The Fallacy of the Obama Economic Policy

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There are a couple of things that everyone should consider (especially elected officials) as we continue down the path of spending to get out of the recession. The Obama Administration continues to be adamant that the way we solve our problems is to spend like crazy and then have economic growth come back to help cover the deficits. The assumptions are that GDP will increase about 3% next year and then 4% after that. There is substantial risk to achieving that kind of growth rate in the current environment. Economic growth, as measured by GDP, consists of three components; labor, capital and technology. These three factors drive GDP growth and have been the primary drivers for the economic growth for the last 30 years. The likelihood of those continuing to be significant drivers is very low.

Labor is based on the number of people working and the amount that they work. We are just starting to hit the time when the baby boomers start to retire and over the next decade or so we will have many more people retiring then enter the workforce (although the good news is they have to work longer now because there retirement funds have decrease so much). There have already been concerns what impact this has on the economy as a large portion of the workforce enters retirement and starts to consume the retirement savings. Immigrant labor may make up for it in terms of number of people, but immigrants do not generally have the same education level so it will not be a complete trade-off. We will likely have a smaller labor pool which diminishes economic growth.

Capital is the second factor. People save money that then can be used by companies to make investments to expand production or introduce technology to improve efficiencies. The government, however, is not a big sucking machine taking dollars that could be investment in business improvements that is not being used to fund government deficits. Some of the government spending may be considered a reasonable trade-off to business, but nonetheless, we are already starting to see government start to run short of buyers to government bonds. The environment to invest is incredibly risky right now and likely will be for many years. Capital is going to be in short supply as the government sucks up most of it, which will further slow down economic growth.

Technology is the third component. We have benefited immensely over the last 30 years by the introduction of the technology age. Companies have been able to use computers to become more efficient. Technology is also subject to the law of diminishing returns. It is unlikely that we will continue to see the same rate of improvement as we have over the last few decades. Most companies have already implemented most of the productive technological improvements and new breakthroughs will likely have a much lower impact. Technology is not going to be a big driver going forward like it has over the recent past.

So where does this leave us. The government is spending like crazy in hopes that the economy will pick up, at the same time the main drivers of the economy are going through fundamental changes that likely will lead to much lower long-term growth. Obama talks about a sustainable economy, but is doing the exact opposite. If you continue to dump pollutants into a lake, eventually the environment is going to be impacted and water quality and wildlife will disappear, having a detrimental and long term impact. The economy is very similar; you cannot continue to borrow money to get out of our current problems without it eventually collapsing under its own weight. It is kind of like saying we will solve the water quality problems in Lake Whatcom by building more houses and dumping more pollutants into it in hopes that eventually it bounces back.

Besides the points above, it is crazy to rely on gross domestic product as the measurement of prosperity. There are much better measures like the genuine progress indicator and other similar indicators. These indicators have showed a consistent decline over the last 30 years and the approaches being taken by the Obama administration will only make them worse. If you want to fix the problems you can start by fixing the measurements and then implementing policies that will actually help.

The current economic approach is as far from a sustainable economy as you can possible get. Labor, capital and technology are going to be in short supply while government debt increases rapidly with no way to pay it back without massive government spending reductions. Obama can start to fix it now, or he can continue his current plan of letting someone else fix an even worse problem at a later date. For a president that advocates sustainability, he really has no clue what it really means.

About Craig Mayberry

Closed Account • Member since Jan 17, 2008

While writing his articles from 2008 to 2011, Craig lived near Lynden and taught at both Whatcom Community College and Western Washington University. He was active in politics and ran for public [...]

Comments by Readers

g.h. kirsch

Mar 27, 2009

What concerns me is the President’s apparent ignorance of the historical and financial causes of the economic predicament we’ve realized.

It’s understandable, given his relative youth and training primarily in law.  Though one could have hoped that his political ideology would have disposed him to consider less mainstream solutions, being the advocate of “change” and all that.

As we have all remarked since he began choosing his cabinet, the administration is anything but progressive in the areas of social or economic thinking. 

But the most serious mistake Obama made was turning to the boys from the Federal Reserve to frame the new governments financial and economic policy. 

It was as ignorant as Bush’s choice of Hank Paulsen to lead the reform of Wall Street.

As Paul Krugman, Dean Baker, Simon Johnson and many others have pointed out, we’ve got one shot at saving the nation from a horrible depression. 

Tim Geithner’s not capable of crafting a solution to the financial mess created by his friends on Wall Street and at the Fed that is consistent with the concept of change the average American can believe in.

He and they have presided over decades of very anti-democratic economic policies resulting in the greatest transfer of wealth from the poor and middle class to the hyper rich.  This concentration of wealth has, as always, created an environment for adventurism, speculation and reckless, short sighted investing.

These people want to continue the corporate socialism of the last 30 years, but don’t want it to become democratic. They’d prefer we just give them the money and go away.

They want to pretend their’s is a private financial system.  Trouble is, it’s our money.  Always was…always will be.  The only thing private about the banking system is their management of it.  Shame on us.

There are a couple of interesting articles you might enjoy, Craig.  They too questions the assumptions that rule at this moment, and the consequences of the spending/debt underway.