Barack Obama is Ensuring a Prolonged Depression

President Barack Obama’s success as reflected in the recent gubernatorial races appears ever more staked on the state of the economy. Unemployment recently reached 10.2%, though the more honest measure of U-6 shows the nation running unemployment at a Depression-like 17.5%. In response to these numbers, Barack Obama has said that “I will not rest until all Americans who want work can.” Yet Mr. Obama’s policies belie his words. In fact, what his administration is doing will ensure massive unemployment and endless economic stagnation.

To understand why I would make such a sweeping assertion, it is instructive to understand how our economy ended up in this predicament in the first place. For this, I must give a cursory explanation of the Austrian theory of the business cycle.

The interest rate is a price signal, no different from the price tag on any good. In a free market (which the US most certainly does not have), the interest rate — the cost of capital — is determined by the supply of and demand for capital. Individuals choose to consume or invest, and this dictates the amount of loanable funds in the economy, which businesses will use to undertake projects to bring goods to market for future consumption.

However, when a central bank like the Federal Reserve prints money, artificially lowering the interest rate and expanding the loanable pool of funds, producers are left with a false price signal. The interest rate will tell producers that consumers want them to undertake long term projects to bring goods to market. This artificially lowered interest rate will induce consumers to save less and borrow and spend more as debt is cheaper.

Resources are misallocated because of the conflicting demands of consumers and undertakings of producers, caused by the government-distorted (the Fed though nominally private is clearly an apparatus of the state) price signal of the interest rate. This leads to the bust, manifested for example in the empty houses and office buildings throughout the country.

Logically, one might think that the best way to fix this mess would be to liquidate the malinvestments of businesses, pay down our debts and start fresh. One might say that we must allow for the market mechanism to correct the imbalances and distortions created during the artificial boom.

Only neanderthals (i.e. policymakers in the pre-Depression era) would advocate the above. The enlightened Barack Obama and his team of trusty economic advisers, along with the ever-compliant Messrs Bernanke and Geithner have other ideas. Practically every single policy they have enacted is intended to stop the market from clearing out the wastes and excesses of the boom. The government has undertaken programs to encourage greater home ownership and keep people in homes that they cannot currently afford, and to buy more cars, fictiously propping up GDP numbers. They have bailed out failing enterprises. They have abrogated contractual obligations. They have created make-work, politically oriented and naturally often fraudulent and wasteful public works projects. They have also increased the money supply at an unprecedented rate, easing the Federal Reserve-controlled interest rate to a ridiculous 0%. They have done all of this while exponentially expanding a national debt which was already egregiously large.

All of these policies in their own way have prevented and will continue to prevent any sort of recovery. They are designed to stop markets from reflecting reality, continuing the distortions already created by government tinkering. History seems to be repeating itself, with Obama following Hoover and FDR’s favorite anti-Depression prescriptions.

There are major costs to these programs. Besides the fact that government is prolonging the downturn by not allowing the gears of the markets to function, the government has created a major moral hazard in bailing out failed companies, hurt those successful companies who have been forced to subsidize the failed ones, and also in propping up failing enterprises, prevented entrepreneurs from putting the assets being tied up in unproductive businesses to better use. The government has also completely misled both businesses and their investors by running roughshod over contracts in both the case of the AIG bonuses and in the relationship between debtor and creditor in the GM boondoggle.

The government has also used its largess to “save or create 600,000 jobs,” a number which is not only dubious but also fallacious. As Frederic Bastiat told us, the good economist examines not only what is seen, but the unseen. This arbitrary number of 600,000 hides the fact that government make-work projects and propping up of unsound ventures stops new and more profitable industries from springing up given the diversion of land, labor and capital in projects that would otherwise not exist. This prevents new job opportunities from being created, and also prevents workers from learning new skills to become viable employees in new and profitable businesses. At best, if there was no politicization, corruption, waste and the government was able to build things both solid and aesthetically pleasing, the government can merely divert resources. They will not be meeting any type of demand of the consumer like a private enterprise because they lack a price mechanism of the market when undertaking their projects, and are not responding to the demands of consumers. They are responding to the demands of political interests. Put more succinctly, we don’t know how many jobs have been lost because of the ones that have theoretically been saved or created.

Not to mention the fact that the resources that are paying to save or create these jobs (and for all of the other bailouts and programs enacted by the government) have to come from somewhere. They come from bilking the taxpayer, or future generations of taxpayers. Ventures that private individuals choose not to undertake with their own capital are instead created by the government.

In addition, low interest rates have not only kept banks alive which would have failed, but allowed them to generate profits on the taxpayer dime by borrowing from the government at 0% and either lending it back to the Federal Reserve or pumping it into the financial markets, where we see the results of continued monetary inflation in the increase in stock, bond and commodity prices. What this represents is a massive wealth transfer from the American people to the financial system, whose participants it should be noted prop up the government itself by underwriting and creating markets in its debt. Most important of all, in keeping interest rates artificially low, the government continues to distort the price signaling mechanism, which caused the whole crisis in the first place.

There are also major costs due to the debt that the government issues in financing their intervention. The massive increase in our debt undermines the creditworthiness of the country which will ultimately lead to an increase in interest rates as people lose faith in our government and in the viability of our economy to generate the funds necessary to pay down these crushing debts. The only way for the government to pay off these debts since they cannot do it honestly by directly taxing will be through the indirect tax of inflation, which as I have mentioned they have been doing since this crisis began and at an absurdly fast rate ever since the Federal Reserve was instituted. And again, this will continue the price-signal distortion.

So just to review, the government is preventing markets from adjusting, preventing businesses from going belly-up and their assets being put to better uses by more competent businessmen and women, creating wasteful public works projects, all while ruining the nation’s creditworthiness and debauching the currency.

There is a last point which must be made. Besides the fact that the government’s policies inherently either encourage non-productivity or reward bad actors which weakens the moral fabric of the people, as during FDR’s presidency, market entrepreneurs (as opposed to the political ones who profit from the aforementioned government swindling) are genuinely afraid of this administration. To say that the GM bailout in addition to the coercion of the banks and most notably Ken Lewis had a chilling effect is an understatement. People in business do not know how arbitrary or onerous government regulations will be.

As the government runs from one whimsical plan to another, all market participants can be sure of is that regarding regulation and intervention, there will be more, and that they will be soaked by taxes either direct or indirect. With businesses unsure of the economic environment but most likely rightfully anticipating (though in my opinion underestimating) an increase in outright socialism in the economy, this will surely quell economic growth.

Thus, we see that Obama’s policies are not only misguided but also incredibly destructive. If we fail to work through the carnage caused by the government-induced boom, and instead try to continue down the path of unsustainability; if instead of letting the economy adjust and liquidate, painful as it may be, we try to continue the illusory boom, we will be doomed to years of unemployment, stagnation and ultimately the “crackup boom” of the economy. And this isn’t even to mention the threats to our economy posed by national healthcare, cap-and-tax and even scarier Mr. Obama’s foreign policy.

The only way to create jobs and fix a broken economic model is to release the entrepreneurial forces of America. Each and every one of these policies retards the necessary adjustment, depriving businesses of valuable assets that can be put to more profitable lines of work and consumers of receiving the products they seek.

Leave a Reply




You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>