Obama’s economic failure


For a man famed for his rhetoric the tweet was simplicity itself: “Four more years”. Indeed, I thought, four more years of high unemployment and economic stagnation.

For the second time Barack Obama had beaten an opponent who understood more about economics than he did. In 2008 John McCain admitted he didn’t “really understand economics” yet in June that year he said,

“We are borrowing from foreign lenders to buy oil from foreign producers. In the world’s capital markets, often we are even borrowing Saudi money for Saudi oil. For them, the happy result is that they are both supplier and creditor to the most productive economy on earth. For us, the result is both dependency and debt. Over time, in interest payments, we lose trillions of dollars that could have been better invested in American enterprises. And we lose value in the dollar itself, as our debt portfolio undermines confidence in the American economy”

Intuitively, McCain had grasped that America could not keep swapping devalued dollars for foreign goods and services.

Obama, meanwhile, gave a speech saying

“I’m not talking about a budget deficit. I’m not talking about a trade deficit. I’m not talking about a deficit of good ideas or new plans. I’m talking about a moral deficit. I’m talking about an empathy deficit”

So Obama had named five deficits, only three of which were real, and he was going to talk about the two that weren’t. This was typical of the sort of overripe guff soaring rhetoric which enraptures Obama’s supporters. It makes you feel good as long as you don’t try to figure out what it means.

And again, this year, Mitt Romney gave a speech saying

“I met with (former head of Goldman Sachs and the New York Federal Reserve John Whitehead), and he said as soon as the Fed stops buying all the debt that we’re issuing—which they’ve been doing, the Fed’s buying like three-quarters of the debt that America issues. He said, once that’s over, he said we’re going to have a failed Treasury auction, interest rates are going to have to go up. We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.” It’s just made up money, and this does not augur well for our economic future.”

Romney was dead right about the parlous state of US finances but, in the same speech, he made his remark about ‘the 47 percent’ and this was drowned out.

Obama, meanwhile, released an ad saying

“Now Governor Romney believes that with even bigger tax cuts for the wealthy, and fewer regulations on Wall Street, all of us will prosper. In other words, he’d double down on the same trickle-down policies that led to the crisis in the first place

Obama thinks this despite the fact that Bush’s deficits were driven by spending increases and not tax rises. There is no mention of loose Federal Reserve monetary policy. There is no mention of political action which pushed banks to lend to marginal borrowers.

Obama’s faulty prognosis follows from his faulty diagnosis. America, he believes, can tax and spend its way back to prosperity.

Well, he tried the spending. In February 2009 the $831 billion American Recovery and Reinvestment Act came before Congress. If the ARRA was passed, President Obama promised, unemployment would peak at 8 percent in late 2009 and would fall to a little over 5.1 percent by October 2012. He painted a doomsday scenario if the ARRA wasn’t passed; unemployment would peak at 9 percent in 2009 and by October 2012 would still be at 5.5 percent.

The act was passed. Unemployment peaked at 10 percent in October 2009 and in October 2012 was 7.9 percent. In other words, even with Obama’s $831 billion package, unemployment peaked later, peaked higher, and remains higher than in the doomsday scenario he said would befall America if the ARRA wasn’t passed. Unemployment was wedged above 8 percent for 43 consecutive months, the longest period since the Great Depression. The American economy underperformed even Obama’s own worst case scenario.

But even these dreadful figures might not tell us the whole story. America’s unemployment figures are notorious for their unreliability. Those who just stop looking for work are not counted as unemployed. So many Americans lost hope of finding a job in Obama’s America that in September 2012 the Labor Force Participation Rate fell to its lowest since 1981. If the LFPR was the same as when Obama took office unemployment would be a staggering 10.6 percent.

And even this might understate matters. If unemployment was measured now the same way it was in the 1930s, today’s level would be higher than in any single year of the Great Depression. That is why Obama didn’t run on his record; it’s awful. Instead his pitch was ‘Give a guy a second chance’ like some desperate ex-boyfriend.

And now he’s going to try taxing. But here’s the problem: last year the Federal government’s unfunded liabilities, which includes Social Security, Medicare, and Medicaid, all programs Obama has no plans to reform, increased by $11 trillion to $222 trillion. To put this in context, the entire American economy is just $15 trillion. If you expropriated the entire wealth of the richest 400 Americans and left them on food stamps you would take $1.7 trillion – it wouldn’t make a dent. All Americans will face huge tax rises.

F. Scott Fitzgerald said that there are no second acts in American lives. Obama must hope he was wrong. As Jay Leno put it, “Economists say we’re heading for a fiscal cliff and we elected a guy whose campaign slogan is ‘Forward!’” Barack Obama: the Thelma and Louise President.

This article originally appeared at The Commentator


It’s anything but the economy, stupid

Wrigley Field, Chicago, 2040 AD

Walking around the ruins of the old Roman town of St Albans can make you feel like Shelley’s “traveller from an antique land”. As you look down into the remains of the Roman amphitheatre, where the town’s inhabitants flocked in the second and third centuries AD, you wonder what those people thought and talked about as Roman Britain approached its collapse.

You’d like to think they talked about that looming collapse. Perhaps they did. It was, after all, the existential issue of the day. But looking at behaviour in another, contemporary, troubled great power, you do wonder.

The United States government hasn’t balanced its budget since 2001. In the past ten years, starting in 2002 when Republicans controlled the Congress and the White House, Federal government debt has more than doubled from $6.5 trillion to over $15 trillion, or nearly $51,000 for every US citizen. Since September 2007 that debt has been increasing by nearly $3.9 billion a day. The Congressional Budget Office reported last week that in 2012 the Federal government’s debt increased by over a trillion dollars for the fourth year running.

Over the same ten year period the dollar has lost about 25 percent of its value. The rampant credit creation of the Federal Reserve which fuelled the housing bubble has created $1.4 trillion of new base money since 2000. At the moment most of this is sitting on banks’ balance sheets but if it emerges into the wider economy the US will have an inflation crisis.

Likewise, if the foreigners who hold nearly a third of America’s debt decide to dump these depreciating assets, the dollar will collapse.

These are the existential issues for the United States as November’s presidential election nears. But to look at the media you’d never know it.

Instead the American media has lately been preoccupied with a fast food chicken chain. More precisely, it has been preoccupied with what the president of that chain thinks of gay marriage.

“Who cares?” might have been the appropriate response. If you’re a Chick-fil-A shareholder and you don’t agree with him, sell up and invest somewhere else. If you’re a customer, go and buy your artery clogging food down the street. Capitalism, more so than any other system, gives you scope to exercise your morality.

Instead the views of one guy became a minutely discussed national news event. Democrats in a number of cities called for local branches of Chick-fil-A to be shut down, a curious course of action in the face of high unemployment. Supporters of Dan Cathy’s views had a Chick-fil-A Appreciation Day where they filled their faces to show solidarity. They should have called it Cholesterol for Christ.

Then, last week, media attention fixed upon the previously little known Republican Representative from Missouri, Todd Akin. In an interview with a local TV station Akin aired the unusual view that women couldn’t become pregnant through “legitimate rape”.

Worryingly Akin sits on the House Science Committee. This provides yet another argument for leaving more to free markets and less to government. Under free markets science ends up in the hands of people like Bill Gates and Steve Jobs. Only government could put someone like Akin in charge of science.

Neither gay marriage nor rape should be belittled as issues. Laurie Penny, not someone I’m given to quoting approvingly, noted in a moving blogpost that between ten and twenty percent of women in America have experienced rape, 90,000 in 2008 alone. This is awful and ought to be tackled.

But neither should silly remarks from a silly man like Todd Akin drown out the great existential issue in American politics: the economy.

And America’s solvency ought to matter to everybody. It ought to matter to Democrats who care about redistribution of wealth: watch your economy disappear over a cliff and then try and redistribute nothing; see how far that gets you.

It ought to matter to neo-conservatives: America’s economic wellbeing is a sine qua non of American strength. The United States did not become rich because it had powerful armed forces; it got powerful armed forces because it was rich. If the wealth goes so does the power.

And, most importantly, it ought to matter to every ordinary American citizen who will suffer if the economy continues on its current, Hellenic path.

But instead of this discussion we have the ongoing row about Mitt Romney’s taxes. With unemployment stuck above 8 percent and poverty at record levels, Obama’s supporters are trying to turn an election that should be about how much money Americans have in their pockets into one about how much money Mitt Romney has in his.

President Obama’s economic track record has been dismal so you can’t blame him for running away from it. Bill Clinton’s strategist James Carville famously said it was “The economy, stupid” but Obama and his supporters are desperately trying to shift the focus of this election to anything but. And the Republicans have been lead-footed enough to let them.

Ultimately, Americans have a decision to make. What matters most: Tax returns or job reports?

This article originally appeared at The Commentator

Barack Brewster’s Millions

Who ya gonna call in November?

Films have often been vehicles for communicating complex ideas and philosophies in coded parables. The dreary films of Marxist filmmaker Ken Loach aren’t much more fun than ploughing through all three volumes of Das Kapital but they do, at least, take less time.

When, in The Shootist, John Wayne’s character, J B Books, says “I won’t be wronged, I won’t be insulted, and I won’t be laid a hand on. I don’t do these things to other people, and I require the same from them”, he was saying roughly what it took Robert Nozick 300 pages to say in Anarchy, State, and Utopia.

But I wasn’t expecting any such heft when I sat down to watch Brewster’s Millions at the weekend. As a child of the 1980s I might have seen this film around 20 times but this time I noticed something new in it; it is a parable for Keynesian economics.

It tells the story of washed up baseball player, Montgomery Brewster (Richard Pryor), who is left $300 million by an eccentric relative. There is one catch: first he has to spend $30 million in 30 days with absolutely nothing to show for it; “you’re not allowed to own any assets. No houses, no cars, no jewelry. Nothing but the clothes on your back!”

Brewster uses a raft of tricks to spend this money, some of which will be oddly familiar to anyone who has been watching economic policy making over the last few years.

Brewster’s first act is to go on a hiring spree offering vastly inflated wages. No, not public sector employees, but a team of security guards. Later he gets into his very own crackpot environmental, or ‘green tech’, scheme when he buys an iceberg with the aim of floating it to the Middle East to bring relief to supposedly drought stricken Arabian farmers.

“What thirsty Arab farmers?” his friend Spike (John Candy) asks, “There aren’t any, because there aren’t any farmers in the desert!” If only John Candy had been on hand before Barack Obama blew $535 million on Solyndra.

Finally he hosts an expensive exhibition game between his old team, the Hackensack Bulls, and the New York Yankees. The Bulls are kitted out in new uniforms and flown in by helicopter. Brewster should, of course, have re-designated some of the major roads in New York as special lanes for his game; then he could have wasted as much money as the London Olympics.

If it sounds fanciful to see any economics in this flurry of pointless spending, consider the words of John Maynard Keynes himself:

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is”

A different attitude to wealth creation is on display in one of the classics of 1980s cinema, Ghostbusters.

Three government employees spend their days trying to seduce their students with phony experiments and running away from ghosts. When this dismal level of productivity proves too low even for the public sector they are sacked and go private, though not without misgivings.

As Ray Stanz (Dan Aykroyd) warns Peter Venkman (Bill Murray), “Personally, I liked the university. They gave us money and facilities. We didn’t have to produce anything! You’ve never been out of college. You don’t know what it’s like out there. I’ve worked in the private sector. They expect results.”

Spotting a gap in the market (“We are on the threshold of establishing the indispensable defense science of the next decade. Professional paranormal investigations and eliminations. The franchise rights alone will make us rich beyond our wildest dreams”) the three borrow some money and set up the Ghostbusters.

Soon they are raking in $5,000 a night, getting coverage from Larry King and Time magazine, and taking on a black member of staff, no affirmative action needed.

Then up pops Walter Peck of the Environmental Protection Agency. “I want to know more about what you do here” he demands. “Frankly, there have been a lot of wild stories in the media and we want to assess for any possible environmental impact from your operation, for instance, the presence of noxious, possibly hazardous waste chemicals in your basement. Now you either show me what’s down there or I come back with a court order!”

With Venkman an unlikely John Galt the government steps in, shuts down the thriving private sector enterprise, and the town is flooded with ghosts.

Where Brewster’s Millions is an object lesson in the wasteful uselessness of Keynesian economics, Ghostbusters is one of the most pro free market films ever made, a hymn to the genius of capitalism and the clumsy damage wrought by government.

Or, to quote another economist, Milton Friedman, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand”

These differing attitudes are on display in the US Presidential election. With the American economy slowing to stall speedthe question each of the candidates must answer is “Where is the growth going to come from?”

With his background in law and ‘community organising’ it’s no surprise that Barack ‘Brewster’ Obama doesn’t know, pinning his hopes on ever more government spending of the Solyndra sort.

Mitt ‘Venkman’ Romney, by contrast, is at least paying lip service to private sector led growth of the Bain Capital sort. The difference is that Bain made money and Solyndra went bust. Do Americans want their economy run by Monty Brewster or the Ghostbusters? That will be the question this November

This article originally appeared at The Commentator

The charts that could doom Obama


Know any good removal men?

In February 2009, less than a month after Barack Obama was sworn in as President, the $831 billion American Recovery and Reinvestment Act came before Congress. If the ARRA was passed, President Obama promised, unemployment would peak at 8 percent in late 2009 and would have fallen to a little over 5.5 percent by May 2012. President Obama painted a doomsday scenario if the ARRA wasn’t passed; unemployment would peak at 9 percent in 2009 and by May 2012 would still be at 6 percent.

President Obama got his Act and the graph below shows what Americans got for their $831 billion.

Unemployment peaked at 10 percent in October 2009 and in May 2012 was 8.2 percent. In other words, even with Obama’s $831 billion package, unemployment peaked later, peaked higher, and remains higher than in the doomsday scenario he said would befall America if the ARRA wasn’t passed. The American economy outperformed even President Obama’s own worst case scenario. The Republicans should send a copy of this chart to every household in the United States. 

To call the ARRA ‘stimulus’ is surely a mistake; it hasn’t stimulated anything. But this isn’t a one off. Despite what Keynesians say, the idea that government spending can stimulate an economy beyond the very short term is a complete myth.

The chart above shows data for EU and G20 member states from 2011 on budget deficits and economic growth. It shows a clear trend: countries with higher budget deficits are experiencing lower growth.

A snapshot might not be too useful so what about over time?

This graph uses data for the EU and G20 member states on changes in growth and budget deficits from 2010 and 2011. Again, the trend is clear: countries that reduced their budget deficits between 2010 and 2011 could expect to see higher growth.

This is not to say that the act of cutting budget deficits of itself caused higher economic growth; correlation does not equal causation. But it does show that cutting budget deficits is not the route to economic meltdown. And it does show that state ‘stimulus’ spending is not the passport to prosperity some people like to make out.

People like Paul Krugman, who was in town last week to plug his new book which takes 259 pages to convey one bone-headedly simple message: keep spending. Krugman wrote recently that “All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment.”

Nothing of the sort has happened. As we see, countries enacting ‘austerity’ policies are doing slightly better than those which, relatively, aren’t.

Krugman complains that spending cuts aren’t really about controlling runaway government spending at all; this is all simply a cloak behind which conservatives are hiding the moves towards a small state they desire. This is, to say the least, an idiosyncratic view of a British government which is going to oversee an unprecedented peacetime rise in the national debt of 60 percent during its term in office. In truth, in clinging onto the belief that government spending creates sustainable economic growth which is being discredited around the world every single day, it is Krugman who is still pushing his failed, dangerous ideology in the face of all the evidence.   

Krugman is not alone. His British Mini Me, Will Hutton, has taken to the pages of the Observer to blame austerity for the parlous state of the global economy. Hutton says that in Britain “manufacturing suffered its biggest plunge for three years, and this in an economy already suffering its longest depression since the 19th century. American jobs growth is petering out. Unemployment in Europe averages 11%”

But look at Britain with its budget deficit of 8.1 percent of GDP. Look at the US with its budget deficit of 9.7 percent of GDP. Look at Ireland, Greece, Spain and France with their budget deficits of 11.2 percent, 7.3 percent, 6.9 percent and 6 percent of GDP respectively and ask yourself in which mad universe these countries can be said to be applying ‘austerity’.

Contrary to what Krugman, Hutton, and others argue it is not ‘austerity’ which has failed, it has barely been tried. Over the last three years Britain’s budget deficits have been 10.3 percent, 10.2 percent and 8.1 percent. According to the Keynesian theory the British economy should be in fine fettle yet it’s still in the tank. It is Keynesian deficit spending that has failed. 

You would have to be a complete fool impervious to all evidence to cling like Linus with his blanket to the idea that we could get more economic growth if only the government would spend more money. President Obama is not alone in seeing his ‘stimulus’ fail to stimulate but that will be of little comfort if he is calling the removal men in November. 

This article originally appeared at The Commentator

America needs a president who prioritises growth over redistribution

“1 million, 2 million…er…”

I’m not a Mitt Romney supporter. He’s certainly less objectionable than other Republican contenders like Rick Santorum or Newt Gingrich but it’s hard to get enthusiastic about a guy when, as the joke goes, he’s managed to be on both sides of every big issue in recent years.

Indeed, if I was asked to name the most impressive thing about Romney his luxuriant hair would be close to the top of the list. But the last week or so I’ve felt a little sorry for him. Yes, I’m feeling a little sorry for one of the richest 0.006 percent of Americans.

In the run up to the South Carolina primary a desperate Gingrich brought up the tax status of front runner Romney. Immediately the pressure was on for Romney to release his tax records. When he did the press screamed “Wealthy Romney reveals 14 percent taxes” What better example of greed?

Except it wasn’t actually true. Ever since billionaire investor Warren Buffett claimed that his tax rate was lower than that of his secretary there has been much debate about the ‘effective tax rate’ faced by the rich. But this ‘effective’ tax rate is made up of apples and oranges. As such it is a meaningless concept.

Romney, like Buffett, pays the top rate of income tax on his salary income, 35 percent. But, like Buffett, Romney derives much of his total income from capital gains, the profits made by investments, which are taxed at 15 percent.

The two types of income, wages for labour (yes, working for Bain Capital classes as labour for tax purposes) and income from investments, are very different. When you labour you are guaranteed your salary come what may. Even if your employer goes bust you are a preferential creditor; any wages owing to you will be paid out of whatever is raised by asset sales before other creditors see a penny.

Investment income is different; as the small print says, investments can go down as well as up. The risk of not receiving a return or income from your investment is much greater than for labour. It follows that if any investment is to be undertaken at all the reward must be high. Not only that, but the investment income that Romney pays 15 percent tax on comes from the profits of companies which have already paid 35 percent in Corporation Tax.

This is why income from labour and income from investment are taxed differently; they are different things. To lump them together and call it an ‘effective’ tax rate is useless.

But there is a deeper point here. From the dawn of man there have only been two ways to increase your wealth. One approach is to supply a good or service which someone else is willing to trade you for, and with both parties benefiting from the transaction everyone’s wealth increases. This is wealth as a positive sum game.

The other is simply to take the wealth generated by someone else; one only gets better off as another gets worse off. This is wealth as a zero sum game.

The obsession with Romney paying ‘only’ $6.2 million in taxes last year (more than 97 percent of Americans) shows that the second approach is gaining popularity. To some extent this is the predictable outcome of economic stagnation. When wealth is growing you don’t worry so much that guy next door is richer than you because you will be richer tomorrow anyway. But when your wealth is shrinking or stagnating, the difference between you and the guy next door becomes a yawning chasm.

Historically the belief, which grows in times of economic hardship, that wealth is a zero sum game and can only be obtained by taking it off somebody else, has led to disaster. In the last century the Germans, Soviets, and Ugandans, to name just a few, all came to think that the Jews, the Kulaks or the Asians had wealth that rightly belong to them and that they would become rich if only they could get their hands on it.

Comparing rich Americans like Romney to those persecuted groups will sound a little shrill, even distasteful to many. But if we become obsessed with who gets what sized slice of our shrinking wealth cake we might forget to just go and bake a bigger one. What America and other countries need is not destructive zero sum envy but growth. And they need real growth, not the unsustainable debt based fantasy of recent years.

There are many who will tell you that further growth is impossible, that the planet is ‘maxed out’. They have been making this prediction since at least Thomas Malthus wrote his Essay on Population in 1798. These people consistently underestimate the one truly inexhaustible resource at humanity’s disposal; its ingenuity.

President Obama said recently that “This is the defining issue of our time” He is right but he is on the wrong side of it. His recent State of the Union speech was heavy on plans to divide wealth up, but lighter on ideas of where this wealth might come from in the first place. And wealth has to be generated before it can be redistributed.

We must hope that the politics of growth wins out over the politics of envy. With his background in community organising and politics, roles all about the spending of money generated by others, it is not surprising that Barack Obama prioritises redistribution. With his career turning round failing businesses Mitt Romney, however imperfectly, leans towards growth.

America needs a president who prioritises growth over redistribution so that the social balm of increasing wealth can work its magic; so that, as an earlier eloquent Democrat put it, a rising tide can lift all boats.

This article originally appeared at The Commentator

Palin’s Popularity

Sarah Palin is the most divisive figure in American politics. 46% of Americans view her favourably while 46% view her unfavourably. 80% of Republicans have a positive view of her while 70% of Democrats have a negative one. Only 8% don’t care either way.

It is difficult to see where these feelings come from. An October 2007 Newsweek profile of Palin and Janet Napolitano, the Democrat governor of Arizona, said “(G)overnors like Napolitano, 49, and Palin, 43, are making their mark with a pragmatic, postpartisan approach to solving problems, a style that works especially well with the large numbers of independent voters in their respective states”. It continued “In Alaska Palin is challenging the dominant, sometimes corrupting, role of oil companies in the state’s political culture…Although she has been in office less than a year, Palin, too, earns high marks from lawmakers on the other side of the aisle”.

Palin’s popularity stems from the fact that she is like a lot of Americans. Like 76% Americans Palin is a Christian. Like 43% Palin supports the right to bear arms. Like 12.5 million Americans Palin goes hunting. Like 51% Palin opposes same sex marriage. Like 82.5 million American women Palin is a mother. Like 40% of children born in US, Palin’s grandson was born to an unmarried mother.

Palin resonates in other ways. In a recent speech to the TEA (Taxed Enough Already) Party movement she claimed “America is ready for another revolution”. This might sound odd considering Americans voted for ‘change’ in 2008 but they have seen very little of it.

Americans seeking change are now looking elsewhere. In November the Democrat governors of Virginia and New Jersey were ousted by Republicans. January saw a Republican elected to the Senate by solidly Democratic Massachusetts. Obama’s approval rating has slumped from 68% to 49%. A recent poll put Obama on 44% against a hypothetical Republican candidate on 42% in 2012. At 11%, just three percent behind the Republican favourite for the 2012 nomination, Mitt Romney, the Pitbull may yet have a run at the White House.

(Printed in London Student, vol 30 issue 10, 01/03/10)