Obama in his first prime time press conference said:

"It is only government that can break the vicious cycle where lost jobs lead to people spending less money which leads to even more layoffs. And breaking that cycle is exactly what the plan that's moving through Congress is designed to do...

More than 90% of the jobs created by this plan will be in the private sector. These will not be make-work jobs, but jobs doing the work that America desperately needs done. Jobs rebuilding our crumbling roads and bridges, and repairing our dangerously deficient dams and levees so that we don't face another Katrina. They will be jobs building the wind turbines and solar panels and fuel-efficient cars that will lower our dependence on foreign oil, and modernizing a costly health care system that will save us billions of dollars and countless lives. They'll be jobs creating 21st century classrooms, libraries, and labs for millions of children across America. And they'll be the jobs of firefighters, teachers, and police officers that would otherwise be eliminated if we do not provide states with some relief.

 I can tell you with complete confidence that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans. My administration inherited a deficit of over $1 trillion, but because we also inherited the most profound economic emergency since the Great Depression, doing too little or nothing at all will result in an even greater deficit of jobs, incomes; and confidence. That is a deficit that could turn a crisis into a catastrophe."

Economists from the Austrian school argue not only is government intervention not necessary to stop economic collapse but it actually prevents the economy from healing on its own.  Obama's argument that the jobs created by his plan are jobs that desperately need to be done is not true, a case in point was a recent award by the NIH of  $1.44 million for a "study of drug and sexual risk among young male sex workers in Hanoi and Ho Chi Minh City, Vietnam."  Democratic Senator Michael Bennet of Colorado has pointed out that though trillions of dollars of Federal debt has been incurred through spending since he was appointed to the Senate in January of 2009, “we have nothing to show for it”.   

    Actually the Obama administration does have something to show for it as of April 2012 one in seven people in the United States are receiving food stamps.  Frank Crimi writes:

Of course, the efforts by the Obama administration to create a new dependent class neatly dovetails with its overall efforts to create an expanding welfare state, efforts which have seen Obama administration since 2009 increase spending by 41 percent on the nearly 80 federal welfare programs that provide food assistance, housing, education services, child care, and medical care.

Those expenditures, which now stand at $668 billion, coupled with another $284 billion in state and local government expenditures, bring the total cost to nearly $1 trillion, making Welfare the fastest growing part of government spending with aggregate costs projected to reach over $1.5 trillion in 2022.

Those staggering outlays led Robert Rector of the Heritage Foundation at a House Budget Committee hearing to say Obama’s massive expansion of welfare-related programs are leading to “ruinous and unsustainable future budget deficits,” adding “Food Stamps are a symbol of that growth.”

Of course, the Obama administration takes a different view. As Agriculture Secretary Tom Vilsack said in August 2011, food stamps are part of the Obama administration’s jobs program, noting “When you talk about the SNAP program or the food stamp program, you have to recognize that it’s also an economic stimulus… If people are able to buy a little more in the grocery store, someone has to stock it, package it, shelve it, process it, ship it. All of those are jobs. It’s the most direct stimulus you can get in the economy during these tough times.”

Given that logic, the record number of Americans now receiving food stamps must certainly indicate that economic prosperity is nearly at hand.

    The problem with Obama's reasoning is that money for food stamps must come from somewhere so you are switching one form of spending for another so that the overall simulus is zero.  In fact you are taking money away from investors who might have created wealth instead of consumed it.  You also create dependency so that those on food stamps have less incentive to work.  Why work for food if you can get it for free?  This policy increases Obama's chances of reelection since those on food stamps will be afraid that the Republicans will take those food stamps away.  Normally market forces would bring down the price of food if people have less money to pay for it but by providing food stamps the food prices stay higher and those who earn money have to pay more for food.

    Another way of understanding what is wrong with To Vilsack's argument is to carry it to its logical conclusions.  If giving out food stamps can stimulate the economy imagine why not give out more?  Why not give everyone in America an additional stipend of a million dollars a month?  Just imagine how much that would stimulate the economy.  If everyone can buy a million dollars worth more every month someone has to stock what they buy, "package it, shelve it, process it, and ship it.  All of those are jobs."  When put that way the question of where the money is going to come from is a very obvious one.

    Where is Obama going to get the money for the food stamp program?

    The arguments that only government intervention can rescue the economy and that spending money is the way to do so are arguments John Maynard Keynes made in the 1930s.  In order to understand what is wrong with the logic underpinning Obama's policies it is worthwhile to understand the logic or rather illogic behind Keynesian economics.

      Keynes wrote an article in 1934 for the popular American magazine Redbook entitled “Can America Spend Its Way Into Recovery?” and opened the article with

“Why obviously!” ... Moreover, tax rates should never have to be increased to pay for the new debt. The money borrowed and spent will revive the economy. A revived economy requires less government spending on the dole “unemployment insurance” and generates a stream of new tax revenue. Together, the savings and the new taxes will more than cover the debt service. "

      This statement illustrates the essence of what is wrong with Keynesian economics.  According to this statement a government can borrow and spend all it wants to because increased tax revenues resulting from such stimulation of the economy will more than cover the debt created by borrowing.  The economist Henry Hazlitt wrote regarding Keynes' ideas:

“How marvelous is the Keynesian world! The more you spend the more you [have]. The more you eat your cake, the more cake [to eat]"

     It is the equivalent of proposing that wealth can be created out of nothing. 

 Another example of such such wishful thinking is the Keynesian multiplier.  Dr. Robert Shenk explained the multiplier as follows:

Suppose a factory with a payroll of $500,000 locates in a Lemmingville, a typical suburban community. Suppose further that the $500,000 is the only money that the factory spends in the community, that all employees live in Lemmingville, and that each person who lives there spends exactly one half of his income locally. By how much will the income of Lemmingville rise as a result of the new factory?

The $500,000 will be an addition to Lemmingville income. But the story does not end here because, by assumption, the people who earn the payroll will spend one half of the payroll, or $250,000, in the community. This $250,000 will become income for the shopkeepers, plumbers, lawyers, teachers, etc. Thus Lemmingville income will rise by at least $750,000. But the story does not end here either. The shopkeepers, plumbers, etc. who received the $250,000 will in turn spend one half of their new income locally, and this $125,000 will become income for other people in the community. Total Lemmingville income is now $875,000. The process will continue on and on, and as it does, total income will approach $1,000,000.

    What if this $1000,000 dollars of income is used to purchase more goods.  It will become 2 million dollars of income.  Once that 2 millions is spent it will become 4 million.  Clearly there is something wrong with the Keynesian multiplier.  In order to understand what is wrong with it we can simply add up the dollars in the town of Lemmingville before and after the factory paid its workers.  What we find is that $500,000 simply changed hands from the factory to the workers and there is no net gain in wealth of the town of Lemmingville resulting from that exchange.  The real gain in wealth in Lemmingville is equal to the value of the products created by the Lemmingville factory minus the cost of producing them.

     If one follows Keynesian logic to its logical conclusion than paying workers to do nothing will generate wealth because they will spend that money and that spending will lead to more production.  John Maynard Keynes came to a similar conclusion and wrote:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course by tendering for leases of the note-bearing territory), there need be no more unemployment and with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.

     Keynes also believed that any investment is better than no investment and that interest rates should be kept as low as possible in order to encourage investment.  The recent collapse of the housing market shows just how wrong Keynes was in his belief that any investment is better than no investment. 

    How can interest rates be kept low if banks are unwilling to make risky loans with low rates of interest?  Keynes advocated that the government print the money and inject it into the loan market.  Keynes wrote in 1943 that credit expansion, performs the

“miracle . . . of turning a stone into bread.”

    In the Keynesian world miracles happen!  Unfortunately in our world they don't. Robert Mugabe of Zimbabwe spent and printed massive amounts of money and injected the money into the Zimbabwean economy by giving raises to his security forces.  Instead of a miracle this created so much inflation that by July of 2008 it cost 100 billion dollars just to buy 3 eggs in Zimbabwe.  In order to stop inflation Mugabe of Zimbabwe instituted price controls. Stores were not permitted to charge the billions of Zimbabwean dollars it cost them to buy food with the predictable result that the shelves of the stores were empty of food.

    Germany also printed money to pay off its debt.  Friedrich Kessler spoke about what happened next.  He said:

"It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money."

  Former West German Chancellor Willy Brandt warned that it could happen here in the United States.  Peter Peterson, in his book about the American economy On Borrowed Time, wrote:"

“I remember well... listening to former West German Chancellor Willy Brandt as he described how, as a child, he had to pack his family’s lifetime savings of deutschmarks into bags and take them to the local orphanage. There they were used to start a fire so the children could be kept warm. “You Americans simply have never experience the hell that can take place in a country if it doesn’t get inflation under control,” Brandt said. “It is what brought us Adolph Hitler. It’s what transformed, in a hideous way, our entire values and society.”

     It became clear in the 1970s and 1980s that Keynesian policies did not work.  Why does the Keynesian beast never die?  That question was the topic of a lecture by Peter Klein at the Mises Institute.  Dr. Klein quoted the University of Chicago economist Luigi Zingalis explanation as follows:

Keynesianism has conquered the hearts of minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behavior. ...

   Politicians like to play Santa Claus.  What better way to get votes than to give money away?  Keynesian economics says go ahead spend, it's good for the economy.  Prescribing Keynesianism to some politicians has been described as prescribing crack to a coke addict.  Dr. Klein said in his lecture that:

They (Keynesian economists) tell politicians who are addicted to spending our money that government expenditures are good. .. In economics it gets you a job in Washington.

In other words if you tell government what it wants to hear you rise to the top.  It is no coincidence that the man who holds the most powerful position in economics the United States, the chairman of the Federal Reserve, Ben Bernanke is a Keynesian economist. 

John Cochrane, professor at the University of Chicago Business School wrote that one reason people cling to Keynesian doctrine is comfort during times of economic turmoil.  He wrote:

The idea that [government] spending can spur the economy was discredited decades ago...It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.

    There is another appeal to Keynesian economics to socialist idealists like President Obama.  Keynesian economics encourages the government to print money.  Printing money is a form of stealth wealth redistribution because it causes the purchasing power of dollars to decrease and shifts that purchasing power to owner of the newly printed money.  It is a way to redistribute wealth to the government.  If the government spends some of that money on programs for lower income people that is a form of socialist wealth redistribution that buys votes.  Perhaps Keynes advocated printing money because he was a socialist idealist.  In chapter 24 of his book The General Theory of Employment, Interest and Money, Keynes revealed his socialist leanings when he argued for a “somewhat comprehensive socialization of investment” and a redistribution of British income in the desirable direction of diminished inequality. Keynes argued that wages should be set based on what is “fair” and “reasonable” instead of by the free market.  Keynes wrote:

“I want to mold a society in which most of the existing inequalities and causes of inequality are removed.”

  When we are all poor all inequality has been removed. 

    There is another reason for believing Keynesian economics and that is the economic boom that occurred after World War II.  Paul Krugman a Keynesian economist who won the Nobel prize explained:

    Peter Schiff, one of the few economists who predicted the current economic collapse, pointed out that if spending on war is what will save the economy then we should all fight a huge pretend war in which we don't kill anybody in order to revive the economy.  Even Paul Krugman doesn't buy his own argument. In September 2003, Dr. Krugman published a collection of his columns under the title, The Great Unraveling, in which he said that the money spent on the Iraq war was harmful to the economy.  Apparently war is only good for the economy if Dr. Krugman approves of the war. 

   There are several possible explanations to the economic boom following World War II.  The Keynesian explanation is that government spending required by the war caused the boom.  A second explanation is that during the five years after the war, federal spending dropped by 58% and taxes fell by 12% and this contributed to the  the post-war boom.  Undoubtedly technological developments and infrastructure improvements that resulted from World War II such as the pipelines that carried Texas oil to the east coast contributed to the post war boom.  A third explanation is that World War II postponed a boom that would have happened anyway.

   If the Keynesian explanation is correct the economic boom should have happened before World War II because the American government did not wait for World War II to spend money.  FDR’s Treasury Secretary, Henry Morgenthau wrote in his diary:

“We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot!”

    It was not until after the spending programs of FDR were over and after World War II that America's economy recovered. 

  In 1901 a small enterprise known as the Gladys City Oil, Gas, and Manufacturing Company struck oil at Spindletop Hill in Beaumont Texas.  This was the beginning of the Texas oil boom.  The amount of oil that gushed out of Spindletop Hill was so large that the price of oil in the U.S. dropped to 3 cents a gallon.  The United States became the leading oil exporter in the world.  That fact alone might be sufficient to explain the post-war boom. 

Today draconian environmental regulations as well as Obama's ban on oil production in the Gulf are having the opposite effect.  Paul Driesen in his article Obama’s Red Sea wrote:

Developing just our off-limits oil and gas resources in the ANWR, OCS and Rockies could generate over $1.7 trillion in government revenue and create 114,000 new jobs, a recent ICF International study concluded. The petroleum would eliminate one-fifth of the nation’s $350-700 billion annual oil imports bill. Developing all US oil and natural gas resources on federal lands could generate $4 trillion.

The American Energy Alliance and other experts say the benefits would be even greater. And this is just conventional oil and gas revenue. It does not include trillions more in revenues from oil shale, tar sands, methane hydrates, coal, uranium and other deposits that Congress, bureaucrats, judges and green activists have conspired to put off limits to the American taxpayers and consumers who own them.

It does not consider the regulatory stranglehold on coal and nuclear power plant construction – and thus on jobs and revenues that those projects and their energy would provide. ..

And they are being closed down – to be “replaced” by pixie dust energy from wind turbines and solar panels that now meet barely 1% of our total energy requirements.

       Keynesian policies of printing paper are a dangerous diversion from what needs to be done to save the U.S. economy which is to allow American industry to develop America's energy resources.