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How Economic Recovery Is Being Sabotaged By Bad Economic Policies
Raymond Richman, 8/29/2011

President’s economic advisors want to spend more trillions to stimulate the economy. They are joined by a large number of Keynesian economists. The huge federal budget deficits of 2009 and 2010 of over $1.5 trillion each, and the President’s $800 billion dollar economic stimulus plan of 2009 – 2011, as we pointed out in this site several times, was poorly designed to stimulate investment in the private sector, a sine qua non for a growing industrial economy. The trillions spent by the federal government must be considered an utter waste of precious resources. Very little of it was de gned to stimulate the demand for new housing or stimulate other private investment. The hundreds of billions spent on subsidizing activities intended to reduce carbon emissions was totally wasted.

Business reluctance to invest in housing is understandable with so many millions of houses awaiting foreclosure and so many mortgages in default. There is thus a surplus of houses, which will take years to work off. The government has made housing into an unattractive investment. As we have indicated on this site more than once, Democrats wanted to make it easy for unqualified households to purchase homes and Republicans supported the policy because home-owners are more likely to be conservative and vote Republican.

It is not hard to explain the reluctance of American businesses to invest in the U.S. while they continue to invest huge sums abroad. The answer is that they can produce their products much cheaper abroad and they can import the products they produce abroad free of duties. Both parties are committed to the false doctrine of  “free trade”.

Table 1.1.5. Gross Domestic Product                                                                                                                                                                                                                       

[Billions of dollars]                                                                                                                                                                                                                                     

2007

2010

 

 Line

2007

2010

              %

            %

 

1

Gross domestic product

14028.7

14526.5

100

100

 

2

Personal consumption expenditures

9772.3

10245.5

69.66

70.53

 

7

Gross private domestic investment

2295.2

1795.1

16.36

12.36

 

8

  Fixed investment

2266.1

1728.2

16.15

11.9

 

9

    Nonresidential

1637.5

1390.1

11.67

9.57

 

10

      Structures

524.9

374.4

3.74

2.58

 

11

      Equipment and software

1112.6

1015.7

7.93

6.99

 

12

    Residential

628.7

338.1

4.48

2.33

 

14

Net exports of goods and services

-713.1

-516.9

-5.08

-3.56

 

15

  Exports

1661.7

1839.8

11.85

12.67

 

18

  Imports

2374.8

2356.7

16.93

16.22

 
 

    Exports - Imports

-713.1

-516.9

-5.08

-3.56

 

21

Government Consumption and

2674.2

3002.8

19.06

20.67

 
 

investment expenditures

         
 

       Source: BEA

         
     

Why is government spending so ineffective? A glance at the Gross Domestic Product data of 2007, pre-recession, and 2010, after two years of recovery, helps explain a great deal of it. GDP as the table shows is the sum of expenditures on:

1) C -- Consumer goods produced in the U.S.  and

2) I -- investment goods and equipment produced and installed in the U.S.

3) X – M -- the sum of exports minus imports, and 

4) G -- the sum of government consumption and investment , goods bought or produced by government.

We note that weakness of consumption expenditures is not a cause of the weak economy. As a percent of GDP, it was higher in 2010 that in 2007, before the recession and it does not include the billions spent on imported consumer goods and service..

On the other hand, we note that Gross Private Fixed investment is a culprit. It accounted for 12.36 percent of GDP in 2010 compared with 16.36 percent of GDP in 2007, nearly 25% less. Non-residential investment and residential were both lower than in 2007. American businesses appear unwilling to invest in the U.S.

The trade deficits themselves make a negative impact on GDP as one can see from the foregoing table. Not shown in the table is the increase to $53 billion in June, 2011. Exports are extolled by candidates of both parties as a way to create jobs but they always fail to mention the negative impact of imports. Economists have brain-washed each succeeding generation of economics into believing free trade is beneficial even when the outcome is an onerous trade deficit. Free trade only exists in the U.S.A. as a result of constitutional prohibitions that prohibit the states from interfering with the movement of citizens, goods, and capital among the states. (The only exception is Obama’s National Labor Relations Board which is attempting to prevent Boeing from investing in a state other than Washington State.)

All of this we learn from the preceding table. The housing sector has not recovered from the burst of the housing bubble which stranded millions of construction workers who are still mostly unemployed. What can we do about the low demand for new housing? Stop preventing the banks from proceeding with foreclosures. Allow housing prices to fall to the levels that will make the existing housing attractive to new households.

 If it is so obvious from above table, how can one explain the Obama administration's failure to pursue sound economic growth policies? It has been misspending trillions of dollar on projects ear-marked by its most important constituency, environmental extremists. It has been wasting hundreds of billions of dollars subsidizing inefficient wind and solar energy plants, nearly all of which would not be undertaken without huge government subsidies and which wil go bankrupt without continuing subsidies. Their demands are founded on the notion of man-made global warming, which many scientists accept but which a large number reject. And this week, Nature magazine published the results of the CLOUD experiment at CERN in Switzerland, one of the leading, if not the leading, nuclear research facility in the world. The experiment showed how cosmic rays originating in the sun’s magnetic fields cause clouds to form. Clouds reflect the sun’s rays, preventing global warming, and the lack of clouds causes global warming.  

Instead of impeding the output of oil, and coal, and natural gas, The government should encourage the domestic production of fossil fuels to reduce our reliance on imports of petroleum. It should promote not deter drilling on public lands, offshore, and in the Arctic.

 It should cease the unreasonable regulations whose purpose, at least so far as the EPA is concerned, appears to be to destroy the coal industry and reduce carbon emissions, all based on an erroneous theory of man-made global warming.   

 We should stop subsidizing wind and solar electricity generating plants. None of them would be built without subsidies. And all of them cost utilities more than electricity from coal or natural gas. It is worth noting in the news (8-15-11) the announcement of the bankruptcy of Evergreen Solar which listed $485 million of debts, much of it owed to state and federal agencies which subsidized the building of its solar panel factories in Massachusetts and Michigan. Last year the company began producing solar panels in China.

The Obama administration has bought the anti-carbon-emissions agenda hook, line, and sinker. Millions of jobs are being lost as a result of unjustified regulations none of which would withstand benefit-cost analysis.

We have in these pages and in our book, Trading Away Our Future (Ideal Taxes Association, 2008) shown how easy it would be to regain full employment by dealing with the above issues. We’ll deal with each of these job-creating policies in future issues. Hopefully, we can convince some Democratic and Republican leaders to put ideology aside and promote a real recovery.

     

b

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Comment by lymangrigsby, 8/30/2011:

 

Thinking of taking classes online? Find an accredited degree program. Look for "High Speed Univ" and it will teach you how to find a suitable degree for you

 


Comment by Cary Henderson, 8/32/2011:

Please join our Facebook group FairTax 2012. We could use some input from economists. We are a group dedicated to promoting the FairTax.




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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]