What is happening to the US economy? Our home values have dropped dramatically, the number of people actively looking for work hasn’t been this low since President Carter left office. The number of people relying on government food stamps is twice what it was just a few years ago. Our government has accumulated nearly $16 Trillion dollars of debt. We are not in good shape at all.
President Obama, a legal scholar and professor of constitutional law, never received any formal education in economics. Yet, he is leading the US with ideas and policies that would require a background in business, finance and economics. Why is he failing to achieve the economic prosperity he campaigned upon just a few years ago?
The core of Obama’s problem stems from a misunderstanding and poor application of Keynesian economics. John Maynard Keynes, wrote an in-depth analysis of economics in his book “General Theory of Employment Interest and Money”. In his book, he detailed his theories about how economic expansion would occur, given certain interventions by the government in money supply, tax policies and spending policies. In all, his theory is quite sound, but it requires one major component that prevents its proper usage today. Keynes noted that in order for his theories to work, the government must be operating in a surplus condition, i.e., revenues, MUST be exceeding expenditures. Although, he admits that there are times when a government could run a deficit, that deficit would need to be short-term and countered with a surplus.
The US government has run a deficit many times in our recent history. Over the last 40 years, there was only a short period (from roughly 1997 – 2001), where our government had a surplus. During that time, as Keynes predicted, the intervention by the government in US money supply by means of policies and taxation, would produce economic prosperity. Beginning in 2002, our federal government began running deficits again. But, those deficits were quite small as a percentage of US gross domestic product (GDP). That would have worked out fine and been countered by offsetting surpluses had our government spending been reduced in future years, but that has not occurred.
By continuing the past spending spree, Obama has lengthened the number of years the US government has been running deficits. As a result, the gross public debt has skyrocket over the last few years. Currently, the federal debt is approximately $16 Trillion. Just 6 years ago, the debt was $8.5 Trillion, and 6 years prior to that, the debt was $5.8 Trillion. According to estimates of the government’s Congressional Budget Office (CBO), the total debt will increase to approximately $24 Trillion by 2016.
The ever increasing weight of this debt and its exponential increases over the last few years is weighing down the US economy. Under Keynesian theory, the government should be able to increase our economic prosperity by getting more money into the hands of its citizens, so there is a larger demand for products. BUT, since this demand is coming from money that has been borrowed, any increase in current economic conditions are more than offset by the damage done to our future economy as that debt becomes due.
What would help? It’s not practical, nor wise for the government to increase taxes on any segment of the population at this time. Any increase, on any income group, would harm our economy by means of job losses, reduced profits, and lower wages, thus reducing the amount of money in our economy. The solution, which Washington has been unwilling to tackle, is a reduction in the size and scope of the US federal government.
President Clinton successfully implemented Keynesian economic policies as well as reduced the size of government during his tenure. Credit should be given to the republican Congressional majority for writing the bills that achieved much of the needed spending cuts and reductions in government size. President Obama would be wise to implement these same policies; dramatically reduce the size of government and its spending. If he did, then Keynes predictions of economic growth would materialize.
If our current path does not change, there are many examples in the European Union of where the US will be headed in the coming years.
