The View From 1776

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The recent Beige Book reports by the twelve Federal Reserve District Banks reveals an economy that is, at best, expanding slowly in some sectors. 

A Wall Street Journal article dated November 19, 2012, reports:

Investment Falls Off a Cliff

U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty

U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

Half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

The Obama administration, post-election, has resumed hammering business with regulations designed to add hundreds of millions of dollars to corporate expenses.  No one knows what tax rates will be or whether, as some Democrat/Socialists threaten, President Obama will deliberately allow current tax rates to expire in January, as a way to gain political leverage.  For the radical wing of the Democrat/Socialist Party, smashing our society down to socialistic equality of income and wealth is a goal that trumps business-led economic revival.

With uncertain prospects for next year’s tax rate increases and for legislation to bring the burgeoning Federal deficit under control, this New York Sun editorial is timely:

Norquist’s Finest Hour


Quote:
To them all we would say remember 1937. That was the depression within the Great Depression. For a while it looked like things were trending for the better. FDR bought the 1936 election with unprecedented spending, just like President Obama did in 2012. Then came a cutback in spending and an increase in taxes, and the country promptly went into the most brutal downturn of the whole 1930s. The liberals, and a handful of Republicans, are all trying to make Mr. Norquist the goat in all this. If we get a 1937 type event because of tax increases, they’ll be singing a different tune. The left likes to say that it was the war that finally pulled us out of the Great Depression. The alternative today — read our lips — is tax cuts on the margin, deregulation, and a move to sound money.

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Was Election a Tipping-Point?
By Jeff Lukens

The unraveling of the American social fabric has now reached critical mass. Barack Obama has succeeded in radically transforming America, and the slide is now gaining speed.

For the first time in United States history, constitutionally minded conservatives are the minority of the electorate. The demographics behind the election results are ominous for what it portends. Where we have always been a Center-Right nation politically, the people have moved Center-Left, and especially on social issues.

We have finally reached a tipping-point on what has been coming on for a long time. The country is coming apart, and trouble will certainly follow.

Barack Obama successfully crafted a message to suit individual constituencies. He bought off enough young, minority, and single female voters to cobble together a majority, while characterizing Mitt Romney as disconnected and focused on helping the rich and destroying women’s rights.

Many people think they could get better benefits by voting for Democrats. It seems to be only about, “what’s in it for me?” If they bothered thinking about a balanced budget at all, it could be rationalized away by taxing the rich. And, of course, Team Obama drove this narrative home to gain their support. None of them stop to consider the numbers do not add up and this mindset could collapse the country.

Every day we saw Obama say things he knew were not true for the sole purpose of exploiting the “low-information” voter for political gain. Truth was relative. Truth was what he led the voter to believe was the truth. 

The danger to America is not so much Obama but those who would entrust him with the Presidency. It would be far easier to limit and undo the idiocy of his presidency than to restore the debased culture of people willing to make, and then remake him their president.

The electorate has changed, and there are simply not enough conservatives to overcome this nonsense anymore. We can pick apart the candidacy of Mitt Romney for the mistakes he may have made. In fact, he was a good candidate and ran a good campaign. He would have made a good president.

Any chance we had to lessen the devastation of the impending sovereign-debt crisis passed with the election. Trillion-dollar deficit spending will continue. Obama is pursuing policies that have not worked, and cannot work. As he doubles down, another recession is coming, and maybe even a depression. The damage of his first term will pale in comparison to what lies ahead.

No one likes to talk about it, but we could be facing the cold reality of financial collapse, a slow-motion train wreck that will devastate everyone. Think riots and mayhem. They may not be far away.

If it is not too late, the key to a possible comeback is that Obama is wrong, and conservatives are right about the issues. Conservatives are right about free markets stimulating the business sector, about deregulation, about decreasing taxes, about reducing spending, and about rolling back the debt. Socialism does not work. As the economic misery Obama imposes upon us gets worse, eventually the masses may be willing to hear the conservative message.

Commentator Dick Morris points out that either Barack Obama’s policies are correct, or conservative policies of lower government spending and higher economic growth are correct. It can’t be both. So which is it? If conservatives are right, Obama’s economy will wither and through painful experience, people will return to free-market economics that conservatives espouse. If Obama is right, the economy will recover and Barack Obama will forever be a hero. Sensible people already know the answer to that question.

Who knows, the economic contraction in the next few years could make it clear to Democrat voters that Obama’s policies have hurt them enormously. Perhaps, it could be so severe that it could break the grip Democrats have had on the voter groups that have supported them over the years. We can only hope.

As it is now, the election marks a critical turning point. America has changed, and the future is uncertain. It will take many years and much work to return the cultural and political center of the nation to the right. 

Are conservatives supposed to stop fighting, stop resisting, stop speaking out? The left would hope so. God help us if we do. No, we should never give up. We should not accept what Barack Obama calls truth. Freedom is too important.

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A dialogue with a reader who generally defends the Keynesian thesis:

Reader:

If you maintain that during a recession that it is best to reduce spending by all parties, how does that get the economic engine going again? Austerity during a depression is obviously non-nonsensical. 



The only way a factory owner is going to hire more staff or build new plant and facilities, is if demand for his product increases.



The only way for demand for his product to increase is for more customers to have enough money in their pockets to buy!



This simple relationship between supply and demand is taught in Economics 101 in every college in the country (and not just in those “progressive liberal commie colleges” on the East and West coasts).

My reply:

The difference in our views centers in what I believe to be your faith that only government spending can produce an increase in consumer spending.  For the entire history of the North American colonies and the United States until the administration of Herbert Hoover there was never such intervention in the economy.  Yet during that period the United States grew to become the greatest economic power on earth, despite enduring numerous punishing recessions. 

The last recession in which there was no government intervention - that of 1920 - 21 - experienced more severe conditions than have beset us in this recession.  Government spending, however, was cut markedly and the government reduced the national debt.  Business rebounded quickly and sharply.

The root difference in our opposed views has to do with the cause of recessions.  The Keynesian hypothesis, which I believe is yours, is that recessions are caused by too much savings and too little consumption.  Hence the prescription to flood the economy with deficit spending financed by manufacturing fiat money.

In the months before the 2007-08 collapse of the financial industry, Fed chairman Ben Bernanke made numerous speeches in which he attributed gathering signs of economic distress to what he called a “worldwide glut of savings.”  In retrospect this is revealed as one of the most colossal misapprehensions in economic history.  The real world, we learned in short order, was swamped by excessive debt.

The earlier view, especially as expounded by the Austrian school of economics, is that central banks’ creation of excessive fiat money during strong economic times gives false signals to business, leading to over-expansion of capacity, especially in the basic industry sectors.  That is what occurred under the newly created Federal Reserve system between 1924 and 1928, as well as during the years preceding our 1970s’ stagflation, the dot.com boom, and the current recession. 

Consumers are encouraged by the flood of phony money to go into debt beyond their capacities to repay it.  In the current mess, mortgage debt was far in excess of the creditworthiness of home buyers; most of the explosion of imports from China was financed by home equity loans; and everybody seemed to have at least two credit cards maxed out.

The Fed increased the money supply far more rapidly than the economy was growing in the 1920s; ditto in the 1960s before our devastating bout with stagflation, during the Clinton administration before the dot.com boom and bust, and during the four or five years before our current disaster.  This illusion of prosperity fed the fires of inflation at the same time that consumer savings, as a percentage of income, were declining.  Just before our 2007-08 collapse, the savings rate went negative; we were spending more than we were making.

When the financial storm overwhelmed us, we had a huge oversupply of consumer capital goods in the housing industry, far too much money invested speculatively in land for additional home building, and excess capacity in all the industries supplying the housing market.  Consumers were tapped out with debt, and businesses suddenly could no longer repay all their debt to banks and bond holders.

Every recession in our history has had similar conditions of over expansion on debt.

The only way to get out of recessions is to lay off unneeded workers, cut other costs, and liquidate excess capacity or allow uneconomic businesses to go bankrupt.  During that time, businesses and consumers must resume saving and paying down their debts.  Only then will the economy regain sound footing and be able to support rehiring of workers and expansion of output.

Government’s failing to step aside and allow businesses and individuals to work out their situations only prolongs the process and makes it far more punishing to everyone.  Government’s so-called stimulus spending is analogous to increasing the narcotic dosage for a patient who has just overdosed and is near death.

Because Obama has fostered anti-business regulations and repeatedly tinkered with one-shot spending such as cash-for-clunkers or “stimulus” programs aimed at bolstering labor unions, the economy continues to limp along, each year at a lower rate of increase than before.

Business’s limited expansion has been primarily in overseas markets or for export.  Increases in business earnings have come, not from increased sales, but mostly from cost-cutting, including outsourcing to countries without rapacious labor unions that drive up costs or refuse to permit essential cost reductions (cf. Hostess/Twinkees).

Since Obama’s accession in 2009, he has lambasted businesses as the cause of the recession.  In reality the Federal Reserve is the author of our troubles through its monetary support of the Keynesian doctrine that government’s increased deficit spending is the answer to every economic problem.  Reduced savings and mounting debt is Keynes’s theoretical road to prosperity.

The only beneficiary of the Fed’s easy money policy has been the stock market.  The Dow Jones and other market indexes have expanded into bubble territory while brokers cheer every new announcement of fiat money creation by Fed chairman Bernanke.  Meanwhile, the real unemployment level, including people who have given up looking for jobs, continues to rise every quarter.

Ultimately business will muddle through the mess that Obama has created, but it has been and will be at a far more painful and slower pace than if the Democrat/Socialist Party had not pursued its interventions and its class warfare aimed at socialistic redistribution of income.

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Regime Uncertainty: Some Clarifications, by Robert Higgs

President Obama has relentlessly attacked business and businessmen who have become wealthy under our relatively free capitalist economic system.  The thrust of his entire administration has been, and remains, to foment class warfare and divide the nation.  Little wonder that businessmen, according to today’s Wall Street Journal, have significantly cut their proposed investments to expand production in the United States during 2013.

A partial list of actions that befog the outlook for business includes threats to bankrupt the coal industry in the name of hare-brained environmentalism; denouncing businessmen and bankers as greedy malefactors; announcing a predisposition to redistribute wealth in accord with basic socialistic principle; proposed or implemented EPA regulations that threatened the dairy business, stopped offshore drilling for oil and gas, as well as fracking production of our most bountiful, most efficient, and cheapest supply of energy; opposition to the pipeline from Canada; threats to punish companies that seek to remain competitive on world markets by transferring parts of their businesses overseas; renewed efforts to give labor unions greater power to unionize and bankrupt non-government employers; NLRB’s efforts to stop Boeing’s production of jets outside the heavily unionized, strike-prone Pacific northwest; nationalizing the U.S. company portion of the auto industry and dictating which plants could be closed, while giving to labor unions what bondholders were legally entitled to receive; EPA regulations designed to force auto companies to divert scarce capital to producing electric cars that fewer than 10% of Americans want; Obamacare’s driving doctors out of their practices and forcing hospital consolidations to meet the ferocious costs of implementing new information systems; threatened punitive actions for fictive racial discrimination against banks that are now endeavoring to adhere to sound lending practices. 

EPA regulations on manufacturing alone (so far, 972 new ones under Obama) have added an estimated $117 billion to manufacturing costs, thereby reducing businesses’ incentives to expand and increase employment.

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