The Art of the Impossible

by Thomas Sowell

Whoever called politics “the art of the possible” must have had a strange idea of what is possible or a strange idea of politics, where the impossible is one of the biggest vote-getters.

People can get the possible on their own. Politicians have to be able to offer the voters something that they cannot get on their own. The impossible fills that bill perfectly.

As a noted economist has pointed out, nothing “could prevent the California electorate from simultaneously demanding low electricity prices and no new generating plants while using ever increasing amounts of electricity.”

You want the impossible? You got it. Politicians don’t get elected by saying “No” to voters.

Of course Californians also got electricity blackouts and, in order to deal with the blackouts, a multi-billion dollar surplus in the state’s treasury was turned into a multi-billion dollar deficit, followed by cutbacks in various other government programs, followed by calls for higher taxes.

You want the government to create more jobs for people when there is widespread unemployment? It’s been done. During the Great Depression of the 1930s, the government employed more young men in the Civilian Conservation Corps than there were in the Army. The money to pay for all this had to come from somewhere– and that meant that there was less money left to employ other people in the private sector. While jobs created by the government may not have reduced total unemployment, these jobs increased votes for the administration, which is the real bottom line in politics.

Are you for “open space” laws forbidding building and also for “affordable housing”? Don’t be discouraged by the fact that severe building restrictions have sent housing prices sky-rocketing in community after community.

It may be impossible to have “open space” laws and “affordable housing” at the same time, but what are politicians there for, except to figure out ways to give us the impossible?

Palo Alto, California, where housing prices nearly quadrupled in one decade after severe building restrictions were imposed, also pioneered in laws mandating that each builder agree to sell a certain percentage of any new housing “below market.”

In other words, they combined “open space” laws with “affordable housing.” Who says the impossible cannot be achieved?

Of course this system can work only where just a fraction of the new housing is sold “below market.” Moreover, the market price of housing is raised so far above what it was by building restrictions that even “below market” prices for condominiums in Palo Alto can run to $300,000 or $400,000.

This is hardly “affordable housing” for people on modest incomes. Only 7 percent of Palo Alto’s police, for example, live in Palo Alto– probably older cops who bought their homes long ago.

But none of that matters politically. What matters is that people in Palo Alto can feel good about themselves, by being for both “open space” and “affordable housing.” Happy voters are what get politicians re-elected.

The big political crusade today is for “affordable” medical care through the government. No one believes that government is just going to be more efficient, and thereby have lower costs that will be reflected in lower prices for medications and medical treatment.

It might seem as if adding the costs of government bureaucracies to the costs of medications and medical treatment would make it impossible for the total costs to go down. But again, the impossible is no problem in politics.

Many countries around the world already have government-run medical care. People who get sick in these countries usually wait much longer to get treatment, including months on waiting lists for surgery, often paying in pain or debilitation, rather than money.

High-tech medical devices like MRIs are also far less common in these countries than in the United States. With medical care as with anything else, you can always get poorer quality at a lower price, though that is no bargain, especially when you are sick.

What you may have in mind are lower prices with no reduction in quality. While that may be impossible, don’t expect that fact to stop politicians from offering it, even if they can’t deliver.

Rich People Versus Politicians

by Walter Williams

Sometimes I wish there were a humane way to get rid of the rich. Without the rich for whipping boys, we might be able to concentrate on what’s best for the 99 and a half percent of the rest of us.

Warren Buffett and Bill Gates, with about $60 billion in assets each, are America’s richest men. With all that money, what can they force us to do? Can they take our house to make room so that another person can build an auto dealership or a casino parking lot? Can they force us to pay money into the government-run retirement Ponzi scheme called Social Security? Can Buffett and Gates force us to bus our children to schools out of our neighborhood in the name of diversity? Unless they are granted power by politicians, rich people have little power to force us to do anything.

A GS-9, or a lowly municipal clerk, has far more life-and-death power over us. It’s they to whom we must turn to for permission to build a house, ply a trade, open a restaurant and a myriad of other activities. It’s government people, not rich people, who have the power to coerce and make our lives miserable. Coercive power goes a long way toward explaining political corruption.

Gov. Rod Blagojevich’s hawking of Barack Obama’s vacated U.S. Senate seat; Ways and Means Committee Chairman Charlie Rangel’s alleged tax writing favors; former Rep. William Jefferson’s business bribes; and the Jack Abramoff scandal are mere pimples on the government corruption landscape. We can think of these and similar acts as jailable illegal corruption. They pale in comparison to what’s for all practical purposes the same thing, but simply legal corruption.

For example, according to the Miami Herald, by March 2008, the powerful Florida Fanjul sugar family had given over $300,000 to politicians and political committees. They didn’t fork over all that money to help politicians to uphold and defend the U.S. Constitution. Like businessmen who approach Charlie Rangel, Rod Blagojevich and William Jefferson, they give politicians money because they want a favor in return — namely import restrictions on sugar so they can charge Americans higher prices. In the case of the Fanjuls, and thousands of others buying favors, they are engaged in legal corruption.

Legalized corruption is widespread and that’s the job of 35,000 Washington, D.C., lobbyists earning millions upon millions of dollars. They represent America’s big and small corporations, big and small labor unions and even foreign corporations and unions. They are not spending billions of dollars in political contributions to encourage and assist the White House and Congress to uphold and defend the U.S. Constitution. They are spending that money in the expectations of favors that will be bestowed upon them at the expense of some other American or group of Americans.

This power helps explain, for example, why a seat on the House Ways and Means Committee, not to mention its chairmanship, is so highly coveted. For the right price, a tax loophole, saving a company tens of millions of dollars, can be inserted into tax law, a la the Charlie Rangel scandal. At state levels, governors can award public works contracts to a generous constituent. At the local levels mayors can confer favors such as providing subsidies for sports stadia and convention centers. When politicians can give favors, they will find buyers.

The McCain-Feingold law was to get “money out of politics” but more money was spent in the 2008 election cycle than ever. The only way to reduce corruption and money in Washington is to reduce the power politicians have over our lives. James Madison was right when he suggested, “All men having power ought to be distrusted to a certain degree.” Thomas Jefferson warned, “The greatest calamity which could befall us would be submission to a government of unlimited powers.” That’s what today’s Americans have given Washington — unlimited powers.

The Economic “Stimulus”

by Thomas Sowell

Two centuries ago, when there were plans to create a huge fund of money to pay off Britain’s national debt, the great classical economist David Ricardo objected on grounds that– no matter what the money was said to be for– politicians could spend it for whatever they wanted.

Two centuries later, we have not yet caught up to that plain reality, even though the $700 billion that was supposed to be used to rescue financial institutions has already begun to be spent on other things.

Regardless of what President Bush or Secretary of the Treasury Paulson may have had in mind when they promoted this huge bailout package, with all due respect to these gentlemen what they had in mind will not matter in the slightest after January 20th.

All that money is just a gift to the Democrats to spend in whatever ways will advance the interests of their constituents and of the Democratic Party.

It was not just a gift of money– huge though that is– it is also a gift of exemption from Republican criticism, even for the bailout of General Motors, which President Bush began, even when Congress refused to give GM the money without preconditions. It is a political get-out-of-jail-free card that can cover whatever disasters the Democrats create on their own in the years ahead.

The whole idea behind the “stimulus” package begins to look more and more dubious as the outlines of the policy begin to take shape.

Take the idea that much of this money will be spent on “infrastructure.” This certainly sounds good– until you stop and think about it. So do most political notions.

Does spending on infrastructure mean that the money is going to be spent filling potholes and repairing bridges? Or will it be spent creating new things?

One of the key reasons why infrastructure gets neglected, in the first place, is that there is very little political pay-off to filling potholes and repairing bridges, compared to spending that same money creating community centers, bike paths and other things.

These new things create opportunities for ribbon-cutting ceremonies that give politicians favorable free publicity in the media. But nobody holds ribbon-cutting ceremonies for filling in potholes or repairing bridges.

The whole process is biased toward doing new things, even if the repair and maintenance of existing infrastructure would serve the public interest better.

But, even in the unlikely event that the public interest triumphs over special interests, there is another very important difference between repair and maintenance activities, on the one hand, versus building new things on the other.

New things require long delays before they can get started, especially when they have to be done by politicians. Someone once said that Congress would take 30 days to make instant coffee– and Congress is just the beginning of the delays, as all sorts of competing interests jockey for position at the public trough.

Just putting together an environmental impact report for something new to be built can be a long process, especially if its findings are challenged by environmental extremists, who pay very little price for challenging, even if the delays caused by their challenges cost others millions of dollars.

In short, it can be years before the money that is supposed to stimulate the economy actually gets into the economy. And nobody knows what the economy will be like when that money finally gets into circulation.

A common problem with government economic policies in general is that it is very hard to predict how long it will be before the policy actually affects the economy. An economic stimulus policy created during a contraction in demand can take effect during an inflationary expansion of demand– and fuel still more inflation.

A trillion dollars or so, created out of thin air by a government that already has a huge deficit, can set off another round of inflation that can take some very painful new policies to bring under control– or can have even more painful effects, if it is not brought under control. The new administration may need that get-out-of-jail-free card.

Political game of blind man’s buff

By Martin Wolf

The UK has proved horrifyingly vulnerable to a financial crisis that has cut off funding from abroad. But why is it so vulnerable? The answer from David Cameron, the leader of the opposition, is simple: “We’re in this mess because of too much debt – too much government debt; too much corporate debt; too much personal debt; and it becomes clearer all the time that the scale of Britain’s debts puts us in a much weaker position than other countries.”

The right answer, Mr Cameron suggests, is “an economy where government and its citizens live within their means, save for a rainy day, waste not and want not. It’s an economy where everyone has the chance to own their own home with space to live and breathe – and where we work to live, not live to work.”* So, in response to the biggest economic crisis since the 1930s, he has decided to take a pre-Keynesian view of the management of public finances.

Mr Cameron argues that the government should save for a rainy day. But he fails to note both that it did – public sector net debt was 36 per cent of gross domestic product at the end of 2007-08, down from 43 per cent in 1996-97 – and that no day could be much rainier than today.

Mr Cameron argues, again, that everyone should own their own home. Yet it was this silly idea – coupled with controls on house building supported by his party and the liberalisation of finance it promoted – that formed the housing bubble and explosion of household debt.

Mr Cameron argues for improving the tax treatment of savings. But an excessive private desire to save is now a huge danger. He also fails to note the already favourable treatment of home owners, savers for pensions and investors in “individual savings accounts”. He is pandering to current complaints about low returns. But low returns are an alternative to debt deflation and mass bankruptcy, which would wipe out many financial assets.

Mr Cameron continues to argue against the government’s decision to cut value-added-tax. But discretionary measures are forecast to cost only 1.1 per cent of GDP this financial year against the forecast of overall public sector net borrowing at 8 per cent of GDP. The question he ducks is whether the government should have tried to cut the fiscal deficit in the midst of a deep recession and, if so, by how much. Compared with this, the VAT cut was a mere bagatelle.

Yet Mr Cameron is also right to argue that “any action that must be taken in the short term must be consistent with the long-term economic change that Britain needs”.

This does not mean the government is wrong to act as borrower of last resort. But the weakness in the government’s position is indeed strategic. From what Alistair Darling, chancellor of the exchequer, said in his interview with the Financial Times this week, it is not clear that its strategy consists of more than trying to get back to normal as soon as possible. If by “normal” one means the pre-2007 economy, that goal is both unobtainable and undesirable. The post-crisis economy must be utterly different from before. Mr Cameron at least understands this.

What does this mean? It means a return to growth, despite lower levels of private borrowing, higher savings rates and a move to fiscal balance. If the government knows how to achieve this combination, it has not said so.

So what are the required elements?

First, the economy will have to grow out of its over-indebtedness during many years. It is important to sustain the financial system, but crazy to expect a return to buoyant lending.

Second, the current account will have to go into surplus, to generate activity without extra borrowing.

Third, higher savings will also be needed. That is partly because output of tradeable goods is more capital intensive than that of services.

Fourth, it makes sense to use a substantial portion of today’s massive government borrowing for investment, particularly in infrastructure. Such investment must make sense when the government can borrow cheaply.

Fifth, the transition to an economy with higher exports is going to take years. The fall of sterling should help. But the economy will depend on large net inflows of capital for some years.

Finally, the government must indeed maintain fiscal and monetary credibility. If a return to inflation is widely feared, the game will be up for the UK. The danger is not only deflation, but also a sterling collapse, a jump in inflation expectations and a spike in long-term government bond rates. The Bank of England was right to cut interest rates modestly this time.

What is needed now is a plan of escape into what should be a different economy. The opposition does have some notion of the need for such a strategic shift, but has a foolish response to the immediate crisis. The government now has a broadly sensible response to the crisis, but no strategic view. Each condemns the other for its failings. Meanwhile, the hapless UK economy flounders.

Banned: Welcome to Nanny State Nation

Obama’s New New Deal

The Obama Gap

Fred R. Conrad/The New York Times

“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years.”

if (acm.rc) acm.rc.write();So declared President-elect Barack Obama on Thursday, explaining why the nation needs an extremely aggressive government response to the economic downturn. He’s right. This is the most dangerous economic crisis since the Great Depression, and it could all too easily turn into a prolonged slump.

But Mr. Obama’s prescription doesn’t live up to his diagnosis. The economic plan he’s offering isn’t as strong as his language about the economic threat. In fact, it falls well short of what’s needed.
Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.

And the Obama plan is nowhere near big enough to fill this “output gap.”

Earlier this week, the Congressional Budget Office came out with its latest analysis of the budget and economic outlook. The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come.

Grim as this projection is, by the way, it’s actually optimistic compared with some independent forecasts. Mr. Obama himself has been saying that without a stimulus plan, the unemployment rate could go into double digits.

Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.

But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. (A number of Senate Democrats apparently share these doubts.) Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: “lots of buck, not much bang.”

The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

Why isn’t Mr. Obama trying to do more?

Is the plan being limited by fear of debt? There are dangers associated with large-scale government borrowing — and this week’s C.B.O. report projected a $1.2 trillion deficit for this year. But it would be even more dangerous to fall short in rescuing the economy. The president-elect spoke eloquently and accurately on Thursday about the consequences of failing to act — there’s a real risk that we’ll slide into a prolonged, Japanese-style deflationary trap — but the consequences of failing to act adequately aren’t much better.

Is the plan being limited by a lack of spending opportunities? There are only a limited number of “shovel-ready” public investment projects — that is, projects that can be started quickly enough to help the economy in the near term. But there are other forms of public spending, especially on health care, that could do good while aiding the economy in its hour of need.

Or is the plan being limited by political caution? Press reports last month indicated that Obama aides were anxious to keep the final price tag on the plan below the politically sensitive trillion-dollar mark. There also have been suggestions that the plan’s inclusion of large business tax cuts, which add to its cost but will do little for the economy, is an attempt to win Republican votes in Congress.

Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.

Obama Employs His Version of Ronald Reagan

By Larry KudlowObama spoke Thursday at George Mason University about his American Recovery and Reinvestment Plan — a.k.a. the stimulus package. There’s an interesting section that would warm the heart of John Maynard Keynes. It goes like this:

“It is true that we cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe.”

Well, 28 years ago Ronald Reagan said government was the problem, not the solution. Dealing with a bad recession like this one, the Gipper lowered taxes and domestic spending. Obama on the other hand has offered an $800 billion package, with plenty of infrastructure spending that alleges to create three million jobs.

Nobody really believes infrastructure spending will end the recession or create permanent new jobs. However, it’s interesting just how much the Obama plan has changed since the election. The size has been roughly constant. But the mix of tax cuts and spending increases is now totally different.

Instead of $100 billion worth of tax credits, there are now $300 billion worth of tax cuts. This includes a big new piece for business, more cash-expensing for small-business investment, and a restoration of the five-year tax-loss carry-back, which will especially help banks and homebuilders. It might even result in tax refunds for businesses, and might also allow banks to rid themselves of toxic assets, since the losses will now be spread over many years.

So what we have now is an $800 billion stimulus package with $300 billion of so-called tax cuts which could infer less spending than before — maybe only $500 billion worth.

Obama’s economic advisers are bragging to me about their new tax-cut package. They say they’re very pro-growth. And you know what? I acknowledge it. People like Larry Summers, Austan Goolsbee, Christy Romer, and Tim Geithner are no left-wing big-government whackos. They may not be hard-core supply-siders. But in terms of the economics profession, I would call them center-right.

And they absolutely understand the importance of private business and investment in the job-creating economic-growth process. And I think they’re views are the main reason for the reshaping of the Obama package between the campaign trail and the eve of inauguration.

The problem is that they’re not reducing marginal tax rates on large and small businesses or individuals. Their tax credits will be two-year’s worth, not permanent. There will be no incentive effects to maximize growth. And many of the tax cuts are refundable credits, which really are a form of government spending.

So it’s not a supply-side package. However, I’ve really never met a tax cut I didn’t like. And any tax cut is better than a spending increase since private companies and individuals will at least get the money instead of government.

This is the interesting part of the Obama plan. Somewhere in there the tax cuts will have a small positive economic effect. I would have designed it differently, but then again Team Obama won the election. I guess I could say it could have been worse.

Of course, Team Obama will have to contend with the sticker shock of a $1.2 trillion deficit for 2009, just printed by the Congressional Budget Office. And that’s before the Obama stimulus plan. But I don’t think Republicans really have a leg to stand on with the deficit argument — or for that matter the spending argument.

Yes, Obama is raising the ante, and the new numbers are just about over the edge. But a lot of that new deficit is TARP money that should be scored as investment — not real spending. And in view of all the economic pessimism out there, I doubt if the public is very worried about deficits.

What’s most regrettable is that congressional Republicans have yet to make the alternative case. They haven’t pressed for marginal tax-rate cuts as an option to Obama’s credits. So far, the GOP is me-too. They’ve offered an echo instead of a choice.

Meanwhile, polls now say the public favors Obama’s plan by 55 to 65 percent. His personal approval rating is even higher. And he’s being politically astute by reaching out to Republicans. He has virtually removed partisan rhetoric. Simply put, Obama is in the driver’s seat right now.

Sure, the Democratic Congress may mangle Obama’s plan. They might even repeal the Bush tax cuts this year. So there is considerable uncertainty about the details of the final package. But I must say, a crafty Obama is doing his best top employ his version of the Reagan tax-cut plan. Obama talks big government. But so far his program actually reduces the government-spending share and increases the private tax-cut share.

Very interesting.

GOP tug-of-war emerging over Obama plan

Minutes after Barack Obama delivered his big economic speech Thursday, the top two Republicans on Capitol Hill popped in front of the TV cameras to say they were ready to work with the president-elect.

Some other members may not be so cooperative.

“There are ways to stimulate the economy. This isn’t one of them,” said Georgia Rep. Tom Price, the incoming chairman of the conservative Republican Study Committee.

Obama’s plan is expected to cost at least $775 billion, and Price and other conservative House Republicans are prepared to argue that “this is, at its fundamental base, money that we don’t have.”

Congressional Budget Office estimated this week that the nation’s deficit will double, to $1.2 trillion, in 2009 – and that’s before the cost of the stimulus package is added in.

Obama acknowledged Thursday that his stimulus plan “will certainly add to the budget deficit in the short term.”

“But equally certain,” he said, “are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy.”

Obama’s Choice: FDR or Reagan

By Patrick Buchanan

Barack Obama, it is said, will inherit the worst times since the Great Depression. Not to minimize the crisis we are in, but we need a little perspective here.

The Great Depression began with the Great Crash of 1929. By 1931, unemployment had reached 16 percent.

By 1933, 89 percent of stock value had been wiped out, the economy had shrunk by one-third, thousands of banks had closed, a third of the money supply had vanished, and unemployment had reached 25 percent — among heads of households. And in those days, there was no unemployment insurance, no Medicare, no Medicaid, no Social Security, no welfare.

FDR’s answer: vast federal spending, tough new regulations on business and higher taxes — like Herbert Hoover before him, only more so.

The Depression lasted until war orders from the Allies brought U.S. industry back to life. Before 1940, not once did unemployment fall below 14 percent. In May 1939, Treasury Secretary Henry Morgenthau testified:

“We are spending more money than we have ever spent before, and it does not work. … I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. 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.”

Politically, the New Deal was a smashing success, with FDR’s landslides in 1932, 1934 and 1936 virtually wiping out the GOP.

Yet, economically, the New Deal was a bust, failing utterly to restore prosperity. Despite the indoctrination of generations of schoolchildren in New Deal propaganda, that is the hard truth.

Consider, now, how Ronald Reagan responded to the economic crisis of 1980, the worst since the Depression. In the “stagflation” of that Jimmy Carter era, interest rates had reached 21 percent and inflation 13 percent.

Reagan’s answer was the tight money policy of Fed Chairman Paul Volcker and across-the-board tax cuts of 25 percent, while slashing the highest rates from 70 percent to 28 percent.

While unemployment hit 10 percent in 1982 and Reagan lost 26 House seats, in 1983 the tax cuts kicked in.

From there on out, it was boom times until Reagan rode off into the sunset, having created 20 million new jobs. “The Seven Fat Years,” author Robert Bartley called them.

Reagan had followed the lead of Warren Harding and Cal Coolidge, who had cut Woodrow Wilson’s wartime tax rates of near 70 percent to 25 percent, resulting in “The Roaring ’20s,” a time of unrivaled prosperity.

The JFK tax cuts of the 1960s, also a Reagan model, were equally successful.

Harding, Coolidge, JFK and Reagan all bet on the private sector as the engine of prosperity. All succeeded. Franklin Roosevelt bet on government. And the New Deal failed. It was World War II that pulled the United States out of the Depression ditch of the 1930s.

Comes now the financial collapse and economic crisis of 2008, inherited by Obama, with 40 percent of all stock values wiped out in a year, foreclosures pandemic, and unemployment near 7 percent and surging.

In crafting his solutions, Obama seems to be brushing aside the Reagan, JFK and Harding-Coolidge models, and channeling FDR and the New Deal Democrats.

Already staring at a $1.2 trillion dollar deficit for the year ending Sept. 30, about 8 percent of the entire U.S. economy, Obama intends to add a stimulus package of $700 billion to $1 trillion, yet another 5 percent to 7 percent of gross domestic product. The resulting deficit would be twice as large as Reagan’s largest, 6 percent of GDP, which was the largest since World War II.

And how is this Niagara of money to be spent?

Hundreds of billions will go out in checks of $500 to $1,000 to wage-earners and individuals who do not even pay taxes. This is much like the George McGovern “demogrant” program of 1972, where every man, woman and child, if memory serves, was to get a $1,000 check from the U.S. government.

Other hundreds of billions will go to shore up state and municipal spending. Other hundreds of billions will go for “infrastructure” projects, another name for earmarks, which is a synonym for pork.

Now, as Obama does not intend to raise taxes, at least now, he is going to have to borrow this near $2 trillion from foreigners or U.S. taxpayers, or the Fed will have to create the money. Undeniably, this will have an impact upon the economy. But what will that impact be?

Where in history, other than World War II, is there evidence that such a mass infusion of spending restored prosperity?

Obama and the Democrats are taking a historic gamble, not only with their careers but with the country. If this monstrous stimulus package, plus the trillions in hot money, do not work; if the two ignite rampant inflation, rather than real growth, we are all out of options. The toolbox is empty.

And what will follow may truly resemble the 1930s.

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on January 9, 2009 at 9:34 pm Leave a Comment

Stinging Hamas

A war even a simple-minded rock star should support.

JAMES TARANTO

Best of the Tube This Weekend
We’re taking a long-overdue vacation and will return Monday, Jan. 12. But we’ve left something for you to remember us by: our appearance on this weekend’s episode of “The Journal Editorial Report.” Tune in at 5:30 and 11 p.m. ET tomorrow (or, if you’re an extreme insomniac, at 6 a.m. Sunday) as we look ahead to 2009 with colleagues James Freeman, Rob Pollock and Kim Strassel and host Paul Gigot. At some point Sunday the transcript will be posted at the link atop this item.

We’re also scheduled to appear tonight on “Lou Dobbs Tonight” as part of the political roundtable. That show begins at 7 p.m. ET, with a repeat showing at 4 a.m. tomorrow. Watch us in the second half hour.

Stinging Hamas
One of the silliest rock songs of the 1980s was “Russians,” a solo number by Sting (né Gordon Sumner), erstwhile lead singer for the Police. It was a simple-minded anthem of Cold War moral equivalence that combined truisms (“We share the same biology / Regardless of ideology”) with manifest falsehoods (“There is no monopoly of common sense / On either side of the political fence”) to draw an utterly fatuous conclusion about nuclear strategy:

There’s no such thing as a winnable war
It’s a lie that we don’t believe anymore
Mr. Reagan says we will protect you
I don’t subscribe to this point of view
Believe me when I say to you
I hope the Russians love their children too

Of course, Mr. Reagan knew very well that a nuclear war was unwinnable, which is why he strengthened America’s deterrent capability, protecting us and ultimately making it possible to win the Cold War. However much the Russians loved their children, it took Reagan to free them (and the children of the captive nations of Eastern Europe, the Caucasus and Central Asia) from the monstrous ideology of communism (though to be sure, Russia and some of the others still have big problems).

Podcast

James Taranto on Sting and Nizar Rayyan.

OK, so Sting got the Cold War wrong. Whatever. But we were reminded of this by a post from blogger David Gerstman on the current war between Israel and Hamas, the terrorist group that holds sway in Gaza. Yesterday, as ABC News reports, an Israeli air strike killed Hamas leader Nizar Rayyan and 15 members of his “family”: four wives, six sons and five daughters.

Unlike the Russians, Rayyan did not love his children. Gerstman tracks down a 2000 New York Times story (written by the notoriously anti-American Chris Hedges) that quoted the terrorist as hoping for his own sons’ deaths:

”There was not a single night that we did not think and talk about Palestine,” Mr. Rayyan said, his eyes moist. ”We were taught that our lives must be devoted to reclaiming our land.”

Mr. Rayyan spent 12 years in an Israeli jail for his pursuit of that end. His brother-in-law was a suicide bomber who blew up an Israeli bus in 1998. His brother was shot dead by Israelis in street protests seven years ago. Another brother was expelled to Lebanon and several more were wounded in clashes.

Today, his three sons–ages 12, 15 and 16–daily join the youths who throw rocks at Israeli checkpoints. All, he said, yearn to be one thing–martyrs for Palestine.

”I pray only that God will choose them,” he said.

The Jerusalem Post’s Khaled Abu Toameh reports that Rayyan got his wish in at least one case:

At the beginning of the second intifada, Rayyan sent one of his sons to carry out a suicide attack in Gush Katif’s Elei Sinai in 2001. Two Israelis were killed. Rayyan was also responsible for a series of suicide bombings and attacks inside the Green Line, including the suicide bombing in Ashdod Port in 2004 in which 10 Israelis died.

As it turns out, the Israel Defense Forces cared more about Rayyan’s children than he did. YNetNews.com reports:

Prior to striking Rayyan’s house the IDF tried to warn his family about the imminent attack and urged them to evacuate the place, but they refused to do so.

Ha’aretz reports that this is typical:

The IDF has made frequent use of what is known as “knocking on the roof”: Militants are warned by phone when a residential building used to store arms will be bombed, and told to vacate the premised [sic] together with their neighbors. The weapons caches are hit only after the residents leave.

Hamas has tried placing civilians on the roofs of such buildings when the phone call warning comes in. In these cases, the IDF fired antitank missiles near the building, and in a few cases the residents left.

“Israel is so scrupulous about civilian life,” notes columnist Charles Krauthammer, “that, risking the element of surprise, it contacts enemy noncombatants in advance to warn them of approaching danger.” He sums up the situation nicely:

For Hamas, the only thing more prized than dead Jews are dead Palestinians. The religion of Jew-murder and self-martyrdom is ubiquitous. And deeply perverse, such as the Hamas TV children’s program in which an adorable live-action Palestinian Mickey Mouse is beaten to death by an Israeli (then replaced by his more militant cousin, Nahoul the Bee, who vows to continue on Mickey’s path to martyrdom).

At war today in Gaza, one combatant is committed to causing the most civilian pain and suffering on both sides. The other combatant is committed to saving as many lives as possible–also on both sides.

The moral asymmetry is so great that Israel is on the right side even by Sting’s standards.

Home on Derange
With less than three weeks left until Barack Obama’s inauguration, a Colorado man suffering from Bush derangement syndrome has taken his own life, Fox News reports:

A man who attempted to rob two banks in Aspen, Colo., on New Year’s Eve with four homemade gasoline bombs in what he called a “suicide mission” was found dead early Thursday after sparking a manhunt that shut down the city’s holiday celebrations.

The man, James Chester Blanning Jr., was found dead early Thursday just east of Aspen in rural Pitkin County, said Asst. Chief Bill Linn of the Aspen Police Department during a news conference held on New Year’s Day. Blanning was found in his Jeep Cherokee and died of a self-inflicted gunshot wound to the head.

Blanning left a threatening note, typed in all capital letters:

WE HAVE ALL OF THE COP THREATS TO US UNDER VERY SOPHISTICATED ELECTRONIC SURVEILLANCE. DO NOT F— WITH US OR THERE WILL BE MASS DEATH LIKE WE HAVE ALL BEEN PART OF OVER IN THAT F—ING QUICKSAND TRAP THAT ROVE’S AND CHANEY’S [sic] MONKEY BUSH PUT US INTO WHERE SO MANY OF OUR SOUL MATES AND BROTHERS DIED VERY HORRIBLE DEATHS. . . .

PS – FOR ADDED INSURANCE, THERE IS ALSO A FIFTH FIRE CRACKER HIDDEN IN A HIGH END WATERING HOLE THAT WE WILL REMOVE AFTER WE ARE FULLY CLEAR AND KNOW FOR SURE ALL HAS GONE WELL. F— THE WHOLE WORLD, ALREADY.

Sounds as though he and Rod Blagojevich used the same ghostwriter.

The Aspen Daily News has more background on Blanning, who has a history of problems with the law. He was convicted of racketeering in 1996 in a real-estate scam and was also considered a sex offender because of a prior conviction of indecent exposure “for confronting a group of local elected officials while apparantly [sic] wearing only a dildo.”

It sounds as though he had mental problems that long predated the current administration. Yet from the political content of his note, it also sounds as though exposure to the Angry Left might have helped to feed his insanity.

Utilitarians for Jesus
Matthew Parris, just back from Africa, has an essay in London’s Times bearing the provocative title “As an Atheist, I Truly Believe Africa Needs God”:

Travelling in Malawi refreshed another belief, too: one I’ve been trying to banish all my life, but an observation I’ve been unable to avoid since my African childhood. It confounds my ideological beliefs, stubbornly refuses to fit my world view, and has embarrassed my growing belief that there is no God.

Now a confirmed atheist, I’ve become convinced of the enormous contribution that Christian evangelism makes in Africa: sharply distinct from the work of secular NGOs, government projects and international aid efforts. These alone will not do. Education and training alone will not do. In Africa Christianity changes people’s hearts. It brings a spiritual transformation. The rebirth is real. The change is good.

Call it the utilitarian argument for Jesus: Christianity is in some sense vindicated because it has good effects on believers.

How might an anti-Christian atheist respond to this? One answer is that the benefits of Christianity are less important than whether it is true. But even if one concedes the premise, this line of argument gets you only so far. It is an argument against interpretations of Christianity that include belief in propositions that are demonstrably false–e.g., that the Earth is 6,000 years old. But as we have noted, atheists often make the epistemological error of misconstruing matters of pure faith, such as whether hell exists, as empirical questions.

Is there a utilitarian response to Parris’s argument? Certainly atheists frequently try to argue against faith on utilitarian grounds, pointing to all manner of misdeeds or atrocities that have been committed in the name of religion. But the record here is, obviously, mixed, and in the case of Christianity, one has to go back centuries to make a convincing indictment. As regards contemporary Christianity, it is hard to deny that the good vastly outweighs the bad.

Constructing a utilitarian argument in favor of atheism is harder still. It would have to contend with the relatively fresh–and in some cases continuing–atrocities in the officially atheist communist world. Atheism need not imply communism, of course, but utilitarian arguments confront the world as it is, not as it might theoretically be.

A more promising argument would be to note that in the West specifically, a slow decline in religious belief has been accompanied by political liberalization, economic prosperity and technological innovation. It is not immediately evident, however, that the decline in belief is primarily a cause, rather than an effect, of these other trends. And it is also the case that America is at once more religious and more liberal, prosperous and innovative than the nations of Western Europe.

We will concede that we were predisposed to agree with Parris’s argument. We’ll see if those inclined to disagree can do a better job of arguing against it.

Cold shoulders

Russia and Ukraine

Cold shoulders

An annual spat between Russia and Ukraine over gas supplies turns nasty

GAS conflicts between Russia and Ukraine have erupted at the turn of each of the past three years. So when Russia cut off gas to Ukraine on New Year’s Day, the news failed to make big headlines. The European Union, which imports a quarter of its gas from Russia, watched the two sides exchange accusations, but tried to stay out of the row, treating it as a purely technical dispute. In Ukraine itself the mood was relatively calm: the country stocked up on Russian gas months ago and has enough reserves to last it until the spring.

But on Monday January 5th this week the two sides pushed the conflict to a new level. First, a court in Kiev unilaterally annulled a transit agreement between Russia and Ukraine. A few hours later Vladimir Putin, Russia’s prime minister, publicly ordered Gazprom, the state-controlled energy giant, to reduce gas supplies to Europe through Ukraine by the same amount that Ukraine was “stealing” from Russia.

Ukraine strongly denies that it is stealing anything. Hryhory Nemyria, Ukraine’s deputy prime minister, says instead that Gazprom’s erratic behaviour is threatening to undermine a complex transit system. He argues that Ukraine was merely taking enough gas to ensure that it continued to function and that Russia was unreasonable in its demand that Ukraine should compensate European customers for the loss.

It is still unclear who was ultimately responsible for shutting off supplies to Europe. But by Wednesday parts of the continent were left without much-needed imports. Slovakia, Hungary and Bulgaria were hit particularly hard but the gas freeze was also felt in Germany, France and Italy. As the row escalated, Mr Putin ordered that no gas should cross the Russian-Ukranian border.

Russia has been trying to portray Ukraine as an unreliable transit country which is jeopardising European energy security and which is unfit for European integration. Ukraine, for its part, says that the conflict has exposed Russia (again) as a bully which uses gas as a political weapon. For now it has some good cards, including large gas reserves and falling demand from industrial users. Nor does Ukraine have to worry about direct agreements with European customers, whereas Russia has a contractual obligation to deliver gas to Europe. An added problem for Russia is that its storage reservoirs are full: unless it starts pumping soon it may have to start burning off the surplus.

The row has several layers. One concerns money. For years Ukraine has been paying well below market prices for its gas. Gazprom says that Ukraine, which last year paid $179.50 for 1,000 cubic metres of gas, should pay market prices (which, at the moment, are more than twice as high). In a move towards a resolution, Russia and Ukraine agreed in October last year to a gradual transition to market prices and long-term direct contracts.

But gas is not an entirely freely traded commodity: its delivery is partly dependent on the transit pipeline controlled by Ukraine. While underpaying for Russian gas, Ukraine was also under-charging Gazprom for the transit to Europe. Its fee of $1.70 for 1,000 cubic metres of gas per 100km is half that charged by other European countries. Gazprom has offered to sell gas to Ukraine at $250 for 1,000 cubic metres while leaving the transit fee unchanged. Ukraine has said it would pay $201 if Russia increases the transit payments to $2.

If this were a purely commercial dispute, a compromise would be found. But political undercurrents are just as important. Little love is lost between Ukraine and Russia, especially since the Orange revolution of five years ago. More recently Russia accused Ukraine of supplying arms to Georgia during the war in August and has said it would take this into account when forming its policy.

Complicating matters further are political rivalries within Ukraine itself, where the prime minister, Yulia Tymoshenko, is vying with the president, Viktor Yushchenko. On December 31st Ms Tymoshenko was poised to fly to Moscow to conclude difficult negotiations over gas, but Mr Yushchenko apparently undermined her effort. (According to a different version, Moscow cancelled her visit.) As tricky is the vested interest of a controversial intermediary between Russia and Ukraine, which is part owned by Ukranian individuals and partly by Russia’s Gazprombank. It was set up under Mr Yushchenko’s watch and Ms Tymoshenko wants to scrap it.

Europe has long abstained from Russia’s gas relationship with Ukraine. It may now have no choice but to get involved. The main lesson from this spat, Gazprom’s executives argue, is the need to speed up the construction of an alternative pipeline which bypasses Ukraine. Ukraine says that closer integration with Europe is the only way to enhance energy security. But the most important lesson is that unless Europe diversifies its energy supplies it will remain a hostage to Russia’s unpredictable relationship with its neighbours.

Israel Resumes Gaza Assault After Break for Aid

As Civilian Suffering Increases, Plan for Distribution of Supplies Is Announced; Diplomatic Efforts for Cease-Fire Continue

Israel’s security cabinet Wednesday approved a continuation of its ground assault in the Gaza Strip, and resumed strikes in the territory after a lull it called to expedite the distribution of humanitarian aid.Israeli officials said a high-ranking negotiating team had been approved to pursue a more permanent cease-fire plan put forth late Tuesday by Egypt and France. The proposal is aimed at halting the fighting between Israel and the Hamas militants ruling over Gaza. It is also intended to alleviate what United Nations officials call a deepening humanitarian crisis in the territory.

Israel said Wednesday it would observe a three-hour cease-fire every other day to allow aid to be distributed in Gaza.

Nevertheless, movement of crucial aid into and throughout the war-torn territory was still slow Wednesday, pushing already-dire conditions for Gaza’s 1.5 million people toward a crisis.

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Reuters

Israeli soldiers mourn the death of fellow soldier Alex Mashavisky at his funeral in Beersheba on Wednesday, the day after Mr. Mashavisky was killed during Israel’s offensive in the Gaza Strip.

Israeli soldiers mourn the death of fellow soldier Alex Mashavisky at his funeral in Beersheba on Wednesday, the day after Mr. Mashavisky was killed during Israel's offensive in the Gaza Strip.

Around 683 Palestinians have been killed in the Israeli offensive, including more than 100 children, and roughly 3,000 have been wounded, according to U.N. officials. Ten Israelis have been killed, including three civilians.

Israel showed little urgency Wednesday in its public diplomacy, despite growing international pressure to end the conflict.

Israeli Prime Minister Ehud Olmert had been expected by some diplomats to fly to Egypt Wednesday. But Israel’s state radio reported Wednesday that lower-level negotiators, including an army general and Mr. Olmert’s diplomatic adviser, could arrive in Egypt as early as Thursday. Egypt’s Foreign Minister Ahmed Aboul Gheit also said an Israeli team was coming to Egypt on Thursday to discuss the peace initiative.

Mr. Olmert’s spokesman said Wednesday that the team wouldn’t soften the government’s position that a cease-fire would have to include a complete cessation of attacks by Hamas, as well as an international monitoring body to be stationed on the Egyptian-Gaza border to ensure that Hamas can’t replenish its weapons arsenal.

Israel says it doesn’t want to increase Hamas’s legitimacy by negotiating a cease-fire directly with the group, and it wants the terms of any new agreement to increase the power of Palestinian President Mahmoud Abbas and his Fatah party, Hamas’s rivals.

Despite a flurry of other negotiating tracks, including talks pursued by Turkey, Cairo has become the hub of diplomacy over the Gaza conflict in the past few days. Egypt has served as a mediator between Israel and Hamas before, helping to broker the six-month cease-fire between the two sides, which ended last month.

In the absence of clear diplomatic leadership from the U.S., Egypt’s President Hosni Mubarak and French President Nicolas Sarkozy appear to be trying to step into the void. Hamas sent a delegation of its representatives from Syria and Lebanon to the Egyptian capital on Tuesday to discuss a proposed cease-fire plan announced by the two leaders.

Secretary of State Condoleezza Rice extended her stay in New York Wednesday in order to discuss the Egyptian-French initiative and other possible diplomatic avenues aimed at forging a cease-fire, U.S. officials said. Ms. Rice met with Egypt’s foreign minister, Ahmed Aboul Gheit, as well as other senior Arab and European diplomats.

Gaza Conflict Intensifies

See the steps that led up to Israeli troops entering Gaza.

Ms. Rice said the U.S. applauds Egypt’s efforts toward a cease-fire. “We’re supporting that initiative. I’ve been in very close discussions with my Arab colleagues, but also with the Israelis about the importance of moving that initiative forward,” she said.

Washington is supporting Israel’s demand that Hamas’s ability to rearm and smuggle contraband into the Gaza Strip needs to be addressed before a sustainable cease-fire is put in place.

Hamas leaders have indicated their willingness to pursue another cease-fire with Israel, as long as Israeli troops leave Gaza and the army eases a months-long blockade of the territory. Israel has said it needs to seal Gaza’s border for security reasons, following Hamas’s takeover of the territory in the summer of 2007.

During the three-hour lull in fighting by Israel, Hamas also held its rocket fire. Before and after the break Wednesday, however, Israeli artillery and fighter jets bombed 40 targets in Gaza, according to Israeli military officials.

Hamas-linked militants, meanwhile, launched rockets that hit deep into southern Israel. At least eight Palestinians were killed by Israeli attacks, according to Palestinian officials. No Israeli casualties were reported Wednesday.

Stimulus on Track, Despite Huge Deficit

JONATHAN WEISMAN and LAURA MECKLER

President-elect Barack Obama’s economic team is pressing ahead with a costly economic-stimulus plan despite a projected $1.2 trillion budget deficit this year.

The incoming administration is convinced that international lenders will be more likely to keep the U.S. government afloat if they see aggressive action to emerge from recession, and that the potential costs from insufficiently bold action are greater than the dangers of rising interest rates from swelling deficits.

And Mr. Obama appears ready to up the ante. In an interview with CNBC on Wednesday, he acknowledged that the plan’s price tag, currently $775 billion, is likely to rise. “We’ve seen ranges from 800 [billion] to 1.3 trillion and our attitude was that given the legislative process, if we start towards the low end of that, we’ll see how it develops,” he said.

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UPI Photo /Landov

President-elect Barack Obama sees the risk of not spending enough to be greater than the risk of larger deficits.

Mr. Obama and his senior economic aides confronted projections from the nonpartisan Congressional Budget Office on Wednesday that the federal deficit will reach $1.2 trillion in the fiscal year that ends Sept. 30. That would shatter the nominal dollar record of $455 billion set in fiscal 2008. Measured against the size of the economy, the deficit — at 8.3% of gross domestic product — is expected to eclipse the postwar record of 6% in 1983.

Mr. Obama pledged Wednesday to attack surging spending on entitlements such as Social Security and Medicare, and he promised to lay out specific federal programs to cut when he unveils his first budget blueprint next month.

But he also framed the dilemma he is inheriting Wednesday as he introduced at a news conference a new federal “chief performance officer,” Nancy Killefer, a senior director at the management consulting firm McKinsey & Co. “If we do nothing, then we will continue to see red ink as far as the eye can see,” the president-elect said. “And at the same time, we have an economic situation that is dire, and we’re going to have to jump-start this economy with my economic recovery plan, creating three million jobs. That’s going to cost some money.”

Mr. Obama will deliver what aides describe as a major speech on the economy Thursday morning at George Mason University in Fairfax, Va., where he will detail his plans to tackle the recession.

In the next decade, the CBO forecasts the federal government piling on more than $3.1 trillion in additional debt. In the short run, the government faces a $166 billion plunge in tax revenue compared with last year, the CBO says.

Spending will grow this year by almost $622 billion. More than half of that growth will come from the Wall Street rescue fund and the federal takeover of mortgage giants Fannie Mae and Freddie Mac. Unemployment compensation will nearly double, to $79 billion from $43 billion last year. Nutrition assistance will surge to $50 billion from $39 billion.

But those figures likely understate the problem. The debt total doesn’t include the stimulus plan, estimated at $775 billion but likely to go higher as it winds through Congress. It assumes all of President George W. Bush’s tax cuts will expire on schedule in 2010, although Mr. Obama has promised to extend all of them except those affecting families earning more than $250,000. And it assumes that Congress will allow the alternative minimum tax to grow unchecked. The AMT went into effect in 1969 to ensure that the super wealthy pay income tax, but it is increasingly hitting the middle class. Extending the Bush tax cuts and holding the AMT at bay by linking it to inflation would add a further $761 billion in debt.

In past recessions, surging deficits have been fed by an upward spiral. The Treasury had to sell more government bonds. To attract buyers, interest rates would rise, leading to ever higher interest costs for the government and higher deficits. This year, federal interest payments are expected to plunge by more than 20%.

[Barack Obama Taps Killefer for Performance Post]

Getty Images

Barack Obama announces Chief Performance Officer Nancy Killefer.

That is because foreign governments, financiers and savers are stashing their money in Treasury bonds. They will continue to do so until the world economy recovers, Obama aides and congressional leaders agree. But deficit hawks worry that economic recovery will present other investment opportunities and could lead to a rapid flight from U.S. government debt. That would cause a surge of interest rates and possibly “an inflationary bow wave out in the future,” said Senate Budget Committee Chairman Kent Conrad, a Democrat from North Dakota.

Senior Obama economic officials have been studying that scenario closely. For now, Democratic economists say even with a trillion-dollar deficit, there aren’t enough Treasury bills to satisfy world demand for a savings safe harbor. The economic crisis has actually put much of the world at more risk than the U.S. And an aggressive response — both through fiscal stimulus and the second $350 billion tranche of the Wall Street bailout fund — will be more reassuring, not less.

But the Obama team recognizes that position won’t last indefinitely. The ratio of debt to GDP has to stop growing and must stabilize at what they see as a reasonable rate. The problem is determining when to ratchet back the stimulus. Obama officials are determined not to pull back too fast for the sake of fiscal discipline and risk plunging the economy back into recession.

“When you start seeing the private sector lending again, when credit is flowing to families and businesses, they can get auto loans, they can support their mortgage, that the job market has stabilized, then we will want to pull back,” Mr. Obama said on CNBC.

On Capitol Hill Wednesday, top Democrats for the first time broadened the stimulus discussion to rank-and-file lawmakers, beginning Wednesday to lay the groundwork for action in the House and Senate later this month.

—Greg Hitt and Naftali Bendavid contributed to this article.

Peter Schiff 1/6/09 – CNBC (discussing the Obama stimulus)

The Long-Term Damage of Bush’s Statism.

The Long-Term Damage of Bush’s Statism.

Bloomberg reports that a growing number of experts are now admitting that Bush’s huge expansion of government will cause immense long-run damage to the economy and living standards:

The Bush administration’s $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat. The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions. Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it. Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts. “We’re seeing a more statist world economy,” says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. “That’s not good for growth in the longer run.” It’s not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University’s Kellogg School of Management. Slower economic growth means lower profits. Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector. … The increase in the government’s role in the economy has been breathtaking. The U.S. looks set to rack up a budget deficit of at least $1 trillion this fiscal year, while the Federal Reserve has already increased its balance sheet by $1.4 trillion since last December. By way of comparison, U.S. gross domestic product last year was $13.8 trillion. Winding back the intervention may not be easy, says Sapienza, who has studied the effect of government ownership on bank lending. When Italy nationalized banks in 1933, “the architects who designed the system envisaged it as temporary,” she says. “It was in place until the end of the 1990s.” … greater government involvement will make businesses less likely to deploy capital in ways that spur growth and profits, says Eric Chaney, chief economist at AXA SA in Paris and a former official at the French finance ministry. Carmakers may be slower to innovate or cut costs, and financiers may shy away from lending to entrepreneurs. “It’s the job of companies, not governments, to take risk and accept the consequences,” Chaney says. “There is no incentive for governments to take risk, so they won’t.” … Until recently, “investors could, broadly speaking, ignore the role of the government when thinking about markets” says Alex Patelis, chief international economist at Merrill Lynch & Co. in London. “This period is over.” … “We’ll end a financial crisis with a fiscal crisis,” says Vito Tanzi, former director of fiscal affairs at the IMF. “We’ll get out with very large public debt and very large public spending. That, for sure, will slow down the rate of growth for the next 10 years or so.”

Keynesian Economics Is Wrong: Bigger Gov’t Is Not Stimulus

Bottoming Signs

Here and there are some small signs that the economy is at least bottoming — a crucial stepping stone to meaningful recovery.

For example, the ISM non-manufacturing services report released today for December came in at 40.6 on the composite index, compared to 37.3 in November. New orders, employment, backlogs, and exports all ticked higher than the previous month. So did the overall-business-activity index. It’s still a recession reading, but a small increase is better than a decline.

The November factory-orders report showed non-defense capex rising at a 3.9 percent annual pace, the first increase in four months and the best gain in 10 months. Computer orders surged 12.5 percent.

Pending home sales — which tracks home re-sales under contract, according to the National Association of Realtors — declined again overall. But out West pending sales continued to increase, and they are up 27 percent since the August 2007 bottom.

Commercial construction rose 0.7 percent annually in November, and is up 12.1 percent over the past three months.

And in the November personal-income report, real disposable income jumped 1 percent for the month and is up 7.1 percent at an annual rate over the past three months. Real consumer spending in that report rose 0.6 percent in November.

These income and spending gains were largely a function of plummeting inflation, where the PCE deflator has fallen 6.1 percent annually over the past three months. That, of course, is largely a function of collapsing oil and retail gas prices. The gasoline drop is probably worth $350 billion as a consumer-purchasing-power tax cut. This is a key recovery mustard seed. So is the outsized growth in the money supply as measured by M1 and M2, fueled by the gigantic increase in the monetary base as the Fed continues to expand its balance sheet.

Additionally, the credit freeze continues to thaw. The three-month LIBOR rate is all the way back to 1.4 percent. And corporate bond rates continue to decline, a signal that private capital markets are starting to function again. The 30-year mortgage rate is holding around 5.3 percent.

At a recent conference in San Francisco, academic economists were very pessimistic, expecting recession to last through the whole year. But easy money and low retail gas prices may be a lot more stimulative than the academics think.

President-elect Obama said today that we should expect trillion dollar budget deficits for the next few years. But do we really need this unbelievable increase in the size and scope of government? Art Laffer is very gloomy about big-government spending and borrowing. He believes deficits of this magnitude and a large increase in the government share of GDP are liens on future tax hikes that will slow the economy’s potential to grow.

It was Milton Friedman years ago who taught us that the real tax burden on the economy is best measured as the government spending share of GDP. That measure has been falling for over 20 years, until President Bush’s second term. Now Obama’s plan will ratchet this tax burden much higher.

My point? We don’t need all this. Lower tax rates for large and small businesses along with easier money and lower gasoline prices will get us on the right track to increase the economy’s potential to prosper.

Once again, I ask what the Republican party intends to do. Will it be me-tooism? Or will they provide a choice, not an echo?

Pat Toomey on Obama Stimulus Bill

Posted by Ricardo Valenzuela at 3:47 PM 0 comments

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We believe in free markets and free people, the principles, if you will, marked in the watershed year of 1776 by Thomas Jefferson’s Declaration of Independence and Adam Smith’s “Wealth of Nations.”

The Art of the Impossible

Rich People Versus Politicians

The Economic “Stimulus”

Political game of blind man’s buff

The Obama Gap

Obama Employs His Version of Ronald Reagan

GOP tug-of-war emerging over Obama plan

See Also

Obama’s Choice: FDR or Reagan

Stinging Hamas

A war even a simple-minded rock star should support.

Podcast

Cold shoulders

An annual spat between Russia and Ukraine over gas supplies turns nasty

Israel Resumes Gaza Assault After Break for Aid

As Civilian Suffering Increases, Plan for Distribution of Supplies Is Announced; Diplomatic Efforts for Cease-Fire Continue

Stimulus on Track, Despite Huge Deficit

JONATHAN WEISMAN and LAURA MECKLER

Bottoming Signs

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