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November 23, 2008

Why Obama's Economic Program Will Collapse
by Gerard Jackson

Obama wasn't kidding when deferred to FDR as an economic guide. Roosevelt was an unmitigated economic disaster. His economic program of trying to maintain money wages and prices was a formula for mass unemployment. Nevertheless, the brilliant Mr Obama sees it otherwise: hence his dangerous proposal for public works of the Roosevelt kind plus his ridiculous promise to create 2.5 million jobs.

Let's first deal with the job situation. That maggot-infested carcase that we call the mainstream media has been busy burying economic views that point out that Obama's energy and tax policies are a direct assault on jobs and investment. Like all true ideologues he and his media supporters are impervious to facts. The US is the greatest job-creating machine in history. In 1970 there were 78.678 million Americans in jobs. By 2006 employment had climbed to 144.427 million. (These figures refer to the civilian labour force). The Obama's of this world do not create real jobs -- they destroy them.

The principle criticism of Obama's New-New Deal is that by the time any real money is spent on these grand projects the recession is over. This is because these projects take years of planning. According to these writers the basic problem is one of time lags. In support of this view they a Congressional Budget Office report that stated:

Large-scale construction projects of any type require years of planning and preparation. Even those that are 'on the shelf' generally cannot be undertaken quickly enough to provide timely stimulus to the economy.

The error here is that these writers have assumed that Obama and his mates are focused on projects that would at least have some utility. Not at all, to Obama work is work irrespective of whether it has utility or not. As his other half Michelle said: "He will expect you to work". His expectations are unnecessary. Americans have always been ready to work. They don't need to be told otherwise by someone who went from university straight into the Democrats' corrupt Chicago machine and then into the Oval Office.

It's because of his primitive view of work that it seems he would consider any labour intensive scheme to be worth subsidising so long as it took people off the dole. Let us not forget that totalitarian states never had a problem with putting people to work. Their problem was always one of how to raise real wages. It's a problem they never solved -- only the free market can do that.

Other critics have stressed that public works schemes implemented to reduce unemployment are actually destructive of jobs and investment. If the money is collected out of taxes and savings then private spending and investments will fall. In addition, no matter how labour intensive the public works program is it will still drain resources from other parts of the economy. Hence the combination of taxation, borrowing and spending will destroy investments and firms that are resting on the margin.

Notwithstanding the fact that all of these criticism are both valid and important a vital element is missing. The so-called boom-bust cycle is said to be the reason why the US economy is sliding into recession. Now there is no such cycle. What we do have are central banks that think that by manipulating interest rates and the money supply (no matter how they define it) they can stabilise the economy.

If only they were right. In fact, it's their monetary shenanigans that generates the booms that always ends in tears. When a central bank's loose monetary policy triggers a boom the production structure is distorted by creating malinvestments, investments that are not economically sustainable. When the recession breaks these malinvestments appear as idle capital. Unless they are liquidated they will continue to drag down the economy. This is why Japan's policy of massive funding of public works failed to lift the country out of recession, even though this has been going on for more than ten years.

I think the Japanese experience puts to rest the view that the problem with public works is the time lag. If Japan had ignored the advice of Keynesians and allowed the necessary economic adjustments to be made there is no doubt in my mind that there would have been a rapid recovery. Now this is not the first time Japan attempted to avoid the costs of a boom by halting the vital liquidation process that purges the economy of malinvestments.

During WW I the Japanese economy boomed. It also accumulated a mass of imbalances (malinvestments). In 1920 the economy crashed and the price level dropped, but not far enough. Rather than allow the depression to run its course and liquidate the malinvestments Japan tried to arrest the process and save its banks and other financial institutions. This policy kept Japan in depression for seven very long years, years filled with political instability and rising militarism.

In 1927 the internal contradictions of this policy were finally resolved by what was probably the severest financial crisis in Japanese history. It brought down industries and wiped out many branch bank systems. This was followed by about 18 months of consolidation that unfortunately helped build Japan's war machine. Thus ended Japan's first New Deal policy, all because she did not follow the American example of 1920-21 and allow market processes to fully liquidate her unsound investments and eliminate excess inventories. The irony here is that Hoover and Roosevelt basically implemented the same policies that post-war Japan did, without, fortunately, the same political consequences.

Any attempt to kick-start an economy with a program of public works, more regulations, higher taxes and greater government spending is doomed to fail. Such a program failed under Roosevelt, if failed in Japan and it will fail under Obama if he implements.

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes economics editor.

Copyright © 2005-2009 Gerard Jackson

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