If you are, say, lost in a dark cave with the sounds of swooping bats it is best not to be alone or feel alone. In that sense, it is comforting to know that while we suffer under the hardship of having the incompetent Julia Eileen Gillard as our political leader, the Americans have Barack Hussein Obama.
President Obama announced his latest jobs plan to a joint session of Congress on 8 September. Now, if your last jobs plan in February 2009 had been an absolute failure. If it had contributed to soaring levels of government indebtedness and, 2½ years later, had taken unemployment from eight to over nine per cent you might rethink your strategy. But then you might not be a left-wing ideologue surrounded by a coterie of Keynesian advisers. In that world, your plan did not fail. It prevented things from being worse. You can never be wrong.
Armed with an invulnerable theory, President Obama urged Congress to pass his “American Jobs Act”. In fact, in a speech lasting 34 minutes, he urged passage 17 times; once every two minutes on average. Perhaps this repetitive insistence convinced the stock market he was serious and contributed to its fall on the day. It can usually spot a dodgy economic remedy. He promised to announce a second instalment of his plan a week on Monday. Sell in advance might be good investment advice.
Last time around, the stimulus was $862 billion of spending and tax cuts. This time around it is $447 billion of spending and tax cuts. Sounds like more of the same and it is; though, apparently, use of the word “stimulus” has been banned by the Democrats spin machine.
Spending is envisaged on roads, rail, bridges and airports, and on hiring more teachers. Shades of the BER (has he been talking to our PM?), the spending also includes repairing and modernising “at least 35,000 schools” and “installing science labs and high speed internet classrooms all across the country”. It’s a boon for all those unemployed construction workers ready, according to the President, to up tools. Though again there was no mention of them being “shovel ready”. That is another one of those terms now clearly in disrepute.
Permanent corporate tax cuts can be beneficial in an underemployed economy when they are applied uniformly across the board. They increase returns on investment and can build confidence. These are not the type of tax cuts favoured by socialist engineers. So we have a range of tax measures aimed at encouraging companies to recruit veterans or people unemployed for more than six months. There is tax relief for small businesses hiring new workers or, astoundingly, raising wages.
Raising wages being something to encourage, in a struggling economy with high unemployment, can only come from the minds of economic illiterates or, in other words, unreformed Keynesian economists. They think that higher wages will result in more spending and therefore more growth. Good economics is stood on its head. Market forces in an under-employed economy will be trying to depress wages as part of the recovery process – as even Keynes knew. The last thing governments should do is to spend taxpayers’ money to thwart that process.
Yet another extension of a year is proposed for unemployment benefits. Unfortunately, as with so many welfare measures, it will have unintended consequences. Unlimited unemployment benefits have contributed to entrenched long-term unemployment in Europe. Living on welfare has become a soul-destroying way of life. The United States is catching up. In August 2011, 43 percent of those unemployed had been out of work for over 27 weeks. Ten years before, that figure was just 12 per cent. Economies (and societies) work best when unemployment results in falling wages; and when those out of work are pressed to find work, including by moving geographically and into different occupations.
These days it’s not so easy for governments to borrow to spend. Debt has finally caught up after decades of reckless entitlement spending across the Western world. President Obama must find this irksome when there is so much more his administration should be doing to turn the United States into a nanny state, in which the Democrats will be entrenched in power.
He has been forced to ask Congress to come up with the money. However, he has an unsurprising partial answer, ratified by rich Warren Buffett, which is to tax the rich. And woe betides Republicans if they refuse to go along. “Should we keep tax breaks for millionaires and billionaires, or should we put teachers back to work so that our kids can graduate ready for college and good jobs?” There is no real contest; billionaires versus teachers and kids.
A different view about the appropriate role of government is at the root of contention between left-leaning and conservative political parties. This is fine so far as it goes. It should not be muddied by bad economics.
Bad economics, inspired by Keynes, has generated and fed misconception among politicians and the media, especially among those who are prone to see government as the answer to life’s problems. They should be made to hang on their doors a sign which says things like: Governments do not create wealth; Spending is not the same as making; Wealth is created by entrepreneurs and businesses investing and making things that people want; Investment requires savings and only the rich save very much.
If left-leaning politicians like President Obama and our PM embraced good economics they could still harbour ambitions of enlarging government, but not illusions. It’s the illusions which have created most problems; like taxing the rich is a free good. It isn’t. It means that government expenditure of one kind or another replaces private investment expenditure that would otherwise occur. This is not to say that you shouldn’t tax the rich more; simply that you should understand and acknowledge the cost.
Warren Buffett, for all his business acumen, does not seem to understand the good he does simply by being rich and sitting on it. That is not his fault. Whatever he does seems wrong, which is presumably why he desperately wants to give his money away to the government or to charities. Keynesian economics tells him that spending on conspicuous consumption is good; yet his social conscience probably doesn’t like it. What a dilemma; and all because of bad economics.