Obamanomics: The Final Nail in the Discredited Keynesian Coffin
This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published July 12, 2012 on Forbes.com.
Keynesian economics is the false vision of human action which says the way to promote economic recovery and renewed growth is through increased government spending, deficits and debt. If that sounds nuts, that’s because it is.
The idea is that the increased government spending and deficits will increase demand in the economy for more production, and that producers will increase supply to meet that demand, hiring more workers and reducing unemployment in the process. Keynesian economics arose in the 1930s in response to the Depression. It never worked then, as the recession of 1929 extended into the decade long Great Depression. And it never worked anywhere it’s been tried since then, in the U.S. or abroad.
By the 1970s, Keynesian policies had produced double digit unemployment, double digit inflation, and double digit interest rates, all at the same time, along with four successive worsening recessions from 1969 to 1982. Keynesian monetary policy involves running up the money supply to increase demand, with artificially lowered interest rates promoting more spending. That is where the inflation came from.
Ronald Reagan explicitly scrapped Keynesian economics for the more modern supply side economics, which holds that economic growth results from incentives meant to boost production. That results from reduced tax rates, which enable producers to keep a higher proportion of what they produce. It results from reduced regulatory costs, which also increases the net reward for increased production. And it results from monetary policies maintaining a strong, stable dollar, without inflation, which assures investors that the value of their investments will not be depreciated by inflation or a falling dollar, or threatened by repeated recessions resulting from policy induced boom/bust cycles, as in the 1970s.
The results of these Reagan supply side policies have been recounted in several prior columns, and in thorough detail in my 2011 book America’s Ticking Bankruptcy Bomb. Inflation was quickly whipped, cut in half by 1982, and in half again by 1983, never to be heard from again until recently. At the same time (which the Washington establishment said was impossible simultaneously), the economy took off on a 25-year economic boom from 1982 to 2007, interrupted by just two, short, shallow recessions, widely recognized in the economic literature, and by the National Bureau of Economic Research, as one long boom. During the first 7 years of that boom alone, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the U.S. economy.
Supply side godfather Art Laffer and Wall Street Journal Chief Financial Writer Steve Moore summarize in their 2008 book, The End of Prosperity,
“We call this period, 1982-2007, the twenty-five year boom — the greatest period of wealth creation in the history of the planet. In 1980, the net worth — assets minus liabilities — of all U.S.households and business…was $25 trillion in today’s dollars. By 2007, …net worth was just shy of $57 trillion. Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years.”
Economist Henry Nau added in the Wall Street Journal on January 26, “the U.S. grew by more than 3% per year [in real terms] from 1980 to 2007, and created more than 50 million new jobs, massively expanding a middle class of working women, African-Americans and legal as well as illegal immigrants. Per capita income increased by 65%, and household income went up substantially in all income categories.”
Similarly, Steve Forbes wrote in Forbes magazine in 2008,
“Between the early 1980s and 2007 we lived in an economic Golden Age. Never before have so many people advanced so far economically in so short a period of time as they have during the last 25 years. Until the credit crisis, 70 million people a year [worldwide] were joining the middle class. The U.S. kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts. We burst from the economic stagnation of the 1970s into a dynamic, innovative, high tech-oriented economy. Even in recent years the much maligned U.S. did well. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China’s economy.”
In other words, the growth in the U.S. economy from 2002 to 2007 was the equivalent of adding the entire economy of China to the U.S. economy.
But Obama, who playacts like he was asleep during this whole time, like Rip Van Winkle, tells us it didn’t work. While many voters in 2008 thought they were electing a progressive, forward-looking President, Obama has turned out to be the most regressive, backward looking President in American history, taking us back to the failed, discredited Keynesianism of the 1930s to 1970s, as if nothing at all interesting happened from 1980 to 2007.
Apparently determined to prove once more that Keynesian economics doesn’t work, Obama’s first major act in office was to pursue the unreconstructed Keynesianism of the nearly $1 trillion so-called “stimulus,” which we now know didn’t stimulate anything except government spending, deficits and debt. Obama promised us at the time that if his “stimulus” bill passed, the unemployment rate would never exceed 8%, and would decline to 5.8% by May of this year. But in reality it was 8.2% and rising in May.
Last Friday’s jobs report for June indicated that the most commonly cited U3 unemployment rate remains stuck at 8.2%. That makes 41 straight months of unemployment over 8%, which the Joint Economic Committee of Congress confirms is the worst recovery from a recession since the Great Depression almost 75 years ago. Indeed, the last time before Obama that unemployment was even over 8% was December, 1983, when Reaganomics was bringing it down from the Keynesian fiasco of the 1970s. It didn’t climb back above that level for 25 years, a generation, which is another measure of the spectacular success of Reaganomics.
Moreover, the June unemployment rate was not much, much higher only because over 7.2 million working people have given up even looking for work under President Obama, so they are not even counted as unemployed in the U3 unemployment rate. Counting these workers, who still exist and still do not have jobs, the unemployment rate would be 11%.
Besides the 12.7 million Americans that are counted as unemployed, another 8.2 million are employed part-time for economic reasons. “These individuals were working part-time because their hours had been cut back or because they were unable to find a full-time job,” the Bureau of Labor Statistics (BLS) reported. Another 2.5 million workers were marginally attached to the labor force, as they “wanted and were available for work, and had looked for a job sometime in the prior 12 months,” but “[t]hey were not counted as unemployed because they had not searched for work in the [prior] 4 weeks.”
That leaves the total army of the unemployed and underemployed at 23.4 million Americans. Counting these workers, the BLS reports the U6 unemployment rate as rising to 14.9% in June. If we add in the long term discouraged workers that the BLS does not even count any more, the Shadow Government Statistics website reports the total unemployment rate increasing to 22.8% in June.
The number of unemployed Americans actually rose over the last 3 months by 76,000, 54 months after the recession started, and 3 years after it was supposedly over. Since the Great Depression, and before this last recession, recessions in America have lasted 10 months on average, with the longest previously lasting 16 months.
The unemployment rate for African-Americans rocketed up again last month from 13.6% to 14.4%, quite a jump in one month. Black unemployment has remained at such depression era levels for Obama’s entire Presidency. Hispanics have suffered double digit unemployment throughout Bush’s Presidency as well, at 11% again last month. For teenagers, the rate last month stood at 23.7%. For black teenagers, unemployment jumped last month from 36.5% to 39.3%. For Hispanic teenagers, the unemployment rate rose to 31%.
Friday’s labor report further indicated that the jobs picture has only been worsening under Obamanomics. A million more workers were suffering long term unemployment of 27 weeks or longer in June than at the supposed end of the recession 3 years ago. Moreover, the median length of unemployment had risen to 19.8 weeks in June compared to 17.2 when the recession supposedly ended.
Obama tells us that the 80,000 jobs created last month (25,000 were mere temp jobs) were “a step in the right direction.” That’s one very tiny baby step forward and two steps backward, as the working age population grew by 191,000 in the same month. Moreover, 85,000 went on the disability rolls during the month, fleeing the Obama economy for their only alternative, taxpayer dependency. Another 275,000 applied for disability during the month.
Obama’s chief economic policy advisor Alan Krueger actually boasted last Friday that private sector jobs have grown for “28 straight months for a total of 4.4 million payroll jobs created during that period.” But at the same point during the Reagan recovery, the economy had created 9.5 million new jobs. Moreover, contrary to Krueger’s claim of 4.4 million new jobs created, total jobs today are still half a million less than in January, 2009 when Obama entered office.
Krueger apparently thinks most Americans do not know that job growth is the norm and not the exception for the American economy. In the 62 years from January, 1946, after World War II, until January, 2008, jobs grew in 86% of the months, or 640 out of 744. Reagan’s recovery produced job growth in 81 out of its first 82 months, with 20 million new jobs created in those first 7 years alone, increasing the civilian work force at the time by 20%. Even George W. Bush oversaw 52 consecutive months of job growth, including 8 million new jobs created after his 2003 capital gains and dividends tax rate cuts became effective (which Obama is dedicated to reversing).
Krueger also solemnly told the public, “it is important not to read too much into any one monthly report.” But as documented July 6 by Bryan Preston for PJMedia, the Obama Administration has said the exact same thing for each of the last 30 months. Do ya think 2 ½ years might constitute a trend?
Obama’s tragic jobs record reflects the dismal economic growth under his Administration’s throwback, Keynesian economic policies. For all of last year, the economy grew by a paltry real rate of only 1.7%, only about half America’s long term trend. The average so far this year has been no better. That dismal growth is further reflected in the Census Bureau reports of falling real wages under Obama, kicking median family income back over 10 years, with more Americans in poverty today than at any time in the more than 50 years that Census has been tracking poverty.
In sharp contrast, in the second year of Reagan’s recovery, the economy boomed by a real rate of 6.8%, the highest in 50 years. Real per capita disposable income increased by 18% from 1982 to 1989, meaning the American standard of living increased by almost 20% in those first 7 years of the Reagan boom alone. The poverty rate, which had started increasing during the Carter years, declined every year from 1984 to 1989, dropping by one-sixth from its peak.
Obama cannot explain away this disgraceful failure of his Keynesian economic policies by arguing it is because the recession he inherited from Bush was so bad. The American historical experience is that the worse the recession, the stronger the recovery, as the American economy snaps back to its world-leading, long-term, economic growth trend line. Based on this historical record, we should be enjoying the third year of a raging economic recovery boom right now.
This historical experience was reflected by the surging Reagan recovery boom. And it is why Obama was confident enough to tell Matt Lauer and the nation in February, 2009 regarding economic recovery: “If I don’t have that done in three years, then this is going to be a one-term proposition.” We are now well past Obama’s own self-imposed deadline, and still no real recovery. Indeed, because of the severity of the recession, Obama should have been blessed with an even more booming recovery than Reagan.
But the dismal economic performance we have suffered instead, with no real recovery from the steep 2008-2009 recession at all, is the disgraceful failure of the throwback Keynesian policies Obama so foolishly embraced when he should have known better by now. Keynesian economics does not work because if the government borrows a trillion dollars out of the private economy to spend a trillion dollars back into it, at best there is no gain for the economy on net. More likely, it is a net drag on the economy, because the private sector in general will spend the money more efficiently and productively than the public sector, and the greater deficits and debt imply future tax increases, which are also contractionary.
That is why when economists W. Michael Fox and Richard Alm examined 110 years of American history from 1901 to 2011, they found that when government spending rose unemployment rose rather than fell, and that when government spending declined unemployment declined rather than rose, exactly contrary to Keynesian doctrine, as they reported in Investors Business Daily on July 6.
The now once again thoroughly discredited, failed Keynesian economics survives intellectually only because it provides cover to the politicians, and to their leftist media cheerleaders, to do what they want to do, which is spend like spoiled children, and not pay for it. But it is long past time for the rest of us to recognize Keynesian doctrine for the now outright intellectual corruption it is, and to hold the Keynesians personally accountable for it.
That means it is long past time for colleges and universities to stop teaching this partisan political silliness, and to be cut off from funding if they do not. For President Obama, the payback will come due on Election Day, when the American people can and should send him to the back of the unemployment lines. But the partisan, party controlled media continuing to trumpet Keynesian doctrine, effectively imposing the suffering that results on the rest of us, should be recognized for the intellectual corruption they represent as well. Worst of all are the most ardent, hysterical and blind media advocates of Keynesianism, like Paul Krugman, who after Obama and his runaway all time government spending spree has taken America to the brink of fiscal insolvency, like a drunken back seat driver belches us on to accelerate even faster on our current course into the inevitable crash and burn.
That needs to be recognized as a form of personal lunacy, for which the only real solution appears to be the restoration of the laws providing for involuntary commitment.