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Posted By Mike Brownfield On September 9, 2011

By most accounts, President Obama’s $800 billion "stimulus" bill that was passed in February 2009 with the promise of keeping unemployment below 8 percent was an absolute failure. However, last night in a speech to a joint session of Congress, the President demanded that it spend another $450 billion on more of the same "stimulus" that has left America with zero job growth and continued economic stagnation. But don’t worry. His top economic adviser Gene Sperling told NBC that this one would likely get us down to 8 percent.

Despite Sperling’s predictions, there are a lot of problems with the broad outlines in the President’s proposal, not the least of which is the fact that President Obama is insisting Congress immediately pass a bill that doesn’t exist. No legislative details have been offered; nothing has been scored by the Congressional Budget Office; there has been no debate or negotiation; and there is no accompanying plan on how to pay for it. President Obama only promised he would talk about paying for it in the weeks to come, and that onus likely will fall on the congressional "super committee" that was supposed to be focused on reducing our debt.

"Minor" details such as the lack of an actual bill or money to pay for it aside (or the fact that $450 billion in one year is more than twice as costly as the annual sticker price of Obama’s last foray into stimulus spending), there are serious substantive problems with the ideas the President proposed. Last night, Heritage’s experts provided their reactions [1] to some of those proposals:

Unemployment Benefits: President Obama wants to extend unemployment benefits yet again as a way to boost the economy. That just won’t work. Heritage’s James Sherk writes, "For welfare reasons Congress wants to help workers who cannot find jobs. This is understandable. That doesn’t mean it will help the economy, no matter how much the President wants it to."

The stimulus bill extended unemployment benefits, Congress has kept them in place several times since then, and the federal government has spent over $300 billion on unemployment benefits since Obama took office. It hasn’t stimulated the economy before. It’s not going to stimulate it now.

Reviving the Failed Hiring Tax Credit: In order to help businesses create new jobs, the President proposed a tax credit for businesses hiring new workers. The trouble is that he’s been there, done that, and it didn’t work. Why try it again?

Heritage’s Curtis Dubay explains the problem with the proposal: "A credit of a few thousand dollars, a mere fraction of the cost of hiring a worker, does nothing to change that calculation. The only positive effect on hiring the credit could have would be on temporary positions if it makes adding a few new temps profitable in the short term. But once the credit expires businesses will let those workers go."

Tax Hikes on Job Creators: Taxing those who create jobs as a way to help create jobs is entirely counterintuitive, but the President proposed it anyway. Even though he has agreed that tax hikes slow economic growth and deter job creation, last night he proposed raising taxes on investors, businesses, and entrepreneurs. Dubay says, "This is akin to bailing water into an already-sinking ship." And with businesses looking for more certainty, continuing to threaten more tax hikes will only dampen America’s chances of real recovery.

Infrastructure Banks That Won’t Build the Economy: Throwing more money at building roads and bridges, President Obama tells us, will create new jobs. So he is proposing the creation of an infrastructure bank that would require a whole new bureaucracy. Heritage’s Patrick Knudsen says that increasing spending on these projects "simply moves resources from one place to another — it may employ construction workers, but only by reducing jobs in other sectors." And taxpayers end up paying the price, all without creating net job growth or boosting the economy in the near term.

Going the Wrong Way on Education: America’s education system needs less federal involvement, not more. But the President used his jobs speech as a way to shoehorn the federal government further into the education business, proposing that Washington spend billions on school construction and new jobs for teachers. Never mind that since 1970, school enrollment in public elementary and secondary schools has increased just 7 percent, while staff hires have increased 83 percent [2]. Heritage’s Lindsey Burke explains, "On a per-pupil basis, federal spending on education has nearly tripled since the 1970′s." And for all that spending, Washington hasn’t improved results.

There’s more the President proposed, as well, but much more he didn’t mention, too. He demagogued his political opponents for favoring smaller government and the "rigid ideas" of what government can and cannot do.

He presented one false choice, among many, between reducing government regulations and protecting the American people. He also promised to "root out" unnecessary regulations, as he has for four straight years, while only adding more costly rules to the books. He proposed a puzzling plan to allow refinancing of mortgages without explaining the details or who pays for it. He proposed extending the payroll tax "holiday," which won’t create jobs [3]. He ignored serious ways to grow the economy, like pursuing domestic energy production, which he himself has stalled.

President Obama has spent two and a half years increasing federal spending, growing government, and punishing businesses with burdensome regulations, and today 14 million Americans remain unemployed. Now the President is demanding more of the same at an even higher price. That is not a plan to create new jobs – that is a politically motivated message that ignores the reality of America’s economic crisis.

URLs in this post:

[1] provided their reactions: http://blog.heritage.org/2011/09/08/reaction-roundup-heritage-responds-to-obamas-jobs-speech/

[2] have increased 83 percent: http://www.heritage.org/Research/Reports/2010/05/Creating-a-Crisis-Schools-Gain-Staff-Not-Educational-Achievement? query=Creating%2Ba%2BCrisis:%2BSchools%2BGain%2BStaff%2BNot%2BEducational%2BAchievement%23_ftn5

If you really want to light the fuse of a liberal Democrat, compare Barack Obama's economic performance after 30 months in office with that of Ronald Reagan. It's not at all flattering for Mr. Obama.

The two presidents have a lot in common. Both inherited an American economy in collapse. And both applied daring, expensive remedies. Mr. Reagan passed the biggest tax cut ever, combined with an agenda of deregulation, monetary restraint and spending controls. Mr. Obama, of course, has given us a $1 trillion spending stimulus.

By the end of the summer of Reagan's third year in office, the economy was soaring. The GDP growth rate was 5% and racing toward 7%, even 8% growth. In 1983 and '84 output was growing so fast the biggest worry was that the economy would "overheat." In the summer of 2011 we have an economy limping along at barely 1% growth and by some indications headed toward a "double-dip" recession. By the end of Reagan's first term, it was Morning in America. Today there is gloomy talk of America in its twilight.

My purpose here is not more Reagan idolatry, but to point out an incontrovertible truth: One program for recovery worked, and the other hasn't.

The Reagan philosophy was to incentivize production—i.e., the "supply side" of the economy—by lowering restraints on business expansion and investment. This was done by slashing marginal income tax rates, eliminating regulatory high hurdles, and reining in inflation with a tighter monetary policy.

The Keynesians in the early 1980s assured us that the Reagan expansion would not and could not happen. Rapid growth with new jobs and falling rates of inflation (to 4% in 1983 from 13% in 1980) is an impossibility in Keynesian textbooks. If you increase demand, prices go up. If you increase supply—as Reagan did—prices go down.

The Godfather of the neo-Keynesians, Paul Samuelson, was the lead critic of the supposed follies of Reaganomics. He wrote in a 1980 Newsweek column that to slay the inflation monster would take "five to ten years of austerity," with unemployment of 8% or 9% and real output of "barely 1 or 2 percent." Reaganomics was routinely ridiculed in the media, especially in the 1982 recession. That was the year MIT economist Lester Thurow famously said, "The engines of economic growth have shut down here and across the globe, and they are likely to stay that way for years to come."

The economy would soon take flight for more than 80 consecutive months. Then the Reagan critics declared what they once thought couldn't work was actually a textbook Keynesian expansion fueled by budget deficits of $200 billion a year, or about 4%-5% of GDP.

Robert Reich, now at the University of California, Berkeley, explained that "The recession of 1981-82 was so severe that the bounce back has been vigorous." Paul Krugman wrote in 2004 that the Reagan boom was really nothing special because: "You see, rapid growth is normal when an economy is bouncing back from a deep slump."

Mr. Krugman was, for once, at least partly right. How could Reagan not look good after four years of Jimmy Carter's economic malpractice?

Fast-forward to today. Mr. Obama is running deficits of $1.3 trillion, or 8%-9% of GDP. If the Reagan deficits powered the '80s expansion, the Obama deficits—twice as large—should have the U.S. sprinting at Olympic speed.

The left has now embraced a new theory to explain why the Obama spending hasn't worked. The answer is contained in the book "This Time Is Different," by economists Carmen Reinhart and Kenneth Rogoff. Published in 2009, the book examines centuries of recessions and depressions world-wide. The authors conclude that it takes nations much longer—six years or more—to recover from financial crises and the popping of asset bubbles than from typical recessions.

In any case, what Reagan inherited was arguably a more severe financial crisis than what was dropped in Mr. Obama's lap. You don't believe it? From 1967 to 1982 stocks lost two-thirds of their value relative to inflation, according to a new report from Laffer Associates. That mass liquidation of wealth was a first-rate financial calamity. And tell me that 20% mortgage interest rates, as we saw in the 1970s, aren't indicative of a monetary-policy meltdown.

There is something that is genuinely different this time. It isn't the nature of the crisis Mr. Obama inherited, but the nature of his policy prescriptions. Reagan applied tax cuts and other policies that, yes, took the deficit to unchartered peacetime highs.

But that borrowing financed a remarkable and prolonged economic expansion and a victory against the Evil Empire in the Cold War. What exactly have Mr. Obama's deficits gotten us?

By Monty Pelerin August 9, 2011

Keynesian economics is a fraud. It has neither theoretical coherence nor empirical support. It was adopted out of desperation in the 1930s.

Many contemporary economists of the time protested that the fundamentals of the theory were incorrect. Economists had rejected some of its premises more than a century before John Maynard Keynes was born. For a sampling of some of the reactions, see The Critics of Keynesian Economics [1].

This article will explore the following topics:

• How Keynesianism Was Accepted
• The Case Against Keynesianism
• How Politics Complicates Economics
• Why There Will Be No Political Solution

Keynesian economics represented a major shift in economic thinking. To understand how it dominated, some commentary on paradigm shifts is useful.

Thomas Kuhn [2] described how knowledge advances in the physical sciences. His work popularized the term "paradigm shift." He asserted that more than just a crisis and "proof" was needed for a new paradigm to be accepted:

Kuhn's understanding of progress did not claim monotonically increasing knowledge. According to the Stanford Encyclopedia of Philosophy [3], Kuhn anticipated occasional loss with the adoption of a new paradigm:

The social sciences are more complex, but presumably paradigms shift in a similar fashion. The degree of uncertainty regarding the interpretation of data in the social sciences complicates the problem. Some epistemologists argue that behavioral data cannot prove or disprove anything. Friedrich Hayek's "scientism" was coined to describe the misuse of physical science methodologies to behavioral fields.

More variables, sometimes exceeding thousands, are related to an outcome. Most of these variables are not knowable or measurable. Many exist only in the mind of the actor(s). Controlled replication of experiments is virtually impossible.

"Proof" is a difficult hurdle. It is in this context that the paradigm shift to Keynesian economics should be viewed. Politicians wanting to expand the role of government delighted in the new theory. This attractiveness, plus the desperation associated with the Great Depression, enabled hundreds of years of prior economic knowledge to be discarded without normal due diligence.

Economists were also beneficiaries. Economists gained higher income and prestige as well as more power. Government-funded research ensured the continued academic support for economic activism.

President Eisenhower warned about the corrupting influence of such funding in his farewell address:

Economists who acted on principle did so at their own personal expense. Few opposed the switch to activist economics and government, especially when better incomes were made available. Big government won and historians fell right in line and created the myth that government spending got us out of the Great Depression. The truth is that the economy did not recover until the government cut spending dramatically at the end of WWII, precisely the opposite of what Keynesians would predict.

Keynesian economics lost much of its luster during the 1970s when the economy was burdened by both slow growth and high inflation. Slowly, however, it climbed back to its position of prominence as a result of its usefulness to a government committed to expansion.

The current economic crisis is more severe than any since the Great Depression, causing the Keynesian paradigm to again be questioned.

Kevin Hassett [4] claims that the net effect of Keynesian stimulus must be negative:

In a sense, Mr. Hassett cedes the value of stimulus to Keynesians and still shows it is not net beneficial. Some Keynesians now question the value of stimulus itself -- an unpardonable sin in the eyes of big-government economists.

According to the Austrian School of Economics, governmental intervention (government spending/credit creation) disrupts market prices, necessarily creating distortions in relative prices. These "incorrect" prices serve as false signals to economic actors, resulting in decisions which may be both unwise and unsustainable. An imbalance between consumption and investment is one result, as are distortions within these categories.

Imbalances are not immediately apparent but they do lower the efficiency of what an unhampered economy would produce. Additional stimulus, generally in increased dosages, is necessary lest the distortions surface. These additional stimuli further distort until a point is reached where additional stimulus is insufficient to cover up the problems.

The current housing crisis is an example of a major distortion that can no longer be hidden. It was created by a credit-induced misallocation of resources. Housing prices are now painfully correcting. Governmental interventions to prevent these adjustments have failed.

The continued unresponsiveness of employment and economic growth at this stage of the so-called recovery indicates serious underlying structural problems. Additional stimulus is unlikely to prevent the inevitable, as described by Ludwig von Mises:

An interesting discussion of Austrian economists' reactions to the stimulus program(s) is available in The Austrians Were Right, Yet Again [5].

The relationship between economics and politics is tenuous. Politicians are notoriously short-term-focused while economics is properly long-term-focused. Mr. Keynes was an influential politician sans office. His economics reflected this. He famously defended his economic policy against criticism by retorting that "in the long run, we are all dead."

Mr. Keynes died within his "short-run," but the rest of us are left to deal with the "long-run" distortions of continuous short-run economic fixes. To be fair to Keynes, it is not clear he would have approved what his epigones have done in his name.

Mr. Hassett described the relationship between politics and intervention economics as a "Keynesian death spiral":

The economy is now well into this death spiral. The continuing shadow of Keynes on current policy and our feckless and cowardly political class was demonstrated in the debt-ceiling charade. This deal was pure snake oil. It accomplished nothing regarding spending or deficit reduction.

Government debt is clearly unsustainable. Adding more is akin to pouring gasoline on a raging fire. That Washington pretends otherwise is disgraceful. Either politicians are the most ignorant fools in the world, or they believe their constituents are. Neither hypothesis is flattering; either suggests that these clowns should be removed from office at the earliest opportunity.

Political irresponsibility is so blatant that S&P has downgraded the US government's debt rating, now rating our debt less safe than France's.

Mr. Hassett concludes that the case against Keynesian economics is so definitive that other motives might be suspected:

The arguments against recent stimulus actions are so strong that one wonders whether big-government ideology is the true source of the Democrats' Keynesian enthusiasm. President Obama's plan all along may have been to expand government spending massively in the name of temporary stimulus, and then fight to never let it decline.

The political motives that drive Keynesian enthusiasm today are the same ones that powered it past the objections of sound economists in the 1930s. Keynesianism is the vehicle for the expansion of government. Many naïve politicians believe government should continue to expand.

Hassett ends his piece with the rather forlorn hope that a lesson may finally have been learned:

That is unlikely to be the case for reasons discussed below.

Aided by Keynesian economics, the political class cultivated and promoted the myth that government was responsible for economic success, especially the notion that more government means more success.

Government is like the rooster who believed his crowing caused the sun to rise. More accurately, the propaganda-conditioned voters see government as this rooster.

Government cannot cause the economic sun to rise. It can, however, prevent it from rising. That is the point this country has reached. Government has crippled the economy with an unbearable burden of poor policies, unnecessary regulations, and overspending.

Now the rooster crows but the sun does not rise. The economic crisis persists and worsens, despite unprecedented government crowing (spending).

The economic solution is simple: pare back government and its burden on the economy. Get government out of the way and the economy will recover. The economic sun then will again rise.

The political solution is not simple. Government is bound by its own Gordian knot. It has convinced voters that more crowing is always better. Less crowing would be political suicide for whoever proposed it. The carefully crafted myth of government is a barrier to any political solution. To admit that the myth is a lie requires an admission that government has been a fraud for the last seventy-five years.

That is why no political solution to the economic problem will be forthcoming. The rooster will crow until markets behead it. Spending and deficits will not decrease until the economic system collapses and we rebuild from the ashes that remain. Ludwig von Mises described both Keynesian economics and our current situation:

Make sure you preserve your seed corn. Hard times are ahead!

[1] http://mises.org/store/Critics-of-Keynesian-Economics-P559.aspx

[2] http://www.amazon.com/Structure-Scientific-Revolutions-Thomas-Kuhn/dp/0226458083/ref=sr_1_1

[3] http://plato.stanford.edu/entries/thomas-kuhn/

[4] http://online.wsj.com/article/SB10001424053111903520204576484071534800318.html?mod=googlenews_wsj

[5] http://mises.org/daily/5512/The-Austrians-Were-Right-Yet-Again