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Views on the News

January 17, 2009

 

Views on the News:          

Listen up, Congress… approving the second $350 billion for the Bailout was a big mistake since there is no evidence that the first $350 billion accomplished its stated goals and no reason to believe the second half will be better managed.  The American people deserve an exit strategy from the taxpayer-funded Troubled Asset Relief Program (TARP) - an exit strategy aimed at getting the federal government out of the private sector.  What Treasury officials are offering instead is an escalation, placing taxpayers on the hook for another $350 billion investment in a program that has been managed with little transparency, no accountability and in a manner totally inconsistent with the way it was sold to Congress last fall.  Not long after TARP was signed into law, the program began to go off the rails.  Funds that were intended to buy up "toxic assets" to help unlock the credit markets at the heart of the financial crisis suddenly made their way elsewhere.  Some went to help financial institutions acquire other banks, while some went to the automobile companies.  Now we don't really know where some of it went.  Is it any wonder that American taxpayers are outraged?  So far, Hank Paulson's Treasury Department hasn't revealed how the bailout funds are being spent.  However, one of the key principles of those who want to shrink government, lower taxes and promote capitalism is that the people should know what government spends their taxes on.  Obama’s Treasury Secretary designate Timothy Geithner and economic advisor Lawrence Summers both helped craft the TARP, so why should we believe it will have better success?  

 

It won’t be long before Americans are disappointed with Obama and think differently about defense, learning, dignity, and decency and Republicans can seize the initiative with a better vision of the future.  Noble ideals of goodness, the dignity of a dollar earned, the honest love of learning, and the warning to all enemies, “Don’t tread on me” – such attitudes used to be as American as the flag and as bipartisan as the Bill of Rights. Why can’t they be again? If we worked as hard at spreading them as we do at electing candidates, they could.  Reagan's economic recovery program was based on these principles, with 4 concrete components reiterated over and over again throughout his campaign, and implemented after he was elected.  We know such policies work because they turned around in just two years an economy far worse than today's, suffering from multi-year double-digit inflation, double-digit unemployment, double-digit interest rates, declining incomes, and rising poverty.  What we suffer with today is not the worst economy since the Great Depression, but The Worst Economy Since Jimmy Carter, which was the last time Obama's ultraliberals were dominant, politically and intellectually.  Those components were (1) across the board reductions in tax rates to provide incentives for saving, investment, starting and expanding businesses, job creation, entrepreneurship, and work, (2) removing the costs of unnecessary regulation, which today would especially mean removing the onerous restrictions on energy production, allowing drilling offshore and onshore for oil and natural gas, and revival of the nuclear power industry, (3) controlling government spending, which contrary to longstanding liberal propaganda Reagan did do, as explained in my article in the November 2008 American Spectator, "When the Republicans Cut Spending," and (4) sound anti-inflation monetary policy.  Indeed, these Reagan policies not only ended the disastrous stagflation of the 1970s, but created what economists Art Laffer and Steve Moore have rightly noted was the 25-year economic boom, from 1982 to 2007, the greatest period of wealth creation in the history of the planet.

Republicans have finally presented an alternative stimulus program, the Economic Recovery and Middle Class Relief Act, that will stimulate the economy and create new long term jobs:

The Republican National Committee (RNC) will have to reinstall its founding conservative principles and values and stop trying to out-liberal the liberals, or it will suffer more losses:

Democrats can no longer blame Bush for their bad legislation and poor results, so Republicans will soon regain the initiative with new ideas that work and alternatives that deliver real desired results.

 

Obama has decided to get a fast start on his administration, but he sacrificed any possibility of a traditional Presidential honeymoon period, since is taking his honeymoon before his inauguration.  Obama has revealed his true beliefs naming Carol M. Browner, one of 14 leaders of a socialist group’s Commission for a Sustainable World Society, as his pick for global warming czar.  Obama is also looking to pass a stimulus package for trial lawyers and liberal-feminists special interest groups with the Lilly Ledbetter Fair Pay Act and the Paycheck Fairness Act, both of which will expose large and small companies to vast new liabilities extending back decades.  Already Obama is learning that governing is much harder than campaigning, such as closing the Guantanamo detention center immediately can’t be done without a great deal of planning.  Barack Obama 2.0” is already fixated on his reelection creating a corps of political “community organizers” to press the President’s agenda and lay the foundation for his reelection.  Apparently Democrat hypocrisy now allows budget deficits under Obama that they railed against for the last eight Bush years, so the solution is to print more “Monopoly” money.

 

Nikita Khrushchev said, “We can’t expect the American people to jump from Capitalism to Communism, but we can assist their elected leaders in giving them small doses of Socialism until they awaken one day to find they have Communism.”  While Americans have embraced elements of the New Deal, the Great Society and progressive taxation, we have traditionally viewed welfare as a way to help those in dire need, not as a way of life for the middle class.  We have grasped, perhaps more than any other nation, that there is a long-run cost to dependency on the state, including an aversion to risk that eventually enervates the entrepreneurial spirit necessary for innovation and prosperity.  The last several months are a foreshadowing of a new era of government activism, rather than an unfortunate but necessary (and anomalous) emergency action.  We will soon shift from a market-based economy to a political one in which the government picks winners and losers and extends its reach and power in unprecedented ways.  Between now and the end of this decade may be one of those rare moments in which among other things will turn decisively one way or the other.  The stakes could hardly be higher for our way of life.  In short, we may be approaching a tipping point for democratic capitalism.

 

Since Obama needs the economic downturn to last at least 4 years to justify all the economic and social changes he proposed, expect his stimulus program to last at least through the next election.  The much ballyhooed Obama stimulus "tax cuts" avoid entirely any reductions in tax rates at all, because Obama considers such rate reductions ideologically immoral.  Obama is trying to stimulate the economy through increased welfare, government spending and deficits, based on the old-fashioned Keynesian economics of the past.  His stimulus package includes such hot new ideas as hundreds of billions for infrastructure, building new roads, bridges, schools, and buildings, like Roosevelt's make-work programs of the 1930s.  Another hot idea is hundreds of billions in state aid for higher state and local spending. His alternative energy subsidies are reminiscent of Jimmy Carter's Synfuels Corporation. Does Obama have any new ideas at all?  His outdated, braindead, Keynesian approach is not going to work, just as it has failed over and over in the past, again because it does nothing to change the basic incentives governing the economy, and because just borrowing trillions from the economy to spend in the economy does nothing to expand the economy on net.  It didn't work the last time it was tried, in the 1970s, when it disastrously produced instead worsening recessions throughout the decade, along with runaway inflation.  And it didn't work in the 1930s, when it only extended the Great Depression for over a decade.  There is another potential financial crisis on the horizon.  State, local, and private pension plans covering millions of government employees and union workers with "defined benefit" accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.  State pension funds began playing the market, putting their money into riskier and riskier securities--first stocks, corporate bonds, and foreign investments, then real estate, private equity firms, and hedge funds.  Obama is more “Regressive” than Progressive in his reaching back to failed ideas from the past such as FDR’s Depression prolonging big government programs and economy killing socialism.

 

Listen up, Congress…. Say NO to the Obama Stimulus, since it will neither stimulate the economy to grow, nor create new long term employment opportunities outside of government.  Though Speaker Nancy Pelosi (D-Calif.) said the stimuli should be “timely, temporary and targeted,” neither she nor President-elect Obama can say what the target should be.  Meanwhile the American people have very little trust and confidence in Congress, the press, or the White House to understand the problems and to fix them in the people’s best interests.  The ideas they’re floating threaten long-term damage to the economy they’re aiming to fix.  Congressional Research Service report said, the current budget deficit -- already over $1 trillion -- may render more deficit spending a burden on the economy rather than a stimulus.  The common wisdom among Democrats is that a new New Deal -- spending on “shovel-ready” construction for the repair of roads and bridges and such -- is the fastest route to economic recovery.  Two huge problems impair that logic:  First, “shovel-ready” and "infrastructure” are Democratic code words for pork-barrel spending; and Second, construction projects don’t necessarily result in rapid job creation. There is a lag time in months or even years between the passage of legislation and bureaucratic action to spend the money authorized.  Now Obama is increasing the number of jobs predicted to 3.7 million, but economic advisors were quick to include the disclaimer “estimates are subject to significant margins of error.”  Americans should realize that any infrastructure effects aren't likely to be felt until the economy is already rebounding on its own.  Worse still, the Democrats are proposing increases in entitlement spending, such as raising Social Security benefits.  Senate Minority Leader Mitch McConnell (R-Ky.) remarked, “Making -- adding more benefits to the current entitlement system, which is already unsustainable, is neither timely, temporary, nor targeted.”  Meanwhile Congressional Democrats will force Obama to abandon his proposed tax cuts for businesses and individuals to repeal immediately the Bush tax cuts, raising taxes on those whose annual income is more than $250,000 this year.  The roll-out of the Obama Administration's fiscal stimulus package has been met with a huge amount of anticipation, heightened by a lack of specifics, which seem almost purposely elusive as a signal to Congress that this is essentially a draft open to discussion.  However, the buildup of such expectations over the outcome of this process creates a distinct risk in casting the fiscal package as a near panacea for pulling the economy out of its current deep slump.  A stimulus package has two objectives it must meet in order to qualify as successful:  First, it must generate quick economic recovery; and Second, that recovery must lead to sustained economic growth.  Contrary to conventional wisdom, the government spending programs implemented during the Hoover, Roosevelt, Ford, and George W. Bush administrations that intended to generate this kind of economic stimulus did not create sustained economic growth or reduce unemployment long-term.  Neither did Japan's years of stimulus spending in the 1990s bring Japan's economy out of recession.  Stimulus packages are never fully successful.  At the moment Obama’s stimulus plan, including the "middle class tax cut" that is really spending by another name, is mostly expenditure.  Obama downplays revenue, because he has only grasped one half of Keynes.  But there is also the considerable risk that Obama's energy program will be filled with subsidies, duties, and restrictions that will introduce economic distortions right when we least need them.  Shoveling aid to domestic ethanol producers while doing nothing to eliminate restrictions on imported ethanol is bad economics, bad energy policy, and harms poor people in other countries by raising food prices.  Other subsidies and duties might provoke retaliation from America's trading partners.  With its whopping price tag, the incoming administration's economic plan makes it more likely taxes will be raised sometime soon.  If that happens, Obama will have failed his first test. He will have stepped into the stimulus trap.  To hear the Democrats, then, you would think Obama has a free pass.  He can implement a true Keynesian stimulus--big spending, tax cuts--until the economy is growing again.  Just because the deficit is perceived as irrelevant now doesn't mean it won't matter in 2010, 2011, or 2012… It will.  The reality, based on hard facts on the ground and the quirky dynamics of fiscal policy, suggest that the potential of such a package to turn the economy around in any meaningful way in 2009 is actually quite limited.  In fact, it is nearly impossible to alter the trajectory of economic activity over the next two to three quarters, fiscal stimulus or not.  Historically a well-established shortcoming of fiscal-stimulus packages is that they produce results too late to alleviate the near-term pain and, actually, tend to take effect when the economy is already in the process of recovering on its own and needs such help the least, leading to a potential overheating of economic activity at that time.

 

 

Obama has only learned half the lessons from the past and has set himself up to fall into the “stimulus trap.”  It's what you fall into when you forget that the secret to Keynesian stimulus is a combination of increasing expenditure (public spending) and decreasing revenue (tax cuts).  A review of economic history suggests that relying on public spending alone won't get you out of the ditch, and it may even make things worse.  That's because spending creates a political environment in which interests clamor loudly to raise revenue in order to reduce the growing budget deficit.  And where does the additional revenue come from?  From tax hikes and increased tariffs and other measures that delay any recovery.  This doesn't matter to the deficit hawks, since to them, the huge deficits are too scary.  They haven't yet seen the gains from public spending on things like infrastructure (because those gains take a while to materialize).  The deficit hawks have the natural human tendency in times of economic distress: Batten down the hatches and hope the house survives the storm.  These deficit hawks forget that what is good behavior for people is not always good for governments, but they have pull.  Politicians are always happy to raise more money to spend.  So taxes go up; budgets are cut; and the economy slides back into recession.  The stimulus trap will then have been sprung.  It's happened before.  The federal government expanded considerably during the Great Depression.  The decade saw the creation of the programs and agencies that liberals hold up as models for the Obama administration: the Civilian Conservation Corps, the Works Progress Administration, the Tennessee Valley Authority, the Civil Works Administration, etc.  FDR's government, to use the latest cliché, "put people to work" digging ditches, building roads, fixing public spaces, and electrifying rural communities.  There was only one problem… It didn't help.  The economy remained in depression until 1942 and the onset of wartime spending.  FDR was ensnared in the stimulus trap.  Unlike today's Democrats, FDR actually believed in pay-as-you-go budgeting.  He thought that what the government appropriated needed to be recouped in taxpayer revenue, and he was partly right.  During prosperous times government has a responsibility to balance its books, but not in times of scarcity.  Then the government's duty is to sow the seeds of growth.  Is Barack Obama about to make the same mistake?  All signs point to yes!

 

If you are sick and tired of government and politics as usual, read my web site with its individual issue analysis and recommendations at: http://www.returntocommonsensesite.com Remember this site is updated every Saturday. Individual issue updates this week include:

 

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David Coughlin

Hawthorne, NY