A presidential reality check

What is one to make of this report?

BEIJING, Nov 18 (Reuters) – President Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

 

With the U.S. unemployment rate at 10.2 percent, Obama told Fox News his administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction.

 

His administration was considering ways to accelerate economic growth, with tax measures among the options to give companies incentives to hire, Obama said in the interview with Fox conducted in Beijing during his nine-day trip to Asia.

 

“It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said.

 

Unemployment keeps rising while jobs disappear. The trillion-plus dollars that have been poured into various pseudo-infrastructure projects and TARP funding are providing no evident return on the vast sums of money spent. The increases in public spending, far from giving the economy the slightest momentum, have unmistakeably pulled the economy back. Indeed, the uselessness of the reflation package is becoming so obvious, even the American President, who signed all of this expenditure into law, is beginning to notice.

The more interesting question, though, is when will the economics profession begin to notice? There are still Nobel Prize winners out there whose only concern with the stimulus has been that it is not enough. As for the run-of-the-mill members of the profession, populating not the commanding heights of our major economic outposts, but the trenches on the front line, if this Keynesian reflation turns out to be the economic disaster it is shaping up to be, in which direction will they turn next?

Because, when all is said and done, it is not the debt that is the issue on its own but the palpable fact that the labour market, both in the US and the UK, has continued to deteriorate in spite of all of the money spent. Mainstream macroeconomic theory is quite clear cut: economies are driven by demand. When in recession, an increase in public spending will raise the level of output and increase the number of jobs.

What we see in the labour market is the clearest evidence one could ever hope to find that the theory does not fit the facts.

I think they will turn to ever higher levels of state intervention. In the context of the recent banking failures – which are (rightly or wrongly) perceived as being the fault of the market – I really cant see them turning to a more free market solution to our problems. So proposals for increased direct funding of industry by the state (cos the banks cant or wont do it),maybe even nationalisation of some banks so political priorities override economic ones for allocating loans to industry, price and wage controls for when inflation starts to kick off, exchange controls to stop capital flight. Higher taxes and, if the markets allow, more public debt.

I think they will turn to ever higher levels of state intervention. In the context of the recent banking failures – which are (rightly or wrongly) perceived as being the fault of the market – I really cant see them turning to a more free market solution to our problems. So proposals for increased direct funding of industry by the state (cos the banks cant or wont do it),maybe even nationalisation of some banks so political priorities override economic ones for allocating loans to industry, price and wage controls for when inflation starts to kick off, exchange controls to stop capital flight. Higher taxes and, if the markets allow, more public debt.

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