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Throughout America, unemployment is high and rising, and an activist president
wants to do something about it, also using economic decline as an opportunity to
advance a radical expansion of the welfare state. Am I speaking of President
Barack Obama? Yes, but also of Franklin D. Roosevelt. As hard as Roosevelt
tried, unemployment rates in mid-1938, more than five years after he took
office, still approached 20 percent. New Deal activism did not bring recovery.
If Obama gets his way, I fear history might repeat itself, albeit perhaps in a
milder form. In Roosevelt’s case, more than three years of ineffective activist
policies by his predecessor, Herbert Hoover, had put the economy in a far more
desperate shape than we are in today.
The Obama/Federal Reserve plan has at least seven parts.
In short, Obama wants an economic transformation at least the equal of Lyndon
B. Johnson’s Great Society, if not Roosevelt’s New Deal.
History and economic theory suggest this will lead to stagnation and
inflation. How do we pay for all the commitments? The idea that the rich can pay
for much of it through higher taxes is fantasy. Until recently, the government
never had borrowed $500 billion in a single year. The Congressional Budget
Office estimates the Obama plan will increase deficits to well over $1 trillion
annually for the next decade, well over doubling the national debt.
Who will buy trillions of dollars of IOU’s from the government? Asian
investors? Their economies are reeling. The oil-rich Arab countries? Oil prices
have plummeted. To sell all the debt, interest rates likely will have to
rise–perhaps substantially. To deal with that problem, the Fed might agree to
buy most of the debt, roughly equivalent to printing money, which almost always
sets off inflation. That could devastate the world economy dependent on the
dollar. We have the prospects of high inflation and high
unemployment–1970s-style stagflation on a bigger scale.
But that is not all. Since Obama’s election, national wealth declined more
than $2 trillion as investors became scared by his trashing of business leaders,
promise of higher taxes on the rich and irresponsible monetary and fiscal
policy. Although the president is cooling the rhetoric as markets tank,
investors still are cautious about making commitments, given the anti-capitalist
tendencies of the nation’s political leaders.
Big federal spending seldom works to improve economic conditions. The massive
Works Progress Administration of the 1930s employed 3.3 million (the equivalent
of 10 million today) at its 1939 peak doing infrastructure projects, but
unemployment remained in the double digits. In the 1990s, the Japanese dealt
with economic sluggishness by moving from budget surpluses to a decade of
massive budget deficits, going on a spending spree, and had the lowest growth
rate in 50 years. Just over a year ago, a bipartisan $150 billion stimulus
package passed Congress, designed to forestall downturn. Result? Unemployment
has soared, the stock market has fallen and a financial crisis ensued. Stimulus
packages don’t work.
What to do? Ideally, nothing. Markets have remarkable self-correcting powers,
and this recession originally induced largely from imprudent Fed and other
government policies can reverse, probably by year’s end. Unfortunately,
government policies have muted market signals that point the way to recovery.
Tragically, inaction is not a political option. More realistically, Congress
should work to moderate and delay the potentially harmful shocks arising from
Obama’s proposed fiscal excesses and dangerous social engineering. This is a
moral issue as well: the staggering debt from this dangerous experimentation
will burden our children and grandchildren for decades to come.
Richard Vedder is a visiting scholar at AEI.
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