Why Obamanomics Failed And Why

It is pretty apparent now that most of this administration's economic policies have been failures. Official unemployment remains at about 10% while the "real" unemployment rate, when you count those Americans who have stopped looking for a job approaches 20%. We are almost 18 months into the administration's stimulus package and nothing has really changed. The stock market is adjusting downward, small businesses (the typical engines of employment growth cannot get reasonable loans to expand), the stimulus already spent was spent on bridges that did not need to be repaired and other trivial, non-economy expanding endeavors, and the housing market continues to be in the dumps with prices and housing starts going nowhere.

And worse of all, the political class has spent unheard of billions via deficit spending to greatly enlarge the nation's debt levels while solving no major economic problem. According to an article written by Jason E. Taylor and Richard K. Vedder in the May/June issue of the Cato Policy Report, "Stimulus By Spending Cuts: Lessons from 1946":

• The Obama administration projects a $1.6 TRILLION deficit in 2010.
• This is 11% of our GDP, almost four times larger than the 3% level which is generally accepted as a prudent annual debt level.
• This follows a Federal budget deficit of $1.4 TRILLION in 2009.
• The $3.0 TRILLION deficit from just the first two years of this administration piles more than $26,000 of debt responsibility onto each American household on average.
• The current deficit is equal to the size of the TOTAL Federal budget in 1997.
• The Conference Board's Present Situation Index of consumer confidence hit is lowest level in the past 27 years in February, 2010, over a year into the Obama administration's rule.

However, the primary emphasis of the article is not the many economic failures of the Obama administration but to describe what happened in 1946, immediately after the war. The economic community's experts were predicting very, very high unemployment as the Federal government wound down its war spending, millions and millions of soldiers returned to private live, and the government economic planning and control, as a result of the war, was allowed to lapse. Some of the dire economic predictions included:

• In August, 1945, the Federal Office of War Mobilization and Reconversions predicted that 8 million Americans would be unemployed which would be the equivalent of 12% unemployment.
• Business Week predicted that unemployment would peak at 9 million or 14%.
• An economist at the American Federation Of Labor forecasted that upwards of 20 million Americans would be unemployed or upwards of a 35% unemployment rate.
• Alvin Hansen, a leading Keynesian economist of the time (Keynesian economists believe that they are smart enough to manage the economy through economic modeling and government spending levels), argued that "government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls." He felt that removing these "government spending stimulus" funds, i.e. government spending for the war effort, would result in a new depression with high unemployment rates.

What really happened? Consider the historical facts:

• Overall Federal government spending went from $84 billion in 1945 to $30 billion in 1946, a reduction in government spending of almost 64%.
• Unemployment levels rose slightly above the wartime rate but stayed around 4.5% from 1945 through 1948, below the long term unemployment rate average of the past century.
• Civilian employment grew by millions of jobs between 1945 and 1947.
• Household consumption, business investment, and net exports grew significantly despite the drastic cut in government spending.
• By 1947, the government was running a budget surplus of close to 6% of GDP and was using the surplus to pay down its war debt.
• All of this economic good news happened despite the armed forces releasing about 10 million servicemen and women into the market.

Can you imagine what Obama and his Keynesian economic advisers would have done back then? They would have significantly increased spending and debt, which is in direct conflict which what was done and WHICH WORKED. They would have extended unemployment benefits for everyone indefinitely, muting desire to get out and find a job, they would have wasted money on wasteful public sector jobs, which are not really jobs since they disappear when the short term government stimulus spending is used up, they may have denied Americans their freedom if they followed Hansen's advice and made them stay in the armed forces "for the good of the country", they would have made the economy operate inefficiently by continuing to produce goods and products nobody wanted if they followed Hansen's advice to keep the munitions factories working, etc.

The article goes on to make a very solid case that what the political class and government interference did in Japan in the 1990s and during the Depression in the 1930s actually made the economic situations worse for a longer period of time. (We may come back to the article in a future post to explore their excellent analysis.) And that is exactly what Obama and his economic advisers and the political class are doing today, the exact opposite of what worked in 1946. It is not surprise then we have very high unemployment, obscene debt levels, and low confidence. Remember, that the best economists of today, including the best Keynesian economists, along with all members of the political class never saw the financial crisis coming until it happened. Thus, why should we continue to give and credence to the stimulus programs and wastes of money they propose when the biggest, largest, most humongous financial crisis happens without any forewarning?

That is why Step 1 in "Love My Country, Loather My Government" is the most critical step in the whole book. If we do not start doing a systematic and long term reduction in government spending and begin to drastically reduce the national debt levels, everything else including our freedoms and liberties will be a moot point. The government economic policies of 1946 showed what can happen when we trust the market and not the politicians.

Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.