Curse of Cassandra

I have often commented laconically that the older we get, the more we become like ourselves.  We all have tendencies and predispositions, and in part through trial and error, over time we settle on approaches which seem right to us.  And this is true both in our personal and professional lives.

A corollary of this rule is that, over time, others who have had the opportunity to observe an individual’s actions, words and decisions have the ability better to discern just who that individual really is.  Whilst I am (thankfully) for the most part shrouded in obscurity, the president of these United States lives and operates at the other end of the visible spectrum.  Hence each of us has the opportunity to gain increasing insight into what makes Mr Obama tick with each new rise of the sun.

It is with this perspective that I now must comment upon Mr Obama’s press conference of a few weeks ago.  The Republican’s are jumping all over his ill-advised comment that “the private sector is doing fine.”  However what concerns me far more is the context in which he made that statement, for it reveals a fundamental macroeconomic philosophy that is both frightening and, to my mind, antithetical to fundamental American culture.  I say this in conjunction with the observation that, as a purely technical matter, Mr Obama’s statement put in context is also completely correct as a matter of basic 101 macroeconomic theory.

To explain this apparent contradiction, I must regrettably restate briefly some of the fundamental principles of the “Grim Science” (i.e., economics).  (To the extent that the two paragraphs that follow are accurate, it is due to the profound teaching of distinguished Professor Carsten Kowalczyk; to the extent there is any inaccuracy, it reflects my own limitations.)

Mr Obama was talking about Gross Domestic Product (GDP).  This term refers to the sum of all goods and services produced by a country in a year (or other designated period).  There are differing ways of calculating this number, but the most common and direct way is the product approach, based on expenditures.  Prior to Keynes, GDP was calculated as the sum of (a) consumption, plus (b) investment, plus (c) all exports minus all imports.  Formulaically, GDP = Consumption + Investment + (Exports – iMports).  [Note:  Historically, imports are represented by the letter “M” to distinguish it from the letter “I” which is reserved for investments.]

After Keynes, this formula was refined, as it was recognized that there are really two, very different types of consumption:  private sector consumption (namely what people and companies spend) and public sector consumption (namely what the government spends).  This was because economists’ principal concern was whether the people in a society were better off, happier, and thus what the government spent was technically outside of (or, to use the economists’ term, “exogenous to”) that calculation.  Thus today’s formulation of GDP is:  GDP = Consumption (private) + Investment + Government consumption + (Exports – iMports).

For those of you still awake, what all this means is only that, under classical (and accepted) macroeconomic theory, government spending is one of the four components of GDP.  Thus, GDP is directly related to increases and decreases in government spending.

Let me now return to what Mr Obama was trying to say.  Mr Obama was commenting upon the measly 1.9% growth in GDP this past quarter.  What his point was that because his approach had “created 4.3 million jobs over the last 27 months, over 800,000 just this year alone,” the problem was not with private sector consumption (“C”)   Rather, the problem is with the decrease in public sector spending (“G”).  “Where we’re seeing weaknesses in our economy have to do with state and local government—oftentimes, cuts initiated by governors or mayors who are not getting the kind of help that they have in the past from the federal government and who don’t have the same kind of flexibility as the federal government in dealing with fewer revenues coming in.”

Let me translate this:  Mr Obama is saying that as a matter of first policy priority, in order to increase GDP the federal government should borrow or tax more so it can then finance more hiring by state and local governments.  Spur the economy by growing the size of government.

While Mr Obama is correct as a matter of introductory macroeconomics, it is reflective of his apparently never having taken, or taken seriously, more advanced economic courses, or any course in microeconomics.  (As a matter of fair disclosure, let me state that I believe macroeconomic theory to be a failure and have observed that it is generally followed only by governments that are controlled by elitist central planners.  For those of you unfamiliar with the term “central planning” – and I know that his will offend my liberal colleagues – it is the economic philosophy followed by the communist approach to growing an economy.)

While it is true that because government spending is a major part of GDP, more government spending will increase GDP on a dollar-for-dollar basis.  The problem is that government spending adds no lasting, sustainable expansion of the economy.  It is temporary.  Look, for example, at the lesson of the stimulus, where hundreds of billions of dollars was gifted as aid to the states, but whose effect has now has now faded.  Thus, this approach is no different an approach than that of so many CEO’s of private companies who lawfully “cook the books” in accordance with proper accounting principles to give the impression that things have gotten better, or that they have done a better job turning around a company, so that they may claim entitlement to higher compensation.  Mr Obama is similarly attempting to cook the books of GDP calculation so as to get elected for another four more years.

More specifically, local government layoffs are not the result of falling state revenues.  Those revenues have actually increased by around 6% over the past two years according to the Census Bureau.  Rather, because the cost of benefits that governments are paying their own workers is increasing far faster than their revenues, they have had to lay off workers to pay for rising pension and health care costs.

And it gets worse.  Look at those states, such as California and Illinois that refuse to follow Wisconsin Scott Walker’s lead and alter the benefits that they pay or reform collective bargaining.  In essence, Mr Obama’s suggestion is that Congress needs to tax Americans from every state more, and borrow more from China, in order to send money to states that have been the most spendthrift.

In summary, Mr Obama’s lack of any private sector experience, and his adherence to simplistic macroeconomic theory, has resulted in his view our current economic woes can best be solved by having our government control and regulate our production.  While such an approach may have worked well for post-war Korea and for China, it is just not in accordance with American culture.  But Mr Obama has already demonstrated, by his ramming Obamacare down our throats despite the overwhelming objection of the American public, that his vision for America is not one that need be in harmony with our cultural hard wiring.

Of course that’s just my opinion, I could be wrong…………… 

© Richard L Wise and RLWise.wordpress.com 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Richard L Wise and RLWise.wordpress.com with appropriate and specific direction to the original content.