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The US recession and Obama's destructive economic snake oil

Gerard Jackson

Monday 20 October 2008

The very important Performance of Manufacturing Index that the Institute for Supply Management produces stands at 43.5. Anything below 50 is contraction. All the important manufacturing indicators are now negative. In plain English, the US is in recession. For years I have been stressing that the focus on consumption as the leading indicator of economic health is dangerously misleading. In 1999 I pointed out that manufacturing was contracting and that this meant an impending recession.

Nevertheless, the economic commentariat cheerfully claimed that falling unemployment and rising GDP was proof that the Clinton boom was succeeding. Of course, once recession struck the Democrats and their media toadies blamed Bush. The US is once again in recession and once again Bush is blamed. (This is what America's treasonous mainstream media calls an honest economic debate).

Bush is no more to blame for the current recession than Clinton was to blame for the last one. Presidents can worsen sometimes very badly what is called the business cycle but they do not cause it. For example, when in 1930 the depression deepened Hoover responded with a range of destructive regulations taxes and the infamous Smoot-Hawley tariff. When Roosevelt became president he followed the Hoover line with a vengeance, giving the US the deepest and longest depression in its history. Hoover is reviled for his economic incompetence: the same critics worship Roosevelt for his economic incompetence.

(Facts and tightly reasoned arguments never sway cultists. One need only listen to the mindless drivel spouted by Obama supporters to find confirmation of this depressing observation).

The situation is greatly aggravated by Keynesian economists, the same crowd that is always surprised when a recession strikes before consumption falls. And it is Keynesian advisors who have played an important role in shaping Obama's views on taxes and other people's money. It was they who told him that if he called a transfer payment a tax credit he could publicly state that he would give 95 per cent of Americans a tax cut. This is about as brazen a lie that any politician could make because a transfer payment consists of taking money from Joe the Plumber and giving it to the Joe who pays no federal income tax. It takes little imagination to see which one will get Obama's vote.

Refuting all of the economic fallacies that underpin Obama's laughable economic policy would take a book. (What is not laughable is the immense damage these policies would do if fully implemented). Therefore I shall focus on the two most prominent fallacies. The first one involves his transfer payment. (Oops, I meant to say tax credit). Being Keynesians his advisors would have told him that this policy has the double advantage of buying votes while stimulating economic growth.

At least they got the part right about buying votes. The rest is unadulterated bilge, and dangerous bilge at that. As any classical economist would have pointed out: what is consumed cannot be invested. This is why consumption was called the "annihilation of value" and not the creation of wealth.

Funds directed from the production of capital goods to the demand for consumer goods will retard the process of capital accumulation. In other words, economic growth. If it were otherwise the consumption of seed corn would automatically lead to the production of more wheat. No Keynesian would be foolish enough to assert such a thing. Yet the same Keynesian will support the same argument when it comes to taxation and consumer spending.

It is savings that fuel economic growth and it is entrepreneurship that drives it. Obama's snake oil would drain the country's savings into consumption which would lead to a lowing of future living standards, not necessarily in absolute terms but certainly in relative terms. If pushed to the extreme overall living standards would fall.

This brings us to "Joe the Plumber" (real name Joe Wurzelbacher) who is being crucified by the media for causing Obama to blurt out that he wants to "spread the wealth around". (The media's vicious persecution of Mr Wurzelbacher should disabuse anyone of the naive notion that these journalists are anything but shills for the Democrats). What should be noted is that Obama was talking about income and not wealth.

Under his tax proposals if Joe did manage to fulfil his ambition of buying his boss's business his money income would most certainly be taxed. But Warren Buffet, the Kennedy family, John Kerry and Teresa Heinz, the grasping Sandlers, Steven Spiegel, Soros and the rest of the super rich who fund the Democrats would escape completely unscathed because their wealth would be protected along with their incomes which are carefully defended by platoons of highly experienced tax lawyers. The sort of lawyers who never had to change as much as a light bulb. So much for the Dems' concern for the "the little guy"

In other words, Obama's policy of spreading the wealth is a vicious con intended to appeal to class envy while securing him the presidency. (John Stuart Mill was moved to condemn envy as "that most anti-social and odious of all passions", On Liberty, Oxford University, 1984, p. 96). On closer inspection we also find that his proposal would amount to a direct tax on the accumulation of capital (wealth). If Obama is allowed to tax more of Joe's income then Joe's ability to accumulate wealth is reduced.

If Joe cannot accumulate capital this means that he has been prevented from expanding his business, which also means that millions of other small businesses will have been stopped from making more investments and hiring more labour at higher wage rates. Obama and his lefty advisors call this "fair". Any reasonable person would call it stupid and immediately question Obama's motives, assuming of course that the person in question was not afraid of being labelled a racist by Obama's media goons.

Joe's plight leads to the vital role that capital gains play in raising living standards. When being interviewed by the ABC's Charles Gibson Obama made it clear that he would be "raising the capital gains tax for purposes of fairness". Capital gains are pure profits. If these gains were completely taxed away the US economy would end up like Venezuela's and I kid you not.

Let us take a happy hypothetical situation where Joe the Plumber has succeeded in buying a business and running it successfully. His capital gains would be reflected in the value of his company. The more gains the greater the value. But these gains would be poured back into the business to buy equipment (capital goods) and to hire labour. This is how businesses expand. Those businesses who did not follow Joe's example would be swallowed up by their more enterprising competitors.

Everything is just dandy and then comes the Obama presidency. Joe's capital gains are looted, his ability to expand and hire more labour is destroyed and his risk taking activities aborted. What Obama and his brilliant economic advisors do not understand as if they care is that no matter how talented and risk-oriented an entrepreneur may be, if the capital gains are not there to fund him he is like an engine without fuel.

For the life of me I cannot see what is fair about an economic policy that at best would keep living standards lower than they would otherwise be or might even devastate them. But look on the sunny side of things. No matter what happens to the "little guys", the Joes of this world, the Democrats' rich supporters will still be able to afford their private jets, armed guards and gated communities.

Gerard Jackson is Brookesnews' economics editor

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