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Obama thinks he can 'jolt' the US economy out of recession. Fat chance — so tighten your seatbelts
Gerard Jackson
To whom has Obama been listening? He says that he wants to 'jolt' the US economy out of recession. God help us! This is Keynesian hogwash and obviously came from one of his brilliant economic advisors. (They must be brilliant because this is what America's corrupt one-party mainstream media keeps telling us. And we know they never lie, don't we).
Let us first get a little perspective here. Some readers have argued that as output has dropped by less than 1 per cent any kind of jolt is unnecessary. Not the point. This is like saying falling off a skyscraper won't hurt you so long as you don't hit the ground. Manufacturing is in a deep recession and it is worsening. There is no way the rest of the economy can be isolated from this. It is not a mere coincidence that consumer spending is now beginning to fall.
The failure to grasp the true economic importance of manufacturing stems from the egregious error of omitting spending between the stages for production from the national accounts. If this spending were acknowledged we would find that consumer spending would be about one-third of total spending with the rest consisting of business spending. Therefore it is the latter that needs to be watched and not consumer spending. This is why Obama's so-called economic "dream team" could turn out to be a disaster.
Obama's economic brains trust is nothing but a group of orthodox Keynesians whose economic medicine consists of the usual Keynesian nostrums that, incidentally, fit in very nicely with the Democrats' pathological desire to exercise control over everything they can lay their hands on. For evidence of this we need look no further than Larry Summers, the "Leader of the Pack", so to speak.
Summers still believes in the discredited Keynesian multiplier. If we are to get some idea of where this bunch is heading we need to pay some attention to this Keynesian fallacy. Quite simply, when the government increases spending it raises total spending by a given factor, say 2: this is called the multiplier. Down to details. A person receives a $1,000 handout from President Obama. He saves $100 and spends the rest.
Now bear with me for a moment. Clearly his saving is one-tenth of the total handout. Therefore, by multiplying $100 by 10 (the reciprocal of one-tenth) we get $1,000. This is what is taught to children when they are introduced to fractions and amounts to nothing more mathematically profound than saying that the man's handout is 10 x $100.
But now we come to Keynesians — and we know how brilliant they are. Possessing intellectual powers far beyond those endowed on mere mortal like us, Keynesians have realised that income (in our example, an Obama handout) is really a function of the fraction that is saved. That's right, folks. It's not the income that allows you to save, it's the amount saved that determines your income. And as they say on the infomercials, "There's more to come!"
According to this logic, the less one saves the richer one becomes. One hundred per cent consumption is therefore the road to fabulous wealth. Ridiculous as this is, Keynes did get carried away and stated that
. . . in the event of the community maintaining their consumption unchanged in spite of the increase of employment and hence in real income, will the increase in employment be restricted to the primary employment provided by the public works. If, on the other hand, they [the community] seek to consume the whole of any increment of income, there will be no point of stability and prices will rise without limit. (John Maynard Keynes, The General Theory of Employment, Interest and Money, Macmillan, St Martin’s Press for the Royal Economic Society, 1973, p. 117).
Suddenly we move from wealth-creation without the need to save to what is nothing but hyperinflation. Never mind, geniuses like Summers discovered the means to do undo Keynes' Gordian knot. They introduced leakages, as if the economy was a piece of complex plumbing. It is these leakages that constrain the 'multiplier effect'. But aw we have already seen, the multiplier is nothing more that a piece of mathematical slight of hand. (When I was first introduced to the multiplier — all those years ago — I was aghast that anyone could be taken in by it. I have since come to terms with that dismal fact).
One final observation is, I think very necessary, at this point. There is no doubt that a 'multiplier effect' does exist, but it is nothing like Keynes', and this effect was well-known to older economists.
Among the ultimate effects of a period of hard times, then, are: a reduction in the prime and supplementary costs of manufacturing commodities and in the stocks of goods held by wholesale and retail merchants, a liquidation of business debts, low rates of interest, a banking position that favors an increase in loans, and an increasing demand among investors for corporate securities. Now all these conditions are conducive to a resumption of business activity, either because (like the settling of old accounts) they remove obstacles, or because (like the reduction of mercantile stocks) they promise a larger demand for wares, or because (like low interest and low manufacturing costs) they widen the margin of profit, or because (like the position of the banks and the attitude of investors) they facilitate the borrowing of capital. Fundamentally, the revivals of business must be ascribed to the processes that initiate these favorable conditions. (Wesley C. Mitchell, Business Cycles and Their Causes, Business Cycles: Part III, University of California Press, 1941, pp. 1-2. Chapter 4 contains a more detailed description of the recovery process ).
Unfortunately the prudence, learning and wisdom of the older economists has been overridden by the intellectual arrogance of Keynes' disciples for whom tunnel vision is a congenital irredeemable defect.
I think it now easy to see where Obama got the economic rationalé for his big spending programs. What he cannot grasp — any more than his advisors can — is that this Keynesian thinking could create a situation in which manufacturing sinks into a state of stagnation while unemployment and consumer prices rise, the current account deficit worsens and the dollar goes into freefall. But more on this next week. In the meantime I'll spend a little time pondering how long it will be before the American public realize that the brilliant Obama really is an empty suit.
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 1 December 2008