Obamanomics Will Never Work

| December 7 2012
Christopher Cook

Barack Obama’s economic philosophy, if you can call it that, is based on a modern left-wing article of faith: government can spend your money better than you can. Glibness aside, they truly believe that if they extract one trillion dollars from the private economy (in other words, from you) and spend it their way, it will generate more economic activity than if you spend it your way.

This concept is problematic on its face.

First, government suffers from a knowledge problem. A small number of planners and experts in government, no matter how many ivy league degrees they have, simply cannot know what millions and millions of people know. They don’t know about your business. They don’t know about your customers. They cannot allocate resources, or fix prices and wages, or determine inventories, or know what works and what doesn’t nearly as well as the millions of people who are actually on the ground dealing with the economic realities of their businesses, their customers, their field, and their local area. All they can do is create cookie-cutter, one-size-fits-all solutions and then set about hammering square pegs into round holes.

Second, government suffers from a corruption problem. When government officials have billions of dollars of taxpayer money to spend, the likelihood that they will spend it in ways that benefit them, their friends, and their reelection efforts is far greater than that they will spend it efficiently and in a way that increases economic activity.

Third, government suffers from an efficiency problem. Government has a terrible time doing things economically. It has high overhead. It has to collect money, decide how to spend the money, route the money to various entities, and distribute it for spending. At each one of these turnings in the journey, money is lost. For very dollar that comes in, a certain amount is guaranteed to go to waste and inefficiency.

Finally, the whole scheme suffers from a problem of basic logic. The money has to come from somewhere, and the only place it can come from is the private economy. Imagine a close-up of a man taking buckets of water from the deep end of a pool an d pouring them in a wheelbarrow (government taking money from the private economy). When it’s full, he starts to wheel it alongside the pool, spilling some along the way (inefficiency). Then, what remains, he dumps back into the shallow end (stimulus). What are the odds that that will actually result in a net gain? The supporters of this practice will argue that they don’t have to pull money out of the pool, they can just borrow it. But borrowing is just a tax increase that hasn’t happened yet; this fact is known by the private economy and that future tax increase has ripples backward in time. Moreover, borrowing by government reduces the stock of available money to be loaned within the private economy. There’s no such thing as a free lunch; either way, the money is coming out of the private economy.

The idea for this kind of “stimulus” took off after the work of economist John Maynard Keynes gave politicians a “scientific” rationale to support what they most fervently dreamed of: the ability to take people’s and spend it however they want. Keynes (and, no doubt, his sycophantic modern-day acolyte Paul Krugman) would give you a long series of abstruse equations showing how stimulus money has a “multiplier” effect on the economy. So far, however, this multiplier has yet to manifest itself in the real world. It sounds all sciencey and stuff, but in reality, it’s it doesn’t hold up.

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