Obamanomics just won’t work Part I

November 6, 10:25 AMOrange County Independent ExaminerChad MacInnes

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John Marnard Keynes: his " third way" contributes greatly to the perpetuation of the bubble economy.

Chad MacINNES

President Obama once again demonstrated his utter lack of understanding of the basic principles of economics during a meeting with his economic advisors on Monday. He chooses to blindly follow the misguided and discredited theories of Lord Keynes, among others, given him by his advisors. It is also most unfortunate for this country that the entire cadre of the presidents economic advisory team seem incapable of objectively analyzing the Keynesian model that they are so attached to, for if they could only extricate themselves from this “third way” paradigm and experience a few moments of economic lucidity, it is highly possible that even they could begin to fully understand just how utterly disastrous Keynesianism has been for the global economy in general, and our economy in particular. Unfortunately, they ignore the continued warning signs that keep popping up and continue to dig the United States ever deeper into this economic black hole that threatens to suck the very life out of what remains of our economy, and will ultimately take what remains of our liberty with it.

Let me be clear: what we are presently witnessing in the ongoing economic crisis is the natural laws of economics giving their referendum on Keynes. The current national unemployment figure of 10.2% simply underscores the point. In short, Keynesian theory suggested what has been called a “third way,” not fully capitalism and not fully socialism. It sought a system where the government, both through the power of the central bank and intervention through regulation, legislation and manipulation would be able to bring about a condition of perpetual prosperity, an end to recessions and economic cycles of boom and bust, and end to the bubble economy. The problem with the theory is that the very controls and manipulations demanded by Keynesians to “grow” and “sustain” the economy are the very things responsible for the creation of the economic bubbles and the business cycle, precisely because these things violate the natural laws of economics. Mises, Rothbard, Hayek and others have proven this time and again. The natural laws of economics correlate with human thought and action, and these things are wholly incompatible with bureaucratized central planning boards and central banks fixing prices, wages and interests rates at values much different than those the free market would deem proper. Attempting to isolate these things from the reality of the marketplace in essence creates the bubbles that are bound to burst at some point because they are at odds with the market, with the decisions and choices producers and consumers make on a daily basis.

Keynesian theory has been the driving force behind the economic policies of the industrialized world since the early twentieth century. Keynes’ model economy was viewed as having evolved beyond capitalism, thus noted above as being a hybrid between capitalism and socialism. It advocates corporatism. It is therefore by its own admission decidedly not capitalism. Those who prefer to cast the blame for the current economic mess on unrestrained capitalism are flat out wrong and woefully uninformed, because there has been no unrestrained capitalism in the United States – ever. Sure, we came fairly close up until 1913; however, once the Federal Reserve Act and Income Tax Acts were passed and the Constitution amended through the ratification of the 16th Amendment, all hopes for true capitalism were indeed dashed.

Mr. Obama and his advisors like to remind us how they inherited this economic crisis from the previous administration. There is nothing untrue in that statement. However, for anyone, especially a well trained and educated economist, to lay the whole blame for this mess at the feet of the Bush Administration without taking into account the overwhelming number of far more important factors that are truly the root cause, is disingenuous, dishonest, and grossly insulting to those of us who have studied anything other than Keynes, as well as an affront to the common sense of anyone who takes the time to question the current scenario and really think it through. Those economists who regurgitate the official government talking points and try to put a positive spin on the current course of action undermine their own legitimacy in doing so. It is simply incredible that so many of these economic advisors are so quick to declare unrestrained laissez-faire capitalism the root cause of this crisis when they know full well that the prevailing Keynesian school of economic thought that has been driving economic policy for the better part of a century is itself specifically defined as being something that is not capitalism. There is far too much at stake to play semantics and talk out of both sides one’s mouth.

Mr. Obama, his advisors, the talking heads on television, and the stock market all initially responded very enthusiastically to last weeks’ news of a 3.7% growth in GDP. The administration talked it up all over the major networks, all but proclaiming a return to prosperity and an end to the “recession.” In reality, though, the only reaction to the news worth taking into account has been that of the stock market. While the market was up 199 points on the day at the news, the following day it dropped 249 points as a sobering reality set it. That reality is the fact that the market, often understood to be a leading indicator, is very uncertain because it knows that this supposed growth in GDP is as much fiction as newly created paper money fueling it. For all the celebration of perceived economic growth, all that has been achieved is the creation of yet another bubble, the purpose of which is to contain the explosion of the previous bubble. In short, nothing good for the long term has been achieved. GDP is measured on spending, and so if billions or trillions are spent either by private industry or the government, such a vast amount will surely have an immediate effect, but that effect can only last for so long.

Government spending is still spending, and it has a cost – often a cost far higher than what would be acceptable in the private sector, were the free market system allowed to actually work itself out. Many are under the serious misunderstanding that government spending equals free stuff for the public. This misguided assumption has been disproved time and time again. The cost of government spending ultimately is laid at the feet of those in the private sector who produce wealth, and as government spending grows and it’s power expands, it obliges itself to partake of ever increasing amounts of that private wealth to transfer it to the public sector.

With an increase in spending comes a need to increase revenue, and this problem of revenue is first solved by taxation (inclusive of fees, assessments, etc.). When it becomes obvious that no amount of increase in taxation will suffice government, because it enjoys a monopoly on the creation of money through the Federal Reserve, simply resorts to deficit spending – spending beyond its means – with the understanding that the Fed will create more money, and the Treasury will sell bonds with which to pay for the increase in government spending. In the Keynesian world this is all fine and well, but the reality is that it is a very, very shortsighted strategy that ultimately creates more problems than it solves. Why? Because someone eventually still has to pay for it, and that someone is always the taxpayer.

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