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The Failure of Obama's, Prof.. Summers', and Prof. Bernanke's Keynesian Policies
Raymond Richman, 5/3/2014

The report that the GDP rose at an annual rate of only one-tenth of one percent (0.1%!) during the first quarter of 2014 was a shock to all economists notwithstanding that it was triggered in part by the horrible winter of 2013-14. Although the low growth rate may have been the result of an unusual combination of factors and is unlikely to be repeated, the slow rate of recovery during the first five years of the Obama administration is surprising given the enormous debt-financed expenditures of the federal government and the billions of dollars injected into the economy by the Fed’s quantitative easing policy. Keynesian economists were in charge, including Profs. Summers, Bernanke, Romer and many others. It is not too early to declare Keynesianism dead. Keynes himself would long ago have agreed with that conclusion given the swift recovery from the post World War II recession which was led by a booming private sector.

Given that a recovery from the great recession ought to have been given the highest priority, the federal government wasted enormous resources in the 2009 $830 billion American Recovery and Reconstruction Act. Almost all of the expenditures were transfer payments, and had as little effect as the Bush and Obama direct rebates to taxpayers did in 2008 and early 2009. As the administration reported, “the stimulus was fairly well divided among different types of relief. The biggest portion was public investment  -- those included the "shovel-ready" infrastructure projects and longer-term investments in green energy, broadband and the like. More than a quarter of the stimulus went to tax cuts, one-fifth went to helping states plug their own huge fiscal holes, and 15 percent went to bolster the safety net.” As the President himself later reported, there were very  few “shovel-ready” projects. And transfer payments create no new jobs.

In spite of the huge subsidies to wind and solar plants, utilities are obligated by law to buy the output of these inefficient wind and solar plants at prices substantially above the cost of producing electricity by nuclear, coal, and natural gas plants.

The Obama administration pursued during the entire five-year period policies which actually discouraged recovery. They include

  1. increased business regulation,
  2. anti-fossil fuel policies in the name of climate change,
  3. the closing of cost efficient electric generating plants,
  4. forcing unemployment in coal mines,
  5. raising the cost of motor vehicles by countless regulations,
  6. subsidies to producers and buyers of hybrid and electric vehicles at the cost to future taxpayers,
  7. subsidies to homeowners and businesses that invested in energy-saving improvements, etc., etc.
  8. pursued a policy of free trade when our principal trading partners, including China, Korea, and others were imposing all sorts of barriers to imports from the US, subsidizing exports to us, and manipulating their foreign exchange rates. Even a free-trader like Prof. Paul Krugman, a Nobel prizewinner, advocated a 25% tariff on imports from China in retaliation.
  9. raising the minimum wage which amount to a tax on unemployed teen-agers, blacks, Latins, and other disadvantaged groups with very high unemployment rates and their potential employers.

Whatever merit these measures had, they did little to create employment and indeed they cost American workers millions of jobs.

So what brought the recession to an end and stemmed the declining economy and what is causing the recovery?

First, under Bush, the banking system was stabilized by Treasury Secretary Paulson’s rescue of the banks and other financial entities by a billion dollar support for dubious financial assets like sub-prime mortgages.

Second, the private sector, in spite of government obstacles like its addiction to environmental foolishness, has not rolled over and played dead. Texas and some other states, mostly Republican-led” have pro-private sector policies that attract industry.

But most important is the shale-oil and natural gas boom which has driven unemployment down in states ranging from N. Dakota and Pennsylvania to Texas and is helping to control the growth of the US trade deficits.  

What has been feeding the recovery is the innovation and productivity of the private sector. The only thing holding back a full recovery is the negative economic effects of the Obama government’s policies.

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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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