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.

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