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.
Peter I'm all for less spending and cutting gov't down to size, but let's not forget the Reagan years were also years of the greatest ever budget deficits up that point in time (and in today's dollars quite comparable to Bush years deficits).
ReplyDeleteThe current 'crisis' has only one outcome and that is economic collapse of our currency. We've mortgaged too much of our future to ever be able to pay it back. The question is just whether we put it off another 10 years by overspending and slowly withering away as we are doing now shoving it into the next administration's shoes, or whether we pull the plug now and get it over with and bite the bullet of hard times now.
Surely now is a better time since the hole only gets deeper with time, but you know that's just not going to happen from either right or left (if Republicans were in charge the policy would be no different). The gov't has lost control over our economic future and the last 30 years (since Reagan's deregulation) it's the banks who control economic policy because they hold ALL the levers.
@Rick,
ReplyDeleteReagan once said that the growing budget deficits during his time in office were his biggest disappointment. I agree that we're headed either for some sort of economic collapse, or default by our government on its debt or programs like Medicare and Social Security. And I also think its too late to fix it.
Peter,
ReplyDeleteTHANK YOU for taking the time to put together a fantastic article that, in keeping with this week's 9/11 anniversary, can be filed under the heading, "Have you forgotten?"
I feel monumentally fortunate to have been alive during a) the PC revolution and b) the Reagan years.
I am constantly frustrated by the current Republican leadership's inability to see that acting like Democrats is bad for the party and for the country. I often wonder where the next Reagan shall come from.
I hope that Obama's presidency will snap this country out of its collective stupor, but if there is no viable replacement we will be seeing a repeat of 1996.
-Todd
France's tax burden is 45% of GDP, Germany's is 37%, compared to United States at 29%. Given these numbers, its hard to point at their economies and suggest tax cuts over here.
ReplyDeleteSource: OECD Revenue Statistics
The current administration is actually straddling Keynesian and Monetarism (Friedman). After the collapse of Lehman, the US was facing a decreasing money supply, which Friedman would classify as a liquidity crunch. Under such a scenario, Friedman would suggest monetary policy is necessary to avoid a deflationary spiral. Loans to financial institutions, the Big 3, and the issuance of long term bonds is consistent with Friedman policies, I agree that direct Government spending has gone out of control. However, criticizing the Keynesian policies without recognizing the Friedman tactics is inaccurate.
ReplyDelete