Obamanomics: Can it Solve the Economic Recession?

The US prints money massively as printing press machines print "toilet papers". At this pace, the US dollar will be soon be a "worthless" paper. There is no need to rush and buy foreign currencies either. Foreign economies, watching in anticipation, are gearing up to follow Obamanomics.

What is Obamanomics? It is President Obama's vision of economic prosperity focusing on "bottom-up" economic policies versus the "trickle-down" policies of Presidents prior to his present administration.

What economic school of thought does Obama base his economic prescriptions? Detractors accuse him of some leaning towards socialism. However, Obamanomics is simply "Keynesian Economics".

John Maynard Keynes was a 20th century British economist. His famous work called " The General Theory of Employment, Interest and Money" in 1936 summarizes the key points of his arguments.

Keynesian economics believed that economic stability, prosperity and full employment are attainable if government can manage efficiently its monetary and fiscal policies. Keynes also claimed that "inflation", the rise of prices, can solve unemployment.

Keynes believed that money flows in a circular fashion. A person spends money on one item. This purchase will bring "earnings" to another person or business. The resulting earnings will then be used to buy other people's or business' products and services. The flow of money continues similar to a circle.

However, in an economic crisis, consumers or business entities will tend to hoard money and thus, the circular flow is stifled. Keynes argues that the government must remove the "choking up of the flow" by priming up spending. The circular flow of money then continues. Government intervention can be in the form of printing more money, lowering taxes (fiscal policy), lowering interest rates (monetary policies) and creating jobs in productive segments of the economy like public works and other investment projects to create wealth. According to Keynes, the redistribution of wealth from the rich to the poor will lead to economic growth since the poor will more likely spend the wealth.

Keynesian Economics was proclaimed the "new economics" in those days. Keynes economic innovation was a direct contrast to the prevailing economic school of thought at that time, better known as Classical Economics. Classical economists believed in "free market enterprise". Keynes argued that classical economics brings so much instability and cannot solve an economic crisis. Keynes insisted that the "free market" philosophy has no "built-in mechanism" to assure full employment.

Keynes gained so much international reputation that the United States adopted his economic policies and since then became the economic "bible" from the mid-1930s to the 1970s. His influence was so strong that universities around the world, especially in the US, consider it as the orthodox dogma in economics.

Keynes prescription to prevent an economic recession was accepted easily because the classical economics cannot give an alternative antidote to stop an economic depression. Classical economists view the economic depression of the 1930's as more complex and complicated. Keynes new economic idea seems to deliver immediate results than what the other classical economists or other economists can provide. Classical economic theories were pushed aside.

The flaw of Keynesian economics, according to many critics, is its myopic vision of the economic situation. It considers only the immediate effects of its policies and not the long term effects to other economic groups or sectors of the economy. The long term consequences of the economic policies tend to be downplayed.

Obamanomics is simply a reinstatement of Keynesian Economics. The economic central planners of Obama embody the principles of Keynesian thought. In fact, the Federal Reserves, the central bank of the US, has in its payroll 220 economists with doctoral degrees in economics. Huffingtonpost.com reports that FED spent "$382 billion in 2008 for fiscal, monetary policy studies". Economists employed by the government must be independent of FED, otherwise, it will just be biased in protecting the mistakes of the organization to preserve their jobs in the Federal Reserves.

The present economic recession in the US is also a complex process. It is too mathematical with complicated deductive reasoning involved. Economists are known to have expertise in making "assumptions" but their mathematic models to explain economic phenomena are imperfect. Majority of Americans do not care to follow through with numbers. Americans are contented with bottom lines. But, bottom lines can be deceptive, for it is easy to give half-truth in numbers.

The challenge to Americans today is to get out of their comfort zones to dissect the economic theories that Obama is following to help our economy get out of the economic recession. A single digit economic growth per quarter should not make Americans relax that we will be out of a recession next year. Economic critics of Obama holler for studies that will show the long term consequences of Obama's economic policies. The government deficit spending and the encouragement of spending by consumers contradict common sense. Common sense dictates that one must live within their means and not splurge using money we do not have by using credit cards. Yet, we follow.

Henry Hazzlitt concludes his book "Economics in One Lesson" saying "The economy of a nation must run for everybody. To see the problem as whole, and not in fragments: that is the goal of economics."

Sources:

Henry Hazzlitt, "Economics in One Lesson"

Ty Andros, "Crack Up Boom, Part III", FinancialSense.com

"Great Myths of the Great Depression", Foundation for Economic Education

Roger Martinez, "Keynesian Economics - A Flawed Economic Theory", CapitalHero.com

John Maynard Keynes, "General Theory of Employment, Money and Interest"

Ryan Grim, "Priceless: How the Federal Reserves Bought the Economics Profession"