Saturday, April 16, 2011

Obama and the Keynesian grail

Girded by a phalanx of Keynesian priests, Obama councils raising the debt ceiling or risk global recession. But how does the Sphinxian prediction square with history?

In 2004, or about 6 years ago as of this writing, the federal debt ceiling was approximately $7.3 billion, or about $23,000 for every man, woman and child in the USA.

By March of 2006, Congress had voted to raise the debt limit 5 times in four years. Senator Obama had this to say before he and Harry Reid voted against the increase:
The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies. Increasing America’s debt weakens us domestically and internationally. Leadership means “that the buck stops here.” Instead Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. America deserves better.

Senator Obama, Congressional Record, S.2237-8, 3/16/2006.

Obama has since heroically clawed back those statements, and we encourage readers to make their own sense of that. Here is Harry Reid:

Of course, times are different now. We are arguably still in recession. And so the apocalyptic message by Obama warning of global collapse if Americans do not take on even more debt and raise the debt ceiling beyond $14 billion is arguably a different matter.

Obama has already spent more money than all previous Presidents combined. Still, in response to the fact that history making government injections of monetary stimulus has done little to spur the economy on to new heights, the Keynesian priesthood has declared that the stimulus was not enough.

Unfortunately, if we look to Japan as a comparative Keynesian experiment, we get much the same result; they are now the most indebted country in the history of the developed world and their GDP growth remains mired in an anemic death trap that their debt is swallowing whole. So what we are led to believe is that historical debt in two instances, enough to imperil the fiscal viability of both countries, was still not gargantuan enough to serve the Keynesian gods.

But this kind of proselytizing regarding government debt has been heard before. In the USA, the end of WWII met a unique crossroads. For the government had usurped more than 50% of the economy and production, along with price controls on a significant portion of the rest of the economy. How to unwind it without creating huge havoc and tumbling the economy back into the depths of a decade long depression?

The Progressive warnings were apocalyptic then as they are now. The American economy would slide into a death spiral without the paternal hand of the federal government. Even lifting price controls would be a dicey proposition, better phased out over a decade long period of paternalistic care and feeding.

Unfortunately for the Keynesian priesthood, that is not what occurred. A newly minted government, cursed by a chorus of economic experts, reduced government spending by over 20% in one year while lifting price controls at the same time.

What happened? Well, GDP rose over 10%. It must have been an incredible fluke, never to be repeated again. And surely wonders will never cease. All praise the Keynesian gods!

But wait. In the late 1980s, Canada had mired itself in federal obligations approaching the catastrophic levels of today’s American Keynesian experiment. Their dollar was failing, not having the luxury of a world currency, and their economy was in a malaise. The fear of debt failure was making its way around the financial circles.

In an historic fit of idiocy according to the modern Keynesian acolytes, the Canadian federal government made two foundational changes. First, it reconceived their bankrupt version of Social Security from a Ponzi tax to a fund which conforms to private enterprise insurance law. It was politically impossible to privatize it, but at least it now conformed to investment jurisprudence.

Second, it slashed government spending across the board by 15% and divested significant federal power to the provinces, along with tax revenue streams. Then, shriveled by Keynesian diatribes, they waited for the impending recession.

But lightening struck again as it had after WWII in the USA; there was no recession. In fact the economy almost immediately took off as the federal government began running surpluses that reduced their debt from roughly 70% of GDP to less than 20%.

Surely wonders will never cease.

Now, some people might say that the economics profession in general has embarrassed itself beyond repair with its Keynesian religion in this latest financially induced recession. The grand Poobah Keynesians were actually telling us we had nothing to fear well into 2008. In fact it is difficult to find a critical and formative juncture in history where Keynesian theory has had anything useful to say at all.

Inspired critics might well ask why then, so many otherwise brilliant academics and politicians remain devotees to such a convoluted discipline so obviously refuted by evolutionary fact, other disciplines including other brands of economics, and just plain common sense. Surely bright minds have found some worth in the hallowed pages of the Keynesian bibles. After all, they aren’t stupid.

But then we do have global cooling and eugenics on the record. In the 1970s the smart and academic money was on the coming ice age. And of course it was western academics that touted and explored the brave new world of eugenics that formed the foundation of Hitler’s policies, and who defended his artful swath through European politics long after most common people had begun raising their voices in alarm. So certainly intelligence is no barrier to stupid ideas.

The answer to the Keynesian priesthood appears all too simple. For it is the only ‘economics’ that espouses great and invading government along with deficit spending as an answer to stave off the negative effects of production (and therefore job and capital) realignment. After all, academics are intelligent enough to know who pays their salaries. And how could a Progressive or socialist resist the juicy temptations of a religion that buttresses large and controlling bureaucracy?

You see, when we build the wrong thing for too long, like say, housing, many of us are going to have to eventually find new jobs and suffer through a decline in house pricing until they are more realistically valued. And those job alignments out of construction and into something else are going to have a rippling effect on the rest of us.

Keynesians actually believe if we get those people building ditches, instead of finding a new job, that we’ll all be fine. It will hasten our path to health rather than just deter our realignment. They also believe that when a significant number of us are out of work and money, if we transfer spending from tomorrow to today, we’ll all be better off. And finally, that if we go into debt while we are poor, we will all grow to prosperity!

So Obama now says if we do not increase our already historic debt, we will get even poorer!

Surely wonders will never cease.

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