This is a bit of a departure from the normal fare on my blog, but the article I read was too good not to share with those who haven’t found it on their own. . .
Tom Woods, author of Meltdown, recently had a piece published on Lew Rockwell called, “Beware of Obamanomics“. This is not some neo-con, pro-Republican/ anti-Democrat shallow tripe. In fact, in his writing Woods regularly refers to the fact that in many ways the Obama economic policy does not represent “change”, but rather a continuation & expansion of the Bush fiscal & spending policy.
Barack Obama won the White House on a promise of “change we can believe in,” but his approach to the economic crisis has been more of the same, including continued bailouts of failed institutions
If you want to understand real free market economics & how we got into this mess, read Lew Rockwell. If you want to dispell notions you might be holding on to that the Stimulus Plan will do anything to “fix” the economy, please read Woods’ Beware of Obamanomics.
http://lewrockwell.com/woods/woods112.html
Here are a few highlights :
In 1920–21, the United States faced a grave economic crisis, worse than the first year of the Great Depression. Double-digit unemployment and a 21 percent decline in production over the previous twelve months greeted the new president.
That president, the now-despised Warren G. Harding, told Americans that the bust following the artificial, credit-induced boom of the war years had to be faced up to, and that no government, however wise, could make it disappear:
The economic mechanism is intricate and its parts interdependent, and has suffered the shocks and jars incident to abnormal demands, credit inflations, and price upheavals…. We must seek the readjustment with care and courage. Our people must give and take. Prices must reflect the receding fever of war activities…. All the penalties will not be light, nor evenly distributed. There is no way of making them so. There is no instant step from disorder to order. We must face a condition of grim reality, charge off our losses and start afresh. It is the oldest lesson of civilization.… Any wild experiment will only add to the confusion. Our best assurance lies in efficient administration of our proven system.
Government actually cut its budget during the crisis. There was no fiscal “stimulus.” The Fed looked on passively. And by the summer, recovery had already begun. According to today’s textbooks, that wasn’t supposed to happen. But it did.
President Barack Obama’s approach to the present crisis couldn’t be more different. Once in office, the candidate who had run on “hope” began speaking in apocalyptic terms of what might happen to Americans if vigorous government intervention were not undertaken. At the very least, we might experience an extended slump rivaling the Great Depression. Just look at Japan, Obama said in his first press conference as president. Japan “did not act boldly and swiftly enough,” he said, “and as a consequence they suffered what was called the ‘lost decade’ where essentially for the entire ’90s they did not see any significant economic growth.”
As usual, unfortunately, our president draws the wrong lesson from history. Japan acted too “boldly” and “swiftly.” Tens of trillions of yen in stimulus packages, combined with propping up failing companies, lowering interest rates to zero, and much additional intervention besides, had nothing to show for it other than making Japan the most indebted country in the developed world. Keynesians desperate to find some reason that their entire slate of proposals failed to elicit a response from the Japanese economy try to argue that Japan didn’t nationalize its banking sector fast enough. But when Japan did start nationalizing its banks, it then endured the two worst years (1998 and 1999) of the whole “lost decade.
RileyDad note : I am working on a piece about the new documentary “Demographic Winter” and how the anti-child mentality that has taken root in the “developed world” is not only destroying our culture, but is one of the root causes of the ongoing economic slide. In Demographic Winter, Japan is pointed to as one example that having less than a replacement rate of children will eventually cripple an economy. According to one of the demographers interviewed, Adam Smith — the father of modern economics — believed that growing populations lead to prosperity & declining/ aging populations produce depressions.
Back to Woods :Shortly after taking office, President Obama urged the Congress to approve a “stimulus” package amounting to $787 billion in order to (he said) restore the economy to health. In his first news conference as president, Obama warned that a failure to pass this bill “could turn a crisis into a catastrophe.” “I can tell you with complete confidence,” he continued, “that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans.” (For the projected deficits resulting from Obama’s spending plans, see Fig. 1.)
Fig. 1
Source: Washington Post; CBO, White House Office of Management and Budget
But, fashionable superstitions notwithstanding, government spending – that is, draining resources from the productive sector and devoting them to arbitrary projects – cannot improve the economy. It can only make things worse. So blinded are Keynesian economists, from whom Obama takes his inspiration, by the view that prosperity is attributable to “spending” per se that they predicted a return to depression conditions when World War II spending came to an end. And indeed in 1946, the year after the war ended, the budget was cut by two thirds. But instead of reverting to depression, what occurred instead was the single most robust year the private economy has ever seen.2
What the economy really needs, contra Obama, is not government “stimulus” spending to try to revive it as it is. We should not want to “stimulate” what should now be obvious to everyone was an unsustainable economy. That only encourages it to continue along a false path whose inevitable abandonment in the future will be all the more painful thanks to our insistence on propping it up now. As we’ll see, what the economy instead needs is a market-driven restructuring, in which bubble activities shrink and resources are reallocated into lines of production that conform to what consumers want and can afford.Woods Continues by explaining :
Where the Bust Came From
How, after all, did we get into this slump? The key culprit is the Federal Reserve and its loose monetary policy.3 The new money created by the Fed under Alan Greenspan in the years following 9/11 went overwhelmingly into the housing market, inflating prices to unheard-of levels (see Fig. 2). According to the faulty conventional wisdom that rapidly took hold, this rise in prices was a sustainable phenomenon that would persist into the future, not an artificial bubble destined to burst. The so-called experts told Americans that their homes were bound to appreciate, that a house was the best investment they could make, and that flipping houses was a sure money-making opportunity.
With home prices rising in tandem with people’s stock portfolios (another bubble), Americans felt wealthier than they really were. They made consumption decisions on the basis of those faulty estimates that they have since come to regret. Some business enterprises that began or expanded under the conditions of the boom could continue profitably only as long as the boom lasted and consumers’ artificially stimulated excess spending went on. With reality now reasserting itself – that is, with easy credit no longer so readily available, and with people now making their spending decisions in light of the decreased wealth they now realize they have – the market is trying to clear away these bubble activities, so that their resources can be made available for use by the real wealth generators in the economy.
Fig. 2Source: Financial Wisdom, http://www.newfinancialwisdom.com/median-home-prices-inflation-adjusted; data from Robert J. Shiller, Irrational Exuberance
The market, in short, is trying to move consumers away from personal finance models based on indebtedness and too much (and/or the wrong kinds of) consumption, and toward more saving and a sustainable level of consumption. To accommodate this shift, labor and capital will need to be reallocated out of some sectors and into other ones. “Stimulus” spending only disrupts and confuses this purgative process, by misdirecting resources into arbitrary projects and artificially stimulating politically favored industries at the expense of the economy’s healthy and productive sector. Obama’s program for recovery, such as it is, looks instead to reinflate the bubble, keep the spending spree going, and give still more artificial stimulus to debt while providing disincentives to save. It refuses to allow the market to correct the unsustainable excesses in the economy. “No scheme which has ever been devised by them has ever made a collapsed boom go up again,” said William Graham Sumner in 1896. Nothing in the historical record since then has altered that verdict.
The Federal Reserve, meanwhile, acting on the basis of the same economic principles laid out by the president, is likewise trying to repair the economy by engaging in more of what caused the problems in the first place. On March 18, 2009, the Federal Open Market Committee (FOMC) announced it would purchase up to $300 billion in long-term government bonds, with the intent of lowering mortgage rates and other rates on consumer debt. It also declared its intention to purchase up to $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. Instead of allowing the market to restructure along a sustainable path, the Fed instead seeks to keep home prices inflated, prop up the securitization model (on which the market is trying to render its negative verdict), and encourage more borrowing and debt.
“Stimulus” Spending Doesn’t Work – Or Make Sense
On a more basic level, the jobs that government creates are unprofitable – that is, they consume more resources than they produce. If that weren’t true, then the profit-seeking private sector would be funding them already. In fact, it’s impossible for government to know whether it is engaged in profitable, productive activity, since it lacks a profit-and-loss mechanism whereby it can calculate whether it is making efficient use of resources. “Stimulus” packages therefore drain the productive economy of resources in order to subsidize money-losing ventures. Because these money-losing ventures get resources shifted to them, fewer resources are available for use by the productive economy; and since the government sector uses resources less efficiently than the private sector, the net result is a decline in wealth – a fact no magical “multiplier” effect can overcome.
The more sophisticated Keynesians will come back with the argument that government stimulus can kick-start “idle resources” that weren’t being employed in any production process anyway. But how can it do that? Our idle resources include, for instance, some of our automobile production capacity, some construction capacity, some of our financial services sector, and the like, as well as a wide variety of types of labor. Now Obama’s stimulus package includes (for example) money to weatherize 2 million American homes. How can weatherizing homes put these and only these idle resources to work? It can’t, of course. And are there enough unemployed weatherizers to take these jobs, or will we be drawing labor from its current uses in the private sector? The question answers itself. In other words, the weatherizing job will have to draw from already employed factors of production, thus redirecting them to a less urgently demanded use than the one the market was already employing them for. That does not create “stimulus.” It destroys value and wealth. And if the claim is that the money spent on weatherizing homes will eventually trickle down, somehow, to the unemployed workers in these other fields, it is hard to take such a crude mechanism seriously.
If we did happen to have enough unemployed weatherizers to weatherize people’s homes, then why would we need Obama’s stimulus package to force laborers and customers together? If prices were allowed to adjust freely, people wanting their homes weatherized would find the weatherizers on their own, and thus the effort to “stimulate” these transactions would become superfluous
If I don’t stop myself here, I’ll end up posting the whole piece. So I’ll just recommend again that you click on this link & read the rest :
http://lewrockwell.com/woods/woods112.html
As I watched this, I was reminded of the fictional Baron Bomburst, dictatorial ruler of the small country Vulgaria in the classic children’s movie Chitty Chitty Bang Bang. As you may remember, the childish Baron Bomburst and his selfish wife despise children. They actually employ the Child Catcher to collect and exterminate children. You may remember one of his memorable quotes, “There are children here somewhere. I can smell them.”
