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The empirical test of Obama’s economic policies

Yesterday, the president told us that conservative economic policies have never worked. Someone should ask him the same questions about the Keynesian theories that drive his big-spending policies. He — and many of his supporters — really do believe that we need economic stimuli in order to jump-start the economy.

Only problem is that such solutions rarely (if ever) lead to sustained economic growth. The New Deal delayed economic recovery in the 1930s. Japan suffered a “Lost Decade” in the 1990s when its government adopted policies similar to those Democrats would follow in 2009.

Instead of trusting to theories which sound good on paper, we need to turn to policies which have succeeded in practice.  In his book on the housing crisis, Thomas Sowell makes the case for a pragmatism that has eluded the incumbent president:

In housing markets, there have been an abundance of theories and of fervently believed doctrines, but not nearly such an abundance of willingness to subject these theories to the test of evidence.   Politicians would be gambling their entire careers on a roll of the dice, if they were to publicly subject the policies and programs that they have been advocating for years to empirical test of their consequences.

The economy grew after the economic policies similar to those Obama derided yesterday took effect in 1983.  And despite Obama’s success in enacting his policies in 2009, the recovery which followed the Bush-Pelosi-Reid downturn (the one that he “inherited”) has been the most anemic in generations.

Would be nice if the president acknowledged that empirical test of his policies rather than stick to the rhetorical appeal which served him so well in 2008.



  1. He’d be right if you ignored helping to create 8.1 million jobs, adding about 3% of GDP growth, shrinking the deficit etc. etc. etc. We were far better off before the liberal created CRA bag of crap exploded.

    Comment by TGC — December 7, 2011 @ 3:28 pm - December 7, 2011

  2. ObamaLand is all about ignoring reality & insisting Keynesian Economics is a good thing; ironically, Obama’s economy is in a crater while he talks such nonsense while he tries to pass the blame to President Bush.

    Comment by Sebastian Shaw — December 7, 2011 @ 3:57 pm - December 7, 2011

  3. [...] The empirical test of Obama’s economic policies [...]

    Pingback by Wednesday’s Words and Wit from the Presidential Campaign Trail: 12/7/11 « White House 2012 — December 7, 2011 @ 5:34 pm - December 7, 2011

  4. I’m not very confident about this, but what I’ve observed is that, while Keynesian economic policies attempt to mitigate the effects of the economic cycle, they only end up exacerbating them.

    Comment by Naamloos — December 7, 2011 @ 9:47 pm - December 7, 2011

  5. Naamloos, I’m very confident about it.

    Keynesian “stimulus” policies send a giant false signal across the economy, deceiving banks and entrepreneurs into thinking their business cases are stronger than they are in reality, so they’ll go ahead and invest in them. As they do so en masse, it seems like good times: the mass outbreak of excess investment drives up asset prices (making people feel richer) and employment. That’s the “boom”. Think of the housing bubble, or the dot-com boom.

    But bad investment (or “malinvestment”) isn’t real investment, it’s more like consumption. The Keynesian boom is, in reality, just a debt-fueled consumption binge. Eventually, it can’t advance any farther – at which point, people suddenly wake up to an economy of massive bad investments and debts to pay. That’s the “bust”. Think of the 2008 financial crisis, or the dot-com bomb.

    So, to the extent that Keynesian “stimulus” policies work at all, they create fake/exaggerated booms, followed by correspondingly greater and more painful busts. Yes – Keynesian policies greatly worsen (if not create) the business cycle.

    Like cancer surgery, the bust is something that must be faced up to and gotten over with – the quicker, the better. The best thing is to let it do its work, namely, the liquidation of the boom’s malinvestments. Bad debts should be written off. Bad businesses should be allowed to fail. Government should be cut, and its “stimulus” policies reversed, and its budget balanced. Then the economy is un-burdened, and a powerful recovery follows.

    That’s how Harding solved the Depression of 1920 and, to a lesser extent (i.e. the Democrats would not let him balance the budget), how Reagan solved the 1980-82 recession.

    But Bush would not let that happen after the dot-com bomb. He tried to end the 2001 recession with more government (increased domestic spending, and increased regulation) and 1% interest rates. Look what it got us: a recovery that seemed a bit anemic at the time, and… the housing bubble. Obama has made it worse. Even more than Bush, Obama would not allow a cleansing recession after the 2008 financial crisis (the housing bubble’s burst). He has increased domestic spending and regulation far more than Bush, run larger deficits and printed far more money to sustain 0% interest rates. Obama’s policies are “Bush times four”, resulting in an even more anemic recovery and far faster growth in debt, that is going to land us in far worse trouble to come.

    Comment by ILoveCapitalism — December 8, 2011 @ 1:23 am - December 8, 2011

  6. Kudos to ILC for a concise and accurate explanation of how dumping borrowed money in gigantic amounts into the economy only forestalls an inflated reckoning when the bills come due.

    But, Obama did not try pure Keynesian “stimulus” policies such as throwing billions at the employment lines. Obama’s “stimulus” money went in part to government employees in exchange for loyalty and in part to other political cronies who laundered an unknown amount of the money into political contributions that enriched the givers. Obama charged a commission in either contributions or fealty.

    Furthermore, much of the Keynesian “stimulus” Obama money was spent to prop up foreign banks that had gotten chronically sick from ingesting too much of the Freddie/Fannie toxic housing loans delivered to them via derivatives from Goldman Sachs and other toxic investment sharks.

    The point here is that Keynesian “stimulus” policies turns the economy even more dependent on needing to be well positioned to help steer the government process of picking winners and losers. Anyone who wants a piece of Keynesian “stimulus” money had better be on the inside of the check writing process rather than sitting on the curb with his hand out. Even if you are “shovel ready”, you had best be in a position to deliver votes to the giver.

    Obama has played the swinging door on the treasury and the FED like a pro. He has cleaned out the vaults and then stood by as the capos deliver the envelopes to the “organization.” And the useful idiots in the MSM have responded by reporting on Michelle’s noble effort to slim down America.

    Comment by Heliotrope — December 8, 2011 @ 9:51 am - December 8, 2011

  7. It’s too bad Cas isn’t here to say ridiculous things, in defense of a failed ideology (Keynesianism / Big Government).

    Comment by ILoveCapitalism — December 8, 2011 @ 11:18 am - December 8, 2011

  8. Yeah, Cas. It is getting harder and harder to pull the magic socialist bunny out of the British or EU hat. And even when the bunny does appear, it is all scrawny, fleabitten and covered with matted hair where there still is hair instead of patches of crusty yellow skin.

    They really do need to borrow and tax themselves back to prosperity as soon as possible. After all, they are in charge of showing us the way.

    Comment by Heliotrope — December 8, 2011 @ 12:07 pm - December 8, 2011

  9. Exactly, ILC and Heliotrope.

    The other pernicious thing about Keynesian spending is that the point of it is to spend the money; value is irrelevant. It is actually BETTER in the Keynesian mindset for the government to spend 16 dollars per muffin than to spend 16 cents; it does more for GDP and for the CBO equations that hilariously count only money spent and say nothing about actual value done.

    But as anyone can tell you, spending $16 on a muffin is economically inefficient when there are perfectly-acceptable muffins available for $0.16. You have essentially blown $15.84 that you could have spent on other things to buy an overpriced muffin. Furthermore, from a macroeconomic sense, you have set in motion a perverse incentive; why now would anyone make croissants that only sell for $2.50 when you could sell muffins to the government for $16, and why would anyone devote resources to producing anything other than muffins?

    Compounding the problem: the government is not wasting its money. It is wasting the money on muffins that it claims to be collecting for roads, schools, etc. from you.

    I silenced a troll very effectively on Twitter the other day who was ranting about raising taxes on the rich by pointing out that Nancy Pelosi’s top-shelf liquor and chocolate-covered strawberries did absolutely nothing to help build roads, fund schools, or pay for firefighters and police officers. I then asked her why my taxes needed to be increased to subsidize Pelosi’s chocolates and alcohol.

    She shut up in a hurry.

    And that is what people need to do. The next time a Cas, a Levi, or a Pomposity shows up ranting about needing more taxes to pay for roads, schools, etc., ask them to explain how Michelle Obama’s separate jet, Pelosi’s alcohol and chocolate, or Rangel’s four rent-controlled apartments support any of those goals.

    What you will find very quickly is that the leftists fall into one of two categories: those who are brainwashed partisans incapable of thinking beyond what the Obama Party tells them to think like Cas, Rob Tisinai, and Evan Hurst, or those like Pomposity and Levi who are demanding more welfare structures so that they can encapsulate themselves in them and live off the taxpayer teat without ever again having to lift a finger to work.

    Cas, Rob Tisinai, and Evan Hurst see nothing wrong with Charles Rangel having four rent-controlled apartments because Rangel told them it was OK, and only a racist Republican hatemonger would disagree with Rangel. Pomposity and Levi want to have multiple rent-controlled apartments themselves, so they support Rangel doing it, because they know Rangel will then reciprocate.

    Comment by North Dallas Thirty — December 8, 2011 @ 12:13 pm - December 8, 2011

  10. Dan, can you clarify this? “Japan suffered a “Lost Decade” in the 1990s when its government adopted policies similar to those Democrats would follow in 2009.”

    I read the AEI link you referenced. It says that Japan should have cut taxes rather than raising them, and that Japan’s situation improved when it implemented a large fiscal stimulus. It even makes a case for permitting temporarily putting up with high debt and deficit. This, of course, is pure Keynesianism.

    In essence, the AEI link suggests we will benefit from:
    ** Quantitative easing (which we’ve implemented)
    ** Cutting taxes (which Obama has done)
    ** Repeated major fiscal stimulus (which Obama supported)

    The author lists these as policies that HELPED (or could have helped) Japan with its “Lost Decade.” In what way does the article suggest “Japan suffered a “Lost Decade” in the 1990s when its government adopted policies similar to those Democrats would follow in 2009″?

    [From the link:

    Japan's large fiscal stimulus packages, which became legendary during the 1990s, were ineffective for several reasons. First of all, the packages were not as large as advertised, often inflated by double counting as stimulus government programs that were already slated to be undertaken. More importantly, the packages were poorly directed--largely toward unproductive public works projects and credits to small businesses that were no longer economically viable. It would have been far better to have reduced tax rates and allowed households to employ the increase in disposable incomes as they saw fit.

    And no, Obama did not reduce tax rates. Instead, he just offered what can best described by a one-time tax rebate. Maybe the stimuli weren't as large as advertised, but they were stimuli nonetheless.

    And let's remember the success of the Clinton "stimulus"--stimulating growth even after Senate Republicans had filibustered it--Dan]

    Comment by Rob Tisinai — December 8, 2011 @ 1:16 pm - December 8, 2011

  11. the AEI link you referenced… is pure Keynesianism.

    The Makin cite is indeed weak, because it makes bad points (conclusions unsupported or even opposed by the many facts it cites). As you point out, Makin suggested fiscal and monetary “stimulus” to deal with the 2008 crisis, which we now see was ineffective at best in 2008 and likely harmful, just as it was even more so when Obama boosted it in 2009. Makin makes clear that he is a Keynesian, when he cites Keynes approvingly.

    As to Dan’s point however, I think he made it clear:

    Japan suffered a “Lost Decade” in the 1990s when its government adopted policies similar to those Democrats would follow in 2009.

    Makin spells out what those policies were:

    As the collapse of equity prices intensified and land prices began to fall, the Bank of Japan reversed course and cut its discount rate rapidly by 275 basis points in the year following June 1991. Subsequent additional cuts of 150 basis points in 1993 brought the discount rate down to 1.75 percent by September 1993. Simultaneously, Japan pursued three major fiscal stimulus packages totaling 6 percent of GDP

    In other words: a LOT of fiscal and monetary “stimulus”. Makin errs, in his Keynesian conclusion/belief that it didn’t work only because Japan should have done it bigger and/or differently via tax cuts. Dan is closer to the correct conclusion to draw from Makin’s facts, namely that Japan’s “stimulus” didn’t work because it can’t work: it’s the wrong course.

    There is a lot of confusion, even in Republican circles, about why the Reagan tax cuts worked. Reagan cut taxes; simultaneously, a Democrat Congress reneged on its promises to Reagan that they would cut domestic spending; resulting in larger net deficits. Reagan’s tax cuts worked by letting people keep more of what they earn (giving them more reason to work, save and invest), and by reducing economic distortions (e.g. from tax shelters). The benefits overcame, for that time, the economic distortion/burden from the larger deficits and the ongoing (if reduced) growth in government. “Compassionate”, Big Government Republicans then drew the wrong conclusion that we can have our cake and eat it too: that we can cut taxes, while increasing domestic spending with new entitlements. So we got the Bush policy set, that I excorciated above as having contributed to the housing bubble and to the (even worse) Obama policy set.

    Makin is probably right, that Japan’s “stimulus” would have been better if they had done it as tax cuts. Still, the best thing – both for the U.S. economy and Japan’s – would have been to cut taxes and spending together. Just reduce government’s role in the economy – get it the hell out of the way – and recovery will be that much stronger. Spending and deficits are *not* the answer.

    Makin, though a confused Keynesian, managed to get a couple more things right:

    The banking system must move promptly (or be moved promptly) to reveal the full extent of its exposure to the depreciating asset–U.S. real estate, in this case. If market-clearing prices for financial assets tied to real estate entail substantial losses for financial institutions, those losses must be taken by shareholders…

    …avoid the temptation to raise taxes… Revenue-neutral reductions in marginal tax rates–more things taxed at lower rates–is the best policy alternative…

    Further subsidies to already oversubsidized sectors of the American economy–like real estate–would be unwise. The extensive subsidies for the real estate sector constitute part of the problem we are now facing, not a desirable part of the solution…


    Comment by ILoveCapitalism — December 8, 2011 @ 2:20 pm - December 8, 2011

  12. Thanks ILC. An interesting perspective.

    Comment by Rob Tisinai — December 8, 2011 @ 2:24 pm - December 8, 2011

  13. I guess I would say in conclusion that there are 3 basic policy sets:

    - Left-wing Keynesianism: massive bailouts and growth in government, paid for with a combination of tax hikes and borrowing (i.e. deficits).
    - Right-wing Keynesianism: targeted bailouts and growth in government, plus supply-side tax cuts, paid for with borrowing (i.e. deficits). Maybe some deregulation.
    - Free-market / Austrian school: no bailouts and no growth in government, in fact cut government spending and taxes and regulation all together.

    I’ve listed them in order of rising effectiveness. Left-wing Keynesianism makes the economy much worse. Right-wing Keynesianism may make it better depending on circumstances, and if you ignore the long-run confusion and debt problems. Austrianism, though painful, works best.

    Comment by ILoveCapitalism — December 8, 2011 @ 2:34 pm - December 8, 2011

  14. Thanks, ILC. Kind of harried right now and did not have time to give Rob the response his question deserved.

    Comment by B. Daniel Blatt — December 8, 2011 @ 2:58 pm - December 8, 2011

  15. Here are a couple charts showing what Japan got for its “stimulus”:

    Let’s see. As of 2010 (things are worse now in 2011):
    - Around 45% of what the Japanese government spends, it must borrow.
    - Around 45% of what the Japanese government collects in revenue, it sends straight to debt service. And that’s with near-zero interest rates keeping the costs down.

    After two decades of near-zero rates, Japan’s famous high savings rate has plummetted… so they can’t finance their deficits/debts themselves, for much longer. Because of two decades of Keynesian “stimulus” (racking up massive debt) plus some demographic problems, Japan is unbelievably screwed.

    Comment by ILoveCapitalism — December 8, 2011 @ 4:58 pm - December 8, 2011

  16. I’ve been thinking more about why/how Keynesianism worsens the business cycle. Since Cas isn’t here to make ridiculous claims in defense of her failed ideology, and I was educated in Keynesianism, I can step in. The typical neo-Keynesian would say:

    Oh but ILC, Keynesianism is meant to mitigate the business cycle. Government should only deficit-spend on the downswing. On the upswing, it should run a surplus. It’s Boooosh’s fault that he didn’t.

    So many things wrong with that, it’s hard to know where to start.

    First, the business cycle is apparent only in retrospect. (Especially with people as dumb as Keynesian economists.) At the time in 2005-6, the left-wing Keynesians were screaming at Booosh, that 4-5% unemployment was still too high because only “McJobs” were being created and we need more government spending because of poor kids etc. The Democratic Congress (newly elected at the end of 2006) proceeded promptly to jack up domestic spending, even more than Bush had already.

    In other words, they weren’t screaming that we were at a business cycle peak and it was time to restrain spending and run a surplus. The left-wing ones never do. No matter where we are in the business cycle, more government spending and deficits is always their answer. If a government ever does run a surplus at a cycle peak, it’s only because conservatives took it over and forced it to (e.g. the Republican congresses of the 1990s, who constrained Clinton).

    Second, do a thought experiment and suppose that Keynesianism worked: that it mitigated the business cycle. Then the cycle would be all the harder to recognize in real time, and the policy that is “correct” for the cycle phase would be all the harder to enact. Keynesianism is kinda self-contradicting, that way. It gives advice that humans can’t carry out and aren’t really expected to, and the less so, the more successful the advice is.

    Third, the fact that the K. theory is based on deception. The theory is that people aren’t spending enough; so entrepreneurs aren’t seeing enough “demand” and banks aren’t seeing enough strong business cases to lend to; so government must spend, borrow and print enough money to *make* the entrepreneurs and banks think the economy is somehow better. Then they will join in and, the theory says, the economy will really be better. In other words, government is so wonderfully powerful that if it sets up Potemkin villages staffed by the leaf-raking underclass, people will be drawn to inhabit the villages and make them real.

    That is deceptive, manipulative, and unreal. Unreality doesn’t work. The economy can’t be made better, in reality, by sending masses of banks and entrepreneurs a *false* positive signal about economic conditions. All it can do is set off a crazy-phony type of boom, to be followed by a painful bust.

    And that gets to the biggest problem with Keynesianism: that it is immoral. It saddles the prudent and the productive with massive debt (or with inflation, i.e. depreciated money) for the sake of a temporary boom – and the pockets of the ever-growing army of government bureaucrats. It’s backdoor socialism, immoral in principle, as well as in its destructive practical effects.

    Comment by ILoveCapitalism — December 9, 2011 @ 1:53 pm - December 9, 2011

  17. [...] – as long as I’m linking to Gay Patriot, here’s a good one regarding Obama’s recent speech in Kansas and the idea that free market capitalism has [...]

    Pingback by Your (semi-) Daily Dose of Reality v.12.10.11 « Falcon’s Eyrie — December 10, 2011 @ 10:16 am - December 10, 2011

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