Theory Behind ObanaNomics is a Proven Hoax

Rarely has there been a better opportunity to judge the validity of economic ideas than the last four, miserable years.  We have experienced in real time an audacious experiment, testing the theory of economist and progressive hero John Maynard Keynes that the government can buy prosperity by spending enormous amounts of borrowed money and the resulting debt won’t matter.

The Commerce Department published its quarterly GDP report, confirming again that history’s largest and most aggressive experiment has proven Keynesian economic theory to be a hoax.

GDP grew at an anemic 2.5% during the first quarter, an improvement over less than 1% in the previous quarter and a bit above average for the four years since the technical end of the recession in 2009.  The White House provided positive spin to be echoed by the President’s media fans:

Today’s report indicates that the economy posted its fifteenth straight quarter of positive growth, as real GDP (the total amount of goods and services produced in the country) grew at a 2.5 percent annual rate in the first quarter of this year…

Their hope is you will think fifteen quarters of growth is impressive.  The chart provides perspective, showing that compared to every previous post-recession recovery on record the past four years have been emphatically unimpressive.GDP-percentages-April-13

President Obama’s early political successes were several legislative initiatives that would add up to a staggering increase in government spending and debt.  His economic team of academics confidently predicted that his nearly trillion dollar “stimulus” program would cut the recession short, and pump up GDP.  The enthusiastic media hailed brilliant economics that would “put America back to work.”  The President himself promised that his stimulus would, in his words, “immediately jumpstart job creation and long term growth.”

So far, the “jumpstart” has been limited to an unsustainable rate of increase in government debt, about $4.2 billion every day.

The supposed justification for spending like drunken sailors is the old Keynesian theory of “counter-cyclical” government intervention to “increase aggregate demand” during recessionary periods.  Keynesian economic theory is especially attractive to politicians of the liberal/progressive persuasion because it provides the illusion of scholarly research and scientific validation for what they always want to do anyway, spend more and expand government.

But it turns out that a massive spending increase is not a proven economic strategy that has been used successfully in the past.  The last time it was tried in the US was in the early 1930s and it utterly failed to shorten the Great Depression. 

Obama’s counter cyclical spending surge is the largest ever attempted.  But the promised economic growth, prosperity and jobs have not materialized.  Instead, as the chart above shows this halting, faltering recovery from recession has significantly underperformed every previous post-recession economy since the Commerce Department began publishing quarterly GDP reports in 1947.

The Bottom Line

The Keynesian fallacy is based in part on the assumption that economic activity that is visible and readily quantifiable, especially government spending, is the only activity that matters.  What are not visible and quantifiable are the losses to the economy when government uses its taxing and borrowing power to divert resources from investments that would have been chosen by entrepreneurs, small businesses and corporations to government projects chosen by the political elite.  There is no way to identify or quantify the business start-ups and expansions that would have occurred if the trillions Obama borrowed for extra government spending had instead been invested by the private sector.

The current recovery is hobbled by more invisible, non-quantifiable barriers than diversion of  resources  from the private to the public sector.  In anticipation of yet to be clarified ObamaCare costs and regulations small businesses (fewer than fifty employees) are reluctant to expand even if they have the capital.  No government agency tracks and counts private decisions to not invest or expand.  But that doesn’t mean those decisions aren’t being made.  In fact the chart above proves they have been made for four years.

Keynesians continue to preach their gospel of borrowing and spending.  Astoundingly, many on the left, including progressive hero Paul Krugman, hold that the economy is weak because Obama’s record-shattering escalation in borrowing and spending wasn’t enough!  They simply ignore the experience of previous recessions when, without massive government intervention, the private sector economy recovered, creating jobs and spreading prosperity.

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