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Why Obama's Stimulus Plan Will Fail... And A Better Alternative

-- Posted Tuesday, 20 January 2009 | | Source:

by Jake Towne

Keynesian and Monetarist economic central planning always comes to a nasty end, as shown by the Austrian School's Henry Hazlitt, F.A. Hayek, Ludwig von Mises, Leonard Read and Ron Paul.

This essay will make three key points as to why Obama's stimulus plan will fail and then will suggest a much simpler plan that will not end in failure and should actually improve the situation. The first reason why Obama's central economic planners will fail is because they are too focused on full employment rather than full production. The second reason is that the American economy, or any economy, is far too complex for any central planning group. The third reason is that Obama's proposal of more stimulus spending is exactly what got us into this mess. I even submit to you that Obama's team has no idea how to even produce a pencil; in fact none of us do. Let me explain. 

(Cartoons from "The Road to Serfdom in Cartoons" by FA Hayek, courtesy, link at bottom)


3The Rallying Cry is "Full Production!" not "Full Employment!"

Last year I traveled to the mountainous and rain-forested Xishuangbanna region on the Chinese-Burma border. In one motley collection of huts far, far away from the nearest (dirt) road, the villagers I met lived in a subsistence economy, as close to a tribe of hunters and gatherers you can probably find on this planet. While they are literally dirt poor (but still managed to live happier lives than many city-folk, in my estimation), one fact I noticed is that they have zero unemployment. That's right! Zero! Everyone has a job and is fully engaged, mainly in providing a food supply.

In fact, even in modern economies, I argue, full employment is exceptionally easy. All you have to do is use inferior capital equipment, build in plenty of inefficient bureaucracy or other forms of busy work. I will revert to China, where I have lived for over three years, once more. Half of the population still farms their own private plots of land, but if they were to try American-style, highly mechanized farming over much larger plots of land, much higher yields would be realized from far less effort. There would also be, temporarily, much higher unemployment. In fact in China, part of the reason these people still live serf-like lives is because their central planners cannot figure out quite what to do with them all. Even Fred Thompson with his "digging holes" parody recognizes the truth of this claim.

As Austrian economist Henry Hazlitt points out in his chapter "The Fetish of Full Employment" in Economics in One Lesson:

"The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. It is for this reason that men began putting burdens on the backs of mules instead of on their own; that they went on to invent the wheel and the wagon, the railroad and the motor truck...

"Translated into national terms, this first principle means that our real objective is to maximize production. In doing this, full employment -- that is, the absence of involuntary idleness becomes a necessary by-product. But production is the end, employment merely the means. We cannot continuously have the fullest production without full employment. But we can very easily have full employment without full production...

"The real question is not whether there will he 50,000,000 or 60,000,000 jobs in America in 1950, but how much shall we produce, and what, in consequence, will be our standard of living?"

On that note, let's now look at Obama's plan. [To his credit, Obama is fully aware that the economy will get far worse before it gets better, although it could also be argued that to say otherwise is delusional.] In his January 10 speech on the economy, Obama notably focuses on just what Hazlitt warns to avoid, "creating jobs," not optimization of our economic production. In fact, the sole mention of production is reserved for alternative energies, which are great, but the trouble there lies in that the central planners, not a free market, will decide which technologies to pursue or not pursue. Consistent with the Chicago School, Obama sums up with:

"It's not too late to change course but only if we take immediate and dramatic action. Our first job is to put people back to work and get our economy working again. This is an extraordinary challenge, which is why I've taken the extraordinary step of working even before I take office with my economic team and leaders of both parties on an American Recovery and Reinvestment Plan that will call for major investments to revive our economy, create jobs, and lay a solid foundation for future growth."

Therefore our central economic planners must take "immediate and dramatic action." Now, notice that by "reviving the economy," he really means to create jobs. In the Romer/Bernstein paper Obama references, they claim 3.3 to 4.0 million jobs will be created by Q4 2010, or two full years later. I could spend another article demonstrating that their voodoo BLS employment statistics and Keynesian GDP math are complete hot air, but let us just take note of page 9/14.  On this page, these central planners have lovingly estimated the job growth in each sector from the funds they plan to distribute to the nearest thousand. Notably missing is the 92,000 new soldiers that Obama plans to create to support more war-making. How do these Keynesians know what our economy should look like in two years?  That Industry A should be favored over Industry B?  I assure you, they do not have a clue.  As I will shortly demonstrate, they do not even know how to make a pencil.

In the Obama-Biden planned economy, what is the #1 priority? Check it out here, of course it's "IMMEDIATE ACTION TO CREATE GOOD JOBS IN AMERICA."  This is followed by #2, relief for struggling families, with which I sympathize, although some of this aid will be made necessary by the unavoidable ineptitude of the central planners.

Next is #3, "direct, immediate assistance for homeowners, not a bailout for irresponsible mortgage lenders." Now, these homeowners did make a conscious decision to sign a mortgage, and will benefit at the cost of taxpayers who do not own a home (a classic divide-and-conquer strategy), although this might be less objectionable than giving money to banks and auto companies. Also, the central planners will need to decide which mortgage lenders are "responsible" and "irresponsible" or "partly responsible." However, so far, not a word about Full Production!

5This is reserved for #4, "a rapid, aggressive response to our financial crisis, using all the tools we have." In other words, "we are going to try like crazy to spend our way out of this." In the subsection entitled "Manufacturing and Green Jobs," we finally see that Obama simply plans to create a hodgepodge of different funds, staffed by bureaucrats, who will dispense funding at their whims to successful applicants. A bonanza for Big Government, and corporate corruption, but a disaster for the free market and the full production it could provide. Three of the five bullets are devoted to clean technology and environmental jobs which will "create 5 million new green jobs."  3, 4, 5, 6 million jobs, whatever!  All these central planners need is cash and they can churn out good, well-paying jobs better than any private company ever could!  It is that easy!  Right?

Well, just for curiosity, let's take a look at the price tag. To be fair, the total amount fluctuates daily and may exceed $1 Trillion, but on January 10 the AP reported $775 Billion, so let's use this figure. [Strangely, our central planners at have forgotten to provide a price tag, probably since they can not estimate the amount of pork Congress will require to pass it!] Romer/Bernstein prophesize 3.675 million jobs in 2 years, plus or minus a cool half million. That works out to $211,000 per job created. Now of course, the intent is to use some of these funds to buy capital, namely manufacturing equipment and raw material supplies, but if we do a little math, we could just cut a $80,000 check to about 10 million unemployed, who with a frugal lifestyle could survive on for over a couple years, which is roughly when our all-knowing central planners Romer/Bernstein (p 5/14) foretell this depression will end.

However, make no mistake. By focusing this Keynesian stimulus plan on creating jobs, in all reality most of the $775 billion will be wasted on paying for the government officials to disburse the bailout (hey more non-producing jobs!), corporate corruption, and incredible inefficiencies. In reality, the Obama-Biden plan will likely create and sustain higher levels of unemployment than right now, just like FDR's New Deal did. 


The Complexity of Economies: Obama's Planners Don't Even Know How to Make a Pencil

Few essays since Hazlitt's work have more beautifully expressed the intricacies of economies than Leonard Read's short essay "I, Pencil" which I encourage you to read. In this essay, Read takes a simple object, a pencil, and tracks its production from start to end and you may be surprised to find that thousands upon thousands or people are involved in the entire commercial process. Here is an excerpt:

"My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

"The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.

"Consider the millwork in San Leandro. The cedar logs are cut into small, pencil length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill's power! Don't overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation."

7So on with the all of the other parts, the pencil factory, the distribution to stores, et cetera. The same could be done with modern devices like plasma TVs or computers, or even just a birthday cake or dinner entree. The main point of "I, Pencil" is that yes, planning must be done, but economic planning is best done in the millions of individual, free transactions done for the mutual benefit of both parties, not done by central planners like Paulson, Summers, Geithner, Rubin, Romers, Bernstein, Bair, and Bernanke who really have no idea how to make a pencil, or anything else for that matter.


A Game of "Spenda"

In addition, what if one studies how we arrived at our current situation? The answer is tied to massive government spending over the Bush years, but even as far back as WWII, resulting in our massive $10+ Trillion national debt. The answer is tied to the massive amounts of new dollars created from thin air, then spent, by the Federal Reserve. We have really been engaged in a game of "Spenda," which this comedian turned into a satirical game based on the tottering tower game of Jenga.

Why all this spending? It is because our government, central bankers, and almost all modern-day economists still subscribe to the benefits of government spending to ease downturns, which follows the teachings of Lord Keynes and Milton Friedman. However, this strategy is only a stalling tactic; it falls apart when the currency implodes. As Ron Paul warns, when the dollar dies so does our entire economy.  I wrote more on this here "The End for the Dollar and all Fiat Currencies (1/5)". Unfortunately, our fractional reserve banking system is helplessly insolvent, as I proved in " Rioting at the Gates of Thermopylae," even going so far as to predict the breakdown of Citigroup, which just occurred.

My point is playing "Spenda" this time will likely not work; in fact, even if it does, this only means that the next downturn will be downright disastrous. Those who have studied the Austrian School's Misesian boom-bust cycles are already aware that all depressions and recessions in America in the last hundred years were all brought on by inflationary (usually war) spending, then resolved by government spending, and each aftermath has pushed the dollar closer and closer to its demise. [The lovely truth about boom-bust cycles is that they do not need to exist if sound money is used.]

8So, in summary, the Obama-Biden Plan for economic central planning will not work as the focus is on job creation, not maximizing economic output. Furthermore, the plan will not work since the chosen, unelected central planners cannot possibly imitate the billions of mutually beneficial trades that occur naturally in a vibrant free-market economy. This was the great lesson learned from the monumental failure of communist Russia. Lastly, Keynesian deficit and stimulus spending only postpones the inevitable Misesian "crack-up boom."

Now for the tougher part of this essay. What WILL work? What could Obama do differently?


IDEA #1: Eliminate the 2008 Federal Income Tax. Replace the Obama-Biden Plan with this stimulus.

Obama: "Will you tell me what's wrong with the economy?"
Jake: "What I just told you over the last three hours, is that it won't work."
Obama: "Why not? Just tell me why not!"
Jake: "Okay, I'll tell you.  You want me to be Economic Dictator?"
Obama: "YES!"
Jake: "And you'll obey any order I give?"
Obama: "Implicitly!"
Jake: "Then start by abolishing all income taxes."
Obama: "Oh no!  We couldn't do that!  That's not the field of production.  That's the field of distribution.  How would we pay our government employees?"
Jake: "Fire your government employees."
Obama: "Oh, no!  That's politics!  That's not economics!  You can't interfere with politics! You can't have everything!"

- From Ayn Rand's Atlas Shrugged, when John Galt (Jake) is held prisoner by President Thompson (Obama) and told at gunpoint he should "fix" their economy:

Let me explain go into some detail. If you check the 2008 White House budget, you will find that total planned government outlays were $2.9 Trillion. (pg26/342). Total receipts were $2.5 Trillion, so the planned deficit was $0.4 Trillion, although $0.8-1.0 Trillion will be added due to last year's bailout nonsense. Also, if we recall that the total size of the bailouts is now close to $8 Trillion, a $1.2 Trillion income tax refund begins to look fairly "cheap."

2008 Receipts (pg35/342) -
$0.35 Trillion from corporate income taxes
$1.2 Trillion from federal income taxes
$0.9 Trillion in Social Security, Medicaid, Medicare, etc.

Total $2.5 Trillion

Now, what if Obama (and don't forget Congress) would do the unprecedented, and instead of spending $775 Billion we do not have, decide to not collect income taxes due this April?

  • Each individual will then naturally make the best decisions for themselves, whether it is to save, pay down debts, or spend on desired goods and services, which would create more jobs.
  • There is no cost to pay government to administer the Obama-Biden Plan.
  • There is no need for the government to spend most roughly $15 billion in IRS spending and tax preparer fees, although rebate checks for the amounts currently withheld would need to be mailed. (source)
  • Many of the IRS's 92,000 employees and many tax preparers can be fired. While this would add to the total amount of unemployed, their jobs are NOT AT ALL economically productive, so our total production will not suffer. In fact, when they return to work, our overall production will be boosted.


My Austrian mindset is very different from Obama's Keynesian brain. For instance, from his January 10 speech, he said:

"We'll create nearly half a million jobs by investing in clean energy by committing to double the production of alternative energy in the next three years, and by modernizing more than 75% of federal buildings and improving the energy efficiency of two million American homes."

9Well, I am not nearly so arrogant to believe that I could decide how best to produce alternative energy, and I have already explained why it would be best for Obama to not even try. However, when he says we can modernize the heating, cooling, and powering of "75% of federal buildings," I think instead, how about we CLOSE  DOWN 75% of federal buildings. Why, in the depths of a possibly monster depression, would we want to spend money on our ultimately completely unproductive departments of Labor, Agriculture, Homeland Security, Energy, Education, CIA, IRS, etc.? Why not slash all congressional and departmental staff budgets by 50%? Yes, there would need to be a temporary support of these people, but just think of the fantastic increases in our production with a larger, unbridled workforce! However, this would also be a longer-term project spanning out over Obama's first term, and would also need a task force to execute.


Does it not strike anyone else as extremely silly to be fighting wars on foreign soils while the American people struggle to support their families? The United States of America spends roughly $1 Trillion annually to maintain our overseas military empire with over 700 bases in over 130 countries. The wars in Iraq and Afghanistan are both lost causes, and do not forget that the Iraq War was initiated by Bush under false pretenses. Bring home the 40,000+ troops in Germany and Europe, the ~40,000 in South Korea, the ~40,000 in Japan! Declare WWII as OVER. Declare the silly War of Terror as OVER.

Some veterans will be need of assistance due to PTSD, war wounds, etc. and must be treated properly, in my opinion no matter how expensive, since this is owed by the American people. All troops based abroad could be returned to bases within the USA. This would result in a consumer spending boost around the bases' local areas. Any unnecessary soldiers could be returned to the private sector. This reduces the tax burden on the taxpayer to finance an army in the field, and will result in a net increase in economic output when the new citizen finds employment.


Obama's plan includes a similar component, but I wish to be more specific and frank. Our politicians have committed to, and to a large extent, We the People currently desire, and will need, a social safety net. Although I am an enemy of the Welfare State, I am socially liberal and do not see any excuse as to why our fellow Americans should not have food or shelter. However, make no mistake; the ultimate goal should be to phase the Welfare State out, which could be done over a longer time-frame than the phaseouts of the other programs.

My opinion is that this undisguised aid should be focused only on necessary levels of food and shelter. [I did not list clothing as fortunately the United States, unlike many countries I have visited, has an immense reserve of clothing thrift stores and unused clothing in private wardrobes. I have faith that Americans would give spare (in truth, completely unneeded) clothing to those who need it, or sell to thrift stores for small fees. Actually, one of the key truths would be realized here: that a government is simply not needed to provide such aid, and over time this could be applied elsewhere, particularly if federal income taxes are abolished.] For shelter, a full disclosure of the KBR concentration camps should be made available to the public; the people might be able to make good use of the facilities, once they're separated from the national security state. 

10In light of the impending baby boomer wave of retirees, the government will need to do this anyways since, unless you are living in la-la land, the Madoff-Ponzi scheme that is the Social Security, Medicare, and Medicaid system is going to collapse in the next decade, or will die with the dollar's demise. The Social Security promise has already been made, however, and we as Americans should do our best to honor it, although for many this will simply NOT be the comfortable retirement they may have dreamed their government would provide. The best benefit we can give to our younger generation is to give them the option to opt out of this future yoke.

Let there be no mistake. There needs to be a future focus on ENDING the Welfare State situation. We the People can do this with the above, but most critically we need the below.


If we have learned nothing else in the past century and past several months, it is that our central bankers planning our monetary policy have a horrendous track record. There is no better example of central economic planning error upon grievous error than in the track records of former FED Chairman Alan Greenspan and the contemporary Ben Bernanke. Fiat Federal Reserve Notes can be replaced by fiat United States Notes issued from the US Treasury on a 1:1 basis immediately, and our country and our world will be much the better for it. 


America has forgotten what money truly is. Actually, this is the true reason for the current financial and economic crises, the wild growth of OTC derivatives would simply not have been possible with Honest Money. The Founding Fathers explicitly stated in Article 1, Section 10 of the Constitution that only gold and silver coins may be used as lawful money. The dollar, in fact, is defined as a specific mass of silver, and this definition has never been amended. At the very least, our monetary system must be debated in a national forum.


I confess I do not have much expertise in this area, I am just an engineer after all, but I have read the recommendation of Michael Lewis and David Einhorn in the New York Times this month and also the Nolan Chart's James Quinn and find it hard to argue with their practical advice. Please see the below source list for more details, and feel to leave any comments or questions below.


Jake Towne

-- Posted Tuesday, 20 January 2009 | Digg This Article | Source:


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