Thursday, September 22, 2011

Obama Against Jobs, Economy, Middle Class, Part 1

Of course, Obama says he is for those things, but his actions work against all of them. Ben Franklin said, “Experience is a dear teacher, but fools will learn at no other.” Obama has learned nothing from the Keynesian experiences of the U.S. or other nations. He hasn't even been able to learn from the already evident failure of his own Keynesian policies. For him, it is as though economic history never existed. He fits Nobel Prize-winning economist Friedrich Hayek's observation that the most orthodox disciples of Keynes have consistently “thrown overboard...all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics.”
Obama claims we need a $447 billion spending bill to create jobs and stimulate the economy. He has learned nothing from the results of his earlier $800+ billion stimulus. It and other federal spending produced a massive increase in the money supply, as shown here, yet were ineffective in stimulating the economy or job growth. Unemployment remains stubbornly at 9 percent.

Below is a graph that shows how ineffective the massive government spending by Obama has been. You can see that the “recovery”—if you can call it that—has been far weaker and slower than previous recessions that didn't have such stimulus spending.

Here's another chart that should have been a teaching experience for Obama—if he had been willing to learn:

 Source: Bureau of Labor Statistics: “The Job Impact of
the American Recovery and Reinvestment Act” [Stimulus Act]

The chart shows (red line) the administration's projection that the stimulus program would hold unemployment under 8 percent. Instead, unemployment actually rose higher than it would have been without the stimulus. Yet Obama now insists on more of the same failed policy.

The idea that government spending would stimulate the economy was the brainchild of John Maynard Keynes. He claimed spending was the driver of the economy and that government spending produced a “multiplier” effect as the dollars were, in turn, spent again and again throughout the economy. He had no evidence to support this. (Keynes' biographer Hunter Lewis says Keynes “wasn't particularly interested in evidence.”) But the idea sounded superficially plausible enough to provide intellectual cover for what Franklin Roosevelt—and many politicians since—wanted to do anyway: massive spending for political and ideological purposes.

But Keynes was wrong. The multiplier didn't work as he supposed. Instead of ending the Great Depression, massive government spending extended it by several years. Nobel Laureate Robert Lucas and Leonard Rapping conclude that on just the basis of Federal Reserve Policy, the economy should have been back to normal by 1935. Economics professors Harold L. Cole and Lee E. Ohanian state: “We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936.” FDR's New Deal policies prevented that recovery. And Obama's policies are having the same adverse effect on the economy today.

The Obama stimulus bill was based on a Keynesian multiplier of 1.50, meaning the GDP will increase by $1.50 for every additional dollar of government spending. This was voiced repeatedly by the Obama administration, but there is no evidence that multiplier is valid. If the multiplier really were larger than 1.0, the GDP would rise even more than the rise in government spending! The U.S., Greece and other spendthrift countries wouldn't be going broke—they'd be getting richer the more they spent! The reality is that the multiplier is always less than 1.0. The money that is spent over and over in the private sector from the government programs is always less than the cost of the programs.

Harvard professor Robert J. Barro has done extensive research on Keynesian multipliers. A recent study by Barro and Charles J. Redlick found a multiplier effect of 0.4 to 0.7. The late Gerald W. Scully, a professor of economics at the University of Texas at Dallas, analyzed federal outlays and GPD 1947-2007 and found a multiplier of only 0.46.

Then there is the work of a trans-Atlantic team of four economists, John F. Cogan and John B. Talyor of Stanford University and Tobias Cwik and Volker Wieland of Goethe University. They found the Obama administration's outmoded Keynesian models yielded estimates for stimulus growth six times as large as they could produce under modern Keynesian simulation.

A study by Harvard's Alberto Alesina of 91 fiscal stimulus programs in 21 developed countries 1970 to 2007 found tax cuts were more stimulative than government spending. Mr. Alesina even found 107 periods since 1980 when governments quickened economic growth by cutting deficits. His findings are just the opposite of Obama's program of stimulus spending and increased deficits.

A 2009 study by the World Bank and Harvard University of economic growth and entrepreneurship found lower tax rates on firms are powerful spurs to job growth and business start-ups.

The Keynesians implicitly assume that government can allocate resources more effectively and efficiently than the private sector. This is laughable. They argue that the multiplier effect allows money to recirculate through the economy multiple times. But if the same money were not initially preempted by government stimulus spending, it would be spent multiple times by the private sector, too—and more effectively. What makes the economy grow is not transferring more money to the government to spend but leaving it in private hands, where savings and investments are used to make workers more productive. The research by Barro and Redlick found that if government spending is funded by taxes, the multiplier is -1.1. In other words, if the government raises taxes by $1, the economy will shrink by $1.1.

Christina Romer, in a study with her economist husband David before she became Obama's economic advisor, found multipliers from tax cuts “have very large and persistent positive output effects.” They concluded that tax cuts have a multiplier of about 3.0. This means one dollar of tax cuts raises GDP by about $3.

Brian Wesbury, former chief economist for the Joint Economic Committee of the U.S Congress writes, “If you take a look at the U.S. economy since 1960, the larger the government share of GDP, the higher the unemployment rate. In other words, when it comes to jobs, government spending has a multiplier of less than one—government spending destroys jobs.”

Now you know why the three charts above show the Obama approach to creating jobs and promoting economic growth has been such a failure. They reflect Obama's conviction, voiced December 8, 2009, that we “must spend our way out of this recession."  His new proposal for tax increases and $447 billion more in federal spending shows he hasn't learned a thing.  Nor have those who still support him.