Posted by Anthony Gregory on 02/06/09 2:45 PM Last updated 02/09/09 12:21 PM   [Newer: Obama Embraces Bush Lawlessness and Secrecy on "Extraordinary Renditioning" ] [Older: Obama and Bush's Faith-Based Socialism]

From the International Herald Tribune: "The United States lost almost 600,000 jobs last month and the unemployment rate rose to 7.6 percent, its highest level in more than 16 years, the Labor Department said Friday." 

As the government-created recession commences, we can expect more unemployment. The Obama administration argues that its stimulus package will address the problem: "This plan will save or create over three million jobs -- almost all of them in the private sector," the president declared. As for the critique that this stimulus bill is nothing but a big spending spree, Obama said, "What do you think a stimulus is? That's the whole point. No, seriously. That's the point!"

Funny, but will it work? The idea is the Keynesian principle called the "multiplier effect." As the government spends more, consumers have more money, they spend more and jobs are created.

The major flaw with the theory was summed up by humorist Dave Barry, who once wrote, "See, when the Government spends money, it creates jobs; whereas when the money is left in the hands of Taxpayers, God only knows what they do with it. Bake it into pies, probably. Anything to avoid creating jobs."

And there's the rub. The idea that government spending creates jobs ignores the jobs that are lost in the process. If Americans have more money that represents actual wealth, then jobs will be created and society will become richer. But if the government simply prints the money, effectively reducing the value of the money they already have -- or if it takes the money directly through taxation -- that money has simply been sent to Washington and back again.

Of course it's worse than that, since the government does not allocate resources as efficiently or profitably as the market does. It is very inefficient in its wealth redistribution and it does not know which enterprises make economic sense to undertake. Unlike enterpreneurs and other market players, who act and react according to the price mechanism and make billions of individual decisions every day that allow for the productive allocation of resources in the economy, the government imposes one plan on everyone, without the information to be able to engage in economic calculation.

That's why the government's primary mechanism of economic management is coercion, whereas the market's primary dynamic is consent and contract. Market players produce wealth. Government central planning does not; it can only use force to command and redirect wealth created by the private sector.

The Keynesian fallcy of spending one's way to prosperity is unfortunately accepted by most of the establishment, including among Republican administrations. George H.W. Bush's Secretary of State James Baker, for example, said the first Iraq War was about "jobs, jobs, jobs" -- as though government spending on war could yield more jobs than it destroys.

This fallacy should have been laid to rest once and for all by Frederick Bastiat, the 19th-century French classical liberal economist and legal theorist, who described it as the "broken window fallacy." The story goes: A naughty boy breaks a store window with a rock, and an observer says this will help boost the economy, since the shopkeeper now needs to buy a new window, so the windowmaker will have money to buy new shoes, so the shoemaker will have more money to buy what he wants, and so the effect of the window destruction will ultimately be wealth creation.

This ignores, however, what the shopkeeper would have done with the money had his window not been broken. He could have bought something else, and he'd still have his window. Bastiat stressed that an economist's role was to understand not just what was seen in economic life, but what was unseen.

What's unseen in the stimulus package is where taxpayers would spend that trillion dollars if it wasn't taxed or inflated away from them. That money would certainly produce jobs that will instead be destroyed by the stimulus package. And those jobs would produce goods and services actually demanded by the market, rather than by politicians and lobbyists and bureaucrats. There is no way the government can create more productive jobs with its package than if it were to do nothing.

The key to overcoming an economic downturn is to allow the market to create wealth. Economic productivity makes for high-paying jobs and an affordable decent standard of living. When the government tries creating jobs for its own sake it could be very counterproductive for the longterm health of the economy.

One reason the Keynesian fallacy being peddled by Obama is so popular is because there is a popular myth that Franklin Roosevelt's New Deal and especially World War II brought America out of the Depression. As economist Robert Higgs has shown, this is based on a few major misreadings of the data. First, although the GDP did rise sharply during the war, this did not correspond to true economic recovery for the people. At home, there was rationing of sugar, butter and fabrics; and entire industries, such as the automobile industry, stopped making domestic goods for the people and instead were devoted to making materiel for the war. The standard of living of average Americans decreased during FDR's last term, as so much of the economic activity, however superficially bigger, was directed toward the war effort instead of consumer goods.

A similar confusion concerns unemployment rates under FDR. Higgs shows how unemployment remained quite high up to the eve of war. And although nominally, unemployment did shrink during the war, this was because ten million young men were conscripted into the armed forces. Being drafted did not help the economic well-being of those who fought and died in the war, even if the numbers look better to the Keynesian economists.

Let us hope, whatever he does, Obama does not persue FDR's ultimate employment policy of conscripting young Americans by the millions. His administration's talk of national "universal service" does not reassure. And since there is pressure also from the neocon right to bring back the draft, we must prepare for a possible national debate on this crucial issue.

In the meantime, however, we can expect unemployment to continue to climb for at least a bit. If Obama wants recovery within his term, he should let the market correct itself. If he continues with these Keynesian stimulus schemes, we know that whatever jobs he creates will be less productive and fewer in number than the jobs destroyed by his meddling.

Posted 02/06/09 5:17 PM Mike of mv Mission Viejo, CA

Wow! Excellent article, Mr. Gregory, and I couldn't agree more. This is exactly the argument I've been trying to convey to my friends, coworkers, and family concerning the "stimulus" package. Thank you for such a coherent and concise piece.

Posted 02/06/09 6:00 PM QueenB4Liberty katy, TX

I agree with Mike. This is a fantastic article that sums up everything I had been trying to articulate to people recently.

Posted 02/06/09 6:54 PM Philip State College, PA

This is fabulous! How can we make sure every person in the United States reads this? We must link to it from our blogs (preferably blogs from domains other than C4L), digg, and email to our friends. Mr. Gregory, conratulations on a job well done.

Posted 02/06/09 7:32 PM leoevon Fontana, CA

Gregory, Im sorry if I ever underestimated you. You rock dude. Im going to share this with everyone. Thanks for the beautiful wisdom.

Posted 02/06/09 11:38 PM Joyce Boise, ID

Excellent Anthony! It's information like this, that I've used to educate my family and interested friends. They all (family) voted for Obama, except for me. I wrote in Ron Paul! However, I've been able to give them 'food for thought' by casually discussing todays economics, politics, which gives me the opportunity to present info I get from you, and others on this site. Thank you so much for sharing with us!

Posted 02/07/09 12:09 AM C00kieM0nster Oxnard, CA

The broken window fallacy is a fantastic parable that every human being should know by heart. Beyond the unseen, Keynesians abhor not knowing exactly if, when, and on what, the shopkeeper would ultimately spend his savings. Perhaps he will continue to save it. Perhaps he will buy shoes, a suit, or invest it in methods to increase productivity at his shop. The Keynesians don't like that their economic "models" cannot be applied to the unpredictable actions of human. They can be applied to the "broken window."

Posted 02/07/09 07:45 AM Godspeed Cressona, PA

Good article; very clear logic and simple language. I know our side has the potential of winning the intellectual argument, but we are missing one point we should not overlook. That is, “we should not assume our government runs on logic” in the first place. Sure there may be “logical principles” the government uses to justify most actions, and I am sure many intelligent people are in the proper place, but I think the dark side here is a dirty word called “political agenda” which does not care to include logical conclusions. I don’t want to be pessimistic here, but we know what is going to happen, don’t we? The stimulus package will go through, so will socialized medicine, ect….and the establishment will create jobs and put a few people to work, and two years from now (mark my word) they will say Keynesians won. How will they pull it off? The media, in every effort not to let Obama fail will focus on the small successes created by the infused socialism, and continue to blame the free market for preventing poor people from prospering. Already establishment outlets like NPR are hosting evening talk shows where they are conditioning the term free market economist with the negative connotation of being rich, greedy, powerful and standing in the way of poor people who simply have the “right” to benefit or fulfill the American dream. They are also playing this out to be like the “clash of the titans” where they say Keynesians vs. Austrian Economics will be the final show-down and “winner takes all” only they know how it will end, because they and the rest of the media in this country will spin it that they and the establishment are superior in their economic reasoning. I guess we will see but I think it’s tough to beat the devil in a game of logic.

Posted 02/07/09 09:28 AM rightsman Las Vegas,, NV

Hey! I think its time to lay off the guy in the White House! Look at what he's done so far to create jobs. He bombed Pakistan and killed only three civilians. That's better than bombing an aspirin factory! Someone had a job building the bomb, and now has to build another. Good going, I say. The pilot that killed those poor civilians has a job. Why there's two jobs right there! Evidently, we didn't have a real American to do the job, so we sent to Indonesia, or the Phillipines, or Kenya for a man who could lead us. Get another credit card, buy a car you can't pay for, watch a little TV, and when your electricity is turned off, write a letter to YOUR Rep in Washington, D.C., if you can buy a postage stamp. If you are unable to buy a postage stamp, maybe your neighbor could lend you one. Oh, he needs one too. Thank you. Robert Walker

Posted 02/07/09 11:48 AM jakgaph cumberland, RI

Great article, but I think the "issue" for Obama comes down to re-election. If he sat back and did nothing (which is what he should do) the right wing would kill him in the court of public opinion, the results of doing nothing most likely wouldn't play out in 4 years so he would be as loathed as Hoover. So this brings us to the observation that The current political establishment (sans Dr. Paul) is more worried about perceived opinion TODAY, they care not about the future. In order for the US to "right the ship" that is the US economy, serious CHANGE needs to occur, end the fed, Sound Money, repeal income taxes, cut spending, give states back rights, stop the wars, as well as the war on drugs, the Dept of education etc. This would entail a ton of Govt layoffs, massive spending cuts and a ton of very unhappy citizens SHORT TERM ! So until we can get the public consciousness to start thinking long term and make sacrifices today for the future of our nation, we will continue to see the demise of our freedom and our nation. Dr. Paul has the medicine, but its not cherry flavored.

Posted 02/07/09 1:42 PM Snorkeler none, TX

Thanks for this article! Near the end you wrote: "Let us hope, whatever he does, Obama does not persue FDR's ultimate employment policy of conscripting young Americans by the millions. His administration's talk of national "universal service" does not reassure. And since there is pressure also from the neocon right to bring back the draft, we must prepare for a possible national debate on this crucial issue." I think this is coming in a big way and I for one don't feel like having my young children be sent off to murder and die for the government's follies.

Posted 02/07/09 4:40 PM AuthenticAuthor Canutillo, TX

Very good article Anthony! Gee, I've got to write an article of my own one of these days... Thank you for mentioning the rationing of resources during WWII; it was a great "No DUH!" moment when I read it, especially considering that as a child I would watch LOONY TOONS depicting the rationing policies during their episodes. And whenever such depictions were put forth, I never did think, "Gosh, I wish America was more like that...being forced to share." If that was propaganda, it didn't work on me, being a selfish brat that I was. But now you have Obama referencing FDR and claiming that the New Deal saved the economy? I guess it's easy to make such claims when the Greatest Generation is dying out, with little survivors left to correct him on the spot. But the past is made up of more than flesh and bone. If he wants to rewrite History, he'll do what many Egyptian Pharoahs did; destroy or vandalize any contradictory relic and hope no one digs deeper than the false facade of the era.

Posted 02/08/09 4:36 PM sbb4th Chesterfield, VA

Here is probably the greatest mystery to me. How did FDR get elected FOUR times as he systematically destroyed the economy? Also I'm not sure exactly what a 'neocon' is. I hear the term bandied about gratuitously but can't seem to get an answer other than vague generalities. I certainly haven't heard anything about reauthorizing the draft. The closest I've heard is about Obama starting his National Socialist, er, Youth Corp.

Posted 02/08/09 8:55 PM odendin New Albany, IN

want a more realistic look at unemployment? use the U-6. U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.. The U-6 is measured at 15.4% currently. Once expected to reach 20% by years end... that numbers been moved up above 30% now. cuz im proud ta be an amurican...

Posted 02/09/09 09:53 AM Mountjoy Halifax, NS, Canada

Thank you Anthony!

Posted 02/09/09 1:30 PM Spkrman Hubbard, OH

To sbb4th: FDR was very selective about how he destroyed the economy. Some parts of the country supported him without reservation, as they were traditional Democrat states and regions. Wherever he encountered opposition was where he concentrated his spending sprees and make-work programs, in order to sway the voters. This was in an era where the politicians were far more trusted by the public at large, and they fell for his shenanigans. This frequently resulted in the money not being spent where it would do the most good, except for on FDR's political agenda. He was no saint. Further, a neo-con is the post-modern "conservative", which favors big government spending on empire building, warfare and big business (who often lobby for regulations that favor big business over small competitors, to preserve their monopoly). Think of them as democrats without any interest in programs for poor people. Contrast this with true conservatives, who favor a smaller government that lets business work, and compete freely without state intervention (and regulation). Mr. Gregory, great article!!