Economies don't do what you want unless you give them what they want. 

In the wake of the recent statements by Barack Obama and Joe Biden that they had "misread the economy" I must state the following:  It is impossible to misread an economy, unless you are so totally ignorant of how an economy works that you cannot see what it happening right in front of your nose.  Economic science is extremely easy to understand.  What makes it complicated is attempting to understand the effects of human behavior on the economy, to compensate for them, and in so doing, attempt to fine tune the behavior of the economy to bring about the best results.  The problem with this comes from one particular fact; "best results" are a matter of opinion, and attempts to manipulate an economy by politicians invariably result in unintended consequences as the economy attempts to find a way around regulation the effects of taxes and other intervention.  

Although there were efforts to intervene in the American economy earlier, major attempts to read and control our economy date, for practical purposes, to the 1930's when the government attempted to intervene in the Great Depression, generally to no real positive effect.  When the Crash of 1929 occurred the first responses were implemented by the Hoover administration.  This was a logical approach for Hoover, who was an extremely successful engineer and had managed a variety of government actions including intervention in the aftermath of disastrous Mississippi River floods.  Hoover wanted to engineer the economy, but what his administration implemented didn't work.  What many people have failed to learn was that the policies of the Roosevelt administration didn't work any better because engineering an economy cannot work.  Until you have the ability to completely control all public behavior you cannot control the results of that behavior. 

Economies exist because people need and want things.  They are the manifestation of how people produce and obtain such things, directly or indirectly.  People like to credit economic "boom and bust" phenomena to the "business cycle."  In fact, true business cycles involve temporary accelerations in business growth which either fall back to a "normal" rate after a time, or which result in a permanent increase in productivity.  They occur most frequently as a result of the introduction of new technology or resources.  The "boom and bust" cycle is the result of something different; most commonly, the misuse or abuse of the tools available in the financial markets, and the most frequently misused or abused tool is credit.  The financial boom of the 1920's was largely driven by overuse of credit, in large part in the stock market which was subject to rampant use of buying on margin.  This is a risky method, which set up what I like to compare to a domino chain.  When a small correction or drop in the market occurs it results in selling to cover margin debt, which results in further drops.  The wide spread use of margin buying resulted from the misconception that the market would not or could not fall. 

This situation was similar in the real estate market during the late 1990's and early 2000's.  Major real estate lenders were marketing their loans on the basis of a belief that real estate prices would continue to rise forever and that they had virtually zero risk in lending, even to people who could not afford to borrow.  They also marketed many of the adjustable rate loans on the basis that the home buyer had no risk because if they could not afford the loan at some later date they could always sell the home at a profit.  Again, this was completely wrongheaded.  It flew in the face of the first law of business that people should become acquainted with in finance classes; nothing lasts forever.  When the inevitable occurred, as usual, it came as a surprise to most "experts."   Major insurance and financial firms were as guilty as any in this.  AIG and Lehman Brothers are two excellent examples of companies who banked on a loss free economy, and lost.  It was similar to those who lost their money in the 1990's tech bubble.  The circumstances or the landscape may change, but the rules never do. 

Today America is experiencing an economic slowdown caused by the collapse of an abused credit market.  The first reaction to the credit meltdown was to give money to the financial institutions in the expectation that the banks would immediately lend it out.  Instead, realizing their recent history of bad loans, the lenders held back and continue to do so.  The problem wasn't a shortage of funds; it was the sudden realization that the market had become dysfunctional and needed to return to proper functionality.  In fact, whether they realize it or not, the banks are forcing consumers away from the over-reliance on credit which had been the hallmark of the consumer goods market for several decades.  It is a needed correction. 

At the start of the Great Depression the government tried using increased taxation as a remedy; our current government is attempting to do the same.  The taxes just have not kicked in yet.  It did not work in the 1930's and it will not work now.  Taxation always acts as a brake on economic activity.  Increasing taxation and adding anti-growth regulation will simply close down businesses, put more people out of work and in some cases, cause major companies to move their operations overseas to friendlier environments.  Despite allegations to the contrary there will not be enough "green jobs" to replace those lost in the energy sector.  And job losses in other sectors will not be replaced any time soon when the economy is being forced into the tank by misplaced regulation.  So far, Houston, where I live, has escaped the worst of the problems but if the carbon tax bill is passed, you can expect unemployment to exceed ten percent here, virtually overnight.  Meanwhile, government fails to note the reason why businesses are in a slowdown mode; they are playing a waiting game because they don't like uncertainty, and they are certainly not going to invest good money in business activities that will be made unprofitable due to future regulation.  

Of course, when you put more people out of work it prevents them from engaging in their normal level of commerce.  Unemployed people don't spend as much money.  This, in turn, puts other people out of work.  The domino effect takes over. 

Government spending and tax increases are not the answer.  Government spending is rarely targeted in the right area.  Instead, political maneuvering takes over and the money goes into payoffs.  The people who need it don"t benefit;  Political operatives do. Taxes will put an additional burden on businesses, leading to failures, unemployment, etc.  All of this leads to lower government revenues as taxable events disappear from the economy. Thus, even with increased taxes, government revenues will decline.  

Barack Obama says that the deficit is unsustainable, but does nothing to cut spending.  Instead he asserts that the spending is absolutely necessary, and then uses it as an excuse for raising taxes.  The result will be economic devastation. High taxes an overbearing regulation is not what the economy needs to recover.  But it appears that this is exactly what it will get.  

So many people are saying that we have such intelligent and well-educated people now running the nation's affairs.  What we see if we apply intellectual honesty is that the "leadership" is adrift, and unable to achieve its professed goals.  Meanwhile, it puts a political agenda above the public good because it is more interested in those goals than it is in what is good for America.  Eventually, an economy will move in the direction it is forced to go, and that direction is rarely the direction that is desired.  Ayn Rand had the right of it.  Atlas will shrug when the burden becomes too heavy.  Barack Obama's legacy may well be as the man who presided over the creation of the second great depression.  Unfortunately, that may be exactly what he wants or is he totally out of touch with the realities of business and economics?