Sunday, June 10, 2012

Obama and the Keynesian play book

America Remains in Recession

 The Obama administration has been claiming an economic recovery now for 3 years. There was the 2009 Recovery Summer. This led to the Recovery Summer of 2010, which continued into the summer of 2011. In order to be able to make a plausible claim that the economy is recovering, there needs to be empirical data that supports the contention that there is an actual “economic recovery” occurring. Two pieces of economic data that is indicative of economic growth are employment and income. Other information necessary to correctly analyze the data is inflation and the value of the dollar.
The so-called economic recovery has been the slowest since the Great Depression. This is an important factor to understand the velocity and direction of the current economic recovery, in that the same economic Keynesian play book, used by President Franklin D. Roosevelt during the Great Depression, is currently being deployed by President Obama.

From 1930 on through 1936 the federal government attempted to “create” jobs through “stimulus” spending. Under FDR, the stimulus spending on “infrastructure”, which is similar to the one trillion dollars in failed stimulus spending on “shovel ready” infrastructure projects under Obama, was claimed by FDR to be working in creating jobs.
However, in 1937 another recession/depression began within the depression, which is precisely where we stand today under the non-recovery economic recovery Obama and his administration, along with the media, are claiming. The problem arose because the government spending programs were not actually improving the economy because there was no “recovery” underway. The jobs that were created under FDR were temporary government centric jobs that did not increase demand or stimulate consumer spending, which is precisely what is occurring today.
In 2011 the Christmas spending was up, however it was up because people increased their debt spending through credit cards. This is precisely what Obama has been doing, spending money on credit. Debt spending is not indicative of a strong growing economy.
Unemployment in 2011, as calculated by the federal government fell from 9 percent in November 2011 to the current level of 8.6 percent. However, the reason that the number declined .4 percent was due to a corresponding decrease in the number of people looking for employment. In other words, even though the number of people unemployed is up and the number of people looking for work is down the government does not count people as unemployed unless they are looking for work.
In 2012, the unemployment outlook is not going to be improving. Large companies such as Bank of American and IBM, will be laying off more employees, as will other large corporations. However, these layoffs aside, the current unemployment rate when calculating in all unemployed Americans is approximately 11 percent.

However, one of the most important factors in improving consumer spending and confidence is workers income. During the recession from 2007 to 2009 income declined by 3.2 percent. When you calculate the devaluation of the dollar, inflation and investment losses the negative impact on workers confidence and spending habits was devastating, because consumer spending accounts for between 60 to 70 percent American economic activity.
During the Obama “economic recovery” between 2009 and 2011 the average American worker’s individual income has declined 6.7 percent according to a research report issued by Sentier Research.
Also occurring in 2011 the U.S. dollar was devalued between 5 to 10 percent during the year and inflation was up by at least 5 percent when calculating gasoline prices increasing 23 percent as well as food and commodity price increases of over 10 percent. The devaluation of the dollar coupled with inflation and the decline in income substantially reduces consumer purchasing power. This leads to lower consumption and consumer demand and the demand that is there is focused on lower end, lower quality and lower cost products.
Therefore, during the recession income fell 3.2 percent and during the recovery income declined over twice as much - 6.7 percent. Hence, personal income has declined nearly 10 percent from 2007 to 2011. This is the equivalent of the prices of everything you buy including mortgages, rent, utilities and food increasing in price by 10 percent. Couple this with two other economic phenomenon, increasing inflation along with dollar devaluation, and you have an economy that is in a recession and not recovery.

by:  Burton Folsom, Jr.

FDR and Obama
President Obama, who often cites FDR, followed his example of targeting spending to interest groups. He signed into law a $787 billion stimulus package that sent tax dollars to various cities and voting groups across the nation. He later supported an expensive “jobs bill” that would send money into key congressional districts. The President also campaigned for a cap-and-trade bill and universal health coverage, both of which promised to increase the federal debt substantially. In fact, the increase in federal debt under Obama and Roosevelt is similar. The national debt more than doubled in Roosevelt’s first two terms, and it is projected to double again in eight to ten years.

Spending fails. After the large increases in federal spending under Roosevelt and Obama, unemployment remained high. In the 1930s unemployment fluctuated, but recovery never occurred. In April 1939, toward the end of Roosevelt’s second term, unemployment was almost 21 percent. Treasury Secretary Henry Morgenthau complained, “We are spending more than we have ever spent before and it does not work.” Nonetheless, almost all of FDR’s programs continued—usually with annual budget increases.
When Obama took office unemployment was at 8 percent, and in the next year it steadily increased to over 10 percent before falling back just under that mark. He and his advisers were puzzled that large spending increases did not slash unemployment, and he argued that his spending was saving jobs that would otherwise have been lost.

Critics of Roosevelt and Obama insisted that it was impossible to spend our way out of a recession. During the New Deal, economics writer Henry Hazlitt observed that public-works spending destroyed as many jobs as it created. “Every dollar of government spending must be raised through a dollar of taxation,” Hazlitt emphasized. If the Works Progress Administration builds a $10 million bridge, for example, “the bridge has to be paid for out of taxes. . . . Therefore for every public job created by the bridge project a private job has been destroyed somewhere else.”

Tax rates raised. During the Great Depression Roosevelt raised both income and excise taxes. In 1935, with FDR’s push, the top marginal tax rate hit 79 percent. Few paid that rate, but thousands of Americans were in the 50-percent bracket. Entrepreneurs had to hand over more than half of any income above a certain level. Facing disincentives to make capital investments, many entrepreneurs used their wealth cautiously—investing in tax-exempt bonds, art collections, and foreign banks. Little wealth went into creating jobs, so high unemployment persisted. During World War II FDR raised taxes further, to 94 percent on all income over $200,000.

quote by Margaret Thatcher: 'The problem with socialism is that you eventually run out of other people's money. '
Most of the tax hikes under Obama are planned for the future. Thus far we have seen proposed tax hikes on products such as cigarettes, liquor, plane tickets, and soft drinks. He wants the tax cuts enacted under President Bush to expire. That will mean a spike in the capital gains tax, the income tax, and the estate tax. As FDR showed, tax hikes eventually follow large spending increases.

Scapegoats.  The sequence of massive federal spending followed by a lack of recovery plus tax hikes is poison for a politician. Therefore Roosevelt sought scapegoats to explain his failure. Wall Street bankers were his favorites. He called them “economic royalists” and blamed them for causing the Great Depression. He also blamed America’s top businessmen for instigating a “capital strike”—they were refusing to invest in order to make him look bad. FDR then launched IRS investigations of key Republicans and used the newspapers to encourage hostility toward these targets.

Obama has followed FDR’s playbook of attacking Wall Street bankers and various corporate leaders. He condemns the raises these bankers sometimes receive and the profits earned by some large oil companies and health insurance companies.

Such emphasis on “class warfare” may be an inevitable part of redistributing wealth from one group to another. Perhaps Roosevelt and Obama believed that by increasing envy and resentment toward some Americans, they could capture the votes of larger groups of Americans and thereby win reelection (in FDR’s case there is evidence of this). True, this strategy guarantees that many wealthy Americans will attack any president who uses class warfare, but the campaign for redistribution will always supply large amounts of money to subsidize favored groups.

About the Author Burton Folsom, Jr. is a professor of history at Hillsdale College and FEE’s senior historian.

Civilian Unemployment Rate (UNRATE)
2012-05: 8.2 Percent Last 5 Observations
Monthly, Seasonally Adjusted, Updated: 2012-06-01  
Graph of Civilian Unemployment Rate

Debt Outstanding Domestic Nonfinancial Sectors - Household, Home
Mortgage Sector (HHMSDODNS)
2012:Q1: 9,747.04 Billions of Dollars Last 5 Observations
Quarterly, End of Period, Seasonally Adjusted, Updated: 2012-06-08) 
Graph of Debt Outstanding Domestic Nonfinancial Sectors - Household, Home Mortgage Sector

Delinquency Rate On Single-Family Residential Mortgages, Booked 
In Domestic Offices, All Commercial Banks (DRSFRMACBS)
2012:Q1: 10.18 Percent Last 5 Observations
Quarterly, End of Period, Seasonally Adjusted, Updated: 2012-05-23) 
Graph of Delinquency Rate On Single-Family Residential Mortgages, Booked In Domestic Offices, All Commercial Banks

hyperinflation 1 300x177 Get your hands on the governments playbook

The government’s playbook

  July 4, 2011
In this bubblicious world of trillion dollar deficits, sovereign bailouts, and fiscal stimulus measures of historical proportions, there is one economist whose theories and underlying philosophy underpin the foundation of modern macroeconomics.

His name is John Maynard Keynes, and his most famous work, The General Theory of Employment, Interest and Money (1936) has become the playbook from which politicians and central bankers are making their trillion dollar decisions.

Just about every politician knows the name Keynes. Most would consider themselves “Keynesian” in that they believe in government spending as a means to maintain economic stability. Few have actually read his book. And yet even fewer realize that Keynes was a major advocate of Soviet-style central planning.

Among the many fascist viewpoints in his General Theory, Keynes argued that:
1) A high rate of interest which encourages saving is bad for society. Consumption and borrowing must be promoted. In fact, high interest rates are to blame for why “the world after several millennia of steady individual saving, is so poor…”

2) Consequently, the government should make money cheap, controlling interest rates with a target level of zero. Further, the government should never deliberately increase rates as inflation will not set in “until unemployment has completely disappeared.”

3) Even if inflation should happen to appear, it’s likely due to the “arbitrary and inequitable distribution of wealth and incomes…” As such, the better solution to control prices and keep the boom going is to simply impose high income and death taxes in order to make a more economically just society.

4) If the boom starts to fade and low interest rates aren’t doing the job, it is the role of the government to step in and ‘invest’ obscene amounts of money to stimulate growth. Only the government is capable of doing this, as “the duty of ordering the current volume of investment cannot safely be left in private hands.”

5) As Keynes favored “a somewhat comprehensive socialization of investment,” he recognized that such complex decisions of investing other people’s money would be “above the heads of the vast mass of more or less illiterate voters.”

6) Not to worry, though, these key decision makers of the state-run economy will have the right “moral position,” so it’s just a question of making sure that the right people are directing the economy.

7) In the event of a crisis, the answer is simple. A government should simply borrow and spend more. In a 1934 article for Redbook magazine entitled “Can America Spend Its Way into Recovery,” Keynes opened with “Why, obviously!”

8 ) If the crisis doesn’t abate after substantial spending an interest rate cuts, Keynes blames these continued problems on not following his advice closely enough: “[A]uthorities of the world have lacked the courage or conviction at each stage of the decline to apply the available remedies in sufficiently drastic doses.”

I could go on, but I don’t want to spoil the ending where the entire global financial system collapses as a result of following these ridiculous policies.

In terms of economic philosophy, very little separated Keynes from Lenin. Keynes even praised Lenin when he wrote, “Let us not belittle these magnificent experiments or refuse to learn from them… the Five Year Plan in Russia, the Corporative state in Italy…”
And yet, this is the man who is held up by world leaders as the architect for economic bliss. Politicians and central bankers are calling his plays almost verbatim– enormous stimulus packages where volume and quantity are all that matter, quality counts for nothing; interest rates at zero; spending your way out of recession; borrowing your way out of debt…
It’s absolutely mind-boggling how modern governments have built such an apparatus to control their economies and run them into the ground. Ironically, each time a crisis occurs, these regulatory agencies, central banks, and executive powers are granted even more authority. This only makes things worse.

Sure enough, in the “Seventh Quarterly Report” that President Obama’s Council of Economic Advisors released on Friday (right before a long weekend, naturally), the numbers show that the administration’s Keynesian stimulus spending has saved 2.4 million jobs at a cost of $666 billion. That’s a total of $278,000 per job, all at taxpayer expense.
In the world of Keynes where debt does matter and inflation doesn’t exist, this number is completely acceptable, right comrades? In the real world, it’s further evidence of how horrific misallocations of capital are bankrupting the economy.

To Keynes, people who work hard to create value cannot be entrusted with their own money. It must be confiscated by politicians for them to invest with the utmost objectivity and expertise, all for the benefit of society as they define in their sole discretion. And if they falter, we must reward them with even more power to tax, print, borrow, and spend.
This is the underlying philosophy of the man whose ideas have driven global macroeconomics for the last 60+ years… and continue to create inflation, bubbles, and economic ruin.

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