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
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.