Capital Commerce

Trillions for Obamanomics

By James Pethokoukis

Posted: December 1, 2008

When Barack Obama's economic advisers "wake up every morning," one of those advisers told me recently,  all they think about is "stabilzing the financial system and getting the economy moving." You wonder what Obama's priorities are? Those are the priorities. And that is why I would guess that the "stimulus" package Obama will propose will end up matching the Paulson Plan -- something in the $700 billion range. Now this NY Times story seems to suggest that Obama would need to create $1 trillion in additional demand both next year and the year after to create the 2.5 million jobs he promised over the next two years. That would mean a $700 billion stim package both this year and next for a total of $1.4 trillion, or pretty much the same amount as we have devoted to the banking system rescue.

Keynesianism Run Amok

Well stated, Mazzula.

The fundamental flaw in Keynesian theory is that you can't force industry to produce, no matter how many customers you force on them. The ersatz nature of a short-term, demand-side stimulus will not be met with a renewal of business expansion but with caution and an eye to the period following the stimulus, when the punch bowl is taken away.

A solid economic foundation cannot be built on government spending, which is merely the consumption and redistribution, and not the creation, of wealth.

Dean of MN @ Dec 01, 2008 12:26:09 PM

Why does money create demand?

These bailouts don't create demand. If you give people money then either that money has to come from somewhere else in the economy or you have to increase the money supply as a whole and all you have done is to inflate the currency (in which case the wealth is still coming from somewhere else in the economy).

There is never a scarcity of demand. Economies are limited because of scarcity in resources and in the limitations of technology to utilize those resources to create supply. Economies expand always and everywhere because of improvements on the supply side--increased capitalization, improvements in technology, discovery of new resources, increases in the workforce, increased trade, and greater protection against threats to these things.

Bailouts avoid shifting resources from those people who have been poor stewards to other people who have made wiser choices. Demand-side stimulus diverts resources from capital expansion (where it would increase supply and increase wealth) to demand-side consumption. We are feasting on our seed corn.

The shift in 2007 from supply-side to the voodoo of demand-side economics is a lesson in how to wreck an economy. I doubt Obama will continue it, because the whole purpose in wrecking the economy was to get a Democrat elected president. The Democrats have no reason to continue this nonsense now. They will likely go back to Clinton-style supply-side policies (e.g. Clinton's adoption of NAFTA, GATT, welfare reform, his reduction in after-tax Social Security benefits, reduction of the capital gains tax, etc.)

There is may be justification for maintaining some stability in the banking system, and there is even justification for demand-side welfare programs, but the cost of these bailouts is widespread economic weakness. As with Katrina relief--we do it in order to spread the burden to the nation as a whole, but there is nothing intrinsically beneficial to the economy as a whole about taking money from those who have used it wisely to send it to people who (in retrospect) have taken on risk unwisely.

Mazzula of VA @ Dec 01, 2008 11:36:26 AM

all they think about is "stabilzing the financial system and getting the economy moving."

Until the next terrorist attack, natural disaster, or foreign unrest, then what?

What kind of person really wants this job?

Larry of CA @ Dec 01, 2008 11:08:34 AM

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Capital Commerce

Capital Commerce

U.S. News business reporter Matthew Bandyk examines the issues, people, and debates that shape the nexus of political and economic life in the nation's capital.

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