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

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”

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

Political game of blind man’s buff

By Martin Wolf

function floatContent(){var paraNum = “3” paraNum = paraNum – 1;var tb = document.getElementById(‘floating-con’);var nl = document.getElementById(‘floating-target’);if(tb.getElementsByTagName(“div”).length> 0){if (nl.getElementsByTagName(“p”).length>= paraNum){nl.insertBefore(tb,nl.getElementsByTagName(“p”)[paraNum]);}else {if (nl.getElementsByTagName(“p”).length == 3){nl.insertBefore(tb,nl.getElementsByTagName(“p”)[2]);}else {nl.insertBefore(tb,nl.getElementsByTagName(“p”)[0]);}}}}In tough times, politicians squabble. Out of this heat, light should emerge. Alas, it is not doing so, at least in the UK. The utterances of leading Labour and Conservative politicians do not explain how the UK economy is to emerge from its current quagmire.

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

The Obama Gap

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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

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

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 has tried to assure Republican support for the spending in his plan by tying it to $300-plus billion in tax cuts. But as much as those may appeal to the GOP, Price calls the rest of the bill — hundreds of billions in spending for conservation projects, unemployment benefits and state aid to fund road projects and bridge Medicaid shortfalls – a “non-stimulus package.”

House Minority Leader John A. Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell (R-Ky.) both say they’re open to working with the incoming president – and vice versa. In addition, Boehner has made it very clear to his rank-and-file that Republicans will suffer if they become “The Party of No” by staging frequent fights with the popular president-elect.

“I do believe our economy is facing crisis,” Boehner told reporters on Thursday. “I do believe that Washington has to act.”

But neither leader wants to swallow principle in supporting the package. And if complaints from the rank and file grow loud enough, Boehner and McConnell may find themselves trapped between their need to represent their members and their desire to appear supportive of the new president — and understanding of the economic troubles facing many Americans.

Many of Boehner’s members abandoned him during negotiations over the $700 billion Wall Street bailout in the fall, and that frustration still remains.

So far, it’s not clear how outspoken Republicans intend to be. With Senate Democrats launching their own criticisms of the Obama plan, the Republicans have been able to fly under the radar while working on their own responses.

On Wednesday, at the House Republicans first Conference-wide meeting of the year, Pence, a former RSC chairman, delivered a Power Point
presentation outlining a series of conservative complaints with the
massive economic stimulus bill, members present at the meeting told
Boehner has tasked his new No. 2, Republican Whip Eric Cantor, to organize a task force to plot the party’s negotiating strategy with the incoming president and his team.

The group met for the first time Thursday night in Cantor’s suite on the third floor of the Capitol. A participant said that embers present threw out a slew of ideas in a rapid-fire exchange during the meeting but did not reach any agreements.

Republican Party leaders retire to Annapolis, Md., this weekend to chart their course for the rest of the year.

Boehner and McConnell both signaled that their support for Obama’s plan hangs on whether he offers Congress “the right balance” between new spending and tax cuts. And, despite a suggestion otherwise from Boehner on Wednesday, the overall cost will be an issue.

“How much debt are we going to pile on future generations?” Boehner asked on Thursday.

McConnell said, “Obviously, the question is how big and what form.”

Obama’s Choice: FDR or Reagan

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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