The 5.7 per cent fourth-quarter figure for GDP certainly seems encouraging, assuming that it is not significantly revised down. However, as is always the case, the devil is in the details. Much as the media would have loved to have presented this as conclusive evidence the economy was expanding and unemployment would soon start falling, their enthusiasm was tempered by the fact that four percentage points were the result of inventories being restocked leaving 2.2 per cent of which two per centage points were consumption. As real economic growth is a process of capital accumulation it is clear from the figures that there was no actual growth.

Now it could be argued that every recovery must also begin with an increased demand for inventories, which is what we have here. Once recovery has been achieved capital accumulation can be resumed. True enough. However, the fact remains that an increase in the demand for inventories does not necessarily mean that a recovery is indeed underway. It is clear from most of the economic and financial commentary that a great many observers are of the same opinion.

More and more members of the economic commentariat are arriving at the conclusion that Obama's economic policies are paralyzing private initiative. His backroom deals with unions, his proposed taxes, his massive meddling in the economy, his energy policies his obvious ignorance of how markets operate, etc., has created an atmosphere of political uncertainty that is deeply inimical to a sustained economic revival. This is bad enough, but I also believe that there are economic forces at work, forces so deep that even if Obama were to successfully engineer a recovery that slashed unemployment Americans would still be confronted by severe economic problems in the near future.

One of the problems with mainstream economics is its focus on aggregates. This leaves no room for discussions concerning the pattern of production and employment. Therefore if manufacturing employment falls while employment rises in services this is dismissed as a natural progression to a "post-industrial" economy. The thought that such a shift in the pattern of employment might be a symptom of detrimental changes in the production structure is given short shrift.

A pessimistic view of rapidly expanding services leads to the conclusion that real wages must drop. As a classical economist would say: "The intensity of demand for labour will fall". If you were to ask him why there is no doubt in my mind he would answer that the capital stock as a proportion of the labour force had fallen. The Huffington Post recently published an article that listed the 10 Industries That Will GAIN The Most Jobs In Next Decade:

1. Management, scientific and technical consulting services
2. Offices of physicians (i.e., looking up medical records)
3. Computer systems design and related services
4. General merchandise stores (Wal-Mart, etc.)
5. Employment services (i.e., unemployment offices)
6. Local government
7. Home health care services
8. Services for the elderly and persons with disabilities
9. Nursing care facilities
10. Full service restaurants

Note that virtually all of the jobs are directly oriented toward the consumption stage of the economy. Now the author concludes that a "demographics shift toward an older population" caused manufacturing jobs to dry up. This is extremely poor economics. When a toolmaker, for instance, retires his job does not up, it merely goes vacant. But what can happen is that badly managed monetary policies (or just plain Keynesianism) can skew the structure of relative prices toward greater consumption at the expense of production, reducing the demand for labour in manufacturing while causing an excessive increase in services. After while one should expect a decline in practical engineering skills would emerge.

There is nothing new about this approach. Hayek referred to it back in 1932 (Capital and Fluctuations: Early Essays, Routledge & Kegan Paul, 1984, pp. 150-2.) The eighteenth century Anglo-Irish banker Richard Cantillon wrote a brilliant analysis of how inflation distorts the price structure and the pattern of production and leads to similar results. (Essay on the Nature of Commerce in General, Transaction Publishers, 2001, written about 1734 and first published in 1752).

I don't want to give the impression that any growth in services must come at the expense of manufacturing. It ought to be self-evident that an expansion of manufacturing must also expand the demand for services. This was made clear by a 1982 report by president Reagan which estimated that 25 per cent of America's GDP was generated by services that manufacturing used as inputs. What matters is not the type of service but the force behind the growth of services. So long as growth is the product of a market-determined ratio between investment and consumption there can be no problem. But this is not the current situation and it hasn't been for decades.

While Obama's ideologically-driven policy of tax, spend, borrow and regulate poses a grave danger to the American economy attention must be drawn to the role that monetary policy as dictated by Keynesianism has played in distorting the economy.