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The economy is contracting following collapse of demand caused by a collapse of credit. The government has been outpouring new capital. The crux of the Obama's stimulus is creating more jobs, at the cost of inflation. Inflation produces higher prices while reducing the value of the debt. Higher prices are needed to reignite economic growth and encourage employment.
Yet, in spite of the stimulus, prices continue to drop; the economy
lost 467,000 jobs in June and unemployment went up to 9.5 percent. The
fiscal rescue plan is not working. Only about 14 percent of the
provided money has been spent. Moreover the total amount of capital
lost is $14 trillion while the new capital provided by the government
is $2 trillion, hardly sufficient to create an inflationary
environment. There might be yet another stimulus. Some doubt, however,
that in absence of velocity it will work, while others see it as a plot
for replacing private-sector with government jobs.
Most economists share a view that the market is self-correcting and that the market run by a government declines. The new widespread theory behind stimulus is that the free market system is inherently unstable, even self-destructive, and that the government must do the job. But the notion that socialistic economy is superior to market economy is laughable in Berlin, Moscow, Beijing and beyond.
True or not, in the U.S., the market has been gradually replaced by the socialistic sector. This sector -- federal, state, and local -- has grown from 25 percent of the GDP in 1950 to about 50 percent in the 1990s. Today the debt of the socialistic sector alone exceeds the entire GDP. The socialistic portion simply dwarfs the free market. Such transformation has consequences. The shortage of capital that we are experiencing is typical for this type of economy.
RESEMBLES BLACK HOLE
Indeed, the U.S. government balance sheet is a bottomless pit, resembling a Black Hole. The government spending resulted in the trillions of, impossible to repay, liabilities. The healthcare alone has $34 trillion in unfunded liabilities. Also on state level other untenable Soviet-style programs have been adding to the debt. Yet socialistic economic sector continues to expand.
During the past 30 years the Japanese economy underwent similar socialistic transformation and developed similar credit problems. The Japanese government pursued a similar strategy in the 1990s. It failed miserably. It could not get out of the deflationary grip. Since then the Japanese economy has contracted 15 percent.
In the 1940s following the Yalta Agreement, a number of countries in Eastern Europe found themselves under the dictate of the Red Army and were forced to replace free market with socialism. This transformation caused loss of productivity, lack of profit, shortage of capital, and ultimately severe indebtedness. These economies had contracted brutally. In the end the entire Soviet economy had crumbled leaving millions in poverty.
The U.S. government laid down a foundation for transformation to socialistic economy with Johnson's Great Society programs, Medicare and Medicaid. Richard Nixon's Environmental Protection Agency, Bush's Americans with Disabilities Act, George W's expansion of the prescription benefits for seniors added to the pot. The FDR's Social Security is underfunded and will need huge inflow of new capital. The inflated cost of education, thanks to Education Act of 1965, has been restraining growth of the housing market, disabling this very important engine of economic growth.
REVISE ASSISTANCE PROGRAMS
I do not advocate leaving the poor without assistance, but these programs must be revised and put on sustainable path. While government is spending trillions it doesn't have and at the same time draining productive sector from capital, it creates the foundation for Soviet type economic collapse.
Meanwhile the spending increases in the president's budget, coupled with tax increases enacted by Congress and state legislatures, will wreck any chance of restoring the economic power of the consumer. And in spite of the proposed tax increases, the government's spending programs will increase deficit. The program to buy CO2 emissions will increase the cost of energy intensive products creating greater burden for the consumer. The new health program will require huge, still undefined tax resources. It will strengthen deflationary pressures and weaken the consumer.
Sadly there are no attempts to reduce government spending. Rather there are attempts to portrait the socialistic, Soviet-type, economic crisis as the failure of the free market.
Jarosinski lives in Waitsfield.