Yesterday President-elect Barack Obama outlined his American Recovery and Reinvestment Plan in a speech at George Mason University. Obama said we need to take "dramatic action" ASAP. He asserted that if nothing is done, "this recession could linger for years." On the contrary, Obama's spending plan guarantees that the economy will not recover because the federal government will spend additional trillions of dollars that must be borrowed to finance one trillion dollar annual deficits for many years.
The United States economy is in a widespread correction, known as a recession or depression, depending on your point of view. This correction is occurring because interest rates were driven down to levels by the Federal Reserve igniting an orgy of speculation in real estate, especially housing, where easy credit sparked a massive buying spree by marginal (subprime) buyers, among others. The housing bubble is unwinding, which means that housing prices are falling to find their equilibrium level, and the sooner this process is completed, the sooner the economy will recover.
If the federal government interferes with the market adjusting to the new reality in the economy, it will prolong the pain of the depression. And with all the bailout money being thrown into the financial system, the adjustment process will take years and years to complete. (See William Fleckenstein's Greenspan's Bubbles for a detailed analysis of the Federal Reserve's role in creating the dot.com boom and bust of the 1990s and the housing boom and bust of this decade.)
As economist Murray Rothbard explains in his 1969 essay about economic crises, an explanation that is even more relevant today than it was 40 years ago:
The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx. Marx saw that, before the Industrial Revolution in approximately the late eighteenth century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subject; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions. Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: That these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.
In addition, Obama's rhetoric about the current crisis is a 21st century version of the failed policies of John Maynard Keynes, the most influential economist of the 20th century. Again, Rothbard, in 1969, showed how Keynesianism has affected the thinking of most economists in America.
For 30 years, our nation's economists have adopted the view of the business cycle held by the late British economist, John Maynard Keynes, who created the Keynesian, or the "New," Economics in his book, The General Theory of Employment, Interest, and Money, published in 1936. Beneath their diagrams, mathematics, and inchoate jargon, the attitude of Keynesians toward booms and bust is simplicity, even naivete, itself. If there is inflation, then the cause is supposed to be "excessive spending" on the part of the public; the alleged cure is for the government, the self-appointed stabilizer and regulator of the nation's economy, to step in and force people to spend less, "sopping up their excess purchasing power" through increased taxation. If there is a recession, on the other hand, this has been caused by insufficient private spending, and the cure now is for the government to increase its own spending, preferably through deficits, thereby adding to the nation's aggregate spending stream.
What did Obama state yesterday regarding our nation's economy?
…at this particular moment, only government can provide the short-term boost necessary to lift us form a recession this deep and severe.
Obama, under the influence of his Keynesian advisors, is embarking on a path for the Second New Deal. The First New Deal was a failure. The Hoover/Roosevelt depression lasted for more than a decade, and the massive unemployment of the 1930s declined when the U.S. entered World War II. Total war is hardly a humane prescription to end double digit unemployment.
The president-elect and his advisors pay tribute to the private sector and free enterprise but are socialists at heart. They believe in the redistribution of income and central planning. Most of Obama's tax cuts-by increasing the earned income tax credit– will go to people who do not even pay income taxes. In addition, one of Obama's initiatives for the economy is based on creating government demand for energy projects instead of letting the market forces allocate the demand and supply for energy.
So while candidate Obama promised "change" during the presidential campaign, he is really a "conservative," preserving the failed policies of the welfare state.