An Open Question to the President

It was back in Philadelphia on April 15 when I met Dr. Foy during the Tax Day Tea Party at Love Park.  I spoke with him for a good while and, as impressed as I was with what he had to say from behind the podium, I was even more impressed with what he was saying one-on-one.  Thumbing through his book, The Young Conservative’s Field Guide, it struck me that he’s really something special.  Drew is as busy as he is brilliant, and given that he is so in demand, I am delighted that we might have him here at America’s Right from time to time.  Enjoy.  — Jeff

From the Chicago Tribune, April 21, 1934. Click to enlarge.

It is being reported that contention arose at the G20 summit between European leaders who want to curb government spending and President Obama, who insists that developed countries continue with Keynesian stimulus efforts in order to sustain the economic recovery.  I wonder if any of these European leaders had the same question I do: “What on earth would it take to convince you Mr. President that your stimulus isn’t working?”

For starters, didn’t Milton Friedman discredit John Maynard Keynes’ theory that deficit spending would stimulate the economy? Keynes argued that economic downturns are characterized by precipitous declines in consumer spending and, in order to spur recovery, governments must increase consumer demand through deficit spending. This theory formed the foundation for many of the economic recovery efforts undertaken by FDR’s administration during the Great Depression. At that time, Keynesianism ruled the day.

Many years later however, Friedman argued that deficit spending would not produce the effects intended and often the actual behavior from individuals and businesses would be the exact opposite of what policy makers desired. For one, Friedman claimed that individuals and businesses would do what they believed to be in their own best interest, despite inducement from politicians to act otherwise. Simply put, most reasonable individuals, when faced with financial hardships, will save and find ways to decrease spending despite encouragement from the government to be unreasonable.

Furthermore, Friedman argued that government intervention in the market causes even more uncertainty than is caused by the downturn itself, and this effect causes consumers and businesses to tighten their belts even more. In addition, the fact that individuals and businesses recognize that deficit spending today must necessarily mean higher taxes and interest rates in the future gives them even more reason to cut spending and cut business investment – instead, preferring the approach ‘to try to do more with less.’

It is probable that Keynes himself recognized some if not all of the limitations to his theory that Friedman elucidated. The problem, as Friedman pointed out, is that in a free society, the state has limited means to coerce individuals and businesses to comply with government plans. For example, while the government might hand out rebate checks, or give tax credits to individuals to purchase some consumer goods, or incentivize businesses to make capital expenditures it (the state) cannot force this behavior. This realization probably led Keynes to preface the German language version of The General Theory of Employment, Interest and Money with the following statement

Nevertheless the theory of output as a whole…is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition…

The result of Keynesian style deficit spending, Friedman concluded, was stagflation – the combination of low growth, inflation and high unemployment – not robust economic recovery. The history of the last century suggests that Friedman was correct and it is now well accepted that deficit spending did not get us out of the Great Depression rather, it only made it worse.

Despite this well-known information Mr. President, you seem more inclined to agree with models from your top economic advisors that suggest Keynesian deficit spending works. However, why do you continue to place faith in the assumptions underlying these models that have since proven to be incorrect?

The original Romer/Bernstein report predicted that, if your stimulus passed, unemployment would not exceed eight percent.  However, unemployment rose to greater than ten percent and is currently holding around 9.5 percent, eighteen months later. On this point, I will concede that economists view employment as a lagging indicator of recovery – I just didn’t think it was supposed to be this high or lag this long.

Anyway, it would seem most of the other indicators aren’t doing so well either. A few examples include the housing market, consumer confidence and small business investment.

According to the National Association of Homebuilders (NAHB), sales of newly built, single-family homes declined dramatically in May following the expiration of a popular home buyer tax credit program in the previous month, according to newly released figures by the U.S. Commerce Department. The data show that sales fell 32.7 percent to a seasonally adjusted annual rate of 300,000 units, the lowest number on record since the government started keeping track in 1963.

In more bad news, a recent Gallup poll found that the number of people surveyed who felt better regarding their financial outlook fell from 54 to 50 percent in May. The firm noted that this decline in consumer confidence has continued on through the first weeks of June.

Finally, the National Federation for Independent Business reported in its Small Business Economic Trends that for the month of May while, “Seven of the 10 Index components increased, job creation and capital expenditure plans barely moved and remain at ‘recession’ levels.”

Specifically, in regard to job creation the report states, “Over the next three months, seven percent plan to reduce employment (unchanged) and 14 percent plan to create new jobs (unchanged), yielding a seasonally adjusted net one percent of owners planning to create new jobs…Since the third quarter of 2009, job creation plans have seriously underperformed the recoveries from the other two deep recessions covered by the NFIB survey.”

Their summary concludes,

The duration of recession readings in the NFIB survey is exceptionally long compared to the 1980-82 recession period. If this is a ‘V’ recovery, it is lower case.’

Putting aside the fact that the government has little constitutional authority to medal in the workings of the market – that they have no right to pick winners and losers – and putting aside my own belief that individual reason is limited to one’s immediate dealings therefore, making central planners incapable of engineering outcomes on a grand scale; I have to point out the obvious: eighteen months after passage of the American Recovery and Reinvestment Act, economic indicators do not indicate that we are in a solid recovery. So I’ll restate my question to the President: “What exactly would it take to convince you sir that your stimulus isn’t working?” If the economy was my patient, I would certainly discontinue the current course of treatment.

——————-

Andrew Foy, MD is a medical resident and co-author of “The Young Conservative’s Field Guide”. His upcoming book “You’ve Got to Stand for Something: Restoring America’s Founding Principles” is scheduled for release in July. He can be contacted through the website www.aHardRight.com.

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Comments

  1. T.I.M. says:

    Mr. Obama lives in a reality of his own creation. He uses figures showing that
    tax cuts only return 99 cents per dollar (vs higher returns for stimulus) when his own economic adviser (Romer) previously published a study showing the tax cut return to be three times that high. He now ignores her earlier figures.

    And he follows the lead of Nancy Pelosi, who claims that unemployment checks are the best way to create jobs. Perhaps a quick popularly elected lobotomy would be in order for our Speaker — we’d need to vote on it before we get to see what’s really in it.

  2. John Feeny says:

    Fancy that – common mathematical sense. How refreshing. Well done, Doctor.

  3. Gail B. says:

    Economists adamantly denounce deficit spending to stimulate the economy–all except for the one(s) the White House has consulted.

    There was a full-page ad that appeared in several large newspapers prior to the Stimulus Bill. The ad had the signatures of economists from all over the world protesting the Stimulus Bill. Did Obama heed the advice? Did Congress?

    Has Obama listened to any American citizen? Or will he just continue to bungle things one after another during his term?

  4. Boston Blackie says:

    Doctor,
    Well said, we are all feeling the same way the European leaders are probably thinking, what will it take for Obeyme to snap out of it. Obeyme seems more inclined to agree with models from his top economic advisors that suggest Keynesian deficit spending works because like them, he has never lived in the real world. Do they even balance their own checking accounts, I fear not. As Robert eloquently wrote in his “Intentions vs. Incentives” piece, this admin beliefs that “if the intentions were not bad, then the consequences couldn’t have been bad. This myopic fascination with intention is a hallmark of liberal thinking, and both beliefs are flatly wrong.” When all is said and done and we are left to clean up this mess for decades to come, do you think we will ever hear the words, Oops, my bad!! uttered from Obeyme’s lips any time soon.
    I DOUBT IT.
    BTW, my two favorite local American Recovery and Reinvestment Act projects have got to be the following;
    Laying down bricks in different areas of the city to give the streets that look of a small town square. The only problem is there soon will be snow to plow and rock salt to de-ice the streets which will then
    tear up the streets never mind how many times the utility companies have to dig up the streets then patch over the holes.
    The second is that they are currently removing ALL highway lights from Interstate 93! Is this to save money on electric bills?

  5. John Buyon says:

    the problem is that Keynesianism is just too alluring for politicians. the other party would have done the same thing the public at large is too stupid to understand the intricacies of tax cuts/neo-liberalism to boost the economy, they would demand big spending.
    and by the way I want to congratulate you on being the only conservative that understands the real limitations of Keynes’s theory. the fact that the government of a free society is so limited that it’s actions in the economic field would backfire/ make things worse.

    big spending didn’t fail in the 1930′s it wasn’t large enough, I could explain why the depression really existed if you would like.

  6. Anonymous says:

    4:21, please, dear God, no

  7. I'll take Conceited for 200, Alex says:

    4:21 said “the public at large is too stupid”

    Kinda along the lines of Mao, Lenin, Stalin and Adolf.

    You gotta love the all knowing progressives.

  8. Smile! says:

    Photogenic v. Presidential….. guess which is winning

  9. Dee says:

    I just read an article that despite the “stimulus” bill most employers are hesitant to expand or hire more people and therefore unemployment has remained high and the economy has been stagnant. They are concerned about the increase in their taxes next year when the Bush tax cuts end and they have seen this administration lambast big business, the health insurance industry, the auto industry, the banking industry, etc. They have heard BO state that at some point “you have made enough money”. BO constantly speaks about this crisis and that crisis. I think that many employers do not feel safe in either hiring more people or expanding. I have noticed in our local paper that the want ads section has become smaller and smaller.
    My favorite stimulus project is still the “turtle tunnel”. I would also like to know how much has been spent on the signs that state this project is a result of the “American Recovery Act”.
    Now Nancy Pelosi, another brilliant member of this administration, stated the other day that unemployment checks were the biggest and best job creators. As another person wrote,according to Nancy, once we are all unemployed we should be at 100% employment.
    If it weren’t so frustrating and scary, this administration would be funny.

  10. Tear down this wall says:

    3:58

    My favorite is now hundreds of miles of cheap steel posts twined together with 4 strands of steel cable along the highway medians here in Tenn. They go about a week before being destroyed by slightly errant drivers and then we’re left with eyesores for months (probably longer) till even MORE ‘stimulus’ money must be spent to ‘fix’ them. And to watch the TDOT crews have to now weedwack miles and miles and miles along these silly little posts is such a flagrant waste of manpower and tax dollars.

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