Not All Economists Agree

In a speech this week summarizing his administration’s economic policies, President Obama grossly overstated the support these policies enjoy by claiming, “economists on the left and right agree that the last thing the government should do during a recession is cut back on spending.” There are a great many economists who were surprised to learn that, apparently, they now agree with the President.

Reading straight from the Keynesian playbook, Obama justified the creation of multi-trillion dollar deficits by asserting that the government must fill the spending void left by the contraction of consumer and business spending. As one of those mythical economists who do not agree with the President, I argue that it is precisely this type of boneheaded thinking that got us into this mess, and it’s the reason we are now headed for an inflationary depression.

We do not need, nor should we attempt, to replace lost demand. As Obama himself pointed out in the same speech, Americans have been borrowing and spending too much money. These actions created artificial demand, underpinned by the illusion of real wealth in overvalued stock and real estate markets. Given his intelligence and rhetorical training, it is hard to fathom how President Obama cannot notice the inherent contradiction in his argument.

While Obama commended millions of American families for making the hard choices to reduce spending, pay down debt and replenish savings, he later outlined the government’s intention to spend every American household deeper into debt, thereby undermining all the good that personal austerity would have otherwise produced.

Obama also made the clear-eyed observation that the foundation of our economy was unsound and that a sturdier one needed to be laid. To do this, he even asserted that we need to import less and export more. This has been one of my fundamental points. Our economy is unsound precisely because it is built on a foundation of consumer debt. Instead of spending for today, we need to invest for tomorrow. However, we cannot save more unless we spend less. Production requires capital, which only comes into existence when resources are not consumed.

However, by interfering with this process, Obama prevents the very transformation he acknowledges must take place. When the government spends what individuals save, private investment is crowded out. Society is deprived of the benefits such savings would otherwise have brought about. How can we lay a solid foundation if the government takes away all our cement?

This brings up an oft-repeated, but oft-forgotten, point: government does not have any money of its own. It only has what it takes from the rest of us. If individuals repay their debts, but their government takes on additional debt, we are all simply swimming against the tide. All forward progress is lost as private debt is replaced by public debt, which must be repaid by private individuals. Whatever gains individuals hope to achieve are negated by the higher taxes or increased inflation necessary to repay their share of a larger national debt.

Obama claims that much of the additional debt is not going to finance consumption, but rather “critical investment”. This is a vain hope. In the first place, much of what he categorizes as investment, such as additional spending on education, is not investment at all. Yes, an educated workforce is important, but throwing more government money at education will do nothing to achieve this goal. Spending money on education and calling it an investment squanders resources that otherwise would have financed real investments. In the second place, to the extent some government money is invested, those investments will likely be less efficient than those the private sector might otherwise have financed. There is absolutely no evidence that governments have the foresight or incentives to make investments that facilitate real economic growth. “Five year plans” didn’t work in the Soviet Union and they won’t work here. If the government simply builds bridges to nowhere, society gains nothing.

If we are going to rebuild our economy on a solid foundation, the market, not the government, needs to draw the plans. When private citizens invest their own capital, those who invest wisely are rewarded with profits, while those who do not are punished with losses. Bad investments are therefore abandoned, with capital reallocated to more successful ventures. Conversely, when governments invest money, these checks and balances do not exist. There is nothing to correct bad investments, as losses are endlessly subsidized by taxpayers. In fact, the more a government plan fails, the more it tends to be funded in the hope that additional resources will finally achieve success. Obama himself proves this by allocating still more funds to government-run schools and student loan subsidies. Other examples, such as Amtrak, the New York MTA, the U.S. Postal Service, Fannie/Freddie, and countless others, prove this process is never-ending – until perhaps the bureaucracy collapses under its own weight.

When it comes to government making tough choices, Obama talks a good game, but refuses to actually make any. However, once the dollar finally begins its collapse, he will have no choice but to match his rhetoric with action. It’s unfortunate that we cannot make these tough choices on our own terms, rather than waiting for our creditors to force our hand.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read my newest book “The Little Book of Bull Moves in Bear Markets.” Click here to order your copy now.

For a look back at how I predicted our current problems read my 2007 bestseller “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

More importantly, don’t wait for reality to set in. Protect your wealth and preserve your purchasing power before it’s too late. Discover the best way to buy gold at Download my free Special Report, “Peter Schiff’s Five Favorite Investment Choices for the Next Five Years”, at Subscribe to my free, on-line investment newsletter, “The Global Investor”, at And now watch the latest episode of my new video blog, “The Schiff Report”, at

3 Responses to "Not All Economists Agree"

  1. serialsaver   April 18, 2009 at 8:00 am

    The financial industry collapsed under its own weight of false profits based on non-productive endeavors. Both are to blame yet neither are willing to see their roles or take responsibility for them. A top-heavy tier that rewarded malfeasance is now supported by more malfeasance both by industry and government; witness the M2M relaxations to further obscure Tier 1, the use of ‘temporary debt incursions’ at the sole discretion of those that lied to begin with about their debt.Clearly to big to fail is too big to exist. Government abandoned their fiduciary responsibility to the nation well over a decade ago. The leaders in the markets serve no country, serve no interest except their own. Narcissism and massive egos that thought through manipulation, debt could endlessly supply growth. This is akin to blaming the sick for being ill and therefore a drain on the system. Did some take advantage and play the game…of course! It was rewarded excessively and encouraged through monetary policies. Learned economists saw no hazards in stunning trade deficit with nothing to replace production and trade otherwise except through ‘innovation’ in the financial industry.Hands of wizards dug deeper into everyones pockets even if they were not invested, debt was necessary to lead ordinary lives as invisible inflation remained unrecognized by those whose very jobs were to identify those hazards. The separation between markets and Main Street is dysfunctional and not sustainable. Its clear some still cannot reconcile this obvious fact.

  2. Guest   April 26, 2009 at 7:17 pm

    “Instead of spending for today, we need to invest for tomorrow.”I think you need to go back to school and take an economics class.Your tuition was its “price” because of the demand that it satisfied, without government support financial aid, and loans more than half of the school would not be their thus your “tuition” would of been doubled if not tripled. In addition since your tuition is so high, your school wouldn’t of been able to fund its ability to get the needed resources, we wouldn’t have quality academics.Republicans dont realize how much they depend on the poor, and price equilibrium is one of them. Many more…..Thus your theory is unfounded and irrelevant.

  3. Guest   April 26, 2009 at 7:35 pm

    If education is not an investment for the future, then why did you go to school?