Vice President Biden recently confessed that the administration "guessed wrong" on the stimulus bill. Even President Obama reluctantly admitted that unemployment is likely to reach ten percent this year, after promising in February that his stimulus package would keep it from exceeding eight.
The US economy is so large and globally dominant that it probably will recover at some point -- perhaps just in time for the 2010 elections. And once it recovers, no doubt Mr. Obama will stop blaming his predecessor and take credit for it. But his actions only worsened the economic recession, just as President Roosevelt's did in the mid-1930s. According to some studies, Roosevelt's policies prolonged the depression by seven years.
So what exactly is wrong with Mr. Obama's plan? The short answer is that he is attempting to stimulate demand, rather than stimulating supply. To make things even worse, he also is taking actions that will depress supply.
For the past three decades, the Federal Reserve Board was allowed to moderate America's money supply with an unprecedented degree of autonomy. Mistakes were made, but the Fed generally has been able to offset -- or at least delay -- the harm done by the looters in Washington.
However, Mr. Obama piled on spending and debt that even the most prudent monetary policies might not be able to counteract. Stagflation and other terms that haven't been heard since the miserable Carter years now are voiced again in economic forecasts.
Mr. Obama's so-called stimulus spending is counterproductive not only because of its unprecedented magnitude, but also because of its beneficiaries. As an inexperienced policy maker, Mr. Obama naively believes that supply follows demand. If mobs of greedy supporters at town hall meetings demand taxpayer-funded kitchens and free healthcare, Mr. Obama will try to find a way to supply them.
But good leaders aren't followers and supply doesn't follow demand -- not in a sustained prosperous economy. As successful entrepreneurs know, supply usually leads demand. For example, we all demand cheap cold-fusion energy, but if it ever becomes commercially viable, it will be supplied in some unexpected way that no consumer focus group (or president) could envision. Sustained demand then will follow supply.
That business principle applies to more than just atomic energy. Ordinary things like Bedford Falls housing developments work that way too. In the 1940s movie It's a Wonderful Life, guardian angel Clarence showed George Bailey, a successful building and loan entrepreneur, what life would be like without him:
Clarence: Are you sure this is Bailey Park?
George: No, I'm not sure of anything anymore. All I know is this should be Bailey Park. But where are all the houses?
Clarence: You weren't here to build them.
The movie dialog hints at the folly of stimulus policies that fund or promote consumer demand, such as those implemented in the past by Fannie Mae, and today by the Obama administration. Demand stimuli lead to inflation and boom/bust economies. They also eventually bankrupt the George Baileys and cause economic slowdowns and massive unemployment. Stagflation.
In contrast, supply stimuli -- investment tax credits, accelerated depreciation, and capital gains tax reductions -- lead to long-term capital formation. Small businesses are started. Big factories are modernized. The results are improved manufacturing efficiency, greater American productivity, more exports, and more jobs. And the jobs turn into productive careers, not temporary day labor.
More importantly, when supply leads demand instead of chasing it recklessly, a stimulus is not inflationary. Stimulated suppliers compete in a crowded market by improving their products and cutting prices. Bailey Park gets built to endure as a well-planned community, not an overpriced boomtown hastily carved into a cornfield.
Like another movie character, Ferris Bueller, perhaps Mr. Obama simply cut class when he was supposed to be learning basic economics. Or perhaps Mr. Obama is fully aware of the destructive consequences of his fiscal policies, but the lure of shifting money and power from individuals to government is irresistible.
If you're not a movie buff, a backyard way of understanding consumer demand stimulus is to think of it as lighter fluid with no charcoal. The temporary flash of heat and light can fool gullible picnickers into thinking they soon will be dining on steak, but of course they'll be stuck with cold potato salad.
Mr. Obama actually has addressed economic supply issues, but instead of stimulating supply, he restricted it further. His new CAFE regulations effectively ban the sale of most cars currently made by US auto companies. Mr. Obama is curtailing supply while stoking demand with his stimulus spending.
It's the automotive equivalent of giving $2000 to crackheads in New Orleans after Hurricane Katrina and then posting DEA agents on every street corner in town. Smuggling, bribery, price-hikes, and gang wars erupt.
Will Mexican drug mules enlarge their trans-border tunnels to accommodate black market SUVs? No, but freedom loving Americans naturally resist fascism, so they will find creative ways to get another Little Deuce Coupe and avoid buying an Obama Motors Little Il Duce Coupe.
Many simply will repair their old vehicles. In doing so, they will "smuggle" safe, comfortable, productive vehicles from the past to the present. As long as automakers and offshore aftermarket suppliers continue making every part, there's no reason a gardener's full-size pickup truck can't last for decades -- or at least until the state overreach is corrected.
Mr. Obama also wants to restrict the supply of affordable coal, oil, and nuclear energy with dramatic increases in taxes, exploration bans, and costly regulations. Energy costs have risen dramatically not because of increased economic activity, but because of supply reductions. More stagflation.
Ditto for nationalized healthcare: In that sector, Mr. Obama's policies will lead to skyrocketing demand while choking off supply, just as it has in every other country that already uses his proposed system. Inflation, rationing, favoritism, bribery, and offshore "medical tourism" will follow.
One might even argue that Mr. Obama is limiting the supply of skilled American labor by encouraging union expansion. Collective bargaining seeks to restrict the number of workers and artificially boost demand for them by reducing their productivity. That will lead to stagflation and more offshore manufacturing -- and increased illegal smuggling of non-union workers across the Mexican border to do domestic jobs that can't be exported to China.
The Left finally staged that Ferris Bueller sequel we've all been waiting for. But it turned out to be a horror flick.