Obama and Keynes, Hayek and Laffer

Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10% of GDP.

The share of the US working-age population with jobs in June actually fell from 58.7% to 58.5%. This is the real stress indicator. The ratio was 63% three years ago. Eight million jobs have been lost.

The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. . . .

"Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m."

. . . This really is starting to feel like 1932.

- Ambrose Evans-Pritchard, The Telegraph, With the US trapped in depression, this really is starting to feel like 1932, 4 July 2010

. . . With significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035.

The CBO warns of potentially devastating consequence for the United States if this debt mountain is not tackled, and even points out that its “projections understate the severity of the long-term budget problem because they do not incorporate the significant negative effects that accumulating substantial amounts of additional federal debt would have on the economy” . . .

With his reckless big government policies, Barack Obama threatens to run his country into the ground, with American decline the inevitable end result. . . .

- Niles Gardner, The Telegraph, America is sinking under Obama’s towering debt, 2 July 2010

We are in a recession - if not a depression - that finally came to the fore in 2007 after two decades of Democrat social engineering of our financial sector. And we today are still in a recession - if not a depression - because of the election of a President who is deeply anti-business and who has demonized the profit motive. Indeed, it is those, along with his twin drives to socialize our economy and empower unions which have been the defining features of Obama's nearly eighteen months in office. Well, those four in addition to world record profligate spending. And on the horizon, Obama promises us massive new taxes ("don't read my lips"). Moreover, the centerpiece of his proposed financial regulations is to reinstall the same social engineering into our financial sector that led to our current economic mess in the first place. For the sake of brevity, I will stop my list there.

And yet now, Obama, in advance of November, is trying to convince America that he is not anti-business. According to Obama, all problems are the result of Republicans, he is struggling mightily to correct the situation (pay no attention to his projections in January 2009 that promised solutions if we immediately passed the Stimulus), and that he is a friend of business, both large and small. All of that is at least as outlandish as it would have been for Bill Clinton, during his last year in office, to try to convince America that he had always been deeply committed to monogamy.

I doubt much of America is fooled at this point:



(H/T Hot Air)

And then there was this the other day:

You’d think the well-heeled and enlightened eggheads at the Aspen Ideas Festival . . . would be receptive to an intellectually ambitious president with big ideas of his own.

In a way, the folks attending this cerebral conclave pairing the Aspen Institute think tank with the Atlantic Monthly magazine might even be seen as President Obama’s natural base.

Apparently not so much.

“The real problem we have,” Mort Zuckerman said, “are some of the worst economic policies in place today that, in my judgment, go directly against the long-term interests of this country.” . . .

“If you’re asking if the United States is about to become a socialist state, I’d say it’s actually about to become a European state, with the expansiveness of the welfare system and the progressive tax system like what we’ve already experienced in Western Europe,” Harvard business and history professor Niall Ferguson declared during Monday’s kickoff session, offering a withering critique of Obama’s economic policies, which he claimed were encouraging laziness.

“The curse of longterm unemployment is that if you pay people to do nothing, they’ll find themselves doing nothing for very long periods of time,” Ferguson said. “Long-term unemployment is at an all-time high in the United States, and it is a direct consequence of a misconceived public policy.”

Ferguson was joined in his harsh attack by billionaire real estate mogul and New York Daily News owner Mort Zuckerman. Both lambasted Obama’s trillion-dollar deficit spending program—in the name of economic stimulus to cushion the impact of the 2008 financial meltdown—as fiscally ruinous, potentially turning America into a second-rate power.

“We are, without question, in a period of decline, particularly in the business world,” Zuckerman said. “The real problem we have…are some of the worst economic policies in place today that, in my judgment, go directly against the long-term interests of this country.”

Zuckerman added that he detects in the Obama White House “hostility to the very kinds of [business] culture that have made this the great country that it is and was. I think we have to find some way of dealing with that or else we will do great damage to this country with a public policy that could ruin everything.”

Ferguson added: “The critical point is if your policy says you’re going run a trillion-dollar deficit for the rest of time, you’re riding for a fall…Then it really is goodbye.” A dashing Brit, Ferguson added: “Can I say that, having grown up in a declining empire, I do not recommend it. It’s just not a lot of fun actually—decline.”

Ferguson called for what he called “radical” measures. “I can’t emphasize strongly enough the need for radical fiscal reform to restore the incentives for work and remove the incentives for idleness.” He praised “really radical reform of the sort that, for example, Paul Ryan [the ranking Republican on the House Budget Committee] has outlined in his wonderful ‘Roadmap’ for radical, root-and-branch reform not only of the tax system but of the entitlement system” and “unleash entrepreneurial innovation.” Otherwise, Ferguson warned: “Do you want to be a kind of implicit part of the European Union?

This was greeted by hearty applause from a crowd that included Barbra Streisand and her husband James Brolin. “Depressing, but fantastic,” Streisand told me afterward, rendering her verdict on the session. “So exciting. Wonderful!”

Brolin’s assessment: “Mind-blowing.”

What does it say when even rabid lefties Brolin and Steisand start to think that you are too far to the left and are leading us into economic Armageddon?

The reality is that what Zuckerman and Ferguson point out is apparent to very many Americans. On a similar note, Wayne Allen Root colorfully described the situation in his column in the Las Vegas Review-Journal:

The current occupant of the White House claims to know how to create jobs. He claims jobs have been created. But so far the score is Great Obama Depression 2.2 million lost jobs, Obama 0 -- a blowout.

Obama is as hopeless, helpless, clueless and bankrupt of good ideas as the manager of the Chicago Cubs in late September. This "community organizer" knows as much about private-sector jobs as Pamela Anderson knows about nuclear physics.

It's time to call Obama what he is: The Great Jobs Killer. With his massive spending and tax hikes -- rewarding big government and big unions, while punishing taxpayers and business owners -- Obama has killed jobs, he has killed motivation to create new jobs, he has killed the motivation to invest in new businesses, or expand old ones. With all this killing, Obama should be given the top spot on the FBI's Most Wanted List.

Meanwhile, he has kept the union workers of GM and Chrysler employed (with taxpayer money). He has made sure that most government employee union members got their annual raises for sleeping on the job (with taxpayer money). He made sure that his voters got handouts mislabeled as "tax cuts" even though they never paid taxes (with taxpayer money). And he made sure that major campaign contributors collected billions off government stimulus (with taxpayer money).

As far as the taxpayers -- the people who actually take risks with our own money to create small businesses and jobs and pay most of the taxes -- we require protection under the Endangered Species Act. . . .

The days of believing the Obama propaganda about a jobs recovery are over. The trillion-dollar corporate handouts (neatly named "stimulus") may have kept big business in the money for the past 18 months, and artificially propped up the stock market, but small business is the real canary in the coal mine.

My small business-owning friends aren't creating one job. Not one. They are shedding jobs. They are learning to do more with fewer employees. They are creating high-tech businesses that don't need employees. And many business owners are making plans to leave the country. In a high-tech world where businesses can be run from anywhere, Obama has a problem. His one-trick pony -- raise taxes, raise taxes, raising taxes -- is chasing away the business owners he desperately needs to pay his bills. . . .

For less color, but more facts, there is this frightening report from the LA Times:

For the recovery to gain steam, most economists believe small businesses need to be strong enough to hire new workers. But according to one measure, the employment picture in this sector is weakening.

Intuit Inc., which provides payroll services for small employers, says the nation's tiniest companies had fewer new hires last month than any time since October.

The data are further evidence of a trend that has had many economists worried for months and intensifies concerns that smaller firms may not be robust enough to help lead the country out of its financial slump. The slowdown in hiring is particularly troublesome, experts say, because small businesses typically hire first during a recovery. A reluctance by little companies to add positions could mean that the big firms, which typically lag behind, will add jobs even more gradually.

"It's a bad sign," said Susan Woodward, an economist who tracks small business employment for Intuit. "Small businesses hire first — and they're losing their steam."

To calculate its estimate of national hiring, Intuit uses payroll information from its 56,000 small-business customers. The company defines small businesses as those with fewer than 20 employees.

Intuit's data show that small businesses hired just 18,000 additional workers last month. That's still positive territory, but it's less than a third of the 60,000 that were added in February, when it seemed that an employment recovery was imminent. Additional hiring dropped steadily during the spring, to 40,000 in April and 32,000 in May. Another payroll company, Automatic Data Processing Inc., painted an even gloomier picture, saying that small businesses lost 1,000 jobs nationwide in June. . . .

Robert Alva, who owns Super Cool Air Conditioning in South El Monte, said he's been trying for months to expand his four-person shop to about 10 people to break into the potentially lucrative business of installing solar energy systems. But customers are reluctant to buy new cooling systems right now or even repair their old ones, he said. Whereas he would normally be able to finance a modest expansion by obtaining a loan, Alva said, he's been turned down twice for a small-business loan — squeezed by the credit crunch that has affected thousands of small firms.

To understand the oversized importance of these little businesses to the U.S. jobs picture, consider that the smallest firms — those with fewer than 20 employees — employ more than one-sixth of the nation's workers. But so far this year, these companies have provided about one-third of all new private-sector jobs, said Brian Headd, an economist with the Small Business Administration. So any cutbacks would be felt disproportionately throughout the economy.

"Small-business hiring is right at the heart of it because small businesses usually are the engine of job creation in the U.S.," said John Challenger, president of the employment consulting firm Challenger, Gray & Christmas. "It's small businesses that drive the unemployment rate down, and if the small businesses are faltering, that suggests that the risks of recession are growing." . . .

As I pointed out in prior posts, Obama has done anything but help businesses generally or small business in particular. Every one of his goals for America, from Obamacare to cap and trade to a complete revamp of our financial regulations, involve vast increases in costs, both to individuals and businesses. And as to small businesses, well, Obama pays little beyond lip service. Of the $787 billion Stimulus, only 2.6% was earmarked to help with small business loans. The vast majority of the remainder was wasted subsidizing profligate state governments and public union employees for a year.

Which brings us to a final point. In the Depression of the 1930's, there were two schools of thought as to how to handle a deathly sick economy. One, that of John Maynard Keynes - and beloved of the budding socialists then and now - suggested that massive government spending was necessary to stimulate the economy and restore confidence. The second school of thought, that of Friedrich Von Hayek, was that the government needed to limit spending and reduce or remove regulations that stifled private sector growth and inhibited trade. Indeed, you can find dueling letters between Keynes and Hayek, setting forth their positions, printed in the 1932 newspaper, The Times.

The question of who was correct was never definitively answered at the time. FDR adopted the Keynesian approach, but we were still in the grips of the depression in 1941 when World War II intervened and solved the problem of double digit unemployment. Most economists agree that it was WWII that drove the end of the depression. So today, the question remains, what should we be doing to treat an economy in deep distress.

Clearly, Obama, like FDR before him, has followed Keynes, at least partly. Obama counted on the massive government stimulus - and Bush's TARP - to put the economy well on the road to recovery, projecting that unemployment would top out below 8% and then recede. But he also did something else that Keynes clearly never supported. Obama has attacked confidence in our economy by promising ever greater spending and taxes and by attacking the private sector and the profit motive.

On the other hand, there is economist Arthur Laffer. He recently wrote an artice in the WSJ taking Crazy Nancy to task for her wildly false assertion that funding yet another extension of unemployment benefits (on even more borrowed money - the left refuses to pay for it with existing borrowed funds) is the best way stimulate the economy and create new jobs. Indeed, even without an explanation from Dr. Laffer, the fact that extending such benefits hasn't worked for two years now ought to be a clue that Crazy Nancy is either being disingenuous or that she is clinically insane (I, in all honesty, think she is both). At the conclusion of his article, Laffer writes:

Any government program that would reduce unemployment has to make working more attractive for both employer and employee. Since late 2007 the federal government has spent somewhere around $3.6 trillion to stimulate the economy. That is a lot of money.

My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound

Interestingly, Laffer is a bit between Hayek and Keynes. He would use government revenues to ease the burden on the private sector.

I happen to agree wholeheartedly with Laffer. Whether Laffer is right will likely be a question argued in the halls of academia many years into the future. But in any event, what is quite clear today is is that a pure Keyesian answer to the problem, as instituted with an Obama twist, has proven a disaster. And it seems, to me at least, that he will lead us into a true depression if allowed to continue on his current path.

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