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.

20161015_161422

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.

The Egalitarian In Chief

All about the philosophy that informs the Obama administration.

As the end of Barack Obama’s administration approaches, we ought to discuss the overall impact that it has had on the United States. While no president is perfect, I believe the overall legacy is a negative one; allow me to defend this position with a discussion of the philosophy of the Obama administration.

When discussing Obama, I am often reminded of the 1972 election when Richard Nixon won in a landslide against George McGovern. At the time, McGovern was the candidate of the far left, which had come to prominence in the wake of the Vietnam War. Nixon positioned himself as the experienced, establishment candidate against a pacifist who would have surrendered America to the Soviet Union. To many voters, Nixon was the man who would prevent the hippies from taking political control. Though we later learned that Nixon had serious ethical and political issues of his own, voters at the time awarded Nixon every state except for Massachusetts. The resulting landslide meant that the radical left was exiled from American politics for two full generations.

The only popular Democratic presidency after the ’72 election was the Clinton administration. Carter, the only other Democrat to be president during this era, was largely seen as weak and ineffectual, as well as economically destructive. The headlines of Carter’s reign spoke of “the misery index”. Economists were baffled when high unemployment appeared at the same time as high inflation, which was considered impossible under the standard Keynesian economic model. Despite the personal scandals, Clinton’s approach was animated by a moderate, “third way” philosophy that had earned respect from many of his political opponents, particularly in the economic realm with the passage of welfare reform. The  ideological left made a return to mainstream American politics with the election of Obama in 2008, who was the first “New Left” American president.

Conservatives took pains to portray Obama as a Marxist in the 2008 presidential campaign, but the truth is that he only appropriates the ideology and rhetoric of class warfare when it suits him in his true agenda, which is more aptly described as egalitarian and not Marxist. Egalitarianism is the view that equality is the most important standard by which we ought to evaluate justice and morality. For egalitarians, equality is a higher value than standard of living or individual achievement. As a self-styled “community organizer” Barack Obama is a philosophical poster boy for Harvard philosopher John Rawls’ theory of “justice as fairness”. Let’s examine some of the specific instances where Obama’s policies have supported his egalitarian philosophy.

To begin, Obama has ratcheted up the traditional Democratic rhetoric against Wall Street and the banks. Along with Senators Sanders and Warren, Obama has called for higher taxes on the wealthy so that everyone is paying their “fair share” though there is little explanation for what is truly “fair” in this context. The president has done his part to convince Americans that the financial sector is parasitical, taking care to ignore the crucial role that the financial sector plays in allocating capital throughout the economy where it is most profitable and therefore most valued. When asked by the New York Times whether he would raise taxes on “millionaires and billionaires” even if it would result in less overall revenue, Obama responded that he would do so, stating that its not a matter of revenue, but “fairness”. Obama truly seems to believe that if a person possesses considerable wealth, irrespective of how they achieved it, then the government is justified in taking the “excess” and redistributing it to those “in need”. If one could custom the presidential seal for each person who holds the office, Obama’s would likely read “you didn’t build that”.

Obama’s administration is also responsible for raising government spending on “clean energy” and seeks to further restrict America’s consumption of electricity and fossil fuels. The truth is that energy is the lifeblood of an industrial, capitalist society and without it, America cannot effectively produce the goods and services that make innovations in every other field possible. At this stage, so-called clean energy is not only “clean”, but overly expensive and ineffective in generating what our economy needs to grow and expand. Any cost-conscious entrepreneur would recognize the value of efficient, renewable energy and invest in it if they thought that there was a chance for profits. Some, like Elon Musk, do this now (albeit with government subsidies). On the other hand, the Obama administration is engaged in a sort of wishful thinking: even if clean energy can’t compete with fossil fuels in terms of efficiency or yield, we still ought to invest in it at the expense of established, proven energy sources because it is “the right thing”.

The question to ask is: right for whom? Eschewing cheap, abundant energy for clean, expensive and rationed energy is not “right” for humans that seek to travel the world, mass produce medicines, generate high crop yields, and expand the reach of telecommunications. The administration’s attitude seems to be that human welfare needs to take a back seat when compared with the environment, the climate, and the mating habits of any and all non-human species on the planet which have an intrinsic value simply because they exist and therefore belong on an equal footing with humans. In other words, energy is great and all, but if it comes down to humans or polar bears, we will just have to go without and sacrifice for the sake of the polar bears. Ayn Rand put it best when she described the American left as seeking “an anti-Industrial Revolution”. To this I would add that the Obamas of the world seek an egalitarian energy policy where the welfare of humans is considered on a par with the welfare of lakes, ferrets, and redwoods.

On the international scene, the Obama administration has consistently acted to diminish America’s stature by denying American exceptionalism. The president applies his egalitarianism consistently to nations of the world as well as individual humans only to conclude that each and every country should be treated the same as every other, irrespective of its actual values and customs. Rather than serve as an eloquent spokesman for the peculiar and unique American tradition of individual rights, separation of powers, free elections, and limited government, Obama has told young people in Argentina that “there is no essential difference between socialism and capitalism” and that they should choose “whatever works”. Rather than stick up for American interests, Obama is willing to subvert American interests to those of the United Nations, an egalitarian body that gives equal representation to all nations, whether they are authoritarian or free.

Mr. Obama has also enthusiastically breathed new life into the tyrannical Cuban regime by pushing the end of the US embargo. This act does a remarkable disservice to Cubans that fled the country and further damages the cause of Cubans that remain on their home island, trying to resist the communist dictatorship. For generations, Cuban refugees have orally transmitted the horrors of communism to their children and grandchildren; they explain that it was the United States that gave them hope and allowed them to prosper after painfully leaving their homeland. The message to young Americans is clear: if Mr. Obama thinks that the Castro family is kosher, perhaps Fidel and Raul are not all that bad after all.

Obama also lacks the moral courage to openly identify radical Islam as a threat to the United States. Like his predecessor, George W Bush, Obama refuses to recognize that what motivates ISIS is not anti-imperialism gone amok but ideas, specifically religious ideas. It is not true that all religions are equal in the effects of their dogma; to see this, note that we are not discussing the threat posed by radical Jainism. Many on the left will argue that Christianity is just as bad as Islam when it comes to fundamentalism, but this is an ahistorical claim. The fact is that Christianity and Judaism have been severely weakened politically in the West after the Enlightenment and the Industrial Revolution relegated them to superstition among the intellectual and business class. The Middle East, on the other hand, is rife with countries stuck in the Middle Ages culturally.

Obama saw the so-called “Arab Spring” through the rose-colored glasses of his egalitarianism and mistook the political machinations of committed Islamists as the rumblings of a native people rising up against their government for an equal voice in a democratic system. The two biggest exponents of Islamism are Saudi Arabia and Iran, a nation that has been in a de facto state of war against the United States since they took hostages from our embassy in 1979. Instead, the president has opted to appease Iranian posturing by kicking the can down the road with regards to their nuclear weapons program.

What about health care, which has been the flagship of Obama’s political legacy? President Obama led the charge to institute his health care scheme as a means of correcting supposed market deficiencies in allocating health care. From the beginning, the left has sought to use health care as a means of undermining confidence in the market by driving up costs and lowering quality. In reality, the health care “market” was heavily regulated and distorted by government intervention prior to the Affordable Care Act. It started with Social Security, a program borrowed from Bismarck’s Germany to placate the middle class at the behest of socialist agitators. It continued with more guarantees in the form of Medicare and Medicaid. Occupational licensing laws were put forth to regulate “legitimate” medical care and outlaw “illegitimate” medical care, making it difficult and expensive for new doctors to enter the market. Finally, it was under Ronald Reagan that federal law required all visitors to emergency rooms to be subsidized by the taxpayers if they could not pay their own bills. The “market deficiencies” that Obama sought to “fix” with his health care bill were a result of government action, not the free market.

Obama’s solution for health care was naturally derived by applying his egalitarianism to health care coverage. The Affordable Care Act put into effect an individual mandate that requires all citizens have health care coverage irrespective of their health and ability to pay. Furthermore, Obamacare decrees that the services rendered by all plans need to be identical, even if particular aspects of the plan are nonsensical or uneconomical. For instance, thanks to Obama, a young man in his 30’s can now have his pregnancy covered by his insurance plan, and anyone diagnosed with a preexisting condition will be covered even though there is a near certain chance that the health care firm will need to pay out heavily for treatment. If we compare auto insurance to health care insurance, the mandate states that one can demand an insurer cover them after they have totaled their vehicle. Rather than treat health care as a service provided by the market, with a variety of products and pricing commensurate with consumer needs, Obama has made it clear that it would be unfair that some go without health care coverage, and that this is prima facie unacceptable.

Finally, there is the deterioration of race relations and the proliferation of identity politics that have occurred under the Obama administration. Despite the fact that Americans voted in a black president, there is a widespread belief that the majority of white Americans are racists. Opponents of the Obama administration that have legitimate criticism are lumped together with white nationalists as racist by the mainstream media and various academics. It is often taken as axiomatic by educated Americans that Caucasians benefit from “white privilege” and there is need to address “institutional racism”. The police have been slandered by Black Lives Matter activists, who claim that there is a preference for jailing black Americans over all others. If someone points out that the incarceration rate of blacks is commensurate with the rate at which they actually commit crimes, they are also conveniently labeled as racists and apologists for oppression.

While Obama has not done much to stoke these flames, he has not done a thing to refute them, even though he can easily do so. Instead, he opts to take the approach that because all people are equal, it must be the case that all cultures are equal as well, and that it would be unfitting for anyone to point out differences, let alone claim that one is better than the other with regard to a given activity or problem.

Obama is the first president to take egalitarianism seriously. Apart from the 2016 election, the Democrats lost seats in Congress in 2010, 2012 and 2014 despite Obama getting two terms as president. Obama has stepped into the fray consistently with the message that even when he is personally not on the ballot, his policies are. Americans heard that message and voted accordingly to reject Obama and his egalitarianism. Though many Americans are not philosophical in their orientation, they are discerning enough to note that the effects of egalitarianism are destructive and harmful when they are implemented.