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Failure to Understand Sound Economics Paralyzing Economy

Flawed economic reasoning and mythical economic fallacies, whose origins and repudiation can be traced back centuries—have nonetheless regained intellectual prominence in recent years.  An eminent agriculture secretary declares that food stamps are a prodigious economic stimulus, the Center for American Progress postulates that minimum wage laws, wait for it, create jobs, and in a possibly clandestine attempt to shame the Nobel prize in economics—NY Times columnist Paul Kurgan posits that we need a pretend alien invasion to jump start the economy.  When will this long national nightmare end?

This long train of economic abuses will charge ahead as President Obama plans to address the nation on a comprehensive “jobs” plan, which, based on previous speeches and various reports, will consist of new infrastructure spending, tax credits and direct assistance to state and local governments.  The plan will reportedly cost the Chinese, excuse me the American taxpayers more than $300 billion.

To begin to unravel the newly minted fallacies inherent in Obama’s new plan, one may simply look at the $300 billion cost.  Who pays this $300 billion?  Ben Bernanke’s printing press?  Fed pump priming invariably leads to some inflation and the new taxes necessary to pay for make-work schemes will destroy other jobs in other industries not saved or created by the president’s magic wand.  Excessive government borrowing will only continue to crowd out productive investments by the private economy.  At best, the public spending schemes divert jobs into politically self-serving and chosen industries.

Appeals to infrastructure spending have long been a staple in the rhetorical arsenal of politicians.  What could be better than a benevolent and ambitious politician serving the greater interests of the community than by building roads, bridges or schools?  Unfortunately, politicians are lousy investors (see “green jobs”) and those promised shovel-ready jobs aren’t as “shovel-ready as they expected.”  Conversely, the quickest way to unleash productive infrastructure projects would be to eliminate government regulations, such as the archaic Davis Bacon Act (1931) which artificially increases the cost of government-funded projects by mandating the prevailing union wage rate.

The president also proposes a new array of tax credits and dares Republicans to oppose him.  Politically he may be correct, but these short term tax credits have been proved ineffective in spurring job creation because employers hire individuals for at least 5 to 10 year intervals, not based on a one year advantage. The original Obama “stimulus” package included tremendous infusions of federal funds to prop up state and local government budgets and jobs.  It seems the president calls for more of the same transfers from the federal to state level, which is tantamount to Uncle Sam paying off his Visa card with his American Express.  Surely this idea is meant to prevent the highly visible effects of state and local government job losses, but these jobs are inevitably unsustainable and are draining valued resources from the private sector.

The superior ability of free markets to generate wealth stems from the fact that it allows individuals to pursue their separate interests, while effectively using widely dispersed knowledge—through the impersonal forces and discipline of prices, profits and losses.  The appeal of Keynesian economics is that it refutes many of these sound economic principles and allows for greater decision making on the part of politicians.  Only when we stop practicing Keynesian witchcraft will we awake from this economic nightmare.