President Barack Obama’s message of hope and change, as well as his plan to put Americans back to work, is reminiscent of Franklin D. Roosevelt taking office after Herbert Hoovers’ continuous economic failures. Now that the stimulus package has passed, the big question is: Will it work?
Unfortunately, the measures taken by FDR did not solve the Great Depression. Rather, they prolonged and exacerbated it — as will Obama’s economic stimulus plan, if history is any indicator.
FDR implemented his own version of Keynesian economics in an attempt to rescue the country.
Keynesian economics was introduced in a book titled The General Theory of Employment, Interest and Money by John Maynard Keynes. In a nutshell, Keynesian economics follows the principle that when the economy enters an off period, it can be fixed by the government borrowing money and injecting it into the economy. While that may sound good — and even work out in mathematical formulas — it does not always work out so well in the real world.
Keynesian economics overlooks one point: Government cannot inject money into the economy without first taking money out of it. This does not increase the available cash in the economy — it merely transfers the wealth.
This is evidenced by history. Hoover took office in 1929 amid a government surplus and low unemployment. The stock market bubble created by the Federal Reserve was beginning to deflate, and in response Hoover increased spending, funded by borrowing. The result was a budget deficit of 4.5 percent of the GDP and widespread unemployment. Roosevelt, while better on trade issues, followed the same approach as Hoover — with the same dismal results.
Obama’s “new New Deal” is reflective of FDR’s New Deal, which ballooned the U.S. budget with spending on local projects. The first New Deal failed because trying to spend your way out of a mess won’t work.
Still more examples — such as Gerald Ford’s tax rebate stimulus, Japan’s 0 percent interest rates, and George W. Bush’s high deficit spending and stimulus packages — demonstrate the overall failure of this economic policy.
These policies do not work because they over-liquidate the market. The last thing this country needs is more inflation — inflation being defined as an increase in the money supply.
Americans now face Obama’s economic plan — building bridges and roads and spending federal money to try to stimulate the economy. Sound familiar?
Obama’s recovery plan just might be the one to bring the U.S. economy to its knees. Americans have lived in a fantasy world of debt-financed consumption, and the nation will try to get out of its overconsumption-based economic woes with more debt.
America’s “phony economy,” as economist Peter Schiff calls it, is collapsing beneath its citizens. Obama must finance most of this debt via inflation. With the Fed already priming the pump with nearly $4 trillion of newly created stimulus just in the past year, America’s economy may become saturated.
Remember, Obama can inject more money into people’s pockets, but that money will have less purchasing power than before. It is not how many dollars but what those dollars can get you.
America could create a hyperinflationary depression with too much printing and spending — a situation everyone wants to avoid. However, if printing, borrowing and spending is this administration’s plan, that may be our inevitable future.
Thomas Frain is a freshman majoring in economics and political science.