PETER SCHIFF

PETER SCHIFF

Monday, April 20, 2009

Not All Economists Agree

by Peter Schiff
April 17, 2009

In a speech this week summarizing his administration’s economic policies, President Obama grossly overstated the support these policies enjoy by claiming, “economists on the left and right agree that the last thing the government should do during a recession is cut back on spending.” There are a great many economists who were surprised to learn that, apparently, they now agree with the President.

Reading straight from the Keynesian playbook, Obama justified the creation of multi-trillion dollar deficits by asserting that the government must fill the spending void left by the contraction of consumer and business spending. As one of those mythical economists who do not agree with the President, I argue that it is precisely this type of boneheaded thinking that got us into this mess, and it’s the reason we are now headed for an inflationary depression.

We do not need, nor should we attempt, to replace lost demand. As Obama himself pointed out in the same speech, Americans have been borrowing and spending too much money. These actions created artificial demand, underpinned by the illusion of real wealth in overvalued stock and real estate markets. Given his intelligence and rhetorical training, it is hard to fathom how President Obama cannot notice the inherent contradiction in his argument.

While Obama commended millions of American families for making the hard choices to reduce spending, pay down debt and replenish savings, he later outlined the government’s intention to spend every American household deeper into debt, thereby undermining all the good that personal austerity would have otherwise produced.

Obama also made the clear-eyed observation that the foundation of our economy was unsound and that a sturdier one needed to be laid. To do this, he even asserted that we need to import less and export more. This has been one of my fundamental points. Our economy is unsound precisely because it is built on a foundation of consumer debt. Instead of spending for today, we need to invest for tomorrow. However, we cannot save more unless we spend less. Production requires capital, which only comes into existence when resources are not consumed.

However, by interfering with this process, Obama prevents the very transformation he acknowledges must take place. When the government spends what individuals save, private investment is crowded out. Society is deprived of the benefits such savings would otherwise have brought about. How can we lay a solid foundation if the government takes away all our cement?

This brings up an oft-repeated, but oft-forgotten, point: government does not have any money of its own. It only has what it takes from the rest of us. If individuals repay their debts, but their government takes on additional debt, we are all simply swimming against the tide. All forward progress is lost as private debt is replaced by public debt, which must be repaid by private individuals. Whatever gains individuals hope to achieve are negated by the higher taxes or increased inflation necessary to repay their share of a larger national debt.

Obama claims that much of the additional debt is not going to finance consumption, but rather “critical investment”. This is a vain hope. In the first place, much of what he categorizes as investment, such as additional spending on education, is not investment at all. Yes, an educated workforce is important, but throwing more government money at education will do nothing to achieve this goal. Spending money on education and calling it an investment squanders resources that otherwise would have financed real investments. In the second place, to the extent some government money is invested, those investments will likely be less efficient than those the private sector might otherwise have financed. There is absolutely no evidence that governments have the foresight or incentives to make investments that facilitate real economic growth. “Five year plans” didn’t work in the Soviet Union and they won’t work here. If the government simply builds bridges to nowhere, society gains nothing.

If we are going to rebuild our economy on a solid foundation, the market, not the government, needs to draw the plans. When private citizens invest their own capital, those who invest wisely are rewarded with profits, while those who do not are punished with losses. Bad investments are therefore abandoned, with capital reallocated to more successful ventures. Conversely, when governments invest money, these checks and balances do not exist. There is nothing to correct bad investments, as losses are endlessly subsidized by taxpayers. In fact, the more a government plan fails, the more it tends to be funded in the hope that additional resources will finally achieve success. Obama himself proves this by allocating still more funds to government-run schools and student loan subsidies. Other examples, such as Amtrak, the New York MTA, the U.S. Postal Service, Fannie/Freddie, and countless others, prove this process is never-ending – until perhaps the bureaucracy collapses under its own weight.

When it comes to government making tough choices, Obama talks a good game, but refuses to actually make any. However, once the dollar finally begins its collapse, he will have no choice but to match his rhetoric with action. It’s unfortunate that we cannot make these tough choices on our own terms, rather than waiting for our creditors to force our hand.

5 comments:

  1. Wow. Powerful stuff, Peter. Keep telling the truth, Peter. Someday it will become obvious, and you'll (again) look like the economic genius you are.

    ReplyDelete
  2. "Given his intelligence and rhetorical training, it is hard to fathom how President Obama cannot notice the inherent contradiction in his argument."

    Obama´s clarity equal to:

    http://www.goodexperience.com/broken/images/stop_signs.jpg

    Peter, your mind is like a clear cut diamond, thanks!

    ReplyDelete
  3. I am not going to congratulate you Peter, what you're pointing out is simply right.

    I simply cannot understand why those so called "economists" grab their Economy 101 book and re-read it!

    What you're saying is simple economics, and all those other economists should remember that to complex problems, simple solutions might be the best.

    For once.. I should recommend to the Fed to Laizzes-Faire (excuse my french), and leave capitalism breath for once.
    Controlling interest rates and all is only suffocating the whole economy.

    Put for example: If I have a CD in a Bank, I would love to have a high interest rate, however I if have a huge debt, I would love to have low interest rates.
    What the feds must realize is that they MUST reward the people that have money in the bank, 'cause thank to them the economy is marching, and not reward the people that has debts, 'cause thanks to them, we are now entering into a recession.

    Thanks for posting Peter... erm Larry ...!

    ReplyDelete
  4. He might recognize the need for a solid foundation but I don't think he is willing to make the tough choices to achieve it.
    How can we export more when our goods aren't competitive in the world-market?
    We have to lower our cost of production in order to achieve that.
    This idea of lowering cost of production may entail less wages and benefits.
    Would an Obama administration ever aid such plan? Of course not--that's completely the opposite of what he stands for.
    He talks about the need to save but in his mind he is forced to spend in hopes the nation will not lose further jobs. He is trying to avoid a tremendous increase of people relying on federal programs, such as : welfare, medicare...etc. Unfortunately, after spending trillions we will be left with armies unemployed relying on handouts.
    Obama, like his predecessors, will not voluntarily lie down a solid foundation but engage on spending as a means of delaying consequences.

    ReplyDelete
  5. He might recognize the need for a solid foundation but I don't think he is willing to make the tough choices to achieve it.
    How can we export more, when our goods aren't competitive in the world-market?
    We have to lower our cost of production in order to achieve that.
    This idea of lowering cost of production may entail less wages and benefits.
    Would the Obama administration ever aid such plan? Of course not--that's completely the opposite of what it stands for.
    Obama talks about the need to save but in his mind he is forced to spend in hopes the nation will not lose further jobs. He is trying to avoid a tremendous increase of people relying on federal programs, such as : welfare, medicare...etc. Unfortunately, after spending trillions we will be left with armies unemployed relying on handouts.
    Like his predecessors, Obama will not voluntarily lie down a solid foundation but engage on spending as a means of delaying consequences.

    ReplyDelete

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