The Obama Economy: A Study in Keynesian Stagnation

The first in a series of posts about Obama’s legacy.

This is the first in a series of essays on the Obama presidency and its long-term consequences on the United States.

President Obama entered mainstream politics by reviving the rhetoric of class warfare. The community organizer-turned-President promised everyone that the key to prosperity was for “the rich to pay their fair share.” His initial policy was to raise taxes on everyone who made at least $250,000 a year or more in order to fund more entitlement spending. He equated “millionaires and billionaires” with “lottery winners” further cementing the well-known sentiments in his “you didn’t build that” speech. Rather memorably, Obama opined that wealth is largely a matter of happenstance that we as individuals have little control over. In his 2008 victory speech, I sat in a Cornell dining hall and listened to Obama tell throngs of cheering Democrats that the United States has “never been a mere collection of individuals” and that we prosper to the extent that each person “resolves to pitch in and work harder and look after not only ourselves, but each other.” Now I look forward as an adult in New York City to his departure from the White House.

It is not difficult to make the case that Obama is a believer in collectivism, but the exact nature of his economic philosophy is not total socialism. Recall that socialism occurs when the government is the sole owner of the means of production and is responsible for allocating goods and services to the general public. Nazi Germany, Soviet Russia, Maoist China, Castro’s Cuba, and numerous other Soviet satellite states are historical examples of socialism in practice.

President Obama, like his predecessor George W. Bush, believes in the mixed economy. A mixed economy is capitalist in its basic structure but with significant government intervention on behalf of various pressure-groups within society. Another term for a mixed economy is a “hampered free market” economy, because people are free to own property and engage in trade but on a far more limited basis than that of a laissez-faire capitalist society. Even in a pure capitalist society it is proper for the government to limit the free actions of its citizens in order to protect individual rights; capitalism is not anarchy. In a mixed economy, the state will exceed this legitimate function and act with expediency to do “good” according to some non-objective standard, often at the behest of the ruling class or some politically powerful democratic majority.

The narrative favored by mixed economy advocates to justify such intrusion is that government is needed to restrain the excesses of the free market. The economist most responsible for formulating the principles of the mixed economy in the 20th century is John Maynard Keynes, whose work was the inspiration for Franklin Roosevelt’s “New Deal” policies in the 1930’s.


Keynes argued that the private sector, left to its own devices, was bound to fail without occasional intervention by the public sector. In particular, the government is obligated to “invest” in infrastructure to stimulate growth.. There should be a central bank, said Keynes, to control interest rates and strictly regulate the money supply. Keynes even advocated deficit spending in the short term to fund large projects if the money was not forthcoming in the present, remarking that “in the long run, we’re all dead.” This is the economic theory that the Obama administration adopted and sought to implement during its tenure. What are the results?

The United States has experienced economic stagnation under Obama, with growth rates less then 3% per year. The percentage of American households with at least one person receiving government benefits has reached an unprecedented 52%, up from 44% in 2008. There is at present a shocking 97,000 pages of federal regulations after Obama’s rule, up from the 79,000 pages that we had under George W Bush. Though these regulations no doubt vary widely in their objectives, the result is a complicated hodgepodge that makes it difficult for upstart firms to compete with more established players. In order to survive in the business world companies cannot afford to ignore lobbyists.

Now some might ask: shouldn’t Obama get a pass on the bad economy since he inherited Bush’s mess? It is true that the economy was in a tight spot at the end of the Bush years thanks to the subprime mortgage crisis of 2008 (which, by the way, was caused by the government and not the free market). All this proves, though, is that George Bush was not a champion of the free market. It does not exonerate Obama, who pursued policies in line with what Bush started and took them much further.

It is no secret that the United States experienced a recession in 2007 that Obama inherited. Before he left office, President Bush signed into law the Troubled Asset Relief Program (TARP) in order to bailout the large banks that were deemed “too big to fail.” Congress then passed the American Recovery and Reinvestment Act of 2009 in an effort to “stimulate” the economy with a cash injection of $831 billion into the arteries of American business. The subsequent Dodd-Frank legislation in 2010 was also passed to further tighten regulations on the financial industry, which was held responsible for the whole affair. Obama, following traditional Keynesian doctrine, signed these bills into law and initiated a largely phony “recovery.”

Despite the lack of results, there is a cost. The stimulus and the later attempt to nationalize the health care industry have resulted in a dramatic increase in the national debt. Under Obama, the debt increased from $10.6 trillion to nearly $19 trillion. Even more alarming is that in 2008 the debt was approximately 65% of the GDP of the US, meaning that it was approximately 2/3 of what the United States produces as a country in a given year. Today, the national debt is 104.5% of GDP if you include external debt! The conclusion that we can draw from this figure is that the US economy is heavily over-leveraged, a fact that is ironic considering Obama and his followers criticized the banks for the same sort of risky behavior when the financial crisis of 2008 hit.

Supporters of the president will sometimes make the claim that Ronald Reagan had a higher percentage change than Obama in the national debt, but this is dishonest rhetoric. When Reagan took office, the total debt was about $1 trillion and by the time he left the debt stood at $2.1 trillion. Overall Reagan added a total of $1.1 trillion to the debt, compared to Obama’s nearly $9 trillion. Even if we adjust the Reagan number to 2016 dollars with the CPI, this leaves you with close to $3 trillion, which is still 1/3 of what Obama inflicted. Economists have also pointed out that aside from the existing national debt, the US suffers from over $127 trillion in unfunded liabilities.

Americans also experienced the so-called Debt Ceiling Crisis of 2011 under Barack Obama. Congressional Republicans, keen to slow down the administration as much as possible in its expansive spending, refused to raise the amount of money that the government could borrow. The result was a political standoff that did little stop the Obama administration’s spending. The “compromise” that ensued promised future tax cuts in exchange for an increase in the national debt by the largest amount in a single day in US history. S&P even went so far as to downgrade the United States credit rating from AAA to AA+.

The truth is that stimulus spending by the government is nothing more than a short term palliative and is not a viable long term solution. Government is funded by tax money that is collected by citizens who participate in the market economy to produce goods and services; it has no money of its own. The fiat money that we use in trade today has only nominal value so long as it can be traded for real goods and services that have actual value to consumers on the market. If the government increases the amount of fiat money in society without a corresponding increase in the number of goods, the result is inflation. Inflation occurs when the purchasing power of money decreases, often due to an increase in the money supply. Inflation functions as an indirect means of taxation, since it devalues the existing savings that existed prior to the money creation. If printing money fails to fix the issue, the government can kick the can down the road with Keynes’ preferred deficit spending alternative.

What about employment, that old Keynesian bellwether?  Supporters of the president claim that he “created” 11.3 million jobs throughout his entire administration and continue to evoke favorable comparisons with Ronald Reagan. There are several things to keep in mind with regards to these misleading statements.

To begin, the comparison to Reagan is specious since the overall labor participation soared under Reagan while the opposite has occurred under Obama. Indeed, there has been an 18% uptick in the number of people who have stopped looking for jobs since Obama took office in 2009. As it turns out, the unemployment statistics only account for people who are actively looking for work; those who choose to remain unemployed are not counted in these statistics. Further, statistics on job creation do not focus at all on job quality and treat full-time jobs with paid benefits as the equivalent of part-time jobs. One could arrive at 100% employment by having half the population dig ditches and the other half fill them; in the meantime, little to no economic value is created.

These quibbles notwithstanding, there is a more fundamental reason to reject the positive picture painted by the Obama administration with regards to jobs. The fact is that the president, like any government organization, simply cannot create jobs. The reason for this is that government does not produce wealth, it merely redistributes existing wealth that is generated by the private sector by force in the form of taxation. Capitalists create jobs when they defer their consumption to invest in a business and serve a market need. Customers patronize the business and the proceeds are used to pay individuals that wish to sell their services without having to take on the risk of the investment. Job creation is one of the many improper functions taken up by government in a mixed economy.

Obama, like many leftists, does not understand that it is private savings and investment on the part of capitalists that expands the economy. When entrepreneurs invest in capital goods, the result is lower good prices and a subsequent increase in the purchasing power of money. The tragic but instructive Obama legacy on economics is a case study in outright Keynesian stagnation.