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Keynes, Obama and the future

youngCHRISTOPHY072610_optBY CHRISTOPHER W. YOUNG
COMMENTARY

Despite the overwhelming amount of commentary about the Great Depression and the recently labeled Great Recession, the United States has survived twelve or more panics, crashes and recessions since its founding in 1776. From the land speculation bubble of 1796 to the beginning of the Great Depression, the political answers to these troubled times was, for the most part, to allow the fiasco's to run their course. Allow the market to fix the problem. Sure, the government put people in jail, others skirted to the hills to save themselves from the vicious mobs who trailed them but overall the government did not intervene with stimulus. The purpose seemed to be that the government wanted society to learn from its missteps despite how painful it may have been.

It was not until the Great Depression when Lord Keynes advocated for ‘temporary' deficit spending by the government to help fuel business investment that government intervention became so popular. Up until the Great Depression of 1929, the United States ran a national debt that was typically about 15-18% of GDP. Post the Great Depression, this number climbed to about 120% in 1946 and 1947 just after World War II. The estimated national debt as a percentage of GDP is expected to be about 102% as of 2015, up from 55% or so in 2000.

What seems to have happened since the introduction of Keynesian economics is the strange idea that running a fiscal deficit is a good thing for a country because it will spur business investment spending and keep unemployment low. Unfortunately this magic has not materialized. The unemployment rate in the United States is still relatively the same as it was in 1930; running about 5% (when not in a recession) and the national debt is just about out of control.

In economic parlance, we call this situation a moral hazard. Since the public acceptance of Keynesian economic theory, politicians have used the tactic of running deficits to help fund special interest groups and party loyalists who in turn will vote for them in the next election. This same tactic is being used by President Obama and his administration, yet with a potentially and substantially worse outcome.

Even if Keynesian economics was a viable solution in fixing our current situation, there are three main attributes that are necessary. First, the deficit spending or stimulus should increase the number of private jobs, which in turn will provide more income to taxpayers — hoping to raise tax revenues to offset the stimulus. Second, the stimulus should be accompanied with pro-business rhetoric giving businesses comfort that they will not be penalized for success. This does not mean that the government cannot prosecute or imprison imposters and thieves. Third, government stimulus should not be offset by state and local tax increases or job eliminations.

Unfortunately, the manner in which the Obama administration is implementing its Keynesian plan is not meeting the three rules outlined above. For instance, the majority of the stimulus is being used to create public government jobs which will need to be paid from future tax revenues. Next, the administration has been anything but pro-business. The Financial Reform Bill and the Healthcare Bill are both creating levels of uncertainty that have not been seen before — at least not in my lifetime. What is most troubling about these bills' is the unknown impact they will have on businesses in the next few years. Will they help? Will they hurt? Who knows? Last, most states and municipalities are feeling the impact of the recession and because of this are acting in a way that counteracts the fiscal stimulus of government. Take for example New Jersey with its $10.7 billion dollar deficit. Governor Chris Christie, acting prudently has made hard decisions and has cut costs across the board. The impact will ultimately reduce the level of government employment at the state level and or reduce spending for vendors and others who provide services to the state.

When looking at the Obama plan in this manner and observing the plan against Keynesian economic theory, it appears that the plan is unintentionally set to fail. The potential benefits of the federal deficit (stimulus) is offset by a regulatory environment that is causing great levels of uncertainty, state and municipal budget reductions which will increase unemployment and reduce contracts to the private sector and the stimulus is creating public sector jobs, which will only increase the overall future tax burden.

It appears as though there is little to no benefit coming from the Obama Plan. The plan does not address the skyrocketing national debt that has been increasing since the introduction of Keynesian economics in 1929; it will not significantly decrease unemployment and in the long run will only further increase the private sectors responsibility to pay for out of control and over indulged government programs.

I could only imagine where we will be in 15 years if we continue to allow government officials to pull on the strings of irresponsible Keynesian policy every time we face a setback. We lived without Lord Keynes from 1776 to 1929 and did just fine. I think it is time to get back to our roots of fiscal responsibility, balance the budget and remove the entire national debt in a planned and controlled course of action.

We can pay for our past fiscal sins today and live within our means or we can wait until tomorrow. The only downside is tomorrow may be too late and cost too much.

Christopher W. Young is a professor of economics at Seton Hall University and managing director of M&A at Berkery Noyes in NYC.

ALSO BY CHRISTOPHER W. YOUNG

Times of uncertainty not helped by President Obama's Financial Reform Bill

 
Comments (3)
3 Sunday, 29 August 2010 06:49
Wishes_Come_True
A Keynesian will say spend Govt. money to increase the demand, the anti-Keynesian to reduce interest rates, and give tax brakes to the wealthy so they will expand their businesses. Despite the supposed democracy, the rich have a greater influence on what happens than the ulturistic, through their leverage in political donations and the control of the media - so its not suprising that the rich get extra tax breaks whilst the average person looses their home. My recipe for success would be:
1. More economical elections; restructure the election system, and add compulsary voting (like in Argentina, Australia, Brazil, Chile, Turkey), why waste money encourageing people to vote.
2. Give all full-time employees annual leave, that they can't loose (like in Australia) - so they'll spend their money in small town businesses, that currently suffer from a lack of manufacturing etc. If people spend on local tourism rather than buying imported goods, it will further stimulate the economy, as the money moves around internally between different businesses.
3. Set up a council of philosphers/thinkers who have no stock market bias to provide ideas on things, rather than relying on politicians & Wall St.
4. Look after the interests of the average person, rather than hope that business will - their interest is to maximise the profits to their stock-holders, not the welfare of the US citizen. Why do some Americans retire in Spain - to get away from the rat race - make it less of a rat race.
5. Spend government money on things that will improve the efficiency of US manufactuire etc later down the track - improved transportation, better communications, more efficient power (once the initial govt. capital is spent) such as Geothermal. Spending money to satisfy environmentalists and other interests groups, without increasing the efficiency of doing business in the US is pure politics, and a waste of taxpayers money (maybe we need a ultruistic King, like in Thailand ??.. Socrates' Philospher King comes to mind).

.. All-in-all a little less Capitalism, and a little more Soicialism, I think will be the recipe for success. Communism is gone, time to soften our philosophical enthusiam for narrow-minded captilism (which doesn't look after the average person).
2 Sunday, 01 August 2010 21:41
James P
This is not really an 'article'. It's an opinion piece from an investment banker who - like just about every other editorialist on the subject on this website - waxes critical of Obama. There's nothing here that isn't expressed as a talking point every day on CNBC and Fox Business and in the Wall Street Journal.

In fact, this author plays so fast and loose with historical facts and statistics, he is BLAMING Obama for the current downturn, which was already in its second year when he took office.

Casino capitalism played no role in the current recession? And aren't the 4 or 5 biggest banks - who were the largest recipients of TARP money - still manipulating the credit markets? Wouldn't this be playing just as big a role in the ability of small businesses to grow and create jobs?
1 Saturday, 31 July 2010 09:15
Luigi D'Onorio DeMeo
Chris, great article. The only things that I would add to further strengthen your argument would be the outcome of the rampant spending and anti-business rhetoric of the Roosevelt administration. That administration, similar to the current one crowded out the power industry and potential entrepreneurship with the Tennessee Valley Authority. This seems similar to the Obama administration's campaign against business and ultimately the new "health-care reformation." The move of the government from regulator and overseer -to- a monopolistic industry player is and has been troubling.
Finally, the rampant spending led to extremely volatile equity markets that did not take out the previous highs until a little under 30 years later... after WWII and capitalism regained its footing.

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