Friday, May 11, 2012

Why the Obama Stimulus Failed

Obama ignored what Margaret Thatcher called "fundamental truths" that history shows work to create economic growth!

In the wake of the farcical election in France which will end up forcing Europe to take a huge step backwards away from economic recovery I was reading an interview that Margaret Thatcher gave in 1976, a year after she became leader of the Conservative Party in the United Kingdom and 3 years before she became Prime Minister. In the interview she famously said "The problem with socialism is that eventually you run out of other people's money." The entire interview is a tour de force of economic truths that history has shown work every time they are tried. Thatcher knew intuitively that liberty and economic freedom are the keys to prosperity, not state control and massive spending.

After reading the interview I was left wondering whether there was a modern American perspective on the subject when I stumbled across a column by Louis Woodhill, an engineer and software entrepreneur. Experience and success have been his teachers. The article addresses the liberal desire for more of the stimulus spending that has been such a colossal failure.

Here's an excerpt from his article, which I encourage you to read in full:
Obamunism is failing, and its ongoing failure is reflected in the employment numbers. Obama's Keynesian mental model of how the economy works is simply wrong, so his remedies, which are based upon Keynesianism, aren't working.

Keynesians believe that economic growth is driven by spending, and that government borrowing and spending will increase total spending, and thereby boost RGDP. It isn't, and it won't, so it doesn't. Obama's signature remedy for our economic woes, "stimulus", was an $831 billion flop.

Keynesianism is a superstition, and no amount of real-world evidence can penetrate a mind in the grip of a superstition. When Obama's massive 2009 stimulus program had the same impact (i.e., none) as Bush 43's smaller programs in 2001 and 2008, Keynesians simply declared that, "It just wasn't big enough". Pop quiz: if your plan is to raise the water level in a pond by drawing out a bucket of water and pouring it back in again, how big a bucket would be "big enough"?

The reality is that investment drives economic growth. It is investment that creates productive capacity, and nothing can be purchased unless it is first produced. During the first 11 calendar quarters of the Reagan economic recovery, real nonresidential investment increased at a 9.4% annual rate, RGDP expanded at a 6.1% annual rate, and total employment grew at a 3.1% annual rate. The comparable numbers for Obama's (non) recovery are 6.0%, 2.4%, and 0.5%.

All of the major elements of Reaganomics, a strong dollar, marginal tax rate cuts, and reduced regulation, favor capital investment. Obamunism is the exact opposite of Reaganomics in these three areas, and it therefore discourages investment. When you discourage investment, you discourage employment. The result is the most discouraging jobs picture since the Great Depression.

But wait! There's more!

Right now, the economy is heading toward a "fiscal cliff", with massive tax increases scheduled for January 1, 2013. Could this be impacting capital investment now, and thereby RGDP and jobs?

Well, let's see. You climb in the back seat of Thelma and Louise's 1966 Thunderbird. Thelma floors it, and she begins racing for the cliff. How likely are you to say, "Hey, let's invest in a new carburetor"?
Through spending, tax and regulatory policy Obama has shown that his liberal/socialist ideology trumps the lessons which history has taught us. Ignore economic liberty, freedom and increase government interference and dependence and the result is as predictable as what happened to Britain in the 70's and the U.S. today!

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