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March 01, 2009

Obama's Spend, Tax and Borrow Policies Will Wreck the US Economy
by Gerard Jackson

If Obama's* oratory was matched with economic wisdom leavened with a sound knowledge of economic history American would have nothing to worry about. Unfortunately Obama is a profoundly ignorant man who shares the statist's contempt for economics, an attitude that will have fearful consequences for the US economy. His ideological mindset is exemplified by his supreme indifference to the state of the markets. The Dow had its worst February since 1933 and now stands at 7,062.93. And this happened after he had given the public another oratorical masterpiece, proving that though you can fool a large number of people for a long time you cannot fool the markets. They listened and then they sold him short.

So what did the markets evidently understand that millions of Americans don't? For starters, his spending package is a monstrous piece of legislation that will do grave damage to the US economy. Furthermore, it is not even a stimulatory program in any meaningful economic sense. It is loaded with pork designed to advance the interests of the Democrats and the country and future generations be damned.

Literary hundreds of thousands of condemnatory words have already been written about Obama's economic incubus. Nevertheless, many more are necessary if Americans are to be made aware of its destructiveness. Obama lied when he said that millions of American will not suffer from the costs of increased taxes because these will be levied on the "rich", those earning $250,000 or more. In fact, there are two lies here. His super rich friends like Buffett and Soros will be able to evoid his taxes. What this means is that his taxes on the so-called rich are really taxes on getting rich. They are taxes on investment and entrepreneurship. Ultimately they are taxes on capital accumulation, the process that raises living standards.

I am forever trying to remind people that it is not governments -- and certainly not the likes of Obama and Axelrod -- but entrepreneurs that drive growth and it is savings that fuel it. The link between the two is indissoluble, though largely overlooked. Now Obama intends to strangle both through the use of higher taxes, more regulations and vastly increased government spending. This means that those who do not pay federal taxes at the moment will nevertheless pay heavily for his feckless policy of spend, regulate, tax and borrow.

By doubling the tax on capital gains he will be confiscating billions of dollars that were destined for investment. Most people simply do not understand the role that capital gains play in fuelling investment, even though it is investment that increases real wages by raising the ratio of capital to labour which in turn intensifies the demand for labour. (Republicans need to get this fact across to the public). The lower the real demand for labour the lower will be real wages. But in Obama's leftwing universe this is called "fair", even though it does not include his rich pals*.

By attacking savings he reduces the opportunity for entrepreneurship. As venture capital shrinks -- thanks to capital gains taxes -- so will the number of profitable investments that can be undertaken, regardless of the number of willing entrepreneurs. (This is something that Reagan fully understood).

His cap and trade policy is not just an additional tax on production but a savage attack on capital accumulation. By diverting hundreds of billions of dollars into solar and wind power he will be dissipating capital while simultaneously destroying masses of fixed capital, particularly among energy intensive industries and coal-fuelled power stations. (I am assuming that he is serious about implementing this program).

His regulatory policy will price coal-fuelled power stations out of business. That's a mass of capital gone for a start. The so-called green alternatives that he intends to subsidise have insurmountable technical and economic inefficiencies that result in massive diseconomies of scale. What this means is that these wind and solar farms suffer from increasing average costs, meaning that the more you produce the greater the unit costs of production will be. The opposite holds for centralised power stations.

Even well informed critics of Obama's crushing energy policy have not grasped the severe damage it would do to the country's production structure. The idea that this could be overcome with subsidies is laughable. Imagine what would happen to aggregate demand once his politically imposed energy costs had devastated production. It would make for a good disaster movie.

Debt must be paid. That's why it's called debt. Governments borrow in order to spend. But when they spend they divert goods from other uses. It follows that the more governments spend the more of a country's resources they divert. This means that companies find themselves having to bid more and more for resources as government spending increases. This would still be the case even if this spending ended up as welfare payments and thereby raised the demand for consumer goods.

As I have already said, capital accumulation is what raises living standards. Only by producing more can we consumer more. But we can only invest by reducing the rate of consumption. In short, to invest means to give up present consumption in favour of greater future consumption. This is precisely what our venture capitalist does when he lends money to an entrepreneur instead of blowing it on another mansion and a score of vintage cars.

As for the debt, it is paid through taxation. Hence a double whammy from Obama's reckless spending binge: higher taxes now and -- if Americans are lucky -- future living standards that will be lower than they would otherwise have been. If they are unlucky -- and this did happen in Argentina -- living standards will drop.

The only ones who will be able to defend themselves from Obama's economic depredations will be his super rich friends, most of whom appear to loath America, why else would they support policies that seem guaranteed to bring the country to its knees?

Obama's defenders are utterly adrift for a sensible defence of his assault on the economy. The best they can come up with is the financial crisis. Well as the thuggish Rahm Emmanuel carelessly said:

You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.

Obama and the rest of the power-hungry Democrats and their filthy rich supporters are using the crisis -- and there really is a crisis -- to try and impose on America irreversible economic policies, the same sort of policies that wrecked the UK economy and ignited riots throughout Europe. Nevertheless, knee-jerk Keynesians and mindless Democrats parrot the line that without this massive spending the economy would sink into a depression.

Point out that these policies have never worked at any time or place and they will reply that they weren't really tried. For instance, William Cheney, chief economist at Boston's John Hancock Financial, said that Roosevelt's initial policies boosted the economy and that it only regressed after he cut spending. Absolute nonsense. It was Hoover and Roosevelt's policies that kept the US in depression. As for the downturn, he would be referring to the 1937-38 crash that sent unemployment rocketing from 14.3 per cent to 19 per cent.

From the following table we can see that from 1936 to 1937 government spending fell by 2.3 per cent while the index for real manufacturing wages* jumped by 10.6 per cent. With factory employment index set at 1936IV=100 Vedder and Galaway found that in the first quarter of 1937 the index stood at103.6 and hourly money wages at 103. By the second quarter of 1937 the unions had driven the money wage index up to 114.5, an increase of 11.7 per cent, causing the employment index to plunge to 84.9, an 18.1 per cent contraction. (Ibid. 136). No matter which way one looks at the data the link between inverse movements in the unemployment rate and the real wage are inescapable.

One should also note the fact that personal consumption never fell below 72.7 per cent of GDP. So if consumption drives the economy why didn't these consumption rates lift the economy out of the depression? I'll give you a clue. It's business spending that keeps the economy moving, not consumer spending, 'too much' of which can lower living standards!

Obama's massive spending binge is built on a myth. A myth that could have the severest consequences for American living standards.

*A number of people have commented on the hypocrisy of Obama and his rich supporters, whose attitude is one of "do as I say and not as I do". Critics do not realise that this is characteristic of leftists. They always exempt themselves from their own strictures. I call this behaviour the Mikoyan syndrome.

Anastas Mikoyan was a communist agitator in oil refineries at Baku Batoum that were owned by an industrialist called Zubalov, Mikoyan led strikes, protests and organised study groups. One can think of him as the pre-Soviet equivalent of a "community activist". However, once the Soviets grabbed control of the state he took Zubalov's mansion for his own, including the servants, cracked down on strikes, shot protestors, banned study groups that questioned the party's authority and sent their organisers to labour camps. He was justified in doing this because -- like today's Democrats -- he believed that anyone who challenged the Party was evil or stupid. I regret to say that Mikoyan survived Stalin's purges and died of old age, unlike thousands of his victims.

At the end of the day, Obama is nothing but a highly polished Hugo Chavez with the same corrupt instincts. To him the crisis is an opportunity to plunder Americans and then -- with the willing assistance of America's corrupt media -- use the loot to effectively turn the US into a one-party state.

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes economics editor.

Copyright © 2005-2009 Gerard Jackson

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