Obamanomics

How responsible is Obama for the United States economic problems?

Obama’s economic knowledge is very limited consisting of mostly of Harvard elitist theories of cap and trade and other academia leftist nonsense. The usual university fare for the young and intellectually curious. The theories are fine for a university but laughable to any Austrian economist. The out of school education he received from his mother, grandmother, friends, Islamic influences, and Frank Davis have been leftist, to put it kindly. He was handicapped by his family and a inferior formal education at Harvard from almost the day he entered politics.

Is it any wonder his presidency will be as infamous as Herbert Hoover’s?

Obama has deferred to leftist Keynesian economist and they have led the economy to the precipice of ruin. Christina Romer was the first with her infamous promise that unemployment would not exceed 8%. Austan Goolsbee picked up the Keynesians baton and ran with it. Timothy Geithner is another true believer in the English fairy tales by John Maynard Keynes and his classic work, The General Theory of Employment, Interest and Money.

Before Republicans criticize Obama and the Democrats too harshly George H. W. Bush, Ronald Reagan, and George W. Bush were Keynesians to some extent. W and his advisor, Hank Paulson, was the most fervent believer of the English fairy tales.

To understand these believers first it is important to understand the fundamental differences between Keynesians economist and Austrian economist and why they disagree so vehemently.

The Austrians look at the Keynesians as a bunch of 16th century doctors practicing bloodletting, covering patents with leeches to get rid of the “bad” blood. The Keynesians look at themselves as the enlightened elite who are the intellectual cream of the crop and destined to lead the nation of dullards to the promised economic Valhalla. Keynesians are about 90% of the economist employed and virtually 100% of the economist in government and universities. Keynesians look at Austrian economist as a bunch of nit wits that would be better off unemployed because they do not think correctly. Similar to how Democrats and Republicans look at each other.

Economist Simon Kuznets got the Keynesian momentum going with his GDP formula Y = C + I + G + NX

Economist Simon Kuznets got the bandwagon going in 1934 (Nobel Prize winner 1971) when he created our Gross Domestic Product (GDP) formula that is used to measure economic performance. According to Kuznets the GDP (dependent variable) is made up of four independent variables that are; consumption (C), investment/savings (I), government spending (G) and exports minus imports (NX). This is also sometimes referred to as the aggregate demand curve.

Y = C + I + G + NX

Please notice that the four independent variables in this equation all have equal weight. To a Keynesian government spending adds just as much to the GDP as the other three variables. To an Austrian this is nonsense. Investment and savings are what determine the future living standard. If you are not building factories, roads, electrical capacity, then your future standard of living will suffer.

The Austrian version of the equation would be as follows:

Y = C + (1.05) I + (-) G + NX.

Notice government has a negative sign in front of it because government does not produce anything, it takes from private sector and redistributes private wealth to itself or other favored constituents.

Richard Kahn came up with the multiplier and Keynes expanded the theory in the 1930s. The multiplier is at the heart of Washington economic thought and must be understood if Washington politicians are to be understood.

John Maynard Keynes got a assist from Richard Kahn and Simon Kuznets to create The General Theory of Employment, Interest and Money" in 1936."

The theory states that if the federal government spends $100 there is a multiplier affect or that the $100 will create $200 of GDP. The belief is that the $100 is paid to a contractor, who buys materials, who pays workers, who then buy food from the store; the store then buys more food from the farmer and so forth. The result is that the $100 turns into $200 and adds to the GDP.

The second Keynesian belief is that the economy has to be “steered” into full employment or full capacity by federal government and Federal Reserve using “injections” of cash and various stimulus programs.

The Obama January 2009 stimulus package would be an example of a “shovel ready” immediate boost to the economy whereas the Federal Reserves Fall 2010 Quantitative Easing II or QE II would be an example if a “liquidity” injection.

If the economy is at full employment and capacity there is no need to “steer” the economy but if the economy underperforms and there is a GDP “gap” between full capacity and under capacity the intellectual elites in Washington and the Federal Reserve can prescribe the correct amount of stimulus to fix the economy and create full employment much like a doctor would write out a prescription.

So for instance if the 2008 the real GDP was $14.2 trillion and full employment was projected to be $15.2 trillion. The “gap” would be $1 trillion. To a Keynesian the obvious answer is as clear as Rosie O’Donnell’s belly. Spend the correct amount of money, taking into account the multiplier, which will bring the economy back to $15.2 trillion or “full capacity” and employment. This seems logical to the average person and average Keynesian.

Most of Obama's economic education outside universities were lessons from Karl Marx

This is why when the Democrats took over the Congress, Senate, and White House they were so confident that they had the right plan for the economy. The plan was so simple even Obama could understand it. The White House proclaimed loudly that with the January 2009 stimulus package passed unemployment would not go above 8%. It was a done deal.

I calculated the marginal propensity to consume (MPC) and the magic “multiplier” for the 2000s for one of my economics classes.

MPC = change in consumption/change in GDP and the multiplier is 1/1-MPC.

The multiplier according to the Keynesian theory should have been around 3.57. For every federal dollar spent the increase to the GDP should have been 3.57 dollars. This means the Obama stimulus plan should have created about $2.9 trillion in economic growth. The economy would be booming in just a short amount of time! It looks funny now, but they were true believers of what they learned at Harvard and Columbia. Certainly the professors knew what they were talking about. The true believers in the White House certainly thought so.

Bush was the set up man for Obama

Bush, a true Keynesian if there ever was one, started the downward spiral going. He spent $152 billion on tax rebates in 2008, followed by $300 billion to refinance mortgages, followed by the $700 billion for the troubled asset relief program (TARP) and Obama’s $823 stimulus package in January 2009. This was the Keynesian economic theory on steroids.

What should have occurred in the fall 2008 is the economy suffer a very severe recession lasting up to 18 months. If the economy had swallowed that tough economic medicine today the economic growth rate would be 5% to 7%. When a forest burns to the ground it is a devastating event but what happens two years latter? The destruction of the old brings new invigorating growth and creativity. If Bush had stuck to his free market principals and let Wall Street crash and burn we would have a new restructured financial system today better than the old system. Sometimes medicine does not taste good but that does not mean we should avoid taking it.

Using the GDP at that time and added the magic “multiplier” dollars from Bush and Obama to the mix our GDP by the end of 2009 but certainly by 2010 should have been $19.7 trillion! In other words if the Keynesian economic theory was anywhere near valid, lets say only a multiplier of two, the economy would be booming. We would be a full employment. With just a multiplier of two the GDP would be $16 or $17 trillion dollars and full employment.

So what happened?

Unfortunately, the theory and Keynesian economics is complete hog wash.

Will the United States disintegrate into separate nations similar to what happened to the USSR in 1989?

The problem that Keynesians conveniently fail to account for is that if the federal government spends a trillion dollars the money has to come from somewhere. The government has to tax the money from people, borrow the money from people, or print the money that causes inflation and is a hidden tax on the people. In other words the Keynesians only show the good part of government spending and not the bad part where they take money from the people.

Politicians love this because they can, as Obama did, give the money to their favored companies and groups to help with election and re-election campaigns later. Another reason is it is a lot of fun to spend other people’s money.

The theory gives politicians the green light to concentrate wealth and power in Washington and to spend as much as they want and feel good about it. If you were a politician would you not like that kind of a theory? You would get to be a Hollywood star steering the idiot peasants out of harms way and toward economic prosperity. Everyone wants to be a hero. Everyone want to be king. Everyone wants to be a Hollywood star.

Former Goldman Sachs CEO Henry Paulson delivered the billions from the taxpayers to his former employer while at the Treasury Department under Bush.

The second problem with the theory is to a Keynesian the government can spend the money on anything, it does not matter, and it will help the economy equally. To a Keynesian a skateboard park in the middle of Oklahoma is of equal economic benefit to society as cancer research. A Keynesian makes no distinction between the consumption of doctors doing cancer research and a contractor building a skateboard park in the middle of nowhere. This seems insane to any rational human being but the Y =C+I+G+NX equation makes it so. To a Keynesian government spending on wasteful projects is just as important as investment in saving lives.

If that were not bad enough when the government spends money there is always a bureaucracy that siphons money off, sometimes as high as 67 cents of every tax dollar goes toward bureaucracy and red tape. If it were a private charitable company the news media would expose them, and they would go out of business. No billion dollar private charity could have such a poor performance and escape media scrutiny.

Even worse all that money created in the last three years from all the bail outs, Freddie, Fannie, cash for clunkers, mortgage refinancing, and so forth will cause inflation. When the Federal Reserve creates additional money the value of the dollar decrease and the cost of goods and services rise. People ask how do you know there will be inflation. Simple, did the Federal Reserve increase the money supply? Yes. Then there will be inflation. Inflation cannot occur in the extended future if the money supply is stable. This is no great secret to anyone except a Keynesian economist.

Number of banks in the USA over time. Regulation, small competitors leave the industry, gain market share, more revenues, more profits, ask for more regulation in the name of safety and security, repeat as often as needed.

Finally the most devastating part of the Keynesian bail out and money injections is that resources, valuable resources, used to build and create jobs, are misallocated for political proposes instead of being utilized in the private sector.

Why is the private sector so important over government?

Because people employed in the private sector are producing goods and services. Government workers take from the private sector. Government workers do not produce anything. Government workers take resources from the private sector and utilize them in whatever the politicians deem desirable. Producers of wealth verses takers and consumers of wealth. Which one is more important economically?

One of the big economic myths is that if you lay off government workers the economy will be hurt. The exact opposite is true. Government workers COST private sector jobs and divert resources from the productive sector of the economy to the nonproductive sector. This will REDUCE the standard of living for Americans. We need to lay off millions of government workers if we are to save the economy and our nation from ruin.

US Treasury Secretary and former NY Federal Reserve President Timothy Geithner discussing business with Federal Reserve Chairman Ben Bernanke

This is not to say we do not need policemen and judges. We need rule of law and stability. That is a legitimate and valuable contribution of government to society. What we do not need is 45% of the GDP consumed by government squandered and wasted to buy votes. Fifteen percent, 15%, is plenty to ensure we have enough resources to ensure the rule of law in a free capitalist society.

People in government and on the left think that everyone is as dumb as they are. We “need” government to tell us how to build a road or regulate our food production. They think that without government food companies would poison their food because it is cheaper to produce and millions would die. They cannot comprehend in a free society any company that engaged it that type of behavior would be almost instantaneously covered up in law suits and bad publicity.

They believe we are 70 IQ dullards that cannot figure out the complexities of designing a road and building it or how to regulate pollution. They fail to understand the power of giving the people property rights. They fail to see that if people had property rights and could sue polluters instead of relying on government to do the job for them there would be no pollution because who in their right mind in a capitalist free society would want to consider the nightmare of thousands of legal actions against them for damages?

Federal Reserve Chairman Benjamin Strong (1914-28) was the set up man for President Herbert Hoovers (1929-33) trip into infamy

In a free capitalist society where property right were enforced there would be LESS pollution because property owners would not tolerate their valuable resources being defiled by a corporation. The left fails to understand the relationship that has always existed between the rich, powerful corporations, and government and they probably never will.

They fail to see how government protects polluters and industry from the citizens through regulations that place enforcement responsibility on the federal government and not the people. Corporations want this regulation and protection from the people and the government is more than willing to provide the legal shield needed to continue so corporations can do as they please.

They fail to see how the federal government creates cartels and enforces the cartels higher profit margins through regulation and corruption. They fail to see the federal government is not on their side. They have been taxed and feed propaganda by the government that took their money and as a reward for getting ripped off they blindly support government policies that favor the wealthy elites in America and against their own financial interest.

They fail to see how regulations from drugs, transportation, health care, automobiles, allow corporations to protect themselves from the public and extract higher profits while reducing competition. The number of banks in the United States has declined from 13.400 to 6,401 from 1988 to 2010. It cost more for smaller banks to comply with regulations than big banks with large administrative staffing. Small start up drug companies cannot afford to wait ten years for the Food and Drug Administration to approve a new drug. It is all a game to the Fortune 500 corporations, they get their politicians to scream about safety and security, pass more regulations, an drive out of business more competitors, gain market share, raise prices, increase profits. Just like that for over a century now. The leftist fail to see what useful idiots they are for the Fortune 500 corporations.

The Central Bank of England Governor Montagu Norman (1920-44) was fixated on returning England to the gold standard at a overvalued rate of $4.80. He persuaded Benjamin Strong to inflate the value of the dollar from 1925 to 1928 creating a real estate and stock market bubble

Austrian economist know that any government burden over 30% is counterproductive. Forget all the hog wash about taxing the rich and social justice. If you do not have a job and are dependent on government there will never be social justice. More government means less social justice to a Austrian economist.

What the 30% number means is that government, federal, state and local government’s share of the GDP should never exceed 30%, preferably 15%. Even at 30% there are damaging affect to economic growth.

If the government share of taxes and consumption was limited to 20%, instead of today’s 45%, including state and local, there would be MORE for the government to consume because the economy would be functioning properly. More voucher schools, hospitals, roads, paychecks, and so forth.

So to answer the question was Obama responsible?

He did drive the final nails into this Keynesian economy. Obama is correct when he blames Bush, but he is so economically ignorant he fails to realize he is doing the EXACT same thing Bush did to destroy our economy. If ever there was a man who should get a refund for his education it would be Obama.

Republican or Democrat, Texan or Hawaiian it makes no difference to the elites in Washington. Different president, same policy.

We have seen the best of the Obama economy. Let me say that again. We have seen the best of the Obama economy. The best we can hope for is another bubble before the collapse.

We have created a money bubble with all the federal spending and borrowing. We have borrowed trillions and invested it into the government sector or non-productive sector of the economy. In 2009 the Obama stimulus bill contained only 12% for infrastructure projects. Simply put we borrow a lot of money and pissed it away.

If we go back and look at our Y = C + I + G + NX equation over the last five years we can see it more clearly. In January 2007 the equation for the was;

GDP = (68.8% of the economy was consumption) + (16.1% was private investment) + (20.1% was government spending), and for this comparison ignore exports and imports.

In 2011 the equation was;

GDP = [68% consumption (up 10.8% in nominal dollar terms)] + [11.9% investment (down 17.4%)] + [23.7% government (up 32.1%) spending], ignoring imports and exports.

From this it is clear what has happened in the last five years. Investment, the most important part of the economy, has declined 26% and government spending, the negative portion of the economy for an Austrian economist, has increased 17.9% in the simplified equation.

So why has consumption stayed about the same at 68% if things are so bad?

We consumed beyond our means by borrowing money from China, Japan and England, and spent it on government workers and projects. The Obama economic plan was nothing more than borrowing money, printing money, and spending it in the hopes that the economy would recover before reality set in. All the “growth” from July 2009 is nothing more than an illusion.

Why is this important now?

The federal credit card just hit its limit. The private bank aka the Federal Reserve is leveraged 53 to 1 and there are no more bullets in the gun. Any more quantitative easing or raising the debt ceiling and monetizing the debt will be meet with swift retaliation from the forces of supply and demand. With even the slightest moderate inflation trillions of red hot cash will come out of the banks holding the cash and flood America like a tsunami. The only silver lining would be if the Federal Reserve went bankrupt.

We have not even hit the payback yet for our irresponsible behavior in Washington. That will come soon.
People forget that in 1929 the economy did not just fall off a cliff. In 1930 the unemployment rate was 8.7%.

Herbert Hoover did much of the damage to create the Great Depression but it was started by Federal Reserve Chairman Benjamin Strong. Strong created his own money bubble in 1925 to 28 when his lifelong friend Montagu Norman, Governor of the Bank of England, politely requested Mr. Strong flood the American financial system with cheap dollars so as to deflate (cheapen) the value of the dollar and inflate the value of the pound. Norman wanted England to return to its prewar glory days where the pound was worth $4.80 and not the post WWI value of $3.50. Strong obliged Norman and created the money bubble that did cheapen the dollar and eventually the conditions for the stock market crash of 1929. Hoover raised taxes, passed tariff increases that cut off trade, created a budget deficit, and generally took a bad situation and made it much worse.

That is where we find ourselves today. Yes Bush did a lot of bad to the economy but Obama is the guy history will remember and the one who led us into the second Great Depression. No one remembers Benjamin Strong. Everyone, even to this day, remembers Hoover. And that will be Obama’s legacy.

What is the bottom line?

One more quantitative easting, one more increase in the debt limit, one more mistake and the house of cards will come crashing down all around us. The progressives will have achieved their goal of bankrupting the country.

We need to rely on local and state government to protect us from Washington. When the USSR became bankrupt the Moscow politicians became a bunch of useless beggars getting money anyway they could. So too will Washington. We need to invest in our local governments to protect us from the thieves in Washington.

How?

Legalize gold and silver. Demand a larger share of the income taxes from Washington to pay for the lack of service. Force Washington to go bankrupt. Demand the end of unfunded mandates, and if worse comes to worse like in the former USSR form separate countries based on the Constitution of the United States as written in 1776. Washington deserve the fate it will receive form the world financial system and from the people it has ripped off for generations.

And when the new nations are formed add 100 amendments limiting the power of the federal government. I would nominate the staff at Ludwig von Misses to perform the honors.