9/12/2009

Where’s Reaganomics?

Washington has attacked the current economic downturn with Keynesian economics - the theory that you fight an economic downturn by pumping money into the economy to "encourage demand" and "create jobs." The result? The longest recession since World War II — 21 months —  with no clear end in sight. The government  borrowed close to a trillion dollars out of the private economy —  yet it has done squat to increase incentives for investment and entrepreneurship.

In February 2008, Bush cut a deal with congressional Democrats to pass a $152 billion Keynesian stimulus bill based on countering the recession with increased deficits. The central feature was a tax rebate of up to $600 per person.  It had no significant effect on economic incentives. In fact, looking back a year, it was a joke.

Learning nothing from this, Barack Obama came back in February 2009 to support a $787 billion, purely Keynesian stimulus bill. Congress, like lemmings, followed along with barely a whimper.

Even the tax-cut portion of that bill was Keynesian. The key feature was a $400-per-worker tax credit, which, again, has no significant effect on economic incentives. The lessons learned are so obvious, yet they still “don’t get it”: printing money and throwing it at the banking system or the consumer doesn’t create economic growth! It just creates bigger and bigger DEFICITS. And you know what? Somebody is going to have to pay the piper. It may not be next year, it may not be for a decade or more- but make no mistake, we WILL PAY for what we’ve done here.

The Obama administration is now claiming success because of the slowdown in economic decline. Last month, only 216,000 jobs were lost, and the economy declined by only 1% in the second quarter. Based on this rhetoric, it looks like Obama expects to get credit for anyone who still has a job!

The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Ronald Reagan's decision to dump Keynesianism in favor of supply-side policies—which emphasize incentives for investment—produced a 25-year economic boom. That boom ended as the Bush administration proceeded to abandon every single component of Reaganomics, one by one, culminating in Treasury Secretary Henry Paulson's atavistic Keynesian stimulus in early 2008.

Stephen Moore of the Cato Institute stated that "no act in the last quarter century had a more profound impact on the US economy of the eighties and nineties than the Reagan tax cut of 1981." He claims that Reagan's tax cuts, combined with an emphasis on federal monetary policy, deregulation, and expansion of free trade created a sustained economic expansion creating America's greatest sustained wave of prosperity ever. Sure, mistakes were made. But the lesson was clear nonetheless.

Obama showed up in  2009 operating under the scenario that none of this history ever happened. Suddenly national economic policy is back in the 1930s. Instead of the change voters thought they were getting, Obama has quintupled Bush's 2008 Keynesianism.

The result is the continuation of the economic policy disaster we have suffered since the end of 2007. Obama promised that his stimulus would prevent unemployment from climbing over 8%. It jumped to 9.7% last month. Some 14.9 million Americans are unemployed, another 9.1 million are stuck in part-time jobs and can't find full-time work, and another 2.3 million looked for work in the past year and never found it. That's a total of 26.3 million unemployed or underemployed, for a “real” unemployment rate of 16.8%. Personal income is also down.

Having rejected Keynesianism in favor of fiscal restraint, France and Germany now see economic growth return in the second quarter this year. India, Brazil and even China are enjoying growth as well. Canada enjoyed job growth last month. But the U.S. still seems stuck in “Keynesian Stinkin’ Thinkin’”.

U.S. economic recovery and a permanent reduction in unemployment can only come from private, job-creating investment. Nothing in the Obama economic recovery program, or in the previous Bush 2008 program, offers that.

To produce long-term economic growth we will require a fundamental change in economic policies — lower, not higher, tax rates; reliable, low-cost energy supplies, not higher energy costs through cap and trade; and no unreliable alternative energy that can survive only on costly taxpayer subsidies. Healthcare reform is an even bigger problem – and based on its Obama Administration track record so far, it appears that Congress really doesn’t yet have a clue as to the negative economic impact of the legislation in its current form.

Once you add in the interest on the growing debt because of the persistent deficits, federal expenditures in 2083, according to the CBO, could range anywhere between 44 and 75 percent of GDP. That’s completely unsustainable and what it means is coming defaults on Treasury debt and social program payments such as Medicare and Social Security. You cannot “inflate your way out” of the current situation, and there’s no way to raise taxes by enough to do it either. We’ve dug ourselves into an untenable economic hole through sheer STUPIDITY!

Unfortunately, Obama and his advisors seem to be wedded to his political talking points, and his ideological tunnel vision seems to be permanent. So don't expect any policy changes. Expect an eventual return to 1970s-style economic results instead – higher inflation and sluggish (if any) economic growth. Is it any wonder that 70,000 unhappy people – Democrats, Republicans, Libertarians and Independents – protested in Washington DC today? You asked for it.