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Issue Analysis

    A Clue to a Clueless President

    Barack Obama is not merely uninformed on economics, he is enthusiastically misinformed. He says he keeps trying to fix the economic mess he "inherited", but nothing he does works.  

    The proof, as they say, is in the pudding. No matter how much a politician likes to proclaim his skill and wisdom -- and Barack Obama likes it as few others -- eventually the effects of his policies on the real world are what matter. Barack Obama has not done what he said he would do, because he can't.

    There are many reasons why Barack Obama can't fix the economy, and in particular, why he, as President with his particular set of skills and policy preferences, can't "create jobs" in the private sector.

    First, no one can "fix the economy". We can and do demand that our government stop breaking it.

    Government does not set up the system for the private sector to follow, government enforces the system people in their society create. The economic system is not a product of government, but the natural outcome of people interacting. They trade, develop customs, and eventually need a way to defend the rights of the weak against the strong and the unprincipled.  

    We now have gone so far beyond that situation that the government picks winners and losers, owns companies, and even counts itself as part of the economy. Its heavy hands are around the throats of people trying to make a living, from small contractors to corporate giants. 

    But more specifically, Mr. Obama can't increase employment and "create jobs" because he tries to do that directly. It doesn't work that way. 

    Private sector employers hire people to do work the employers have, but don't have enough manpower to get done.  They don't hire people as charity, or in response to tax credits, or to help the President's numbers look good for reelection. To do anything else is to be out of business.

    The key clue to Obama's cluelessness is the phrase the White House has used for months, "jobs created or saved".  When introduced, the phrase was its own punch line, since there is no way to measure how many jobs a program has saved.  Yet the administration continues to use it.

    The phrase also reveals the incurable problem with Keynesian economics. A recession is not caused by a lack of "aggregate demand". A recession is caused by misaligned capital and labor. Trying to save jobs or bail out failing companies extends the conditions leading to the recession, making recovery impossible.

    When bubbles happen, capital is flowing into the wrong areas. Whether it's tulips, Internet stocks, or real estate, people don't know they're putting their money in the wrong spot, but they are. Because the value of a good or service is whatever someone will pay for it, people investing in the bubble see prices going up and assume they will always go up. Or at least, most investors assume they can sell at the top. 

    People suddenly realize that the value of a tulip or that dotcom stock is not what they thought, and try to sell. The perceived value of the item plummets.

    The same thing happens in the market for labor. People with particular skills are sought after and their value rises relative to others. A mania can develop, in which companies believe they need better social media marketing, or Cloud Computing IT staff, or whatever the hot item is.  As people rush to acquire those skills, the market can become glutted, and a pool forms of people with the unmarketable skills.  

    Bubbles in entire industries have the same effect on labor. But there are also what I call complacency bubbles, in which technological advances or societal changes cause demand for a product in use for decades or even centuries to dry up, often seemingly overnight.

    It is senseless to try to save jobs or even entire industries that produce things no one wants. If those jobs are useful, they'll save themselves.

    If the jobs aren't useful, government subsidy serves to prolong the conditions that led to the bubble, or to keep the people in question from facing the reality of their situation. Instead of liquidating their failed, outdated business, a government subsidy allows them to maintain the fiction that they are profitable.

    That applies in all areas of the economy, from bailing out companies and propping up bad mortgages to farm subsidies. Eventually, the mistake someone is making in trying to be in a business or to have an investment that cannot profit on its own will trickle up to the taxpayers.

    We have tried it Barack Obama's self-serving Keynesian way. It's time to get government out of the way and see what happens when free people are allowed to compete.