Obama’s American Jobs Act Spends More for Economic Recovery, Perpetuates Keynesian Myth

President Obama delivered his jobs speech this evening, which focused on job creation via tax breaks for small businesses, cuts in payroll taxes, and more infrastructure projects.  This is the usual rhetoric coming out of Washington and many will liken it simply to a last-ditch effort of the White House to improve polling numbers going into the campaign season.  But we should not focus on such drivel.  Rather what should be noted is that only one month after averting a U.S. sovereign default and seeing our credit rating downgraded for the first time in nearly a century, stimulus spending in the name of economic recovery has not left Washington, as it is at the heart of this legislation.  President Obama stated:

The purpose of the American Jobs Act is simple: to put more people back to work and more money in the pockets of those who are working. It will create more jobs for construction workers, more jobs for teachers, more jobs for veterans, and more jobs for the long-term unemployed. It will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services. You should pass this jobs plan right away.

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Wow!  I am so glad we learned our lesson about unrestrained spending and fiscal prudence.  Oh wait, President Obama also stated that every piece of this legislation is paid for.  But this depends not on dollars we currently have saved in some bunker beneath the White House or the U.S. Treasury.  The money that will pay for the American Jobs Act is that which has yet to be saved.  Recall the Budget Control Act passed last month to avert a default on U.S. credit.  It called for nearly $1 trillion in immediate cuts, but the term “immediately” in Washington-speak actually means spread out over the next ten years.  So we are to pay for this legislation, much of it with immediate costs, with spending cuts that will be enacted under a different Congress and Executive? Really?  But wait, there is also the additional $1.5 trillion in spending cuts to be determined by our beloved “Super Congress” before the end of the year.  But the likelihood that such cuts will see the balance sheet within the Obama administration, or even the next, is not likely.

Here are some more reasons why Congress should pass yet another Keynesian policy, despite the utter failure of its predecessors.

  • Pass this jobs bill, and starting tomorrow, small businesses will get a tax cut if they hire new workers or raise workers’ wages.
  • Pass this jobs bill, and all small business owners will also see their payroll taxes cut in half next year.
  • Pass this jobs bill, and thousands of teachers in every state will go back to work.
  • Pass this jobs bill, and companies will get extra tax credits if they hire America’s veterans.
  • Pass this jobs bill, and companies will get a $4,000 tax credit if they hire anyone who has spent more than six months looking for a job.
  • Pass this jobs bill, and the typical working family will get a fifteen hundred dollar tax cut next year.

The bottom line is this.  Our government continues to spend and propose additional spending in the name of economic recovery with little results and an empty wallet to boot.  The results at this point are certain.  Any recovery proposed by Washington policy hounds or the President will fail because two things must happen for a recovery: (1) decreased government spending, and (2) increased spending in the private sector to fuel consumption.  Yet, our government is stuck in the ideological misnomer of Keynesian stimulus spending.  Consequently, they seek to accomplish private sector growth by crowding our private sector markets.  It is an economical contradiction and illuminates the lunacy of Washington politics.

The best policy that could come out of Washington at this point is no policy at all.  But that is not the take of our beloved President.  He made his ideological stance on the government’s role in the free market quite clear.  “As I’ve argued since I ran for this office, we have to look beyond the immediate crisis and start building an economy that lasts into the future – an economy that creates good, middle-class jobs that pay well and offer security.”  By “we” he does not mean the American people, but Congress and the Executive.  Despite the rhetoric of Washington politics looking to and “representing” the people, their record demonstrates actions often to the contrary.  So one must conclude from this statement that the intent is not to let the markets recover on their own, but to continue crowding out any chance at a recovery now and in the near to mid future.  The only substantive impact of increased spending now is increased taxes later, but without an economy to raise wages enough to offset such tax increases we will all see a real decline in living standards.  Welcome to the new America!

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Recall, Atlas Shrugging from Washington Policy Hounds

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I recently found the following opinion piece that, although written two years ago, presents the case of Washington policy hounds in strikingly luminous and parallel fashion to Rand’s magnum opus.

“For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises — that in most cases they themselves created — by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.”

The relevance of Rand’s masterpiece half a century after its entrance into the public forum is evident in two ways.  First and foremost, we are living its story.  Secondly and subsequently, the controversy over Rand’s ideas has grown to magnificent proportions since 2008.  Whether you are for or against Rand’s philosophy of Objectivism, one thing remains clear.  The more the government meddles, the more the government is called to meddle.  So the question is to examine whether such meddling has been more beneficial or harmful. What has such meddling produced beyond additional calls for government stimulus, bailouts, and tax reform?  Most recently and attributable to the heavy hand of government fiscal policy and the Federal Reserve’s perpetual devaluation of the dollar – the world’s reserve currency – is the S&P downgrade of U.S. credit.  While many mainstream Washington pundits attempt to rationalize S&P’s move, I suspect they do so in modest aspirations to avert potential panic among investors; this of course makes sense.  However, what they overlook is the more fundamental implications of such a downgrade, instead maintaining by a posteriori logic that U.S. credit is still good to foreign investors like China and Japan from the simple fact that they have nowhere else to invest.  But a credit downgrade of this type carries with it much deeper implications that cannot be shucked aside due to the dollar’s preeminent place in the global markets.  Indeed it is for this very reason why investors, foreign and domestic, should be concerned.  The implication is this: when the dollar fails due to government mismanagement, whether from loose fiscal or monetary policy, the entire global financial network, due to the dollar’s preeminent place in it, will surely follow.     There will be no “stimulus-effect,” no bailouts, nor any liquidity because to a large degree, global liquidity is furnished by the dollar.  To deny this, is to assume some other universal currency will provide a safe haven for investors.  Perhaps gold, but such a shift still necessitates the destruction of the dollar, U.S. Treasuries, and much of the wealth of our nation.

It should become quite clear at this stage that government interference in the economy – whether one calls it Keynesian economics, deficit financing, or stimulus spending – encroaches upon and binds up the free-market.  Such programs as the $700 billion Emergency Economic Stabilization Act of 2008 (H.R. 1424), the Auto Industry Financing and Restructuring Act of 2008 (H.R. 7321; note that this bill was never voted on in the Senate, but was passed in the House), the American Recovery and Reinvestment Act of 2009 (H.R. 1), and the most recent Budget Control Act of 2011 (S.365) with its 13-member ‘Super Congress’ have failed to generate adequate job growth.  Instead, the national debt has grown to proportions even Washington is unable to manage.  Much can be gleaned from the general descriptions of these bills.  For example, H.R. 1 is summed up as follows: “Making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization.”  Job creation and investment are primarily functions of the economy, not government, while assistance to the unemployed – when done in perpetuity – only exacerbates natural market fluctuations, which delays natural readjustment by the market.  Moreover, state fiscal stability, so long as it lies at the federal level negates the very core conception of statehood.  If I live in Georgia and decide I do not agree with its policies, I can move to Oregon.  But if both states depend too heavily on federal sustenance, where does one go?  Where has one’s choice gone?  The end result here is statism, whereby the State (i.e. the federal government) controls most aspects of private life.  Economic policy that negates market principles in place of political ideals inevitably fails because this is to replace principles grounded in reality (i.e., the market) with those conjured from the depths of human emotion.  While not the only avenue of statism, this is arguably its most far reaching.

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The ideological and practical implications of this are enormous for Republican government.  It is critical to realize that the more a people rely on their government, the less freedom they allow themselves.  I am reminded of Hobbes’ classic political tract written in defense of the monarchy during one of England’s most turbulent times.  I am reminded of this because Leviathan assumed the natural inferiority of the people to their government and the doctrine of the “Divine Right of Kings.”  He argued the necessity of an absolute monarchy, lest we fall back into the “state of nature,” whereby the weak succumb to the brute force of the strong.  I recall the cover of Leviathan (seen left), whereby the body (the people) is incomplete – dysfunctional – without the head (the state).  The political (post-9-11) and cultural (welfare-dependence) ideologies of America today resemble more closely than at many times past the traditional justification of the authoritarian state called from the necessity for stability and safety. This ideology is highly antiquated.  Hobbes published this tract in 1651, yet we still see today the fear-mongering that has become the cornerstone of big government.  The state is quickly becoming the sole arbiter of private disputes, the sole thinker of our generation.  Rand once stated that “A country without intellectuals is like a body without a head” (For the New Intellectual, p. 12).  What she meant was that a generation without those willing to think and judge will sink beneath the weight of government.

Keynes vs. Hayek, An On-going Debate

A recap from the BBC of one of the most important economic debates throughout history:

Keynes v Hayek: Two economic giants go head to head

John Maynard Keynes and Friedrich August Hayek were two prominent economists of the Great Depression era with sharply contrasting views. The arguments they had in the 1930s have been revived in the wake of the latest global financial crisis.

Full Article →

What is it About Economics…The Debt Deal Examined

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Government spending is out of control.  The national debt is almost equal to GDP (97%).  Unemployment is at 9.6% officially, almost 20% unofficially.  The debt ceiling game in Washington leaves little room for comfort among middle class Americans and investors.  A U.S. credit downgrade is imminent.  The future is not bright.  So what is it about economics that leaves so many people (on many occasions myself included) confused and bewildered into a state of apathy?  After all, are we not taught the fundamental aspects of economics, namely that competition preserves ingenuity, the law of demand determines fair (market) prices, and that a market free of government encourages investment for future growth because the market is the amalgamation of millions of choices – for America approximately 311 million.  So long as these phenomena are allowed to occur unimpeded, the path toward prosperity continues.  As more jobs are created and more products enter new markets, economic growth occurs both vertically (established markets grow) and horizontally (new markets emerge). The net result is a forward-moving economy and a growing people. So how is it the average American has ended up in the ditch, given only the choice to take the hand to his Left or Right?  The Cato Institute’s Daniel Mitchell discusses just how Keynesian economics has contributed to the growing bewilderment surrounding economic analysis, namely the misdirected attention given to GDP as a measure of the health of an economy.  He engages in useful analogy, using the finances of an individual home in place of an entire economy.  In economics, models are often used to simplify economic variables, rendering understanding of the fundamental more prevalent.  Mitchell has done this beautifully.  He demonstrates two key points contrary to the Keynesian solution.  

  1. Government expenditure crowds out the private sector.  That is, as government spends more, less is left for private consumption and investment, the driving forces for economic growth.
  2. As taxes increase, spending (as measured by GDP) stays the same, while less expenditures are free for things that improve our lives because more of our total income (fixed in the analogy) is redistributed as a tax expenditure.

Mitchell’s message is this: “government is capable of redistributing how national income is spent, but it isn’t a vehicle for increasing national income.”  The wealth of a nation is not determined, nor can it be significantly increased, by government spending (as shown in GDP).  Rather, wealth is determined by gross national income (GNI).  While GDP reflects higher levels of spending, an actual increase in GDP is only a product of increased national income. This point is particularly important given the debt deal just passed by the House.  It incorporates “enforcement mechanisms” built into what I would call a debt deal that pays only lip service to the people.  Besides the fact that the deal only trims a “projected” $1 trillion from the national debt over the next ten years (this is paltry and means very little), President Obama rejected any proposals that would enact cuts from entitlements after 2013.  Here is a passage from the White House fact sheet:

“In Securing this Bipartisan Deal, the President Rejected Proposals that Would Have Placed the Sole Burden of Deficit Reduction on Low-Income or Middle-Class Families: The President stood firmly against proposals that would have placed the sole burden of deficit reduction on lower-income and middle-class families. This includes not only proposals in the House Republican Budget that would have undermined the core commitments of Medicare to our seniors and forced tens of millions of low-income Americans to go without health insurance, but also enforcement mechanisms that would have forced automatic cuts to low-income programs. The enforcement mechanism in the deal exempts Social Security, Medicaid, Medicare benefits, unemployment insurance, programs for low-income families, and civilian and military retirement.”

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Although tax-reform is on the agenda upon the expiration of the Bush tax cuts at the end of 2012, which according to the President would require higher earners to help pay for deficit reductions, the reality of exempting entitlements entirely will necessitate either higher taxes for everyone or continued growth in the debt.  Moreover, although the debt deal reduces the rate of spending, discretionary spending still projects upward over the next ten years.  Consequently, the debt deal will most likely result in higher taxation and less disposable income for the people – an additional and significant detractor from economic recovery.  In short, it is my contention that the deal does nothing for the long-term financial solvency of the U.S. government and will result in tax increases and spending allocations that will surely out pace our weak recovery, leaving less for private consumption and investment. Despite often conflicting ideologies regarding issues such as entitlement spending, foreign wars, and tax reform, our dual-party system hardly represents differing views when it comes to economics, namely spending.  That is, they both prescribe to a school of economic thought that has led America to where we now kneel.  Whether you have heard of Keynesian economics or not, you have felt its impact via stagnant wages, lost jobs, and growing government.  The new debt deal only reinforces this. While typically associated with the Left, Keynesian economics, whether in the name of stimulus, tax reform, or entitlements, promotes government expenditure at the expense of the private sector, stifling growth and rendering competition, demand, and the free-market mute.  These trends have grown beneath both parties in recent decades.  Consequently, more spending for entitlements and foreign wars is rendering the welfare-warfare state an increasingly stark reality.

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Debunking Keynesian Economics

Below is a video I came across courtesy of Daniel Mitchel of the Cato Institute.  This is an excellent presentation of a basic misinterpretation of Gross National Product (GDP) that so many fall into.  In short, the argument demonstrates that focusing on GDP as a measure of economic growth via government expenditures is very much a bit of Keynesian smoke-and-mirrors. Rather than focusing on how national income is distributed (government expenditure), we should focus on how national income is earned as expressed in Gross National Income (GNI).  As the video states, the point is to grow the pie, not devise new ways of slicing it.  Enjoy and please pass this along to all you know.

I also highly recommend Mr. Mitchel’s article on the Cato Institute’s blog: Basic Economics for Financial Journalists and Other Dummies

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