Obama is Correct but for the Wrong Reason

In a recent interview with 60 Minutes’ Steve Kroft, President Obama was asked if he felt he overpromised during the last presidential campaign when it came to fixing the economy.  The President responded:

“I didn’t overpromise. And I didn’t underestimate how tough this was gonna be…Reversing structural problems in our economy that have been building up for two decades — that was gonna take time. It was gonna take more than a year. It was gonna take more than two years. It was gonna take more than one term. Probably takes more than one president.”

It is uncommon, but I must admit that I totally agree with Obama.  However, my agreement with him is for a reason that he did not intend with his remark.  He was espousing the view that it would take many more years of Keynesian economic policies to dig ourselves out of the economic ditch.  I am saying his position is precisely why it will take many years to recover from the Great Recession.  Essentially history proves that Keynesian economic theory does not work.  In fact, it has been proven to make things worse.

An often forgotten (either intentional or not) economic depression took place in 1920.  It was in 1920 that the spending of Congress and the inflation of the dollar by the Federal Reserve in order to fight World War I finally caught up with the U.S. economy.  After the artificial boom brought on by government policy busted, unemployment increased from 4 percent to 12 percent.  At the same time, GNP contracted by 17 percent.  Relatively speaking, the depression of 1920 was as severe as any in U.S. history.

In those days America still believed in free market capitalism.  President Harding’s response was to slash the federal budget almost in half between 1920 and 1922.  He also reduced tax rates for all income groups and decreased the national debt by one-third.  Additionally, the Federal Reserve did not use its powers to increase the money supply to fight the contraction.

No, the federal government and the central bank’s response were to let the economy liquidate the mal-investments that had built up during the spending and inflating of the war years.  It wasn’t to try to “stimulate” the economy back to growth and the Federal Reserve did not attempt to re-inflate the economic bubble.

By 1922, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.  Recovery occurred within two years of the onset of depression and opened the gate for a decade of enormous economic growth.

 

Now fast forward to the Great Depression of 1929-1946.  The common myth is that Franklin Roosevelt brought us out of the Great Depression with his New Deal policies.  The New Deal represented the first time in our country’s history that the federal government attempted, in a robust way, to remedy an economic downturn with “stimulus” spending and other bureaucratic interventions.  Roosevelt’s program included make work schemes, industrial codes of fair competition, guaranteed trade union rights, the regulation of working standards, minimum price fixes on agriculture, petroleum and other products, and other assorted welfare programs.  Essentially Roosevelt had taken over the U.S. economy and then over time he found it necessary to raise excise taxes on business to pay for his schemes.

The result was a prolonged depression.  The New Deal did not allow the mal-investments of the previous boom to liquidate.  It discouraged entrepreneurs from investing and the artificially high prices it imposed squelched consumer demand.  It was such a failure that in 1939 Henry Morgenthau, Roosevelt’s confidant and Secretary of the Treasury, proclaimed:

“We have tried spending money. We are spending more than we have ever spent before and it does not work…We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started.…and an enormous debt to boot.”

And this is why Barack Obama was correct in his statement that it will take many more years to turn the economy around.  History proves that government intervention in an economic downtown only worsens the situation.  Since taking office in 2009, Obama has spent trillions through make work projects, Cash for Clunkers, First Time Homebuyers’ credits, extensions to unemployment benefits, and other schemes.  He reappointed Ben Bernanke to Chairman of the Federal Reserve precisely because he favors the Fed’s long term quantitative easing program which has pumped trillions more new cash into the economy.

What do we have to show for it? – an economy still in shambles 4 years after the downturn with real unemployment north of 16 percent, a lackluster GDP, 46 million Americans on Food Stamps, and $4.3 trillion more in debt.  Obama is right, it will take years to undo the damage caused by his policies.  The question is, why doesn’t Timothy Geithner have the same honesty that Henry Morgenthau Jr. did?

Article first published as Obama is Correct But for the Wrong Reason on Blogcritics.

Gun Sales are a Sign of Things to Come

While the so-called “mainstream” media is reporting with great glee that 2011 Black Friday retail sales was up 6.6 percent over last year to a record $11.4 billion one other tidbit of data was ignored that probably says more about our social condition than anything: the FBI reported that background check requests for prospective gun buyers on the same day shattered the single-day, all time high by 32 percent.  According to Deputy Assistant FBI Director Jerry Pender on November 25^th, 129,166 checks were submitted far exceeding the previous high of 97,848 on Black Friday 2008.

Now it could be argued that the record gun sales are a result of more Americans all of sudden taking an interest in hunting or gun collecting.  But this explanation seems far-fetched as these two things are not normally associated with fad behavior.  Furthermore, the recent surge in gun sales is part of a larger trend in gun ownership.   According to the Gallup Organization, 47 percent of Americans report they keep a gun on their properties.  This is up 15 percent from a year ago and the highest Gallup has reported since 1993.

Make no mistake about it, the massive increase in firearm purchases has everything to do with the miserable shape America is in socially.  For one thing, as the economy continues to deteriorate with rising price inflation and chronic high levels of unemployment, Americans know that it is only a matter of time before they could become the victims of crime.

Americans also understand that social unrest like has been seen in Europe is possible in the U.S.  Even though it has been relatively peaceful, the Occupy Wall Street Movement is seen by many as a harbinger of things to come.  Given that there are many Americans who feel betrayed, disenfranchised, and totally frustrated by a system that has taken their sustenance in order to bailout those that produced the Financial Crisis of 2008 and the resulting prolonged depression, it is possible that as a society we could be one financial shock away from social upheaval.  This may sound paranoid, but given the recent surge in gun sales I may not be alone in my thinking.

So while robust retail sales on Black Friday is being construed as a hopeful sign for the economy, the surge in gun sales on the same day is an indication that many Americans don’t feel the optimism.  Things are bad everywhere and they are going to get a lot worse before they get better.  Black Friday gun sales are proof that this commentator is not alone in his prognostication.

Tocqueville as Prophet

“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

Alexis De Tocqueville, Democracy in America (1835)

Last week the economic central planners at the Federal Open Market Committee (FOMC) of the Federal Reserve Bank issued a statement tempering their previously optimistic forecast for recovery from the “Great Recession”.  In its statement, the Ben Bernanke led FOMC indicated that the weakening recovery has made it necessary for the Fed to keep interest rates at “exceptionally low levels…for an extended period”.  Additionally, the FOMC stated it will change course.  Instead of shrinking its historic $2 trillion balance sheet, the Fed will reinvest money from maturing mortgage bonds to buy up more assets (notably government treasury bonds).  All of this will be done in an effort to further stimulate the markets to recovery.

No one doubts that something needs to be done to reverse the downward spiral that our economy is once again taking.  After all, consumer confidence is down, factory orders are down, the real unemployment rate which takes into account discouraged and underemployed workers is still north of 16 percent, Food stamp usage has skyrocketed to a record high of 40.2 million recipients, and  Bank repossessions and foreclosures are still a massive problem.  No, nobody doubts that something needs to be done, but that something should not be more of the same that got us into this mess in the first place and is keeping us in it in the second.

Now, I would not question the intelligence of anybody on the FOMC.  Bernanke and his comrades are smart folks.  They all have fancy degrees and have spent years on Wall Street and/or in the government cutting their teeth becoming seasoned economists and financiers.  They certainly are not “wet behind the ears” as is said in the business.  So then if it is not mental ability maybe it is motives that drive the FOMC members to pursue what appear to the reasonable layman as an insane policy.  Let’s analyze the situation further by looking at historical examples.

Faced with double digit inflation and an unemployment rate of 11-12 percent in the early 1980’s, then Fed chairman Paul Volcker did exactly the opposite of what our current Fed commander has done.  He raised money market rates to 19 percent.  It was painful at first, but in the long run the policy broke the decade long grip that stagflation had on our economy and ushered in a decade of solid economic growth.

Then we can point to Japan’s horrible experience with “quantitative easing” in the 1990’s as another example for objecting to the FOMC’s lamebrain policy.  Japan’s financial meltdown in the early 1990’s like ours this time was caused by government induced easy money and real estate speculation.  Once the bubble popped the Japanese powers that be pursued a policy of massive fiscal stimuli, propping up of insolvent banks, and discriminatory credit allowances. Sound familiar?  All in all, in the decade of the 1990s Japan passed 10 fiscal stimulus packages worth more than 100 trillion yen.  Instead of curing its economic ills the spendthrift policy led to what is now known as the “Lost Decade” in Japan.  In fact, many economists claim Japan has still not recovered.

Of course, Bernanke will make up excuses why the same policy he is pursuing for the U.S. didn’t work for Japan but will work for us.  Actually, all he really has to do is reference noted Keynesian economist Paul Krugman who says both Japan in the 1990s and the U.S. today simply did/have not spent enough to stimulate their respective economies.  Unfortunately for Bernanke at least two of his underlings don’t buy the argument.  In March of 2009 Timothy Kehoe, Edward Prescott of the Minneapolis Fed and a team of 24 economists from around the world published a report indicating that it is the “overreaction” by government which “prolongs” and “deepens” economic downturns.  In fact, if you look at the three crisis in the last 100 years where government has overreacted the most (the Great Depression, Japan’s Lost Decade, and our current crisis) they are also the longest lasting.  This is a fact that seems to solidify Kehoe and Prescott’s conclusion.

Lastly, the U.S. government has tried quantitative easing and Keynesian economics to solve our most recent troubles for close to 3 years now.  When the “Great Recession” began in December 2008 the national debt was a little over $9 trillion.  As I write this article, our debt is more than $13.3 trillion.  And this doesn’t count the trillions of dollars in easy credit doled out by the Fed to induce banks to loan again.  The longevity and size of the effort can only make one wonder about the motives of the FOMC to pursue more of the same.  Could it be that we are missing some information only available to the Fed?  Or could it be that Tocqueville was correct when he prophesized that Congress would discover that it can bribe the public with the public’s money.  We are talking about the Federal Reserve but who chartered the Fed and refuses to audit its books – Congress.  What’s unknown, given our current circumstances, is how much longer our republic can endure?           

Article first published as Tocqueville as Prophet on Blogcritics