Like a horde of addicts looking for their next fix, 49 of the nation's governors or governors-elect descended on the City of Brotherly Love last Tuesday to meet the incoming pusher in chief, Barack Obama. Of course, the governors were not seeking heroin or any other banned substance from the president-elect, but were looking for a more potent "drug," OPM-other people's money.
President-elect Obama vowed to enact a stimulus plan that would be "from the bottom up." New Jersey governor Jon Corzine asserted that whatever the size of the stimulus package is it should be much larger. The prevailing mood in DC today and most state capitals is that something has to be done to create jobs and get people borrowing and spending again to boost the nation's economy. As the late management guru Peter Drucker remarked, "Don't confuse motion with progress." And there is a lot of motion going on in DC and around the nation these days to boost the economy.
Why is the U.S. economy in a mess today? And can the incoming president, Congress and the Federal Reserve get the economy out of its downward spiral?
The U.S. economy is in a correction-an inevitable adjustment to the housing bubble that was caused by the Federal Reserve's easy money policies that drove short-term interest rates to 1 percent several years ago. As the FED then drove up interest rates rose to dampen the housing speculation and the accelerating price inflation in goods and commodities, the housing bust unfolded. Commodities also have been especially hard hit, as the price of oil has plunged more than $100 a barrel in less than six months.
The housing bust and the rise in foreclosures have prompted governors to enact programs to help out homeowners. Why? If homeowners are over their heads with debt, they should try to restructure that debt or walk away from the property and rent. That would be the solution if we had a free market economy. Instead, we have a mixed economy that prevents the normal adjustments to take place when people have made bad decisions.
Easy money and a growing welfare state are responsible for the economic mess we are in.
For the past 75 years, since FDR took office at the depth of the Great Depression, the "planners" in DC and their allies in academia and the media, have been extolling the virtues and potency of big government policies to stimulate the economy: low interest rates and more social welfare spending to create jobs and meet basic human needs. The consequence of the left-liberal agenda: more people than ever are dependent on government to survive.
The great Austrian economist Ludwig von Mises identified the flaws in the leftist view of the world when he wrote:
"Government spending cannot create additional jobs. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other."
"The government and its chiefs do not have the powers of the mythical Santa Claus. They cannot spend except by taking out of the pockets of some people for the benefit of others."
In other words, government spending causes job losses in the private sector and redistributes income to the politically connected. In short, government spending imposes a huge opportunity cost on society's ability to generate wealth. The massive increases in government spending by the federal government and the states and the flooding of the economy with new money by the FED will not revive the economy, but will lead to the collapse of the U.S. dollar.
After three quarters of a century, the results of the greatest social experiment in U.S. history are in: big government has failed miserably to produce sustainable prosperity. You would think that leftist would be humble or at least somewhat introspective about their agenda. No. It's full steam ahead to collectivize and socialize the American economy.
The Philadelphia get together can be summed up in one word: desperation. Obama and his advisors and most governors are clinging to the myth that government spending, more easy money and more debt will stop the bleeding of jobs and boost family incomes. But like an addict who refuses to acknowledge his addiction, Obama and Congress continue the greatest dependency program ever devised by human beings, the welfare state.
Regrettably, the basic economics lessons have not been learned by members of the political establishment, including self described fiscal conservatives and leading business and financial executives. In short, the conventional "wisdom" in America is that the federal government is indispensable in creating prosperity. Old myths die hard and some addictions are hard to break, especially the ones that feed on other people's money.