Results Are In: Obama’s Keynesian Gamble Failed
Government economists issued their GDP report for the fourth quarter of 2010 on Friday. The report confirmed again that the largest and most aggressive test of Keynesian stimulus theory ever tried has failed.
President Obama and his advisers promised that a massive Keynesian “stimulus” in the form of Trillions in deficit spending would result in prosperity and jobs. Accordingly, they boldly gambled with America’s future. In 24 months since the beginning of the Obama Administration government debt has grown by $3.4 trillion, a whopping 32%. But the economy remains weak and unemployment remains at record highs.
If Keynesian stimulus had worked as progressives insisted it would we would be enjoying prosperity with full employment and rising wages. Instead this recovery from recession has significantly underperformed compared to previous recoveries, especially the Reagan recovery of the 1980s when government’s strategy was to lower taxes, deregulate and allow liberty to work.
GDP growth in the fourth quarter of 2010 was 3.2%, up slightly from the two previous quarters. This is certainly good news, but not nearly good enough.
The chart compares current, lackluster, GDP growth with the first six quarters of the nine years growth, prosperity and job creation that began after President Reagan’s 1982 tax cuts.
Presidents Reagan and Obama each inherited recessions that were similar in their length and severity. By one measure, unemployment rate, Reagan inherited a worse crisis than Obama.
But the similarity ends with policy responses and the resulting recovery
- The centerpiece of Obamanomics is the $814 billion “stimulus” diverting resources from private sector spending and investment to additional government spending, over and above the already bloated federal budget. This is textbook Keynesian doctrine that has utterly failed to do what the President promised, “jumpstart job creation.” President Reagan had no such program.
- Presidents Bush and Obama implemented a massive bailout to save Wall Street firms, and unionized car companies from the consequences of their own bad judgments. Reagan allowed the market and the bankruptcy process to clear away business failures quickly.
- Reagan pulled back government intervention and regulation, while Obama has dramatically expanded government interference in the private sector.
- Reagan worked with Democrats in Congress to enact broad based, sweeping tax cuts, leaving more wealth in the hands of the entrepreneurs who created it, to be reinvested in business expansion and job creation. For two years Obama promised large tax increases on investors and on the most successful small businesses to begin this month. At the last possible moment he backed away from that promise and signed legislation extending the current tax rates, but for only two years.
The Bottom Line
As the chart shows, quarterly GDP growth is has been a deep disappointment under the Obama-Keynesian approach. There is no reason to believe that the Obama agenda of massive deficit spending, threatening tax increases, government take-over of health care and subsidies to blue-sky energy schemes will ever result in a return to growth and prosperity.
The mission of the new Republican majority in the House of Representatives is clear. They must put an immediate end to the Obama/Keynesian experiment.
Even worse, GDP growth was fueled largely by inventory growth. Read: replenishment. That is not sustainable. It reaches equilibrium. Final retail sales grew an anemic .9%. Ugh.
Further, spending was supported by a reduction in saving, even while the debt of personal balance sheets remain above historical norms……….and not even taking into consideration baby boomer retirement considerations. Yech.
For all the world this seems a Christmas blow off. Only time will tell, but I’m rather pessimistic. And I don’t see official unemploment – even with doctored numbers – under 9% in the foreseeable future.
Where is 1000 Flowers Wilting?
Drew
Can you please explain what a Christmas blow off is? Also don’t businesses have to replenish inventory?
This graph is bulls**t. Reagan’s recession was nothing like this. It was a mild, temporary downturn. Reagan didn’t start in the middle of the worst financial crisis in a century, at the end of 8 years of hollowing out regulation
If Reagan were president today we’d be in a worse depression than 1929. Obama’s stimulus and other measures were designed to offset the horrendous crisis that was already under way when he was sworn in.
This belief that we can just let corporations run everything without any governmental oversight is what caused the financial crisis.
Rebecca -
Slang for above trend spending during the holidays which will result in less spending later on. Another way to say it in slang: binge spending. If you look at incomes and the drawdown in the savings rate (plus tax increases) American consumers will have less to spend in the future months as they repay their Christmas credit card debt, get their new property tax bills etc. Its just an equilibrium concept.
Speaking of which: yes, inventories need to be replenished. But if the rate of inventory increases isabove normal due to coming off of a position of depleted stocks, or is above sustainable long term trend, that replenishment must slow down………they must return to equilibrium. That’s why the final sales number is important. That tells you what the real consumption activity is.
In summary, the GDP number was artificially inflated. The best econimic stat I can see right now is the stock market, which makes people feel thay can spend more and save less. However, many believe that housing prices have a nother 15% leg downward, which will be an offsetting effect.
The worst econ ststs I can see right now are rising energy and food prices, which are drawing more spending power to them rather than other goods and servicess.
I hope that helps.
I see TFWilting is delusional as always. TF, the single most important regulatory issue was the repeal of Glass-Steagal……….which occurred under a certain WJ Clinton.
And by the way, when are you guys going to stop using the excuse of the past, 2025? If the man isn’t up to the job – and he clearly isn’t – then step aside and put someone competant in. Its called the President of the United States, not the President of Excuse Making.
i wish it Results Are In: Obamas Keynesian Gamble Failed | Liberty Works | at present im your rss reader
Anyone who really wants to understand the Big Picture on employment, and why BoomerJeff is correct need only go here:
http://research.stlouisfed.org/fred2/series/EMRATIO
And why today’s unemployment report is bogus go here:
http://www.zerohedge.com/article/labor-force-participations-plunges-fresh-26-year-low
Here:
http://www.zerohedge.com/article/persons-not-labor-force-who-want-job-now-jumps-all-time-record
And here:
http://www.zerohedge.com/article/underemployment-divergence-seasonally-adjusted-u-6-drops-two-year-low-non-seasonally-adjuste