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Friday, March 22 , 2019, 7:47 am | Fair 44º


Commentary: Obama Snubs the Econophile

Sooner or later, you're going to find out that Keynesian stimulus just doesn't work.

Dear President-elect Obama:

Since I haven’t heard about my online application for a job in your administration, I thought I would inquire directly with you. I thought I had good qualifications to be appointed to some economics advisory position, but, apparently not. I was hoping for the Council of Economic Advisers, National Economic Council, or assistant secretary of the Treasury for economic policy.

I can understand why you thought Larry Summers, Christina Romer or Tim Geithner would be better at it than me. MIT and Harvard and all that; I didn’t attend those institutions. These are fine people and are safe choices. I’m guessing they were selected because they support massive deficit spending as fiscal stimulus. I don’t.

I remember that your call for change emphasized your support only for policies that work and you weren’t going to do the “same old, same old.” That’s why you need my counsel on economic policy because you won’t hear the same things everyone else is saying. Just in case the Keynesian remedies don’t work, maybe you need a Plan B.

Your advisers are the ones who didn’t see the crisis coming, and were supportive of the many things the government did to cause this crisis. So why would you want them to tell you how to get out of the crisis?

Mr. Summers is a fine economist but he believes strongly in Keynesian fiscal stimulus. Mrs. Romer wrote your economic plan, so she’s supportive of fiscal stimulus (though she thinks tax cuts are better than spending). Geithner is a protege of Summers, so that kind of rounds it out.

If you hired me, the first thing I would do is ask your advisers when Keynesian spending ever worked. I would ask them to consider the experience of Japan from 1990 to 2005 as proof that it doesn’t. Your advisers will tell you that Keynesian theory was fine, but it wasn’t implemented soon enough, they didn’t spend enough, or that there were intervening circumstances that caused it to fail. Defenders of failed theories always say thing like that.

I would tell you what I think will happen as a result of spending $800+ billion:

» Money will pour into things that are politically desirable, not things people actually want. Thus no wealth will be created to support continued employment.

» You will first try to pay for it by borrowing money. Since Americans don’t save, the money will have to come from China or Japan.

» Since no one will want to lend us money at 0 percent, interest rates will be driven up to attract lenders.

» Your advisers fear this will put the brakes on any recovery, so you won’t want to do this.

» If we can’t get the money from Asia, you can try to raise taxes. Since your advisers know that also squelches any recovery, you might not want to do that either.

» Your last resort will be to pay for it by printing money. Inflation: It’s really a hidden tax but harder for voters to see.

» Eventually all prices will go up, interest rates will rise, and debtors will pay back loans with cheaper dollars, thus eroding savings and investment capital.

» This may turn the economy around in the sense that you will reinflate the economy and start a new credit bubble, the consequences of which may be worse than the one we are recovering from now. But it might get you through the next election.

» The most likely result will be economic stagnation like the Japanese suffered for 15 years. They tried all the things that you and your advisers say they will do and got nowhere.

You might consider Plan B, which would be to not spend any more money, cut federal spending, further reduce trade tariffs, support the dollar, reduce taxes on business and high-income taxpayers, and not prop up failed businesses. I can actually point to history and show you when this worked. After all, you don’t want to take a credit bubble and turn it into a 20-year depression like Hoover and FDR, do you?

I’m a busy man, but I’ll be waiting for your phone call.


— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, Subprime Crisis Forum.

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