A recently released economics book will not likely be featured by the legacy media as a selection for the Obama Book of the Month Club.
Last March, TIME noted that the White House had been "seized" by a book entitled Animal Spirits: How Human Psychology Drives The Economy, and Why It Matters For Global Capitalism written by two economists. White House Budget Director Peter Orszag was photographed clutching a copy. A May piece in the American Thinker stated that Animal Spirits authors Akerlof and Shiller implied that we citizen consumers are irrational animals and the government is the wise zookeeper. Key points in the book include these:
(1) The authors accept [John Maynard] Keynes' understanding of the role of government vis-à-vis citizens with regard to the economy. For them, it's like a parent-child relationship.
(2) The current downturn in the U.S. economy can be traced to inadequate parental oversight.
(3) When animal spirits are free to roam amidst an undisciplined, under-regulated free market bad things can, and often do, happen, say the authors.
(4) Akerlof and Shiller eventually write what may bring some discomfort to White House readers: Government's counterproductive behavior can summon the baaaad animal spirits.
(5) The impact of animal spirits during a financial crisis gives the government an "opportunity" to intervene.
Today, another book on economics is on the scene and it offers a message that won't be welcome in the White House.
A September 6, 2009 Telegraph article entitled "Barack Obama accused of making 'Depression' mistakes," noted that Dr. Charles K. Rowley, Duncan Black Professor of Economics, George Mason University, has written and published a monograph titled Economic Contractions in the United States: A Failure of Government. (George Mason Univ. doctoral student Nathanael Smith is a co-author.)
At 124 pages, the work is shorter than Animal Spirits but thicker with historical documentation and scholarly analysis. Here's an overview of its thesis.
"[W]e suggest that the current economic recession, like the extended Great Depression of 1929-1939, represents a failure of government, and of state capitalism [defined as a "heavily-regulated, mixed economy, with governments at national, state and local levels that engage in production, distribution, regulation and coercive wealth transfers, as well as serving as an often uneven-handed referee." P. 56.] that is its creation, certainly not a failure of laissez-faire capitalism." (p. 2)
"The American national myth that FDR and the New Deal ‘pulled the US out of the Great Depression' does not stand up to an examination of the facts." (p. 20)
"The market chaos that ensued [in 2008] can be regarded as the outcome of rational behavior in a dysfunctional state capitalist environment." (p. 60)
"State capitalism rather than laissez-faire capitalism is the primary source of the moral failings which are now the object of populist anger that is being fueled, ironically, by the very politicians who were the chief culprits in stoking the house-price bubble that caused the financial crisis." (p. 61)
"The financial crisis of 2008 in the United States was primarily a failure of government: poor monetary policy, poor fiscal policy, and poor microeconomic policies." (p. 87)
As to the current intervention in the economy driven by Congress and the Obama administration,
"In our judgment, the current recession is by no means as deep as President Obama and his administration would have us believe. By exaggerating the seriousness of the economic contraction, the President has opened up avenues for a full-blooded pursuit of a much more far-ranging, left-leaning economic agenda than the majority of Americans would normally endorse." (p. 96)
In short, in trying to fix what it broke, the federal government is only making matters worse as "plans seem to be underway to introduce still more policies that impede market recovery." (p. 95)
As to what the future holds,
"The November 2008 elections placed into the Oval Office a liberal-democrat with the most left-wing voting record in the US Senate. The voting record was down-played throughout the electoral campaign. Since his election, however, President Obama has displayed his true colors through a policy program designed to shift the US economy sharply leftwards. Once this shift in economic policy is fully achieved, Anglo-Saxon laissez-faire political economy will give way to continental European social market political economy as reflected in current French and German economic stagnation." (p. 53)
"It may be necessary to help (or wait for) people to learn the right lessons from the crisis before solving the problems of the US economy will become politically feasible." (p. 63)
We contacted Dr. Rowley and invited him to respond to several follow-up questions for the benefit of American Thinker readers. Our three queries and his responses follow:
Question 1: Let's assume that all the major announced legislative initiatives coming from the Obama administration are passed by the Congress with only relatively minor adjustments. Those initiatives would include, but not be limited to, healthcare reform, Cap & Trade, Card Check, immigration reform, and perhaps even the Global Poverty Act of 2007 that Obama sponsored while a Senator. Specifically, what will likely be the impact on the US economy?
Dr. Rowley Response (1):
"Men at some time are masters of their fates:
The fault, dear Brutus, is not in our stars,
But in ourselves, that we are underlings."
(William Shakespeare, The Tragedy of Julius Caesar Act I, Sc. ii)
According to the White House's own estimates, the federal budget deficit for 2009 will be $1.6 trillion, 11.2 percent of the overall economy, the highest on record since the end of the Second World War. By 2019, the national debt will have built up to 76.5 percent of the US national economy, the highest proportion since just after the Second World War. As Nathanael Smith and I explain in our book, these huge deficits and debt burdens, by themselves, constitute a clear and present danger to the economic well-being of all Americans. Unlike 1945, the US in 2009 does not, and will not in 2019, reign hegemonic over a war-shattered world economy as was the case throughout the great US postwar recovery of 1946 to 1964.
Healthcare reform legislation will surely be enacted before the 2010 elections. If the Democrats fail Obama with respect to his major policy objective, predictably they will lose control over Congress in 2010. In my public choice prediction, the public option will not be part of the immediate outcome but will lurk in the wings to be introduced should universal coverage not quickly emerge. The overall impact will be the same. The new legislation will not be budget- neutral, since Obama will not tax current beneficiaries (and sacrifice union support) and will not significantly cut Medicare (and lose the senior vote). Funding 45 million additional individuals into the healthcare program, because of moral hazard, will prove to be expensive beyond all expectations, and will add trillions of additional dollars to the debt between 2010 and 2019. Unsurprisingly, once individuals perceive a free lunch, many more than 45 million will crowd the tables. Like Social Security, Medicaid and Medicare, once enacted, the program is irreversible, because of the new beneficiary class of voters that consolidates around it. The march to socialism gains momentum.
Some modified version of the Waxman-Markey bill, designed to create a cap-and-trade mechanism for carbon dioxide discharges into the atmosphere, is also likely to pass the Senate (it has already passed the House) before the 2010 elections. In August, a Zogby-poll, commissioned by the National Wildlife Federation (a surely ‘unbiased' source) found that 71 percent of likely voters in the United States support it. Of course, many voters are unaware of the large energy taxes implicit in such a mechanism. They dream of a coal-free, nuclear-free, gasoline-free environment, without any recognition of the enormity of the costs of such transition.
Legislation will occur, driven by powerful interest groups, including the Sierra Club, the Environmental Defense Fund, the World Wildlife Fund, and the small but growing wind and solar industries, with payoffs in the form of additional subsidies to buy the farming vote. The outcome will be soaring energy prices, electricity brown-outs of California-magnitude, massive subsidies to West Virginia and the Powder River Basin in Wyoming, and voter rage that will emerge too late to foreclose on the deal. The US energy industry thenceforth will be controlled completely and forever by the US federal government. In the meantime, India and China will choke up the atmosphere with carbon dioxide emissions, congratulating themselves on the bounded rationality of the US electorate.
Suppose that Obama runs out of legislative steam by the 2010 elections and holds over the remainder of his agenda. Further suppose that voters wake up in 2010 and fall back on the separation of powers, depriving him of a working majority in the new Congress. Obama nevertheless will preserve his policy advances until 2012 through the use of the veto power. Further suppose that Obama pays the ultimate price in 2012 with defeat in the presidential election. Still he will ‘own' legislation that will transform the US economy possibly irreversibly, from laissez-faire to state capitalism. Quite an achievement for a one-term senator without any prior executive experience, would you not say?
Question 2: If you're willing, take out your economist's crystal ball: If the Obama agenda is successful, what impact are we likely to see, say two-to-five years from now, on (a) inflation, (b) unemployment, (c) the federal budget - both in the distribution of the expenditures and in size, (d) devaluation of the dollar, (e) the federal debt, (f) our international trade profile, plus other major indicators of the health of the economy?
Dr. Rowley Response (2):
"There was chest on chest full of Spanish gold,
With a ton of plate in the middle hold,
And the cabins riot of stuff untold,
And they lay there,
That had took the plum,
With sightless glare
And their lips struck dumb,
While we shared all by the rule of thumb...
(Derelict aka Cap'n Billy Bones his song by Young Ewing Allison)
My reply to this huge question will be brief but to the point. In 2012, the election year, unemployment will remain stubbornly high at some 8 percent of the labor force. Inflation will be 6 percent per annum, and rising, in a Fed-driven bid to monetize the debt. Economic growth will be anemic at 1.5 percent per annum. The exchange rate will be $2 to the euro, with the dollar in fast-fall as its status as an international reserve currency swiftly fades. The federal budget will be in massive deficit as expenditures rise uncontrollably while tax revenues stagnate. Entitlements and interest on the debt will account for a fearfully high percentage of expenditures, crowding defense outlays off the table. Nominal interest rates on long term government bonds will run at 10 percent and rising, reflective of hyper-inflation fears. ‘Happiness' indices will be low and falling.
Question 3: At the beginning of Chapter 4 (p. 55), "Laissez-faire Capitalism has not failed in The United States," you ask, "Where have all the flowers gone"? By "flowers" you mean those financial and economic scholars that once would have been expected to defend laissez-faire capitalism against the onslaught of state capitalism. You name several as the "business cycle scholars," "monetarists" who once sided with Milton Friedman against "hydraulic Keynesianism," "efficient capital market theorists," "law-and-economics pioneers who once boasted about the wealth maximizing propensities of the common law," and the "critics of economic regulation." So, where do you think they've gone?
Dr. Rowley (3):
Dr. Charles K. Rowley (PhD, University of Nottingham) is Duncan Black Professor of Economics at George Mason University and General Director The Locke Institute. The monograph previewed above is available through http://www.amazon.com/ or from http://www.thelockeinstitute.org/
Where have all the free market soldiers gone?
Why, they have run for cover, almost every one!
Their models have failed, their math is undone.
They need new statistics and that's no fun.
They retreat to the shadows, evading the socialist gun.
All escape routes are shut off, nowhere else to run.
So they hide in the darkness, evading the free market sun.