Will Obama’s failure to create genuine wealth finally end Keynesian economics?

Many of Obama’s most educated supporters believe in him because they believe in Keynesian economics.  Central to that belief is the theory that government itself can be an economic engine.  If people aren’t working, have them work for the government or at least have the government fund their ostensibly “private sector” jobs.  This theory holds that all jobs are good jobs, regardless of the employer.  Indeed, ardent Keynesians say the government is both the best employer and economic manager, because it’s big enough to control the entire economy, getting money and jobs where they most need to be.

I turned my back on Keynesian theories when I finally figured out that there’s a difference between jobs and wealth.  As Milton Friedman famously said, if all that you’re interested in is employment, forget shovel-ready jobs and aim, instead, for spoon-ready jobs, which will put more people to work.  At the end of the day, whether you have ten people with digging away with shovels or one hundred people picking away with spoons, all you’ll end up with are holes.  Under this model, any benefits from fuller employment are transitory.

What creates meaningful jobs, the kind that move the economy forward instead of create a static back-and-forth of taxes to the government and make-work to the people, is a dynamic private sector.  That’s where you get innovation, imagination, and energy.  Under this free-market economic model, the government’s job is to prevent abuse.  It steps aside to allow the greed that’s necessary for capitalism, while acting affirmatively to prevent fraud, abuse, and other kinds of things that interfere with the marketplace.

During the debate, Romney was referring to this policing role when he said some regulation is not only good, but actually necessary.  It’s when the government starts managing the economy that wealth vanishes.

If you have a rich country (or, as was the case with Europe when America paid for her Cold War security, a sugar daddy), you can keep the back-and-forth of taxes and government make-work going for quite a long time.  Eventually, though, you’re left with jobs, but no wealth.  And no wealth means no taxes, which means no jobs.  Welcome to Greece.

What Romney has to do during the next month is convince undecided voters, or worried voters who aren’t as decided as they thought they were, that, while, Obama’s policies can and will create jobs (as today’s anemic, and suspect, job reports revealed), his policies not only cannot create wealth, they are antithetical to wealth creation.  I think this ad is a good start:

Let’s do the time warp again — Progressives keep urging those failed economic policies

The Huffington Post is one of the ugliest websites I’ve ever seen.  I’m not talking about content (although I’ll get to that), but about its layout.  The left-most column (and that turns out to be a very clever pun on my part) actually has some visual stability, insofar as it allows the hapless visitor to grasp what content the various blogs are offering.  The central column and right columns, however, are a disorganized amalgam of pictures and one- or two-word summaries of underlying stories.  Even I, an adept at reading the internet, find that these summaries range from cryptic to unintelligible.  Even worse, they keep resetting automatically, so it’s difficult to find a story that, one or two minutes before, might have caught my interest.

Having had occasion to read the substantive articles at HuffPo, I’m beginning to wonder whether this home page chaos is intentional, insofar as it’s meant to keep people away from content.  I mean, if I was the one publishing Robert Kuttner’s article about the American economy, I’d be so embarrassed as the publisher that I too would want to use subterfuge and prestidigitation to keep people away.

Kuttner, bless his little ol’ heart, is someone who seems to have missed the last 80 years.  More than that, he’s missed any sophisticated analysis of the last 80 years.  His economic understanding is rooted in post-New Deal 8th grade American history textbooks that assured credulous youngsters that even FDR’s best efforts at centralizing America’s economy failed, making WWII an economic necessity.  I kid you not:

Something similar [to today's economic problems] happened in the late 1930s. Though economic growth returned, it wasn’t strong enough to repair the damage of the Great Depression or create enough jobs. Despite the New Deal, unemployment remained stuck at around 12 percent.

World War II solved the problem — it was the greatest accidental economic stimulus in economic history. It put people back to work, retrained the unemployed, and recapitalized industry. But today, there is nothing in the wings waiting to play the role of the Second World War.

During the war, federal deficits averaged more than 25 percent of GDP, nearly triple today’s deficits. But that’s what it took to blast out of the depression. After the war, high growth rates paid down the accumulated national debt.

Anyone who had read Amity Shlaes’ very accessible The Forgotten Man: A New History of the Great Depression knows that Kuttner’s view of the 1930s is based upon Progressive propaganda, rather than economic facts. Shlaes cut through this gauzy reminiscent haze about the glories of New Deal Democratic politics, and looked at the economic numbers in the 1930s.

With actual data, Shlae’s ably demonstrates that Hoover, like Roosevelt, tried to manage the post-crash economy, and with equally deleterious results. Fortunately, because he was essentially conservative, Hoover’s efforts were tentative, and therefore not deeply destructive.  Sadly, the 1932 election came along before the economy had a chance to right itself from Hoover’s tepid efforts at market management.

With FDR’s New Deal firmly in place, there was no hope. FDR sucked money out of the economy and into the government, paralyzing wealth creation.  Since this economic experiment was the first of its kind in America, however, and because people bought into FDR’s ebullience and optimism (something sadly lacking in the dour, accusatory man living in the White House today), people cheered the sizzle and ignored the fact that it was, in fact, a scratchy recording, unaccompanied by actual steak.

When World War II came along, it had the virtue of providing almost full employment for the American public. Significantly, although the government was writing the checks, this wasn’t make-work. The U.S. needed to build ships, tanks, planes, and weapons, and it needed bodies in the field. In other words, this was the rare occasion when a centralized command and control economy was geared towards efficiency, rather than simply producing low employment numbers.

Normally, the opposite is true — that is, output is irrelevant — in a government-run economy. Milton Friedman nailed the problem with a government’s make-work “economy” when he delivered his pithy challenge to the whole notion of “shovel-ready jobs”:

Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: “You don’t understand. This is a jobs program.” To which Milton replied: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels.”

Busy work does not create economic dynamism. It simply allows a government to boast about its low unemployment. Eventually, the government runs out of money, and then you have . . . Greece.

What Kuttner also fails to grasp with his erroneous Depression/WWII analysis is that part of the US’s enormous economic success in the post-war era was the fact that it was the only Western or Eastern country that hadn’t seen its infrastructure (and population) destroyed by the War. England and Germany, which had led the free world in manufacturing before the War, had seen virtually every one of their factories wiped out. Those few English factories that survived the war were firmly rooted in the 19th Century, and the stagnant socialist economy that followed the war meant that these factories stayed mired in the past.

WWII  also spelled the end of Empire.  England and other former imperialist powers didn’t have their previous unemployment safety valves, nor did they have ready access to the rare materials that had once powered their manufacturing.

Russia had lost perhaps 20,000,000 people, which was a heavy burden when added to the 20-30,000,000 that Stalin killed in the 30s. Add to this the inefficiencies of a Communist “economy,” and you can see that Russia wasn’t going to stand in America’s way.

In other words, it wasn’t just that America was so good after the war; it was also that everything else was so bad. Right now, under Obama, we have the worst of all possible worlds, which is that both America and the rest of the world are in dire straits. By copying the world’s disastrous economies, America is unable to rise above them.

In addition to misunderstanding the 30s, 40s, and 50s, Kuttner seems to have slept through the 80s and the aughts. I vividly remember Jimmy Carter’s malaise economy, consisting in equal parts of inflation and stagflation. I remember, too, the uproar when Reagan insisted on unleashing capitalism’s power. Sublimely locked into my juvenile Leftism, I absolutely refused to acknowledge that it was Reagan’s commitment to the marketplace that enabled me, a young lawyer, to step into a thriving economy, complete with an obscene salary. I’m glad to say that, in 2001, when Bush pushed through his tax cuts, I’d matured enough to realize that the best way to allow economic growth is to trust “We, the people” with the money, leaving to the government the job of creating a stable environment that doesn’t see wealth creators (individuals and businesses) constantly trying to hide their money from an avaricious, inefficient, frequently corrupt bureaucracy.

Working from a mountain of ignorance, amnesia, misconceptions, and misapprehensions, Kuttner assures HuffPo’s hapless readers that the only way to end Obama’s economy is to raise taxes on the producers and have the government provide jobs for the unemployed — unaware, apparently, that this is precisely what Roosevelt did in 1932, and what led to a 12 year long Depression:

What’s needed today is a massive investment program, to shift the economy to a clean energy path, modernize infrastructure, increase productivity — and along the way create millions of good jobs and restore consumer purchasing power. Then, the vicious circle could be reversed.

The problem is that neither party is proposing such a program. It is entirely outside mainstream debate.

President Obama is willing to have the federal government spend more money. But he has partly bought the story that deficit reduction has to come first. The Republicans would further gut the public sector.

Contrary to the conventional view that deficit reduction would somehow “restore confidence” and increase business investment, that’s not how economies work. Businesses invest when they see customers with open wallets. Though the Congressional Budget Office projects higher growth returning around 2014, it bases these projections on a “return to trend.” There is no plausible story about where the higher growth will come from.

Kuttner is certain that, if Obama can just get four more years, everyone in America will eventually get a spoon. Then the American people can start digging their little holes, and the government can boast about its Soviet-style full employment.

A couple more fallacies in Kuttner’s thinking:

First, Kuttner, who insists that WWII was the best economic engine possible, was against the War in Iraq. Why was that? He should have been celebrating the economic opportunities, and shilled it as WWIII.

Second, Kuttner, in common with all the Progressives, keeps nattering on about revitalizing America’s infrastructure with “green” energy products. He makes this argument even though (a) the government’s “green energy” bets have failed at a terrible cost to the American budget (Solyndra, anyone?); and (b) the strangulation of rules and regulations (especially environmental rules and regs) in the last 30 years means that it’s virtually impossible to complete a big infrastructure job, or even to begin one.

As to the malignant effect of hyper-regulation, here’s just one example proving that the Hoover Dam era is dead and gone: The San Francisco-Oakland Bay Bridge partially collapsed in 1989, when the Loma Prieta earthquake struck. That collapse proved conclusively that the original eastern half of the Bridge (built in 1936) was a seismic disaster.

In a pre-regulatory era, it’s very likely that the Bridge could have been rebuilt, both quickly and economically. In modern American, though, by the time the new structure is completed (maybe) in September 2013, it will have taken 24 years to rebuild just half the bridge, at a cost no less than $6.3 billion — a mere $6.1 billion dollars over the original estimate.

Kuttner’s post is the triumph of theory over fact. Kuttner was clearly the good little boy back in the 1970s, carefully studying his generic history textbook, and locking away in his brain forever all the Leftist fallacies about economic growth and the glory days of a government controlled economy. He is the poster child for the fact that, while the first Obama term has pushed us to the edge of the economic cliff, a second one will most assuredly push us over.

Enacting useless regulations in order to force the transfer of wealth from rich to poor

There’s a famous story about Milton Friedman’s response when confronted with make-work projects:

While traveling by car during one of his many overseas travels, Professor Milton Friedman spotted scores of road builders moving earth with shovels instead of modern machinery. When he asked why powerful equipment wasn’t used instead of so many laborers, his host told him it was to keep employment high in the construction industry. If they used tractors or modern road building equipment, fewer people would have jobs was his host’s logic

Then instead of shovels, why don’t you give them spoons and create even more jobs?” Friedman inquired.

We all know that government’s do this to swell the job rolls.  But what happens when governments create regulations that force private citizens to create make-work?  Zombie explains that it’s just socialist redistribution in a different guise.

Milton Friedman, wise and witty

John Hawkins has pulled together some excellent Milton Friedman quotations.  I’m embarrassed to admit that, growing up in my Left wing, liberal arts enclave, I’d never heard of Friedman.  I wonder if early exposure to his ideas (and his charm) would have lifted me out of the darkness sooner.

My favorite quotation from the Hawkins column is this one, which is the pithiest summary I can imagine for the beauty of a healthy marketplace:

“The most important single central fact about a free market is that no exchange takes place unless both parties benefit.”