In his speech last week summarizing his administration's economic policies,
President Barack Obama grossly overstated the support these policies enjoy by
claiming, "economists on the left and right agree that the last thing the
government should do during a recession is cut back on spending". There are a
great many economists who were surprised to learn that, apparently, they now
agree with the president.
Reading straight from the Keynesian playbook, Obama justified the creation of
multi-trillion dollar deficits by asserting that the government must fill the
spending void left by the contraction of consumer and business spending.
As one of those mythical economists who do not agree with the
president, I argue that it is precisely this type of boneheaded thinking that
got us into this mess, and it's the reason we are now headed for an
We do not need, nor should we attempt, to replace lost demand. As Obama himself
pointed out in the same speech, Americans have been borrowing and spending too
much money. These actions created artificial demand, underpinned by the
illusion of real wealth in overvalued stock and real estate markets. Given his
intelligence and rhetorical training, it is hard to fathom how Obama cannot
notice the inherent contradiction in his argument.
While he commended millions of American families for making the hard choices to
reduce spending, pay down debt and replenish savings, Obama later outlined the
government's intention to spend every American household deeper into debt,
thereby undermining all the good that personal austerity would have otherwise
Obama also made the clear-eyed observation that the foundation of our economy
was unsound and that a sturdier one needed to be laid. To do this, he even
asserted that the US needed to import less and export more. This has been one
of my fundamental points. Our economy is unsound precisely because it is built
on a foundation of consumer debt. Instead of spending for today, we need to
invest for tomorrow. However, we cannot save more unless we spend less.
Production requires capital, which only comes into existence when resources are
By interfering with this process, Obama prevents the very transformation he
acknowledges must take place. When the government spends what individuals save,
private investment is crowded out. Society is deprived of the benefits such
savings would otherwise have brought about. How can we lay a solid foundation
if the government takes away all our cement?
This brings up an oft-repeated, but oft-forgotten, point: government does not
have any money of its own. It only has what it takes from the rest of us. If
individuals repay their debts, but their government takes on additional debt,
we are all simply swimming against the tide. All forward progress is lost as
private debt is replaced by public debt, which must be repaid by private
individuals. Whatever gains individuals hope to achieve are negated by the
higher taxes or increased inflation necessary to repay their share of a larger
Obama claims that much of the additional debt is not going to finance
consumption, but rather "critical investment". This is a vain hope. In the
first place, much of what he categorizes as investment, such as additional
spending on education, is not investment at all. Yes, an educated workforce is
important, but throwing more government money at education will do nothing to
achieve this goal. Spending money on education and calling it an investment
squanders resources that otherwise would have financed real investments. In the
second place, to the extent some government money is invested, those
investments will likely be less efficient than those the private sector might
otherwise have financed. There is absolutely no evidence that governments have
the foresight or incentives to make investments that facilitate real economic
growth. "Five-year plans" didn't work in the Soviet Union and they won't work
here. If the government simply builds bridges to nowhere, society gains
If we are going to rebuild our economy on a solid foundation, the market, not
the government, needs to draw the plans. When private citizens invest their own
capital, those who invest wisely are rewarded with profits, while those who do
not are punished with losses. Bad investments are therefore abandoned, with
capital reallocated to more successful ventures.
Conversely, when governments invest money, these checks and balances do not
exist. There is nothing to correct bad investments, as losses are endlessly
subsidized by taxpayers. In fact, the more a government plan fails, the more it
tends to be funded in the hope that additional resources will finally achieve
Obama himself proves this by allocating still more funds to government-run
schools and student loan subsidies. Other examples, such as Amtrak, the New
York Metropolitan Transportation Authority, the US Postal Service, mortgage
guarantors Fannie Mae and Freddie Mac, and countless others, prove this process
is never-ending - until perhaps the bureaucracy collapses under its own weight.
When it comes to government making tough choices, Obama talks a good game but
refuses to actually make any. However, once the dollar finally begins its
collapse, he will have no choice but to match his rhetoric with action. It's
unfortunate that we cannot make these tough choices on our own terms, rather
than waiting for our creditors to force our hand.
Peter Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets. Euro Pacific Capital commentary and
market news is available at http://www.europac.net.
It has a free online investment newsletter.
(Copyright 2009 Euro Pacific Capital.)