http://mises.org/daily/3907

Political success, as reflected in the recent gubernatorial races appears ever-more staked on the state of the economy. Official unemployment recently measured 10 percent, though the more-honest gauge (U-6) shows the nation running unemployment at a Depression-like 17.2 percent.

In response to high unemployment numbers, Barack Obama has said, "I will not rest until all Americans who want to work can." Yet Mr. Obama's policies belie his words. In fact, what his administration is doing will ensure massive unemployment and endless economic stagnation.

To understand why I make such a sweeping assertion, it is necessary to comprehend how our economy ended up in this predicament in the first place. For this, I must give a cursory explanation of the Austrian theory of the business cycle.

The interest rate is a price signal, no different from the price tag on any good. In a free market (which the United States most certainly does not have), the interest rate is determined by the supply of and demand for capital. Individuals choose to consume or invest, and this dictates the amount of loanable funds, which businesses will use to undertake projects to bring goods to market for future consumption.

However, when a central bank like the Federal Reserve prints money, artificially lowering the interest rate and expanding the loanable pool of funds, producers are left with a false price signal. The interest rate will tell producers that consumers want them to undertake long-term projects to bring goods to market. This artificially lowered rate will also induce consumers to save less and spend and borrow more.

The conflicting actions of consumers and producers in response to the government-distorted price signal of the interest rate cause the mass misallocation of resources. This leads to the bust manifested, for example, in the empty houses and office buildings throughout the country.

Logically, one might think that the best way to fix this mess would be to liquidate the malinvestments of businesses, pay down our debts and start fresh; in other words, allow for the market to correct the imbalances and distortions created during the artificial boom.

But the enlightened Barack Obama and his team of trusty economic advisers, along with the ever-compliant Messrs Bernanke and Geithner, have other ideas. Practically every single policy they have enacted is intended to stop the market from clearing out the wastes and excesses of the boom.

The government has undertaken programs to keep people in homes and cars that they cannot afford, fictitiously propping up GDP numbers. It has bailed out failing enterprises; abrogated contractual obligations; created make-work, politically oriented, and naturally often fraudulent and wasteful public-works projects; and increased the money supply at an unprecedented rate, easing the Federal Reserve–controlled interest rate to a ridiculous 0 percent. Our representatives have done all of this while vastly expanding a national debt that was already egregious.
"The interest rate is a price signal, no different from the price tag on any good."

All of these policies prevent any sort of recovery. They are designed to stop markets from reflecting reality, and to continue the distortions already created by government tinkering. History seems to be repeating itself, with Obama following Hoover and FDR's favorite anti-Depression prescriptions.Download PDF

There are major costs to these programs. Government has (and continues to) prolong the downturn by effectively jamming the gears of the markets. It has also created a major moral hazard by bailing out failed companies, hurting those successful companies who have been forced to subsidize the failed ones, and preventing entrepreneurs from putting the assets (now being tied up in unprofitable businesses) to better use.

This forced subsidization of failed enterprises has been perhaps most notorious in the mortgage-lending market, where banks, not individuals in many cases, have had to take responsibility for underwater mortgages, absolving debtors from discipline, and discouraging banks from extending mortgages in the future. The government has also completely misled businesses and their investors by running roughshod over contracts in the cases of the AIG bonuses and the GM-creditor boondoggle.

Government has extended largess to purportedly "save or create 600,000 jobs," a figure that I say is purported because we know it is downright fallacious. As Frederic Bastiat told us, the good economist examines not only what is seen, but also the unseen. This arbitrary number of 600,000 hides the fact that government make-work projects and supports for unsound ventures stop new and more profitable industries from springing up, because of the diversion of land, labor, and capital into projects that would otherwise not exist.

This diversion prevents new job opportunities from being created, and also prevents workers from learning new skills to become viable employees in new and profitable businesses. At best, if there was no politicization, corruption, or waste, and the government was able to build things both solid and aesthetically pleasing, the government could merely divert resources. However, it would still not be meeting any consumer demand (like a private enterprise would) because government lacks the price mechanism of the market, which would show profits or losses. Government responds to the demands of political interests.

Put more succinctly, we don't know how many jobs have been lost because of the ones that have theoretically been saved or created. The resources used to save or create these jobs (and for all of the other bailouts and programs enacted by the government) have to come from somewhere, and they do: from bilking the taxpayer and future generations of taxpayers.

In addition, low interest rates have not only kept alive banks that would have failed, but allowed them to generate profits on the taxpayers' dime by borrowing money from the government at 0 percent and either lending it back to the Federal Reserve or pumping it into the financial markets, where we see the results of continued monetary inflation in the increase in stock, bond, and commodity prices.
"We don't know how many jobs have been lost because of the ones that have theoretically been saved or created."

The banks have no incentive whatsoever to gamble their free money by lending it to risky borrowers like the overleveraged American people. What this represents is a massive wealth transfer from the public to the financiers, who prop up the government itself by underwriting and making markets in its debt.

Most important of all, in keeping interest rates artificially low, the government continues its distortion of the price-signaling mechanism, which caused the whole crisis in the first place.

There are also major costs due to the debt that the government issues to finance their intervention. First, an increase in the national debt represents a levering up of the public balance sheet, counteracting the positive effects of the necessary delevering of the balance sheets of businesses and households. Second, the massive increase in our debt undermines the creditworthiness of the country, which will ultimately lead to an increase in interest rates as people lose faith in our government and in the ability of our economy to pay down the debts.

The only way for the government to service these debts (since they cannot do it honestly by direct taxation) is through the indirect tax of inflation. And again, inflation will continue the price-signal distortion.

So, just to review, the government is creating wasteful public-works projects, preventing markets from adjusting, preventing businesses from going belly-up and their assets from being put to better uses by more competent businesspeople, and all the while debauching the dollar and ruining the nation's creditworthiness.

There is a final point that must be made. Just as during FDR's presidency, market entrepreneurs (as opposed to the political ones, who profit from government swindling) are now genuinely afraid of this administration. People in business do not know how arbitrary or onerous future government regulations will be.

As the government runs from one whimsical plan to another, all that market participants can be sure of is that there will be more regulation and intervention, and that the people will be soaked by taxes either direct or indirect. Since businesses are unsure of the economic environment, but rightfully anticipating (though, in my opinion, underestimating) an increase in outright socialism, this uncertainty will surely quell economic growth.



Thus, we see that Obama's policies are not only misguided but also incredibly destructive. If instead of letting the economy liquidate, painful as it may be, we try to continue the illusory boom, we will be doomed to years of unemployment, stagnation, and ultimately the "crack-up boom" of the economy. And this isn't even to mention the threats posed to our economy by national healthcare, cap-and-tax, and, even scarier, Mr. Obama's foreign policy.

Each and every one of these policies retards the necessary adjustment, depriving businesses of valuable assets that can be put to more profitable lines of work and depriving consumers of the products they seek at true fair-market value. The only way to create jobs and fix a broken economic model is to release the entrepreneurial forces of America. Unfortunately, it appears that President Obama does not care for this solution, preferring to ensure a prolonged depression to serve his political ends.