Obama in his first prime time press conference
"It is only government that can break the vicious cycle
where lost jobs lead to people spending less money which leads to even more
layoffs. And breaking that cycle is exactly what the plan that's moving
through Congress is designed to do...
than 90% of the jobs created by this plan will be in the private sector.
These will not be make-work jobs, but jobs doing the work that America
desperately needs done. Jobs rebuilding our crumbling roads and bridges, and
repairing our dangerously deficient dams and levees so that we don't face
another Katrina. They will be jobs building the wind turbines and solar
panels and fuel-efficient cars that will lower our dependence on foreign
oil, and modernizing a costly health care system that will save us billions
of dollars and countless lives. They'll be jobs creating 21st century
classrooms, libraries, and labs for millions of children across America. And
they'll be the jobs of firefighters, teachers, and police officers that
would otherwise be eliminated if we do not provide states with some relief.
I can tell you with complete confidence that a
failure to act will only deepen this crisis as well as the pain felt by
millions of Americans. My administration inherited a deficit of over $1
trillion, but because we also inherited the most profound economic emergency
since the Great Depression, doing too little or nothing at all will result
in an even greater deficit of jobs, incomes; and confidence. That is a
deficit that could turn a crisis into a catastrophe."
Economists from the Austrian school
argue not only is government
intervention not necessary to stop economic collapse but it actually
prevents the economy from healing on its own. Obama's argument that
the jobs created by his plan are jobs that desperately need to be done is
not true, a case in point was a recent award by the NIH of
$1.44 million for a "study of drug
and sexual risk among young male sex workers in Hanoi and Ho Chi Minh City,
Vietnam." Democratic Senator Michael Bennet of Colorado has
pointed out that though trillions of dollars of Federal debt has been
incurred through spending since he was appointed to the Senate in January of
2009, “we have nothing
to show for it”.
Actually the Obama administration does
have something to show for it as of April 2012 one in seven people in the
United States are receiving food stamps. Frank Crimi
Of course, the efforts by the Obama administration
to create a new dependent class neatly dovetails with its overall
efforts to create an expanding welfare state, efforts which have seen
Obama administration since 2009
increase spending by 41 percent on the nearly 80 federal welfare
programs that provide food assistance, housing, education services,
child care, and medical care.
Those expenditures, which now stand at $668
billion, coupled with another $284 billion in state and local government
expenditures, bring the total cost to nearly $1 trillion, making Welfare
the fastest growing part of government spending with aggregate costs
projected to reach over $1.5 trillion in 2022.
Those staggering outlays led Robert Rector of the
Heritage Foundation at a House Budget Committee hearing to
say Obama’s massive expansion of welfare-related programs are
leading to “ruinous and unsustainable future budget deficits,” adding
“Food Stamps are a symbol of that growth.”
Of course, the Obama administration takes a
different view. As Agriculture Secretary Tom Vilsack
said in August 2011, food stamps are part of the Obama
administration’s jobs program, noting “When you talk about the SNAP
program or the food stamp program, you have to recognize that it’s also
an economic stimulus… If people are able to buy a little more in the
grocery store, someone has to stock it, package it, shelve it, process
it, ship it. All of those are jobs. It’s the most direct stimulus you
can get in the economy during these tough times.”
Given that logic, the record number of Americans
now receiving food stamps must certainly indicate that economic
prosperity is nearly at hand.
The problem with Obama's reasoning is
that money for food stamps must come from somewhere so you are switching one
form of spending for another so that the overall simulus is zero. In
fact you are taking money away from investors who might have created wealth
instead of consumed it. You also create dependency so that those on
food stamps have less incentive to work. Why work for food if you can
get it for free? This policy increases Obama's chances of reelection
since those on food stamps will be afraid that the Republicans will take
those food stamps away. Normally market forces would bring down the
price of food if people have less money to pay for it but by providing food
stamps the food prices stay higher and those who earn money have to pay more
Another way of understanding what is
wrong with To Vilsack's argument is to carry it to its logical conclusions.
If giving out food stamps can stimulate the economy imagine why not give out
more? Why not give everyone in America an additional stipend of a
million dollars a month? Just imagine how much that would stimulate
the economy. If everyone can buy a million dollars worth more every
month someone has to stock what they buy, "package it, shelve it, process
it, and ship it. All of those are jobs." When put that way the
question of where the money is going to come from is a very obvious one.
Where is Obama going to get the money
for the food stamp program?
The arguments that only government
intervention can rescue the economy and that spending money is the way to do
so are arguments John Maynard Keynes made in the 1930s. In order to
understand what is wrong with the logic underpinning Obama's policies it is
worthwhile to understand the logic or rather illogic behind Keynesian
Keynes wrote an article in
1934 for the popular American magazine Redbook entitled “Can America Spend
Its Way Into Recovery?” and opened the article with
“Why obviously!” ...
Moreover, tax rates should never have to be increased to pay for the new
debt. The money borrowed and spent will revive the economy. A revived
economy requires less government spending on the dole “unemployment
insurance” and generates a stream of new tax revenue. Together, the savings
and the new taxes will more than cover the debt service. "
This statement illustrates
the essence of what is wrong with Keynesian economics. According to this statement a government can borrow and spend all it wants
to because increased tax revenues resulting from such stimulation of the
economy will more
than cover the debt created by borrowing. The economist Henry Hazlitt
wrote regarding Keynes' ideas:
“How marvelous is the Keynesian world! The more you
spend the more you [have]. The more you eat your cake, the more cake [to
It is the equivalent of proposing
that wealth can be created out of nothing.
Another example of such
such wishful thinking is the Keynesian multiplier. Dr.
explained the multiplier as follows:
Suppose a factory with a payroll of $500,000
locates in a Lemmingville, a typical suburban community. Suppose further
that the $500,000 is the only money that the factory spends in the
community, that all employees live in Lemmingville, and that each person
who lives there spends exactly one half of his income locally. By how
much will the income of Lemmingville rise as a result of the new
The $500,000 will be an addition to Lemmingville income. But the story
does not end here because, by assumption, the people who earn the
payroll will spend one half of the payroll, or $250,000, in the
community. This $250,000 will become income for the shopkeepers,
plumbers, lawyers, teachers, etc. Thus Lemmingville income will rise by
at least $750,000. But the story does not end here either. The
shopkeepers, plumbers, etc. who received the $250,000 will in turn spend
one half of their new income locally, and this $125,000 will become
income for other people in the community. Total Lemmingville income is
now $875,000. The process will continue on and on, and as it does, total
income will approach $1,000,000.
What if this $1000,000 dollars of
income is used to purchase more goods. It will become 2 million
dollars of income. Once that 2 millions is spent it will become 4
million. Clearly there is something wrong with the Keynesian
multiplier. In order to understand what is wrong with it we can simply
add up the dollars in the town of Lemmingville before and after the factory
paid its workers. What we find is that $500,000 simply changed hands
from the factory to the workers and there is no net gain in wealth of the
town of Lemmingville resulting from that exchange. The real gain in wealth
in Lemmingville is equal to the value of the products created by the Lemmingville factory
minus the cost of producing them.
If one follows Keynesian logic to
its logical conclusion than paying
workers to do nothing will generate wealth because they will spend that
money and that spending will lead to more production. John Maynard
Keynes came to a similar conclusion and
If the Treasury were to fill old bottles with
banknotes, bury them at suitable depths in disused coal mines which are
then filled up to the surface with town rubbish, and leave it to private
enterprise on well-tried principles of laissez-faire to dig the notes up
again (the right to do so being obtained, of course by tendering for
leases of the note-bearing territory), there need be no more
unemployment and with the help of the repercussions, the real income of
the community, and its capital wealth also, would probably become a good
deal greater than it actually is.
Keynes also believed that any
investment is better than no investment and that interest rates should be
kept as low as possible in order to encourage investment. The recent
collapse of the housing market shows just how wrong Keynes was in his belief
that any investment is better than no investment.
How can interest rates be kept low if
banks are unwilling to make risky loans with low rates of interest?
Keynes advocated that the government print the money and inject it into the
loan market. Keynes wrote in
expansion, performs the
“miracle . . . of turning a stone into bread.”
In the Keynesian world miracles happen!
Unfortunately in our world they don't. Robert Mugabe of
Zimbabwe spent and printed massive amounts of money and injected the money
into the Zimbabwean economy by giving raises to his security forces.
Instead of a miracle this created so much inflation that by July of 2008 it
cost 100 billion dollars just to buy 3 eggs in Zimbabwe. In order to
stop inflation Mugabe of Zimbabwe instituted price controls. Stores were not
permitted to charge the billions of Zimbabwean dollars it cost them to buy
food with the predictable result that the shelves of the stores were empty
Germany also printed
money to pay off its debt. Friedrich Kessler spoke
about what happened next. He said:
"It was horrible. Horrible! Like lightning
it struck. No one was prepared. You cannot imagine the rapidity with which the
whole thing happened. The shelves in the grocery stores were empty. You could
buy nothing with your paper money."
Former West German Chancellor Willy
Brandt warned that it could happen here in the United States. Peter
Peterson, in his book about the American economy On Borrowed Time, wrote:"
Ben Bernanke claims that he will be able to
rein in inflation when it comes. If we assume that he has time to stop it
he will need to raise interest rates in order to suck dollars out of
circulation. Federal Reserve
Chairman Paul Volcker had to raise interest rates to 21.5% to get inflation
under control during the 1980s. If the Federal Reserve had to raise
interest rates to 21.5% once again just the
the national debt would be over 2.4 trillion dollars.
“I remember well... listening to former West German Chancellor Willy Brandt
as he described how, as a child, he had to pack his family’s lifetime savings of
deutschmarks into bags and take them to the local orphanage. There they were
used to start a fire so the children could be kept warm. “You Americans simply
have never experience the hell that can take place in a country if it doesn’t
get inflation under control,” Brandt said. “It is what brought us Adolph Hitler.
It’s what transformed, in a hideous way, our entire values and society.”
It became clear in the 1970s and
1980s that Keynesian policies did not work. Why does the Keynesian
beast never die? That question was the topic of a
lecture by Peter
Klein at the Mises Institute. Dr. Klein quoted the University of
Chicago economist Luigi Zingalis explanation as follows:
Keynesianism has conquered the hearts of minds of
politicians and ordinary people alike because it provides a theoretical
justification for irresponsible behavior. ...
Politicians like to play Santa Claus.
What better way to get votes than to give money away? Keynesian
economics says go ahead spend, it's good for the economy. Prescribing
Keynesianism to some politicians has been described as
prescribing crack to a coke addict. Dr. Klein said in his lecture
They (Keynesian economists) tell politicians who
are addicted to spending our money that government expenditures are
good. .. In economics it gets you a job in Washington.
In other words if you tell government
what it wants to hear you rise to the top. It is no coincidence that
the man who holds the most powerful position in economics the United States,
the chairman of the Federal Reserve, Ben Bernanke is a Keynesian economist.
John Cochrane, professor at the
University of Chicago Business School wrote that one reason people cling
to Keynesian doctrine is comfort during times of economic turmoil. He
that [government] spending can spur the economy was discredited decades
ago...It is very comforting in times of stress to go back to the fairy tales
we heard as children but it doesn’t make them less false.
There is another appeal to
Keynesian economics to socialist idealists like President Obama. Keynesian economics
encourages the government to print money. Printing money is a form of
stealth wealth redistribution because it causes the purchasing power of
dollars to decrease and shifts that purchasing power to owner of the newly printed money.
It is a way to redistribute wealth to the government. If the
government spends some of that money on programs for lower income people that is a
form of socialist wealth redistribution that buys votes. Perhaps Keynes
advocated printing money because he was a socialist idealist. In chapter 24 of his book The
General Theory of Employment, Interest and Money, Keynes revealed his
socialist leanings when he argued for a “somewhat comprehensive
socialization of investment” and a redistribution of British income in the
desirable direction of diminished inequality. Keynes argued that wages
should be set based on what is “fair” and “reasonable” instead of by the
free market. Keynes wrote:
want to mold a society in which most of the existing inequalities and causes
of inequality are removed.”
When we are all poor all inequality has been
There is another reason for believing
Keynesian economics and that is the economic boom that occurred after World
War II. Paul Krugman a Keynesian economist who won the Nobel prize
From an economic
point of view World War II was, above
all, a burst of deficit-financed
government spending, on a scale that
would never have been approved
otherwise. Over the course of the war
the federal government borrowed an
amount equal to roughly twice the value
of G.D.P. in 1940 — the equivalent of
roughly $30 trillion today.
Had anyone proposed
spending even a fraction that much
before the war, people would have said
the same things they’re saying today.
They would have warned about crushing
debt and runaway inflation. They would
also have said, rightly, that the
Depression was in large part caused by
excess debt — and then have declared
that it was impossible to fix this
problem by issuing even more debt.
But guess what?
Deficit spending created an economic
boom — and the boom laid the foundation
for long-run prosperity.
Peter Schiff, one of the few economists
who predicted the current economic collapse,
pointed out that if spending on war is what will save the economy then we
should all fight a huge
pretend war in which we don't kill anybody in
order to revive the economy. Even Paul Krugman doesn't buy his own
argument. In September 2003, Dr. Krugman published a collection of his
columns under the title,
The Great Unraveling, in which he said that the money spent on the Iraq
war was harmful to the economy. Apparently war is only good for the
economy if Dr. Krugman approves of the war.
There are several possible explanations to
the economic boom following World War II. The Keynesian explanation is
that government spending required by the war caused the boom. A
that during the five
years after the war, federal spending dropped by 58% and taxes fell by 12%
and this contributed to the the post-war boom. Undoubtedly
technological developments and infrastructure improvements that resulted
from World War II such as the pipelines that carried Texas oil to the east
coast contributed to the post war boom. A third explanation is that
World War II postponed a boom that would have happened anyway.
If the Keynesian explanation is correct the
economic boom should have happened before World War II because the American government did not wait for
World War II to spend money. FDR’s Treasury Secretary, Henry Morgenthau
wrote in his
“We have tried spending money. We are spending more than we
have ever spent before and it does not work. … We have never made good on our
promises. … I say after eight years of this Administration we have just as much
unemployment as when we started … and an enormous debt to boot!”
It was not until after the spending
programs of FDR were over and after World War II that
America's economy recovered.
In 1901 a small enterprise known as the Gladys City
Oil, Gas, and Manufacturing Company
struck oil at Spindletop
Hill in Beaumont Texas. This was the beginning of the
Texas oil boom.
The amount of oil that gushed out of Spindletop Hill was so large that the
price of oil in the U.S. dropped to 3 cents a gallon. The United
States became the leading
oil exporter in the world. That fact alone might be sufficient to
explain the post-war boom.
Today draconian environmental regulations as well as
Obama's ban on oil production in the Gulf are having the opposite effect.
Paul Driesen in his article
Developing just our off-limits oil and gas
resources in the ANWR, OCS and Rockies could generate over $1.7 trillion
in government revenue and create 114,000 new jobs, a recent ICF
International study concluded. The petroleum would eliminate one-fifth
of the nation’s $350-700 billion annual oil imports bill. Developing all
US oil and natural gas resources on federal lands could generate $4
The American Energy Alliance and other experts say the benefits would be
even greater. And this is just conventional oil and gas revenue. It does
not include trillions more in revenues from oil shale, tar sands,
methane hydrates, coal, uranium and other deposits that Congress,
bureaucrats, judges and green activists have conspired to put off limits
to the American taxpayers and consumers who own them.
It does not consider the regulatory stranglehold on coal and nuclear
power plant construction – and thus on jobs and revenues that those
projects and their energy would provide. ..
And they are being closed down – to be “replaced” by pixie dust energy
from wind turbines and solar panels that now meet barely 1% of our total
Keynesian policies of
printing paper are a dangerous diversion from what needs to be done to save
the U.S. economy which is to allow American industry to develop America's