Thursday, October 08, 2009

9.8% Unemployment in September

The Obama administration has fallen victim to the broken window fallacy (the belief that an economy can be stimulated by breaking all the retail shop windows so that money must be spent to repair them).

The cash for clunkers program was a classic example of the fallacy. In this case, our government spent an average of $4,285 for 700,000 cars before destroying them. The 3 billion spent on cars was nothing but "pork barrel spending", yet another bail out for the auto industry and its union workers. The stimulus was temporary as future car sales were pushed forward.

The basic argument made in support of such programs is ...

that they get the "money flowing". It is the re-spending of the dollars, the multiplier effect, that supposedly does the economy good. Of course, a general tax cut would get the "money flowing", but those in government love being in control. They love and use the power to decide where the flow of money should start. Reducing the taxes on individuals would allow individuals to decide where money should flow. The problem politicians have with tax cuts is the unlikely probability that individuals would direct the spending to "friends of government" (campaign fund contributors).

Those who are leading the "borrow, spend and tax" charge are facing two problems. The first is floating exchange rates. In the old days, money did not flow from country to country nearly as easily as it does today. Today, when our government borrows to buy used cars, the law of supply and demand works its magic and our dollars are reduced in value. At the same time, the Japanese, Chinese and other world economies are stimulated just as much as ours. Our trading partners enjoy the stimulus but we are left with the debts to pay. Our auto dealer friends have done well but their share of the debt is the same as ours.

The second problem is that the American people are wising-up to the shenanigans of politicians. Gradually, Americans are coming to understand that when our government borrows money to destroy cars or to experiment with windmills, that we have collectively taken out a mortgage on those destroyed cars and silly windmills and that we collectively must pay off the mortgages. Knowing our dollars are being wasted, all but puts our economy in reverse. The wasteful programs take away some of our incentive to work hard and get ahead. The depressing effect is generally small in each individual case but it is a pervasive depression.

When Obama was elected, many folk thought he was "the answer" to all problems. Today, people are using new tools, provided by the Internet, to express their displeasure with "borrow, spend and tax" policies. Many folk no longer see the government as a big money tree that can pay for unlimited free health care for all. The chart posted, shows how far the Obama stimulus package missed its target.
in reference to:
"There has been a net loss of 3 million jobs since the stimulus was passed."
- 9.8% unemployment in September « Don Surber (view on Google Sidewiki)

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