Ignore President; Listen To Rep. Ron Paul

Published February 26, 2009

President Obama grabbed attention with his primetime televised speech on economic recovery Tuesday night, but the real cure for America’s economic ills was prescribed in a quick few seconds of a two-minute speech delivered Wednesday morning to the House Financial Services Committee. 

“If we think we can reinflate this bubble by artificially creating credit out of thin air and calling it capital, believe me, we don’t have a prayer of solving these problems,” U.S. Rep. Ron Paul (R-TX) told his fellow committee members. “We have a total misunderstanding of what credit is versus capital. Capital can’t come from the thin air, created by a Federal Reserve System. Capital has to come from savings. We have to work hard, produce, live within our means, and what is left over is called capital.” 

If only our president, Federal Reserve chairman, and others at the top of the Obama administration understood this, we’d be on a plausible path toward economic recovery. 

Instead, Obama told the nation he plans to spend, spend, spend more taxpayer dollars. He hinted at a huge new bank bailout costing “probably more than we’ve already set aside,” still more billions for American automakers, a “cap-and-trade” system to reduce use of fossil fuels that will make energy much more costly, and an extravagant overhaul of the nation’s health-care system. 

Government borrowing and printing of money would have to continue on their record pace to finance all these things, breaking the president’s promise to cut in half the federal budget deficit, now approaching $2 trillion. 

Much of the president’s talk Tuesday night focused on increasing the flow of credit, but years of artificially easy credit are what caused much of the current crisis. Tax, monetary, lending and regulatory policies encouraged Americans to borrow like there was no tomorrow. In the 96 months from the start of 2000 through 2007, the national savings rate fell to just 2 percent or less during 59 months, including 30 months below 1 percent, and two months in which the savings rate actually went negative. 

In five of the 12 months of 2008 the savings rate was below 1 percent. We ended 2008 with a savings rate of 3.6 percent, less than half the average 8 percent savings rate for the years 1980-1994, according to the Federal Reserve Bank of St. Louis. 

Credit has dried up because savings have dried up—as Paul noted, without saving there is nothing to back up credit. Printing money without saving simply creates inflation, and government borrowing inevitably brings higher taxes. The fourth-largest item in the federal budget already is debt repayment.

Obama has often spoken of the need for sacrifice, but the centerpiece of his economic rescue plan is vastly higher government spending. Spending—the hope for immediate gratification he promotes—is the opposite of sacrifice. 

The government plans to continue selling debt to finance this spending. But if government policies continue to encourage Americans to spend our money as fast as it comes in, and if the economies of China, Japan and other countries that have been buying our debt are also tanking, who is going to be able to buy all this new debt? 

Our grandparents understood the truth Rep. Paul spoke on Wednesday. They knew that thrift and frugality build a better future. We won’t get out of this mess until our government stops promoting the opposite policies. 

Steve Stanek is a research fellow at The Heartland Institute. He can be contacted at [email protected] and (815) 385-5602.