Obamanomics

(LOS ANGELES) - President Obama’s approach to economic recovery has now been defined by the Senate’s passage of a $780 billion economic recovery-stimulus package (albeit with $110 billion slashed from the House version), called the American Recovery and Reinvestment Act 2009.

The Act is a paradigm shift from the conservative-era, supply-side approach to tax, regulation and spending offered by Presidents Reagan, Bush Sr and Bush Jr. Obama argues that supply-side policies are at the very root of our current economic crisis.

The Senate’s approval of a three-quarter trillion-dollar government social and infrastructure spending package has ushered in a new era of economic thinking, namely, Obama-nomics. In other words, using governmental deficit spending as a cure for the current economic recession (and threatened depression).

I, the author of this column, must admit to not being an economist. Nevertheless, it is indisputable that Obama’s economic recovery proposals are based firmly upon those of the celebrated British economist John Maynard Keynes, author of The General Theory of Employment, Interest and Money (1936).

Keynes offered his economic theory when the world, including the United States, was in the seventh year of the Great Depression. Keynes took an alternative stance to that of the neo-classical economist theorists of his day, who believed in the self-correcting properties of the marketplace, whereby recovery would take place in the absence of intervention, and in its own good time.

We must remember that 1930s economists’ views about private, free-market capitalism were not as optimistic as those of the experts who control much of today’s popular thinking. When Keynes was writing, critics of the free-market economy maintained that nothing could be done to counter-act economic depressions.

Keynes theory offered the hope that fiscal policy, similar to Obama’s recovery plans, would control business cycle down-turns and the resulting unemployment.

In layman’s terms, the objective of Keynesian policy is to achieve full employment. This is to be done by increasing cumulative effective demand, through what Keynes described as “inducement to invest” (rate of investment). Commentators maintain that Keynes’ solution to economic depression was to achieve full-employment though some combination of two approaches, namely, low interest rates and government investment in infrastructure. Thereby, investment stimulus increases income, which results in more spending, production and investment, and triggers a cascade of events whose total increase in economic activity is a multiple of the original investment.

Whilst Republicans and Democrats currently agree on the immediare cause of our current economic ills, they differ in their explanations for it. Republicans blame ‘liberal’, big-government-subsidized homeowner-mortgage programs (‘sub-prime’ loans), which have enabled unsuitable consumers to become homeowners with mortgages they can no longer afford to pay.

The consequent widespread home foreclosures have damaged the lending banks’ balance sheets, creating a depressive ripple effect throughout the entire economy. By contrast, Democrats place the blame on Republican-era banking deregulation, which incentivized banks to promote these risky, sub-prime loans, luring unsuspecting homebuyers, who now can no longer afford their own high mortgage payments.

Regardless of the explanation, however, the Obama Administration is attempting to convince Congress, as a part of the recovery-stimulus package, to approve nearly $300 billion in infrastructure spending, broadly defined. The Administration decided to address the banking industry’s mortgage-foreclosure problem in expected new rules governing the remaining allocation of $350 Billion in Congressionally approved Troubled Asset Relief Program (TARP) bank bail-out funds.

Unfortunately, a very recent report by the American Society of Civil Engineers estimates that nearly $2.2 trillion is required to bring US roads, levees, hazardous waste, schools, inland waterways, dams, transit, aviation, wastewater, drinking water and energy, all of which the report assigns a near-failing “D” grade, up to acceptable levels.

Hence both the Obama Administration and Congress will have to figure out how to finance the remaining balance-gap necessary to repair ailing infrastructure. This will require additional financial initiatives, which will arguably, in their turn, stimulate further job creation.

The high price-tag of infrastructure development should encourage innovative financing mechanisms that will serve as a catalyst to encourage substantial investment from non-governmental capital pools (public and private employee pension funds, for example) in infrastructure. For example, the Federal Government could subsidize interest rates to make state and local infrastructure bonds competitive with corporate bonds.

Ironically, Milton Freedman’s famous adage in Time magazine that ‘we are all Keynesians now’ was made in response to tax cuts, and not infrastructure investment, enacted under former President Lyndon Johnson in 1965. Similarly, President Obama, in his effort to win a few Republican votes for his recovery-stimulus package, also uses tax cutting incentives, which in fact account for nearly 40% of the monies provided for by the proposed Recovery Act.

Obama-nomics is not based on a trendy, supply-side, tax-cutting flavor-of-the-month. Instead, President Obama has decided to base his economic recovery policies on the seminal theories of Britain’s John Maynard Keynes. Let us hope that President Obama’s plan to increase investment in our crumbling infrastructure works to achieve the economic recovery and resulting new jobs that his policies are intended to produce.

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Jim February 14, 2009 11:05 am (Pacific time)

Dr. Barth et al: below is a comprehensive source link, especially good for lay people as well as business/academic professionals. It has other resource links and a clear no-nonsense graph (be sure to click on the graph to enlarge it!) that provides a good visual longitudinal analysis of the commercial and private real estate market over several decades. The author of the article also makes it clear from what side of the ideological coin he comes from, which is not a conservative one. Hopefully all readers and posters can take a few minutes to review the graph and brief narrative to gain insight on what happens when we have too much govt. intervention, once again, this is empirical proof. Of course we can now also measure the "ripple effect" that govt. intervention currently is having on commercial real estate, which should allow for some excellent latitudinal evidence: "Every once in a while, though, we get lucky. The differences between residential and commercial real estate provide the means to test the hypothesis that government intervention or the lack thereof caused the housing bubble and subsequent collapse of the financial system. We can compare the two markets because the same institutions ultimately make residential and commercial loans. They make loans in the same communities and regions. Changes in the economy affect both types of real estate at the same time and to the same rough degree. The only major difference between the two markets lies in the degree of government intervention." http://chicagoboyz.net/archives/6775.html

Henry Ruark February 13, 2009 12:35 pm (Pacific time)

Jim: You speak of your "business experience", yet we know not which business, at what level, what your role was, or how it means anything in this issue. FYI, I worked one summer as stock clerk at Woolworth's. Does that qualify me with "business experience "? I doubt it... Also now at 92 have solid experience in about ten other enterprises, in several areas from media production (250 clients, last billing $36,000) to freelance writing (DON'T try it !) and corporate management training firm (very tough,dollarwise, in Chicago); any of those qualify here ? I doubt they compare with Prof. Barth's experience --both practical and academic-- and learnings via in touch with many others in field worldwide, since he writes and publishes therein. SO no way "putting you down" (thus no "insult !), simply rational, reasonable question of your question to recognized authority proven and open- market-tested (via sale of writings, editors and purchasers as hard judges since they spent dollars) on very flimsy ground. Your "opinion" is personal feeling, undocumented,unproven and distorting of dialog here via its intention to downplay "informed opinion" via your own simple personal feeling. Hope that clarifies a bit for many others who do not seem to see "the difference" which absolutely exists and is root cause of much of public misunderstandings on issues. FYI heavy psychological (and some psychotic) research is on tap here for any points you may care to question. See Op Ed upcoming, too.

Henry Ruark February 13, 2009 12:02 pm (Pacific time)

Jim: "Arrogance" defined: Grad student + business experience vs famed writer published worldwide. That equates personal feeling with practical informed opinion based on years of study in specialty, skills in teaching it, and further skill in writing about it for all to understand clearly --when feeling is held in bay and rational reason is allowed its due sway.

Anonymous February 13, 2009 10:54 am (Pacific time)

Jim: "Everyone is entitled to his own opinion; but not his own facts." --Daniel Patrick Moynihan You can hardly argue with famed conservative Moynihan, and you present no facts, only your unsupported opinion vs that of qualified, expert, experienced, world-known writer who laid it on the line. That demands a certain kind of arrogance all too familiar here.

Jim February 13, 2009 9:23 am (Pacific time)

Dr. Barth thank you for your opinion. From my experience both as a form grad student and a businessman, there are always conflicting opinions on most any topic, especially in the social sciences. I do say that comparing the commercial real estate market with the private home market provides empirical proof that increasing government intervention has harmed our capitalist market system. Subsequently the failing private home market is negatively impacting commercial real estate, but in this case we know what caused it. That old arguement , what comes first, the chicken or the egg? Well, don't forget the "rooster."

Henry Ruark February 13, 2009 7:44 am (Pacific time)

To all: We owe Dr. Barth our thanks and gratitude for making sure the real import of his article remains clear to all concerned by his unambiguous last sentence. That's where we started; that is where we must end, if we pay any attention to historic fact.

William K. Barth February 12, 2009 11:58 pm (Pacific time)

Thank you for your interesting comments and query. My article is not meant to be a piece on comparative political-economy. Rather, I merely intend to distinguish the economic theory upon which Pres Obama's stimulus package was based, from that of prior administrations. Keynes theory has become part of accepted economics doctrine since its introduction in the thirties. His theories provided a basis for many of policies employed to end the Great Depression. Obama, has decided to re-employ them once again. The supply-side approach of recent years, appears to have resulted in dramatic reports of job layoffs and economic downturn.

Jim February 12, 2009 2:05 pm (Pacific time)

Henry I appreciate your views for they allow me to re-check my own thinking and viewpoints about various topics. Regarding the downturn of private housing where we certainly have had too much government intervention in my opinion, why do you think commercial real estate did not have to deal with such a similar downturn? As you know there has been far less government intervention in commercial real estate, so not second guessing different economic theories we have irrefutable empirical evidence that government has been the boogie man in the downturn. Please note that real estate sales are currently up, and retail sales are up, which in turn the unemployment rate was reported today as not increasing. For people not familiar with commercial real estate, it is every type of property not classified as private homes, so to speak. Duplexes and some multiple housing units may be included in private housing, but very minimal. As per the CBO we may not need this stimulus bill. I wonder why we the public have not had access to the bills content so we can provide feedback to congress? Where's the transparency?

Henry Ruark February 12, 2009 8:55 am (Pacific time)

Chris, Jim: Yrs simply reflects oldstyle and lack of information demanded now for 21st Century operations and understandings. All economic bets have now changed with globalization and other inescapable trends, of which you seem unaware. Re Hazlitt, found long ago, and offset by Reich, Klein, Korten, et al --some 50 books on shelf here. ID to Editor for full exchange list; and yes, have read annotated and still review every one as needed. Unfortunate political emphasis unavoidable via ongoing noise machine operations is in large part responsible for erroneous concepts found here and still far too universal. For ref. to documentation re noise machine, same pattern: ID to Editor. Until and unless you will see out and study same basic literature, we doomed to operate in the blind re these points. Cannot do more than offer proper illumination...if you feel so strongly, why NOT do rebuttal for Editor Tim, in same 1000-wd. format ?? We welcome honest, open, documented nonpartisan sources democratic denials as well as allasame Comments... !!

Henry Ruark February 11, 2009 7:26 pm (Pacific time)

"Anon": Yrs re non-working Keynesianism mentioning Japan denied in detail in NATION 2/23/09, review of Krugman book Return of Depression Economics, five full detailed mag/pages. Dunno if you can follow without tutor, but you should try to fill in huge holes in your information.

Jim February 11, 2009 6:17 pm (Pacific time)

So Henry, what you're saying is that there is no current successful keynesian economic model to point to, right? Government spending eventually means higher taxes or more printed money, which means both higher taxes and possibly hyper-inflation. Government can create jobs in the short term, private enterprise does so in the long term. It is the latter that creates the revenue so as to create government, who is suppose to work for us, not the other way in which is a wet dream for the radicals.

ChrisJones February 11, 2009 5:47 pm (Pacific time)

If you want a crash course on real economics read Hazlitt's Economics in One Lesson.

Henry Ruark February 11, 2009 4:20 pm (Pacific time)

To all: Simple short-course in sensible applied economics is ready for YOUR examination --in NATION 2/23/09. See CRASH LANDINGS, review of Krugman's famed early book (1999)now updated in new edition: The Return of Depression Economics. The review runs five detailed pages; it puts to rest once and for all what Krugman has proven over past decade, every day, in his earlier edition and then in New York TIMES column. Read (and possibly weep !) if you wish to understand reality of worldwide Depression now well overdue but arriving...

Henry Ruark February 11, 2009 3:19 pm (Pacific time)

"Anon": Do NOT owe you even this short-answer until you ID self to Editor for open, honest, continuing dialog. BUT will state here, ready for proof by performance with anyone so doing, have at least 50 top references, quotes, citations, full documentation including major articles, some books, and other media materials proving up every point I have made. That's collection assembled over years, starting soon after FDR, carring through War II with its proofs now world recognized by such as Samuelson, in 10 or so direct statements in hia MACROECONOMICS, leading text used widely. Have you ever read any version of it ? Do you have any professional or even amateur training from which to draw your erroreous neocon-essential statement ? To cite title of an Op Ed, You Lie In Your Teeth, Sir !"

Anonymous February 11, 2009 10:40 am (Pacific time)

Henry the Keynesian theory has never worked in the long term. Possibly you can show a place where it does. Using Japan, a major trading partner as an example of their government using Keynesian techniques to ameliorate their economic downturn which failed is a real-world example. As is England and western Europe.

Anonymous February 11, 2009 8:27 am (Pacific time)

billions more to the banks, just like in Sept. 2008. The dollar wont be worth the paper it is printed on. obama breaks article one section 2 of the constitution in regards to the census. This is really getting ridiculous taking time to show obama is yet another puppet of the elite. It is soooo obvious.

Henry Ruark February 10, 2009 12:22 pm (Pacific time)

Friend Murph: IF you really intend your query for Dr. Barth, why not use his email address clearly given here ? Thus your Comment intended ONLY to obfuscate, delay, defy and deny real understandings involved, since surely anyone able to write Murphy should also know that Japan is about as different economically as well as culturally as Itosaki is from Murphy. Yr international survey (per your own words vs Keynesianism in action)should surely be worth reporting in depth here, don't you agree ? When will it appear ?? Facts are facts. Keynesianism has worked well wherever tried ever since his General Theory, which I feel sure you have never skimmed. In contrast we've all had very close impact by "supply-side" and "monetarism" (read distort the dollar's value) in our own lives for more than 30 years. Nice try, Murph...but far short of the basket, no score, and makes you look the fool, too, esp. since we have no word on your preparation via life experience, academic or other training, or business experience demanded for some understandings.

S. Murphy February 10, 2009 10:16 am (Pacific time)

Dr. Barth could you point to some other country that has been doing well using Keynes' economic policies? It appears to me none can be found. Did not Japan attempt the same thing Obama's advisors have him going for (Obama never took any economic courses as per the public record) and Japan ended up increasing their debt by nearly 400%? So it appears we will soon see what will happen. Your response would be appreciated when time allows.

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