The Contradictions of Obamanomics

Vincent J. Curtis

February 23, 2009

As the U.S. Congress prepares to receive President Obama's speech on jobs creation this Thursday, September 8th, 2011, it would be useful to remind ourselves of went on previously.  The posting below was written on Feb 23, 2009, as the $873 billion "stimulus" package was being debated.  It's fearless forecast, given at the close, was amply born out in the ensuing 18 months.

As the Obama Administration sucks and blows its way through the economic crisis, it is useful to note for future reference the various principles it simultaneously affirms and denies.

The Obama Administration holds that high levels of deficit spending is necessary to lift the US economy out of a recession, and the porkulus package of $790 Billion, spent over the next two years, is the means by which that lifting will be done.  The principle here affirmed is that tax cuts and large deficit spending by government generates more economic output than put in.

The Obama Administration also promises to cut the deficit in half by the end of the term by a combination of spending reductions and tax increases.  Thus the measures that lift the economy out of a recession will be more than reversed in order to stop the harm of excessive accumulation of debt.  By the end of the term, the economy will be back where it started but with the government having accumulated the debt assumed in the process of temporarily lifting the economy out of recession.

The reasons are these: If deficit spending creates economic activity by a multiple of the input, eliminating deficit spending destroys economic activity by a multiple of the reduction.

If cutting taxes increases economic activity to the point where the loss in revenue is regained, then raising taxes reduces economic activity such that no increase in revenue occurs.

The completion of the spending program conceived of in the porkulus package will of itself nearly cut the deficit to half of what it is, so the goal of cutting the deficit in half is nothing more than returning to the deficit that currently is.

The principle of cutting taxes to stimulate the economy is based on the belief that the rich, who have surplus income to invest, will make capital investments because they get to keep what they regard as a fair share of the return.  The benefit the lower income earners 

obtain from capital investment by the rich is called "trickle down economics."  

Observe that the Obama Administration believes in "trickle down economics" to the extent that it actually happens, but object to it on the grounds of justice and fairness.  Hence, raising taxes on the rich is seen as a way of raising revenue and achieving a measure of justice at the same time.  However, because raising taxes on the rich reduces the amount of capital invested, those of lower income who would have benefited from investment lose those benefits.

Cutting taxes now with the promise of raising taxes in the future is the worst kind of strategy because no one will invest now if he believes he will be denied what he regards as a fair share of the return by a capricious government.  Thus the gain in economic activity hoped for by tax cuts will not be achieved in the first place.  The government can't seize the crop if the farmer doesn't sow it in the first place, because he believes the government is going to seize the fruit of his labor.  Withal, the Obama Administration accepts the principle of operation of "trickle down economics" as a fact of economics even if it regards it as unjust.

The best action the Obama Administration can undertake based on the principles they accept is the one advocated by Republicans, who are regarded as heartless realists on matters of economics.  That program 

is by and large to do nothing, and let nature take its course.  

Modest tax cuts are in order, as is a measured amount of spending on capital projects like infrastructure, where government spending is not at present completing with the private sector for labor.  But by all means the government has to restore order to the financial system, since is it is uncertainty here that is causing investors to stand aside and leave their money in treasury bills, gold, and commodities.

The conclusion is that by the end of the next economic cycle, the US government will be deeper in debt and no further ahead economically if the Obama Administration follows through on its contradictory policies.

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The above posting, though submitted, was not previousl published.