to the ground. If corporation aren't investing with cost of money being at zero then tax reduction will be used as a retrenchment tool by corporations in this deteriorating economic environment.
Obama's stimulus policy is right on. No question about it. But Castellanos makes an important point. Government stimulus does not create sustainable wealth or economic growth for that matter. The trillion dollar infusions into the economy through fiscal policy are at best stop gaps. And they will eventually use their effectiveness like they did in Japan. Japan failed to put into place institutional reform required to get past their malaise.
http://www.whitehouse.gov/omb/assets/fy2010_new_era/A_New_Era_of_Responsibility2.pdf
For me, this means it is a planned failure.
National debt growth is one way to perform quantitative easing on the money supply. As long as inflation is at a reasonable rate and dollar is not deteriorating rapidly against other major currencies, then we can afford to incur deficits. Budget deficits were not meant to run unchecked. A few years of deficits followed by few years of surplus are ideal. Again, deficits are to be used as a fiscal tool by the government to stimulate the economy.
But we have managed to run budget deficits year after year because there has been virtually no consequence with being in the red continuously. Many are currently warning about dire consequences of current round of increase in national debt. But choices are limited and we have no other tools left in the economic policy toolbox. Hopefully, once we turn the corner on this crisis, we can come together as a nation and institute rigorous policies that promote lowering and eventually eliminating national debt.
Remember government has many ways to institute taxation so as to eliminate budget shortfalls. But we have an obligation to not overburden our citizens with taxation. Ideally, as income rate grows, we are able collect substantially more taxes without altering the tax structure. That happened in the last few years of the Clinton administration where budget surpluses were created.
That simplistic analogy applies to Bush (bomb Iraq and then rebuild it). It doesn't apply to Obama's stimulus. You need to talk to (or better, listen to) a lot of notable economists on the need for stimulus spending.
I notice you offer no solution, just "do nothing" and have faith in the American people. Is that the change you were expecting from Obama?
This is why Republicans have no credibility - bogus arguments and no solutions.
Better than most of his ilk.
Again, give me something that would prove Obama would increase the national debt at the PERCENTAGE W did. Let's see it. Fact is, you can't!
It's always fun to see voodoo economy apologists like you who go with "the percentage" when defending your own ideas, and the ugly raw numbers when attacking others.
What was it? "National debt is ok as long as the growth in GDP outpace the growth of the debt". It's this kind of moronic stuff blurted out by you guys that got us in this mess.
THE FEDERAL RESERVE WOULD SERVE NO PURPOSE WITHOUT DEBT !!!1
I'm not into the blame game (a pox on both houses), but where we are today - I don't see how we can afford to continue doing this - and certainly - the current budget doesn't addres it. And as a simple proof - the Obama budget expects the debt to grow by more than GDP *every year* for the next 10 years - and not in percentage terms - in dollar terms. Right now, every dollar of incremental government spending is producing less than one dollar of GDP.
The only way I see out of this is freeze federal spending until the forecasts improve. Period.
as always - here are the sources:
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm
http://www.whitehouse.gov/omb/assets/fy2010_new_era/A_New_Era_of_Responsibility2.pdf
http://research.stlouisfed.org/fred2/data/GDPA.txt
Second, Obama did not inherit a $1/2 Trillion surplus and a robust peacetime economy in a mini-recession (after unprecedented economic growth had raised media income by $7500 per year) as Bush did; he inherited record debt, record deficits, a net loss in personal income of $2500 per year, and two wars, one of them utterly unnecessary, the other one something that should have been over quicker than the Kosovo War. Oh, and the biggest economic disaster since the Great Depression.
Third, the cost of the unnecessary Iraq War alone is far more than the stimulus will ever be.
After 3 decades Republicans have grown the national debt TENFOLD. How do you think you have any credibility at all?
Under Clinton, as with every adminsitration since 1957, the debt grew. There has been no budget surplus for over 50 years. Also, after taking out the Iraq war (~500 billion, the interest payment on the debt ~1 trillion, and the entire military budget (~2.5 trillion) for the last 8 years, and the federal government still spent a trillion more than it collected.
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm
http://www.irs.gov/pub/irs-soi/histab18.xls
Check the current budget - the debt is projected to grow faster *dollar for dollar* than GDP - every year.
http://www.whitehouse.gov/omb/assets/fy2010_new_era/A_New_Era_of_Responsibility2.pdf
But that is EXACTLY the difference between ex-President Bush's deficits & President Obama's deficits. Bush wasted money on a big tax cut and a war. The resulting wealth is totally illusory, since the big profits from Halliburton and other Republican funding sources don't offset the cost of the war, and much of the wealth added to the rich has disappeared with the fall of the stock & real estate markets.
By contrast, President Obama is proposing substantive investments in infrastructure & education, which will form the foundation for future wealth.
Even the Japan example is overused. They may have had a "lost decade", but anyone who has visited Japan in the last year or two can attest that the Japanese people are healthy, well-dressed, neighborhoods are clean and well-maintained, and that construction is going on apace. Whatever the numbers say, the Japanese people are better off for having had all the government spending.
And that's the bottom line. Will the life of the average American be better after this exercise in government spending than it would have been without it. I don't see anyone discussing the issue in these terms.
Assume a true conservative wins the White House in 2012 and we embark on the path as laid out by conservatives. We reduce the size of the federal government until we can drown it in a bathtub.
Presume: the only remaining function of the government becomes national defense, corporations are freed from governmental regulation, laws protecting workers and consumers are invalidated, and taxes are reduced to near zero.
Now what? How will the free market make the economy work? The only sector of the market that has any ability to influence the economy (the government) is neutralized. What is going to give consumers the confidence to purchase goods and services? What is going to prevent corporate moguls from driving wages to subsistence levels? How is a guy trying to feed his family on subsistence wages going to afford to fight back (i.e., sue) against a corporation that causes injury to him? How far will housing prices have to fall before people will be able to afford to buy even a modest home?
What then?
This is a slightly modified version of a post I wrote yesterday re: Rush. Same questions
A competent business person would have insured the shop with an equally competent actuarially based insurer who has set aside some portion of the premiums they charge to pay for that portion of the insured population that will unfortunately suffer a loss. The insurance company would have paid out from the proceeds of their investing that is set-aside to cover losses. The rest of the story is therefore, utter rubbish. Yes, there would be a slight but completely forecast reduction in profits for the insurance company. Overall there would be an increase in economic activity as the glassier got work paid for from insurance company reserves. If you cast far enough some unaware or inept person might have been harmed but that needs a very wide net indeed. In my example all players receive exactly the result they've planned for.
No surprise that the right-wing economics is inept. Their economic philosophy y starts based on ineptitude, and then they conveniently stop looking when the story appears to favor their argument. Ironically, this is exactly the most compelling complaint of Mr. Hazlitt; that liberal economists were stopping before considering the wealthy victim of their policies.