Five Years Later...Why the Stimulus And Keynesian Economics Failed

Remember this chart:

This is what Obama's economic advisers predicted would happen with or without the passage of the $787 billion Stimulus Package (aka the American Recovery and Reinvestment Act of 2009).  Of course, implied in that chart is that economic activity, as measured by our Gross Domestic Product (GDP), would also return to normal levels by the First Quarter of 2014.

The plain fact is that real unemployment did even worse than Obama's "Without Recovery Plan" with the peak unemployment rate hitting 10.1% in 2010.  Today, when it should be at 5%, we are still struggling at 6.6%.  When Obama took office there were 155.2 million workers in the labor force.  Despite the fact that nearly 7.5 million new workers should have entered the workforce over the last 5 years, the number has only inched up to 155.4 million. That 7.5 million, euphemistically called discouraged workers, have just given up looking for work.  As a result, they are no longer counted as being in the workforce. So much for "real" job creation.

And, GDP?  Well, its seen the worst recovery since the Great Depression with an average of about 1.97% growth per year since the recession ended in 2009.   Normally, growth should be 50% greater than that; at 3% or higher. Obviously, the stimulus didn't work as promised; and, even today, three-quarters of Americans still think we are in a recession.

While there are several reasons why Obama's Keynesian-Style Stimulus Package failed, the primary reason lies in the false belief that, when the economy slips into recession as a result of slack consumer spending, that lack of spending can be made up by increasing government expenditures.  But, this is just ridiculous.  The simple fact is that consumers don't spend like governments.  They don't build roads or bridges and they don't spend their money fixing them.  So, instead of stimulating the existing parts of our economy that are in the process of dying off, the Keynesian stimulus winds up  stimulating a subset of the economy that had nothing to do with the reason that the economy faltered in the first place.  What's worse, most of these projects have a low labor cost to materials and equipment costs ratios.  That is why you wind up with statistics that show that, at the very least, it cost the taxpayers $185,000 for each job that was supposedly created.

Another problem with using federal and state construction projects as a means of trying to stimulate the economy is the fact that any spending and job creation will always be short lived.  If the project is 1 month long or 3 years long, that part of the economy that is being stimulated will only benefit as long as the project is still alive. Once its over, so are the jobs and so is the spending.

Lastly, there's the argument by the Democrats that every dollar spent returns $1.50 in economic activity.  To some extent that's true, but $1.50 is an average.  Depending on how labor intensive the  effort is, the returns will range between 70 cents (a loss) and $1.90.  Heavy construction projects are more towards 70 cents than anywhere near $1.50 because the labor costs are so low relative to the overall cost of the project.  Thus, the potential for any true economic expansion is lost. More importantly, the stimulus is a drag on everyone's wallet because deficit spending devalues all the dollars that are in the economy.   This weak dollar effect means that things will cost more; especially imported items.  For example, oil, which is priced worldwide on the basis of the strength or weakness of the U.S. dollar, has dramatically risen since 2009.  The result has been that gasoline prices rose from $1.74/gallon in 2009 to the current rate of $3.63. This is despite the fact we are now awash in new, domestic oil as a result of fracking and other new technologies. In contrast, natural gas, which is not traded in terms of the value of the dollar, has seen its prices fall from $12.49 a cubic ton to $9.40 from 2009 to 2012.  All because of fracking.

Despite whatever spin the White House puts on the stimulus results, it was nothing but a failure and, I think, definitive proof that Keynesian economics is simply another tool for left-wing politicians to grow the government and redistribute wealth.

References:

The Worst Four Years Of GDP Growth In History: Yes, We Should Be Worried: http://www.forbes.com/sites/realspin/2013/04/12/the-worst-four-years-of-gdp-growth-in-history-yes-we-should-be-worried/

As Obama starts sixth year, 74 percent say US still in recession: http://www.foxnews.com/politics/2014/01/22/fox-news-poll-as-obama-starts-sixth-year-74-percent-say-us-still-in-recession/

White House Says The Stimulus Cost Per Job is $185,000; not $278,000: http://www.nationalreview.com/campaign-spot/271107/white-house-nuh-uh-stimulus-jobs-only-cost-185k-each

Politifact: Every Dollar of Spending Returns Between $0.70 & $1.90 in Increase Economic Activity: http://www.politifact.com/truth-o-meter/statements/2010/jul/27/jeanne-shaheen/lawmaker-claims-unemployment-benefits-boost-econom/

A Scorecard on the economy under Obama: http://www.politifact.com/truth-o-meter/article/2012/jun/01/scorecard-economy-obama/

The Democrats And The Keynesian Con Game

In the hands of a Democrat, Keynesian economics is simply an excuse to spend; a con game.  When they spend it is usually in the form of crony capitalism or in the form of paybacks to their union buddies.  When it doesn't turn the economy around, they always complain that the spending wasn't enough.  Yes, they need more!   A lot more!  When they've driven the deficits to new heights, they balk at any spending cuts because they say it will hurt the economy.  Even though the economy never benefited from it in the first place.  Instead, they would rather raise taxes.  Today it's on the rich.  Tomorrow it might just have to be on everyone.   And, that, my friends, is why liberals have always been referred to as "tax and spend Democrats".

Obama Stimulus: $738,000 Per Job

The President always likes to say his plan "worked".  Well, a few days ago, his Transportation Secretary, Ray LaHood, proudly declared that the $48 billion spent on infrastructure projects created 65,000 jobs on 15,000 projects.  

As I've said before, heavy construction projects -- like the ones that the federal government gets involved  in -- are more equipment and material dependent than people dependent; and, that kind of spending doesn't replace the lost consumer spending that caused the recession.  Therefore, a lot of money is spent with only a few people actually gaining work.  When you do the math on Lahood's proudly declared projects, the government actually spent $738,000 on each job it created.   And, when those transportation projects were finished, the workers went back being unemployed.

This is why Keynesian-style stimulus is such a waste, and, this is why so-called government stimulus won't create jobs and won't cause an economy to recover.  Obama's plan is socialist idiocy!  Now, we're saddled with trillions of dollars in debt and nothing to show for it; creating thousands of jobs when millions are unemployed.  Let's replace this guy in the fall.  He's literally destroying this country from within!

Reference for this post:

More Stimulus Madness -- $738,000 For Each Job Created By DOT: http://reason.com/blog/2012/08/21/more-stimulus-spending-madness-738000-fo

Milton Friedman's Words Ring As True Today

If he had lived, economist Milton Friedman would have been 100 years old today.  To me, personally, Friedman was a mentor.  He, as an adviser, was what helped make Ronald Reagan so economically successful. And, to those who call themselves Keynesians,  Friedman was their worst nightmare; exposing the myth of government spending as a means of stimulating an economy.  At the same time, he destroyed the typical liberal concept that increasing taxes have no consequences.

For the most part, his economic principals emanated from a simple, old saying: "There is no such thing as a free lunch".  Friedman's use of those words to explain economic principals is as true today as when he first started popularizing them; especially, now, with Obama and Bernanke spending like the proverbial drunken sailors and, with Obama and the Democrats planning new taxes for the so-called rich.  For this reason, I present one of Friedman's many speeches.  This one titled: "The Free Lunch Myth":

 

Finally, there is this 1978 speech that Mr. Friedman gave on the impact of the government takeover of healthcare.  Again, as pertinent today, with ObamaCare, as it was in 1978.

Obama Says His Economic Plan "Worked"

Just 4 days ago, on July 23rd, Obama said this on his handling of the economy:



Well, if having a year by year weakening of this country's economy can somehow be described by the phrase "it worked", then, apparently, it was Obama's plan to do just that.  The fact is that, with every additional application of stimulus spending, the economy only got weaker.  In the 3rd quarter of 2009 -- the 1st quarter following the end of  the Great Recession with hardly any stimulus monies being applied -- the economy went positive and grew by 3 percent.  Then, the 4th quarter clocked in with the fastest growth rate in six years at 5.7 percent.  And, again, all this with only limited stimulus spending.  Those two quarters, combined, meant that the economy grew by 4.3 percent in the last half of 2009.  In 2010, the growth rate fell to a level of just 3 percent as the bulk of stimulus money was being applied.  2011 saw even less growth at 1.8 percent.  With this morning's release of data, we now know that, annualized, the economy only grew by 1.5 percent in the second quarter. 

So in summary, the "it worked" statement goes like this: 4.3% (last half 2009), 3% (2010), 1.8% (2011) and, now, 1.5%. 

Story on this morning's economic growth: http://www.washingtonpost.com/business/economy/gdp-us-economic-growth-slowed-to-15percent-in-last-3-months/2012/07/27/gJQAK8diDX_story.html

Krugman Decries Austerity, Again!

On Sunday, in the article: Austerity Is So Wrong!, New York Times economic columnist, Paul Krugman. once again argued that government spending, not austerity, will "easily and quickly" cause an economy to grow.  But, the best example of why Krugman is "so wrong" is to merely look at Germany as part of the EuroZone.  In 2008, when the recession hit most of the world, Germany suffered greatly because 1/3 of its economy was dependent on exports and the export market had weakened significantly.  Within months however, the economy snapped back quickly.  Today, Germany is the only shining spot in all the EuroZone.  Most of the rest of the countries are either in the throws of recession or teetering on bankruptcy.

Germany flourished when others were still struggling because of the economic recovery programs of Angela Merkel. While it is true that she spent $72 billion dollars in stimulus, it is also true that she cut government spending by nearly twice that amount -- $123 billion -- in austerity programs.  She also convinced labor unions to give up or reduce benefits in what can only be defined as even more austerity.

Germany is now in better shape because they didn't buy into the Keynesian belief that you can simply spend yourself out of a recession.  Something that the likes of Paul Krugman can't get through their heads.

Keynesian Economics: Planting Apple Trees and Expecting Oranges

In the past, I have always argued that it was the devaluation of the dollar that kept Keynesian fiscal stimulation from truly pulling any economy out of a recession.  I still believe that to be true because massive spending and the resulting weak dollar adversely affect consumer spending.  Then, just last week, I had an epiphany (of sorts) that better explains why Keynesian fiscal stimulation, like the Obama Stimulus Plan, is ineffectual.  It all has to do with apples-and-oranges spending. So, let me explain.

Keynes, like almost every other economist, believed that an economy is driven by two sources of demand (aka spending):  (1) the Private Sector (made up of consumer and business spending) and (2) the Public Sector (made up of spending by federal, state, and local governments).  Further, he correctly believed that recessions are typically caused by a slowdown in private sector spending.  But, where he gets it wrong is in his belief that the federal government should increase spending through work-projects to compensate for the loss of private sector demand. However, the spending for federally-sponsored work projects is nothing like the loss of either consumer or business spending.  Federal projects involve buying massive amounts of things like concrete, asphalt, sand, gravel, steel, etc. along with purchasing heavy equipment to build roads, bridges, airports, or whatever.  Consumers typically spend their money locally on things like entertainment, food, clothing, TV's, and so on.  Five guys, filling potholes, twenty miles away from a restaurant struggling to stay in business isn't going to save that restaurant and its employees from unemployment.  This is why Obama's stimulus hasn't "really" made a single dent in the number of unemployed.  Further, because most federal work programs are so material and equipment intensive, the amount of jobs being created is actually miniscule.  Therefore, no amount of federal projects can truly offset the loss of jobs in the private sector. And, when the project is over or when the stimulus funds dry up, the federally-supported workforce goes back to being unemployed.

In a nutshell, Keynesian fiscal stimulus fails to stimulate the specific sectors of the economy that need to be stimulated to pull the economy out of recession.  And, if the economy does improve while Keynesian stimulus is being applied, its only because the economy is correcting on its own.

Obama Didn't Fix The Economy. He Made It Worse.

Anyone who has watched the 17-minute, Tom Hanks narrated, Obama web documentary, The Road We've Traveled, saw a President being portrayed as the "hero" who put together an economic team that saved the economy from one of the worse recessions since the Great Depression. But, was the economy really saved by team Obama and their Keynesian-minded economic strategy of spending our way out of a recession? To that, I say no. In fact, I contend that all that Keynesian spending has actually retarded growth.

To prove this point, one needs only to look at the last three years of economic growth in terms of Gross Domestic Product (GDP). But, first, lets look at the economy in the last quarter of 2008 through the end of 2009:

From the graph above, you can clearly see that economy hit rock bottom in the last quarter of 2008. After that, there was a steep recovery as noted by the trend line that I applied to this chart. Most economists would say that this kind of sharp recovery was to be expected because, historically speaking, the deeper the recession -- the faster the recovery (aka the Zarnowitz rule). Of course, Obama and his supporters would have you believe that this snap-back in the economy was all their doing. That might well be true if it weren't for the fact that the economy was improving on its own before any stimulus monies ever got out the door. In fact, only about 26 to 28% of the $787 billion dollars in stimulus funds were actually spent in 2009. There were delays because most of the so-called shovel-ready projects had to be re-bid to conform to Federal work rules. More importantly, the Stimulus Package was intentionally back-loaded by the Democrats with 60% of the spending to occur in 2010; an election year.

Certainly, the last quarter of 2009 was economically beautiful with an outstanding 5.7% annualize economic growth rate. In fact, that quarter was so good that many Keynesian-minded economists were projecting that 2010 would grow by 6% or more as even more stimulus monies would be applied. All over the place, in early 2010, economists thought they were seeing "green shoots" and Joe Biden boldly proclaimed "a summer of recovery" in June of 2010. But, the "shoots" turned brown and the summer didn't recover very much at all. Instead, the economy slowed down to a meager 3% growth for the year; proving that all that extra stimulus did very little to contribute to an economic rebound. As a result of the disappointing numbers, Obama started to use the excuse that the "recession was deeper than we had thought"; even going so far as to blame the Bush economic team for hiding data about how extreme it was. Then, too, Keynesian economists like Paul Krugman of the New York Times began blaming the slowing economic recovery on the fact that stimulus spending was too little. In their minds, the stimulus should have been well over a trillion dollars; maybe even two $trillion.

Then, after that dismal growth rate in 2010, the once-enthusiastic Keynesian economists took a more somber position on 2011's GDP growth. For 2011, the consensus estimate for growth was 3.1%. Once again, the economists got it all wrong and 2011 only grew by 1.7%. For the second year in a row, the economy's growth rate declined. In fact, one could say that the 1.7% growth in 2011 wasn't really growth at all because you need at least 2.5% growth to start making any real dent in the unemployment rate.

So, that brings us to this year. Economists are now saying that the economy should only grow by 2.1% to 2.2%. But, if the history of prediction over the last three years repeats itself, I'm betting that we will again see another decline in the growth rate. That's why I think we will only see growth of about 1% this year or worse. There are a lot of roadblocks out there for any real growth. Gasoline, food and other energy prices are hurting the consumer and consumer spending is likely to retreat. The housing market is still stagnant and foreclosures are still too high. One of our many trading partners, the European Union, has moved into recession. Most importantly, spending by the Obama Administration continues unabated.

In conclusion, I think the economy was recovering on its own in 2009; just as the Zarnowitz rule predicted. But, spending and debt accumulation has its consequences. The dollar is devalued in the process and, subsequently, the consumer is pinched by higher and higher food, energy and import prices. And, that's where John Maynard Keynes got it wrong.

The Wind-Down Of Iraq/Afghanistan Wars Will Hurt and Help The Economy

Not that I am any fan of war but, Americans should be made aware of the economic consequences of winding down our involvement in the two wars in Iraq and Afghanistan in 2012. In a nutshell, we will lose jobs. That's because the military industrial complex, in support of any war effort, is a real job creator. It's what most economists call a "war-time economy" and, for those spendthrift Keynesians, it is often referred to as "military Keynesianism". But, like all Keynesian spending efforts, the direct economic benefits will also stop as soon as the spending stops.

Right now, we have thousands of workers who have been "employed" in the re-arming, feeding, and outfitting of our military. What percentage of those who will actually lose their jobs is hard to determine. It depends on how many will continue in the war effort by supplying Iraq and Afghanistan troops. In the short term, there is bound to be a hit on employment. However, in the long term, the economic benefits will be significant, because contrary to Keynesian spending theory, the U.S. deficits will be reduced; the dollar strengthened; and consumer spending will benefit from lowered import prices.

Of course, this will all be for naught if Obama and the Democrats try to use the decline in war-spending as some kind of new found money they can spend on more economy-killing social programs. Hopefully, the Republicans won't let this happen.

Obama's Idiot Economics: Extending Unemployment Insurance Creates Jobs

On the 8th of this month, Obama gave a speech whereby he claimed that extending unemployment insurance would create jobs, (Click to See the Video). Then, today, the President's spokesperson, Jay Carney, reiterated that claim by saying that extending unemployment benefits would actually create a million new jobs (Click here to See that Video). But, this is not a new idea for any Democrat. Just last year, that wizard of economics, Nancy Pelosi, said exactly the same thing (Click to See that Video).

By implication, Pelosi, Carney, and the President seem to be saying that unemployment is a good thing. In fact, one could deduce that if every American lost their job, millions of new jobs would be created; simply thanks to unemployment insurance. That's not Keynesian economics. In fact, it's not even Voodoo economics. It's just plain "Idiot" economics.

Our economy is 70% driven by consumer spending. When someone loses their job and goes on unemployment insurance, at the very minimum, half their previous income is just completely gone from any consumer spending activity. If anything, this loss of consumer spending will have a ripple effect in causing even more job losses. It certainly doesn't create any new jobs (except, of course, more and more government "union" jobs to handle all the new and continued unemployment claims). The only real benefit that unemployment insurance has to the "overall" economy is that it slows down the ripple effect so that unemployment doesn't completely spiral out of control by feeding on itself.

With that, you can now understand why this President and the Democrats can't get this economy growing again!

Obama's Indirect Tax Through Keynesian Economics

Even this tax-and-spend President has agreed that raising taxes during a weak economic period is a bad idea because it would further exacerbate an already languishing economy. But, indirectly, that's exactly what he and his previous completely Democrat-controlled Congress did through a massive "stimulus" spending program.

John Maynard Keynes, certainly the pure consciousness of Keynesian economic theory, correctly assumed and stated that the total aggregate demand (spending) in any economy is a direct result of the spending activity by (1) the public sector (state, local, and federal governments) and (2) the private sector (consumers and business). Further, he theorized that "if" private sector demand fell during an economic downturn, the economy could be righted, again, by simply increasing the amount of spending by the public sector; and, thus, offsetting any loss of demand in the private sector. In theory, it seems so elegantly simple and logical. Thus, we have the basis of "stimulative" spending that almost every Democrat believes to be the key to good recession-beating economics.

But, what Keynes (and the Democrats) totally missed the boat on, is the fact that all that stimulative spending would severely devalue our currency. In fact, in the last 2-1/2 years, the the U.S. dollar has lost more of its value against a market-basket of other key currencies than it had in the 15 years prior to Obama taking office. And, in an economy, like ours, which is so dependent on consumer spending and with a consumer who is so dependent on imported goods, this is pure economic poison.

In our economy, the consumer reigns king; normally representing about 70% of our total economic activity. The remaining 30% is comprised of a combination of public sector and private business spending. So, if, in any way, you hamper the consumer's ability to spend money by diverting a bigger chunk of their paycheck to either higher or new taxes or through higher prices, the economy would be doomed to falter; a fact that we are now seeing after having spent trillions to supposedly "stimulate" the economy.

The reality is that the consumer's paycheck has been under assault by the continuing devaluation of the dollar; which, in turn, has driven import prices higher and higher. In fact, in the last Import Price Report, the "average" of all import prices rose 13.6% -- year over year -- while the American paycheck has remained fairly stagnant. As a result of this inflation, the American consumer has seen their gasoline expenses double under Obama's watch; with the "average" 2-car family now paying about $2000 more per year. (Please note: The doubling of gasoline prices is only partly driven by the dollar's loss in value. The rest of the price inflation is due to the speculation that future demand could outstrip supply; eventually making world oil prices skyrocket. The demand side of this speculation is also being driven by the increasing need for oil by some rapidly emerging economies such as China and India. In addition, the instability in the Middle East could result in supply shortages. Also, there are foreseen supply limitations in this country due to Obama's anti-drilling policies; especially since America, with only 5% of the world's population, uses 25% of world's entire oil supplies.)

On top of higher oil prices, the consumer has seen their average food bill rise by almost 30% since 2009. That's because much our nation's food bill is for imported products. For example, 70% of our seafood comes in from other countries. Most all of the nation's fresh, off-season fruits and vegetables are imported. Even that morning caffe latte is dependent on coffee being brought in from places like Columbia. In addition, food prices are also very sensitive to rising energy prices. That's because gasoline and diesel fuels and electricity are heavily involved in every aspect of food production and in the delivery to market. While I have not been able to determine an exact number, my guess is that an average family of four has seen their food bill rise by at lease $2200 a year since the value started dropping in 2009.

Also, in a surprising way, domestically grown foods and food products are seeing prices rise as a result of the devalued dollar. That's because, as the dollar weakens, our farm goods and our manufactured goods actually become cheaper; overseas. That may seem like a good thing; and, for the most part, it is. But, it also has an adverse effect by increasing the demand for all those now-cheaper American farm goods that are supply-limited due to the fixed available acreage that can be dedicated to that products production. In effect, as our products get cheaper overseas, we find ourselves competing with the rest of the world for our own farm products. As a result, the extra demand -- given effects of the Law of Supply and Demand --- causes prices to rise domestically. Sometimes, farmers, seeing a more lucrative opportunity for an exporting farm good, will switch crops to a more attractive and profitable exportable product. When this happens, a supply-void occurs for the farm product being abandoned. As a result, that product, too, will see its prices rise as supplies decline.

The bottom line is that the stimulus package, by virtue of a weakened dollar, is actually having the opposite of its intended effect because it, for the most part, hurts the primary driver of the economy: the American consumer. Added to this, consumer spending is being further eroded by all the new taxes and increases on existing taxes that are being applied by individual state, county, and local governments across this country, as those governments try to push back against their rising deficits. But, as in the case of the weakened dollar, raising taxes just causes the economy to decline even further; thus, conversely, causing deficits to increase from an economy that gets even weaker.

I believe that the adverse effects of the stimulus spending (and taxes) can be clearly seen in the chart (below) which shows that our economic activity declined as more and more stimulus money (and taxes) is applied:

Prior to the application of any stimulus funds, the economy was actually on the mend as noted by this chart of Gross Domestic Spending:

Visually, there is an obvious change in our economy's direction as the stimulus money rolls out. The chart above clearly shows how the economy was recovering and, if left alone without stimulus funds, it would probably be doing fine right now. Instead, we are on the verge of going negative; once again.

I just think the economy would have been better served by reducing the amount of Federal spending; not increasing it. In that way, import prices would have actually fallen because the dollar would have strengthened. This, then, would have promoted increased consumer activity and that would have resulted in renewed hiring instead of the increased unemployment we have now. While it is a fact that exporting corporations might have been hurt by strengthening the dollar -- making their products more expensive in the world marketplace -- that fact could have been easily mitigated by reducing the corporate tax rate. Furthermore, Congress could have helped stimulate corporate business activity by passing legislation that would have allowed multinational companies to return profits back to the U.S. without any penalty of Federal taxation. Right now, those profits would not only be taxed in the foreign country in which they were earned, but also by the U.S government; should any of those profits be returned to this country. As a result, much of those funds are used to help the economies of the countries of origin and not the United States.

To Obama: The Bump In Our Economic Road Is Not A Bump And It Was Clearly Predictable

If you listen to Obama and his soon-to-be-leaving chief economics adviser, Austan Goolsbee, the rise in last month's unemployment rate is just a bump in the road in an economy that they believe to be recovering. But, from my perspective -- and based on the facts that I will present -- that "bump" is more than just a bump. Instead, the rise in the unemployment rate was representative of a 2010 slowdown in the entire economy; and, a slowdown that was easily seen coming. All one had to do is simply look at the track of the nation's Gross Domestic Product (GDP) since the 4th quarter of 2009 to know that our economy wasn't firing on all cylinders. What's worse, the rapid recovery that had been previously seen in Obama's first year in office was actually being destroyed throughout 2010 and now, again, in 2011 as more and more stimulus funds were being dished out; creating massive amounts of national debt and a heavily devalued U.S. dollar. As a result of the dollar's fall, there has been rising inflation in both food and energy costs. As a consequence, this inflation was draining the consumer of their discretionary spending money that would otherwise be put to use in non-food/energy purchases and which would effectively fuel our economy back to a healthy recovery. This is a common problem with any Keynesian-style stimulus in an economy that imports far more than it exports and in one that gets 70% of its economic activity from consumer spending. In fact, the spending policies of Obama and the Federal Reserve have resulted in a 21% loss in our dollar's value in less than 2-1/2 years. In all of the 10 years prior to the Obama presidency, the dollar only lost 17% despite the billions being spent on two wars and the billions spent in the post-9/11 beef-up in our nation's security in federal buildings and in the formation of Homeland Security and the TSA.

To support my conclusions, I need only to present two charts:

Chart 1. Real GDP Reporting by Quarter from a negative 6.8% GDP in the 4th Quarter of 2008 to a positive 5% growth in the 4th Quarter of 2009. A Linear Regression Trend Line is overlaid to reflect the "steepness" of that recovery.

As you can clearly see from the trend line on the above chart, the economy was very much on the mend with GDP improving in each quarter of 2009. Also, you should note that there was nothing done by the Obama Administration in the first half of 2009 that would account for this easily seen economic reversal in that same year. After all, the initial stimulus funds didn't start going out the door until August of 2009. Furthermore, much of that stimulus funding wasn't actually applied to the economy until well past that date due to project delays associated with having to rebid many projects as Federal projects (requiring federal work rules and union labor) and due to the lack of either permits from local or state governments or, when applicable, project approval from the EPA. Recently, President Obama, himself, referenced those delays when he uttered these now-infamous words while some members of his Job Council just laughed: “Shovel-ready was not as ... uh ... (as) shovel-ready as we expected.”

Read more: The Marietta Daily Journal - Jonah Goldberg Obama s stimulus program just a shovel ready punch line

Chart 2. Real GDP Reporting by Quarter from the 4th Quarter of 2009 at a 5% growth rate to the 1st Quarter of 2011 were the economy had slowed down to only 1.8% growth. Again, a Linear Regression Trend Line is applied; this time, to reflect the slowdown.


Obviously, the Stimulus didn't work. We actually had better performance in 2009 before any stimulus spending was ever applied. Once again, Keynesian economics has failed to produce the expected results. It failed during the Great Depression under FDR where Europe recovered much faster without Keynesian spending. It failed in the so-called "Lost Decade" (now 2 decades) in Japan where Keynesian-style stimulus was also tried a number of times to kick-start their economy. In fact, I'm not aware of any instance where the demand-side application of Keynesian economics has ever really worked. That's because Keynesians falsely assume that the economy is like some simple windup toy that can be given a few turns on the winding key (through massive government spending) and the economy will, like magic, take off again. But, this fact has never been proven to work. Yet, liberals/progressives just keep trying to make it work; over and over, again, and to no avail. They just can't help themselves. That's because they all believe that John Maynard Keynes had handed them the greatest gift that a liberal or progressive could have ever received: A macro-economic theory that gives them a license to spend, spend, and spend, again, without a care about the debt and the subsequent inflation they are creating!

And, when they are through creating massive deficits, they just want to raise taxes again to fix the mess they created. History saw this ugly fact in 1937 under FDR when taxes were raised and, as a result, the economy took another nose dive after looking like it just might be recovering. Obama has already stated that he wants to tax the millionaires and billionaires who make more than $200,000 for unmarried filers and $250,000 for those married and filing jointly to reduce the massive deficits he has created. If so, I think we'll easily see 1937 all over again.

John Maynard Keynes' Multiplier Effect

Those who follow the Keynesian economic theory firmly believe in the "multiplier effect" as was originally espoused by Mr. Keynes. The multiplier effect is a demand-side economic theory that assumes that, for every dollar that is spent by any government, the economy will actually be stimulated by 1.5 times that amount as that dollar of spending ripples through the system. Simply said, a dollar spent returns $1.50 in economic activity.

But, for me, and many in the economic community, Keynes ignores the supply-side effect in promoting this demand-side economic philosophy. That's because government spending, through higher deficits, additional taxes, and inflation that is ultimately caused by the printing of more and more money, will have a more negative effect, in the long run, because too much disposable income (supply) is being removed from the economy in that government's quest to spend the country back into economic health.

Additionally, there is an immediate "carrying cost" associated with all government spending. By this, I mean, that, for every dollar spent by any government, more than one dollar had to have been collected in taxes and/or penalties. That's because any dollar of government spending is only a dollar after all the administrative costs and interest on that money has been paid. In our country, that carrying cost can be as much as 30% as any dollar of collected taxes tries to make its way through our massive bureaucracy for final distribution. Further, that distribution, especially in the case of the Stimulus Package, is typically to State governments who, in turn, deplete the value of that dollar with their own handling costs before any final distribution to the private sector.

Lastly, Keynes does not take into consideration what ultimately happens to every dollar of spending; once it makes it's way to the private sector. It's taxed! And, because a lot of stimulus money is given to small businesses and contractors for government-let projects, the tax rates are some of the highest in the country. Then, after the contractor pays his taxes on his/her portion of the stimulus money that remains as profits, any stimulus that was distributed to their employees in the form of pay is also taxed.

To me, there is no multiplier effect. If anything, a dollar of government spending was probably more than a buck and a half before the government got its hands on it, completely negating that supposed $1.50 multiplier effect. That's why the Stimulus Package hasn't worked and that is why Keynesian economics has never worked in the past. Further, as governments continue to grow in size, the false theory of the multiplier effect gets even weaker as more and more of any collected tax money yields less and less value after being digested by the government.

This is why lowering taxes is the best mechanism to stimulate the economy. Lower taxes means that any dollar of stimulative spending is a real dollar in spending; long before the government gets its value-shredding hands on it. Then and only then, is there any true multiplier effect!

Capiche, all you Keynesians out there!

Keynesian Economics Is Like A Drug Addiction

In the 1930's, FDR used excessive Federal spending, a cornerstone of Keynesian Economics, in an attempt to revive the U. S. economy during the Great Depression. It failed. At the same time, Europe recovered much quicker without the spend-thrift precepts of Keynes insanity. In retrospect and in a futile attempt to save Keynesian Economics from the trash heap of economic theory, those "apostles of John Maynard Keynes" have concluded that Federal spending during the Great Depression didn't produce the intended results because FDR didn't spend enough; and, because he tried to cut spending at the same time.

In the 1970's, the same Keynesian spending programs were attempted by the Democrats and Jimmy Carter; though much more limited than all the spending that took place during the Depression. But the Keynesian practices of that era, too, failed and, once again, the Keynesian economists claimed it was a failure of not spending enough and not a failure in the soundness of their philosophy. However, and in complete contrast to Keynes, Reagan took the reins and applied tax cuts, not spending, and the country righted itself economically.

Also in contrast to Keynes debt deepening beliefs, both JFK and Bill Clinton spurred their economies on through tax cuts; even though the Clinton tax cuts were primarily driven by a Republican Congress and the implementation of Newt Gingrich's Contract with America. Today, Democrats constantly refer to Clinton-economics as being the powerful engine that created a surplus that George W. Bush completely erased. However, in doing so, the Democrats seem to forget that Bush, like so many other Presidents, inherited a recession at the tail-end of the Clinton Presidency and, then, only 9-months into his Presidency, he was hit with the economy killing effects of 9/11. If the Democrats would simply put ideology aside, they would have to truthfully agree that it was the Bush tax cuts that produced a gradual erasure of the deficits for each year following 2003 until the housing bust and recession that started in 2008. This was despite all the spending for two Wars and the dumb excessive spending by the then Republican-controlled Congress.

Now, we have Obama and his economic team. Once again, the principals of Keynesian economics are being applied with all kinds of Federal spending; from the TARP to the Stimulus Package. And, as had been the case in the application of all Keynesian economic spending in the past, our economy seems to be stalling out after only 16 months since the Stimulus was implemented. Now, as before, there are calls for even more spending.

The trouble with Keynesian economics is that all those massive infusions of cash have only a small and temporary impact on the economy. To sustain the benefits, you have to keep repeating the programs until, literally, you go broke doing it. Much the same way a drug addict keeps needing more and more "fixes" to satisfy their habit.

Two perfect examples of this were the "Cash for Clunkers" program and the first-time home buyers tax credit. Both programs created increased buying in their respective areas of the economy. But, once these programs ran their course, the buying not only stopped but, it fell far below the buying that had been seen prior to the implementation of either of these two programs. Of course, this fact, as in all the cases of all other applications of Keynesian economics, resulted in calls by the auto and home industries and some Democrats to extend the spending. And, so, the parallels to drug addiction.

The problem with Keynesian economics is that the effects are always short-term. They focus too much on growing the government when it is the private sector that actually grows the economy. The government, through taxing, only saps our economy. That's why tax cuts and not government spending have always produced better results. Proof of the addictive behavior of Keynesian spending comes from the likes of lefties like Paul Krugman and Robert Reich who are screaming that we need more and more spending. Obama, too, being a good little Keynesian, has warned the G20 member heads of state to keep the spending going to save the world's economies. However, history has proven this to be a flawed belief and most of those G20 members have seen the light. In a direct slap at Obama, most will now cut spending and, maybe, some taxes to save their economies from completely collapsing under the failure of Keynesian spending. Mr. Obama would be wise to follow their lead and dump his head-strong big government philosophy; unless, of course, his true intent is something other than saving our economy from a deep recession.

Another Take On Producer Prices and Inflation

Yesterday, my blog entry took aim at Obama's Keynesian economics policies and the potential for double-digit inflation that could result from excessive governmental spending. In that same vein, Patrick Murphy, a Senior fellow in business and economic studies at the Pacific Research Institute, wrote an excellent commentary and I would like to pass it on to you (the link is at the end of this entry).

His commentary, like my blog entry, refers back to the Carter years of the 1970's and early 1980's when there was both a recession and rampant inflation -- a condition often referred to as stagflation. When you really think about it, the Cash for Clunkers program was inflationary relative to the Law of Supply and Demand because it artificially increased the demand for new cars and reduced the supply of used cars that were destroyed in the process. In fact, used car prices had marked price increases following the end of that program. Since most people bought a car that they were going to buy anyway, that program only served to inflate prices and did nothing to get the economy back on track.

At the same time, the $8000 tax credit for first time home buyers is also creating inflationary demand. Furthermore, the monthly statistics show that new home builders are actively building homes. Given the fact that we already have a glut of vacant foreclosed-on homes, the amount of new home building is just insane. But, people are buying new homes rather than buy existing ones that are selling for the same price because the real estate taxes for the older homes remain at the same level that they were when those older homes were double their existing value. That, too, is insane.

Obama's entire Stimulus Package, is pretty much inflationary because it keeps government spending levels high; thus, feeding inflation. To stimulate an economy without inflation, you need to cut taxes and stop playing games with targeted tax credits. And, for sure, you need to reduce government spending; not keep increasing it. Otherwise, you will encounter stagflation and, as I said yesterday, we will have another "Carter-like economic fiasco on our hands".

Anyway, please take the time to read this excellent commentary: "MURPHY: Setting the stage for stagflation".