Tag Archives: Stimulus

The President’s Half-Truths & Expired Theories

On Wednesday, Harvard’s campus newspaper The Harvard Crimson ran an opinion piece by the President addressing the economy and student loan debt. Unfortunately, the op-ed was riddled with flawed logic, inaccurate statements, and deficient ideology that the American people shouldn’t endure.

First of all, it is worth noting that state-centric approach the President has taken to solve the woes of our time. Speaking to his jobs proposals that did not fair well on the hill, the President said “the best way to attack our economic challenges and put hundreds of thousands of people back to work is through bold action in Congress.” The idea, and the hubris needed to accept it, that the federal government wields sufficient power over the fourteen and a half trillion dollar U.S. economy and can, at will, micromanage it back to health is a bit disconcerting. Such ideas stem from overconfidence in government action and a flawed understanding of a market economy.

Hubris aside, the President bolsters the case for his jobs bill by repeating a faslehood tackled by the watchdog group FactCheck.org. He says:

[…] it’s been so disappointing to see Republicans in Congress block jobs bills from going forward—bills that independent economists say could create millions of jobs though the kinds of proposals supported by Democrats and Republicans in the past.

According to FactCheck.org, “the median estimate in a survey of 34 economists showed 288,000 jobs could be saved or created over two years under the president’s plan.”

Secondly in his piece, the President addressed student loan debt with this:

Living with that much debt forces you to make some tough choices. And when a big chunk of every paycheck goes towards student loans, it isn’t just painful for you—it’s painful to our economy and harmful to our recovery.

Here, the President is insinuating that the economy is suffering from a lack of spending in the private sector as graduated college students make down payments on the loans with money they would have otherwise spent. Unfortunately for Mr. Obama (and for his Keynesian cohorts), that is not the case. According to economic data, personal consumption is at much higher levels today than prior to the recession. And furthermore, consumption is not the engine of an economy, it is production that makes wealth. We should be removing all barriers for the producers of this economy to continue and expand production. With one of the highest corporate income taxes in the world, mounting regulation, and massive deficit spending, accompanied with a growing movement in the downtown regions of many U.S. cities which demand further sacrifice from producers, it is no wonder why the economy is stagnant.

Progressives, such as President Obama believe in a perverted understanding of liberty.  According to them, liberty was not just the freedom from oppression by others, it was the freedom to achieve the most in one’s life — that all peoples were entitled to explore themselves and grow to be the best they can be. From this shore, progressives justified extraordinary breaches of individual liberty including the establishment of the welfare state, extensive regulation of commerce, and atrocious distributions of wealth.

The President seeks to accomplish the same thing as he echos the cries of the Occupy Wall Street hippies for the wealthy to “pay their fair share” in taxes in order to help the country eliminate its deficit problems; as he designs to spend more money we do not have on stimulus projects that do not work.

The President should not get carte blanche to propagate half-truths and expired economic theories. The President can do us all a favor by doing two things: instruct the federal government to move out of the way of the producers of this country and let the marketplace restore itself, and reconcile his progressivism with Jeffersonian liberty in favor of the later.

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The Shortcomings of Keynesianism

Keynesianism’s premise is that the private sector does not allocate resources properly, and that government, through deficit spending and expansionary monetary policy, is the only vehicle to stimulate the economy. I wholly disagree with that premise. The opposite of Keynesianism would be neoliberalism – my economic philosophy: that the private sector can allocate resources much more efficiently through the influence of market forces, and it is the optimal role of government to take as little capital away from the market as reasonably possible.

As the Keynesian theory goes, recessions are caused when – for some reason or another – individuals stop buying goods (perhaps due to pessimistic views of the future). They begin to horde money. As consumptions decreases, as does employment. It is therefore the duty of the government to spend large sums of money to “prime the pump”, i.e., flood the market with money so as to increase consumption, and sustain employment.

This suffers from a variety of flaws in my opinion. First of all, people need to consume the basics to survive. Bread, milk, shoes, etc. If people must continue to spend, then they must continue to produce, which in turn leaves room for adjustment of the market. The fact that businesses and banks are unwilling to invest or lend, is due in part because they are still attempting to clean their books. By allowing businesses to adjust naturally (by lowering wages, reducing spending) it gives them time to rebuild savings, and return to productivity. Money pumped into the system prematurely by the government, only adds to uncertainty, increases the level of nonperforming assets held by banks, and prolongs the recovery.

But because fear of the future exists, people are more likely to be prudent with their money as opposed to spend it away. An increase in confidence is what’s needed in order for people to reignite the flow of capital. Stimulus packages, mounting debts, inevitable tax increases, bailing out of banks and car companies, and government involvement in Health Care, only adds to the uncertainty of the future.

Its important to look at the historically miserable record of Keynesianism, because it really tells of the story for us. The 1921-1923 economic recession, which began with a steeper decline than the Great Depression, got no help from the government, and saw a quick economic recovery for precisely that reason. The federal government actually reduced spending from $6.4 billion in fiscal year 1920 to roughly $3.3 billion in 1923. The pullback by the federal government left more capital in the private sector to fund real economic growth rather than government consumption.

However, in 1933, Roosevelt went on a spending binge, and while got industrial production to increase, by 1934, it took a U-turn back down, showing that a large jump in government stimulus can only temporarily improve the economy. Follow the logic here. Governments can only spend to the extent that they can borrow or tax from the private sector. In that sense, the economic growth that funded the spending had already occurred. To presume that productivity would multiply thanks to government stimulus is the equivalent of assuming that a thief could aid a convenience store by first stealing $20 from the store, then returning later in the day to spend it. Whether by increasing taxes, national debt, or printing the money (growing inflation), the government has to damage long-term wealth in order to provide short-term economic activity.

Tax cuts are far more superior in stimulating the economy than direct investment by the government. Allowing companies to keep more of their revenue is an incentive to create more wealth and thus promote economic growth. Allowing individuals to spend more of their own money as they see fit helps the market more accurately understand demand signals than when the government just spends trying to create demand out of nothing. For example, in the six months prior to the Bush tax cuts, GDP grew at an annual rate of just 1.7%, and lost 267,000 jobs. In the six quarters following the tax cuts, the growth rate was 4.1 percent and added 307,000 jobs, followed by 5 million more jobs in the next seven quarters. Tax revenues in 2006 were 18.4 percent of GDP, which was above the 20-year, 40-year, and 60-year historical aver­ages.

Keynesianism, with its kneeling so much on government, cannot possibly work to stimulate the economy in the long-run. Only the private market can fix itself, and if the government wants to help that natural process, it can refrain from taking away capital by spending less and lowering taxes.

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