Political Economics

[Body-by-Guinness]

January 26, 2009
"Making Work Pay" Credit Will Not Stimulate the Economy
by Curtis S. Dubay
WebMemo #2240
President Barack Obama's "Making Work Pay" tax credit is a major piece of the fiscal stimulus plan currently being debated in Congress. The new credit is being touted as a tax cut, but in reality it is just more spending through the tax code. Moreover, since it is also "refundable," it would send money directly to low-income taxpayers who pay no income taxes.

This Making Work Pay credit does nothing to create jobs. A better approach would be growth-promoting tax cuts that increase taxpayers' incentives to work, save, invest, and take on risk.[1] The best way to do that is to lower rates on individual income, capital gains, and corporate taxes and to eliminate the death tax.[2]

Spending Through the Tax Code

The Making Work Pay credit would fulfill President Obama's campaign promise to cut taxes for 95 percent of working families. It is worth $500 for an individual or $1,000 for a couple. The credit is refundable, so if it is greater than the total that the taxpayer owes in income taxes, they will get a check from the government for the remaining amount of the credit. For instance, if a couple has an income tax liability of $800 (after all other credits and deductions in the tax code), the new Making Work Pay credit would completely wipe out their tax liability. Then, they would receive a $200 check from the IRS from the refundable portion of the credit.

This kind of credit is actually a spending program because it directs money to a targeted group based on political considerations. Economically, it is no different than if Congress passed a spending bill that simply sent checks in the same amount to the same people. The only difference is that it is run through the tax code.

Using the tax code for this kind of spending is favored politically because spending is unpopular with the American public. Tax cuts, however, are popular. This misleading brand of spending as a tax cut gives lawmakers a freer hand to institute, through the tax code, the same programs that would be unpopular if rightly called spending. Moreover, spending through the tax code is a stealth off-budget expansion of the federal government and circumvents the standard budgetary process where spending would ordinarily receive intense scrutiny.

Paying Those Who Pay No Income Taxes

The Making Work Pay credit will send money directly to millions of taxpayers who pay no income taxes at all. It is impossible to cut taxes for a taxpayer who pays no taxes. Thus, refunds to taxpayers who pay no income taxes cannot, by definition, be a tax cut. This is spending pure and simple, and it is misleading to pretend otherwise.

In 2009 alone, the IRS will already mail checks worth an estimated $57.8 billion to taxpayers who pay no income taxes but still get a refund from the two largest refundable credits--the Earned Income Tax Credit and the Child Tax Credit.[3]

The tax code should not be used to direct payments to targeted groups. The merits of such programs should be discussed and debated in the budgeting process instead of obscured in the tax code and misnamed a tax cut. This would increase the transparency of government and give taxpayers a better sense of how their money is spent.

Credits Reward Politically Favored Activities

More tax credits in addition to the Making Work Pay credit are likely to be proposed in the near future. It is important to remember that tax credits are often misused to influence behavior and achieve political goals. This is not a new development, as the very first income tax in 1913 had a deduction for interest paid to encourage home ownership. Tax credits designed to influence behavior are not tax cuts, however. They are social or political policy implemented through the tax code. If taxpayers must undertake a certain behavior to receive a reduction of their tax bills, they are being paid to engage in a politically favored activity.

There are already countless provisions in the tax code that pay taxpayers to engage in behavior deemed beneficial by Washington. The federal government spends almost $1 trillion annually through 161 different credits or deductions for education, energy production, energy use, the environment, agriculture, housing, transportation, community development, health care, and many others. These are no different economically than if the government directly paid taxpayers through spending programs to undertake the politically favored activities. Such policies, therefore, should be regarded for what they are: spending, not tax cuts.

Thus, the Making Work Pay credit is another step down an increasingly slippery slope.

Making Work Pay Credit Will Not Boost the Economy

The Making Work Pay credit, or any new credit, will fail to stimulate the economy because government spending cannot create new purchasing power out of thin air.[4] The money that would go out through this credit would have to be taken out of the private sector by either taxing or borrowing, negating any effect of new government spending. The only sure way to stimulate the economy is through permanently lower tax rates, because they improve taxpayers' incentives to create income through working, saving, and investing.

The Heritage Foundation recently released a plan that would create 3.6 million jobs through 2012 by lowering tax rates. The plan calls for making the 2001 and 2003 tax cuts permanent, an additional cut of 10 percentage points in the top individual income and corporate income tax rates, and reductions of other income tax rates by similar amounts from their current levels.[5] The plan would cost less than half of the current stimulus package, would actually create new private sector jobs, and would really be a tax cut.

Spending in Disguise

Congress should do away with the Making Work Pay credit, but at the very least it should limit its damage by making the credit non-refundable. Not only would this prevent non-taxpayers from getting government handouts through the tax code, but it would also reverse the trend of using the tax code as a spending mechanism.

The Making Work Pay tax credit now in the stimulus is not a tax cut at all. It is spending through the tax code. It will function like a spending program and send checks to taxpayers who pay no income taxes. Even worse, it will not stimulate the economy. Lawmakers should focus instead on real tax cuts such as cutting tax rates.

Curtis S. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.


[1]Stuart Butler, "Permanent Tax Relief--Not Tax 'Holidays'--Stimulates Economic Growth," Heritage Foundation WebMemo No. 2152, December 3, 2008, at http://www.heritage.org/Research/Taxes/wm2152.cfm.

[2]Alison Acosta Fraser and Curtis Dubay, "Cutting Taxes to Promote Growth and Restore Fairness: A Memo to President Obama," Heritage Foundation Special Report No. 29, December 2, 2008, at http://www.heritage.org/Research/Taxes/sr29.cfm.

[3]Office of Management and Budget, Analytical Perspectives, Fiscal Year 2009, p. 291, at http://www.whitehouse.gov/omb/budget/fy2009/pdf/spec.pdf (January 8, 2009).

[4]Brian Riedl, "Why Government Spending Does Not Stimulate Economic Growth," Heritage Foundation Backgrounder No. 2208, November 12, 2008, at http://www.heritage.org/Research/Budget/bg2208.cfm.

[5]J. D. Foster and William W. Beach, "Economic Recovery: How Best to End the Recession," Heritage Foundation WebMemo No. 2191, January 7, 2009, at http://www.heritage.org/Research/Economy/wm2191.cfm.

http://www.heritage.org/Research/Taxes/wm2240.cfm

[Body-by-Guinness]

http://www.latimes.com/business/la-fi-cleantrucks27-2009jan27,0,4024214.story?track=rss
From the Los Angeles Times
TRANSPORTATION
L.A. port's clean-truck program running on empty
Funding for a $20,000 incentive for buyers of clean-fuel trucks has dried up. Some trucking firms have spent millions of dollars on greener fleets, expecting the cash.
By Ronald D. White

January 27, 2009

It sounded like a good deal: The Port of Los Angeles offered to pay $20,000 incentives as part of its Clean Trucks Program, launched Oct. 1 in conjunction with the neighboring Long Beach port to reduce pollution from trucking fleets serving the harbor.

That sent Vic La Rosa into overdrive.

The owner of Total Transportation Services Inc. ordered 111 trucks, some powered by cleaner-burning diesel and some by liquefied natural gas, each eligible for the $20,000 because they meet 2007 emissions standards.

Then came the roadblocks.

Port officials were expecting only modest interest in the incentive program -- maybe 1,000 rigs -- because eligibility hinged on far surpassing the requirements of the Clean Trucks Program, which initially bans all trucks built before 1989. Instead, more than 100 large and small trucking companies turned out, with as many as 7,500 trucks requiring grant money over the course of the next year.

On top of that, state officials nixed funding assistance and a federal agency blocked the collection of fees to support the program, forcing the L.A. port to dip into its strained budget for $44 million to cover the first 2,200 trucks.

That's leaving Total Transportation Services of Rancho Dominguez and other motor carriers short of a full load.

"It's like no good deed goes unpunished," said La Rosa, who spent an average of $130,000 on his trucks. "We followed their directions and their plans. We felt it was the port's responsibility to follow through on this. We're out over $15 million on these truck purchases."

Some carriers are worried they could go under if they don't get all of the help they had anticipated.

Overseas Freight Inc. of Long Beach has committed to overhauling two-thirds of its 80-truck fleet and says it needs the $20,000 it expected for each new vehicle.

"Without the $20,000 promised by the Port of Los Angeles, it will be very difficult for us to get through the tough economic times ahead," Joseph Wang, president of Overseas Freight, said in a recent letter to S. David Freeman, president of L.A.'s Board of Harbor Commissioners. The family-owned business has ordered 54 clean trucks, Wang said.

Brian Griley, president of Southern Counties Express Inc., a Rancho Dominguez company, has purchased 50 LNG trucks and 55 new diesel trucks. Without the port's incentives, "my cash flow cannot support these start-up costs, and I fear we many not survive these ugly financial times," he said.

Experts said that the hiccups in the Clean Trucks Program might be only the first in a series of unanticipated problems that will result from the biggest and most controversial effort any seaport has made to clean the air. Other ports are also pursuing green goals -- such as the Northwest Ports Clean Air Strategy in Vancouver, Canada; Seattle and Tacoma, Wash. -- but nothing on the scale of that in Southern California.

"Everything you are seeing in Los Angeles and Long Beach you will see happening at every other port around the nation as they attempt to clean up their acts," said John Husing of consulting firm Economics & Politics Inc., an expert on goods movement. "But because they are the biggest, the busiest and most important ports, Los Angeles and Long Beach get to go first. They get to turn over all of the stones and find all the creepy crawly things hiding underneath."

Los Angeles and Long Beach port officials initially had planned to use an electronic system at terminal gates beginning Oct. 1 to assess a fee of $70 for every 40-foot container. The fees would be used to help finance the purchase of newer, cleaner trucks. Los Angeles came up with the additional incentive of $20,000 for each of the cleanest trucks and exempted them from the $70 container fee.

But the fees were blocked by the Federal Maritime Commission, which also has filed a federal lawsuit against parts of the clean-truck plan and has claimed that the ports have overreached their authority and are interfering with interstate commerce.

The commissioners have repeatedly made requests for more information from the ports, and each request begins a new 45-day period in which the ports are blocked from charging the fees.

In addition, the ports have been told not to count on the state for funding, given the swelling budget deficit.

Growing concern from La Rosa, Wang, Griley and seven other trucking company executives who had, in total, purchased $126.5 million in new trucks convinced port officials that their reputation was on the line. The worst thing they could do was tell the trucking companies that they would have to wait until they were able to collect the fees meant to fund the program.

"The impact on large companies that maintain fleets of several thousand trucks would not have been fatal," said John Holmes, deputy director of operations for the Port of Los Angeles, "but all some of the smaller companies do is drayage in and out of the ports. They have spent a lot of money procuring new trucks. If they don't get these incentives, particularly in this economy, they will be exposed."

Officials at both ports have decided to begin collecting the fees next month and are hoping that federal officials won't try to thwart them again.

"The fee collection is essential to fully realize the environmental benefits of the program," said Richard Steinke, executive director of the Port of Long Beach. Port of Los Angeles Executive Director Geraldine Knatz echoed that sentiment, saying: "It's imperative that we start the program."

With 2009 shaping up as an even slower year for trade at the ports than 2008 was, port officials are hoping that the Obama administration will fill the two vacancies at the five-member Federal Maritime Commission with appointees who are sympathetic to their efforts. But with so much more on the new administration's plate than the ports, it's not clear when or whether that will happen.

"We have to do everything we can to keep the clean-truck program going and everything we can to collect the fees for these incentives," Holmes said.

La Rosa is happy that some of the money is on the way. But even with the $20,000-a-truck incentive, he says it won't be easy to pay off and maintain the new fleet.

"Our business is down across the board from between 20% to 30% because of the economy. Our earnings have plummeted," La Rosa said.

"We are heavily committed to this clean-air program. We want this to work."

ron.white@latimes.com

[Body-by-Guinness]

2nd post.

10 Reasons to Whack Obama's Stimulus Plan

January 27, 2009 02:10 PM ET | James Pethokoukis | Permanent Link | Print
Some people are going to oppose President Obama's ginormous stimulus package just because they're on a different political team. But when you look at the economic evidence, it sure seems like an economic recovery package that's heavy on government spending and light on tax cuts is just the opposite of what we should be doing right now. Try this closing argument on for size:

1) A 2005 study by Andrew Mountford and Harald Uhlig "analyzed three types of policy shocks: a deficit-financed spending increase, a balanced budget spending increase (financed with higher taxes) and a deficit-financed tax cut, in which revenues increase but government spending stays unchanged. We found that a deficit-spending shock stimulates the economy for the first 4 quarters but only weakly compared to that for a deficit-financed tax cut." In other words, FDR vs. Clinton vs. Reagan, Reagan wins.

2) Harvard economist Robert Barro looked at the multiplier effect of World War II military spending -- supposedly the Mother of All Stimulus Plans and found that "wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier." Barro prefers eliminating the corporate income tax to massive government spending.

3) Alberto Alesina of Harvard and Luigi Zingales of the University of Chicago want to adress the fear and confidence issue by creating "the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years."

4) An initial CBO analysis found that a mere $26 billion out of $274 billion in infrastructure spending, just 7 percent, would be delivered into the economy by next fall. An update determined that just 64 percent of the stimulus would reach the economy by 2011.

5) University of Chicago economist and Nobel laureate Gary Becker doubts whether all this stimulus spending will do much to lower unemployment: "For one thing, the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies. For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative."

6) Christina Romer, the new head of the Council of Economic Advisers, coauthored a paper in which the following was written about taxes: "Tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects." And former Bush economic adviser Lawrence Lindsey tack on this addendum: "The macroeconomic benefits of tax cuts can be two to three times larger than common estimates of the benefits related to spending increases. The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet."

7) Economists Susan Woodward and Robert Hall find that the multiplier effect from infrastructure spending maybe just 1-for-1, less than that 3-to-1 ratio for tax cuts that Romer found: "We believe that the one-for-one rule derived from wartime increases in military spending would also apply to increases in infrastructure spending in a stimulus package. We should not count on any inducement of higher consumption from the infrastructure stimulus."

Economist John Taylor thinks it better to let the Federal Reserve deal with the short-term problems in the economy, while fiscal policy should attend to long-term issues: "In the current context of the U.S. economy, it seems best to let fiscal policy have its main countercyclical impact through the automatic stabilizer ... It seems hard to improve on this performance with a more active discretionary fiscal policy, and an activist discretionary fiscal policy might even make the job of monetary authorities more difficult. It would be appropriate in the present American context, for discretionary fiscal policy to be saved explicitly for longer-term issues, requiring less frequent changes. Examples of such a longer-term focus include fiscal policy proposals to balance the non-Social Security budget over the next ten years, to reduce marginal tax rates for long run economic efficiency, or even to reform the tax system and Social Security."

9) Massive stimulus didn't work in the Great Depression. As this Heritage Foundation study notes: "After the stock market collapse in 1929, the Hoover Administration increased federal spending by 47 percent over the following three years. As a result, federal spending increased from 3.4 percent of GDP in 1930 to 6.9 percent in 1932 and reached 9.8 percent by 1940. That same year-- 10 years into the Great Depression--America's unemployment rate stood at 14.6 percent." Same goes for Japan and its Great Stagnation of the 1990s.

10) Olivier Blanchard, the chief economist of the International Monetary Fund, coauthored a paper which found "that both increases in taxes and increases in government spending have a strong negative effect on private investment spending."

 Bottom line: There is another model out there. One that worked in 2003, 1997 and 1981. But will America use it?

Sources:

1) http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2005-039.pdf

2) http://online.wsj.com/article/SB123258618204604599.html

3) http://online.wsj.com/article/SB123249646698200289.html

4) http://cboblog.cbo.gov/

5)http://www.becker-posner-blog.com/archives/2009/01/on_the_obama_st.htm

6)http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf

7)http://woodwardhall.wordpress.com/2008/12/11/measuring-the-effect-of-infrastructure-spending-on-gdp/

8)http://www.stanford.edu/~johntayl/Papers/Reassessing+Revised.pdf

9) http://www.heritage.org/research/economy/bg2222.cf

10) http://www.mitpressjournals.org/doi/abs/10.1162/003355302320935043?cookieSet=1&journalCode=qjec

11) http://www.weeklystandard.com/Content/Public/Articles/000/000/015/951hvyxc.asp?pg=

http://www.usnews.com/blogs/capital-commerce/2009/1/27/10-reasons-to-nix-the-stimulus-plan.html

[HUSS]

The economic stimulus plan is a gigantic boondoggle
Read all about it here. Paraphrasing the immortal words of P. J. O'Rourke, someone should take this bill out behind the barn and kill it with an axe. (Obama already killed Nancy Pelosi's embarrassing proposal to stimulate the economy by spending more on contraceptives.) It does very little to stimulate new economic activity, and way too much to create new goverment programs (36 new programs costing over $136 billion). Only 3% of the bill is directed to road and highway spending. The CBO estimates that only 25% of infrastructure dollars can be spent in the first year.

http://scottgrannis.blogspot.com/2009/01/economic-stimulus-plan-is-gigantic.html

[Crafty_Dog]

Scott Grannis's blog is a north star of clear headed economic and stock market analysis.  I'm over there every day the market is open.

[HUSS]

Scott Grannis's blog is a north star of clear headed economic and stock market analysis.  I'm over there every day the market is open.

I visit his site everyday as well.  I think you were the one who put me on to him in the first place.
As of late though i have noticed he is becoming less and less optimistic about recovery in the near future.

[Crafty_Dog]

Which makes sense to me-- Keynesian is wrong and does not work- and Scott is a stellar Supply Sider.  Artificially low interest rates are a huge part of how we get ourselves into this mess and continuing the foolishness is only going to take us down the road to Japan.

[HUSS]

continuing the foolishness is only going to take us down the road to Japan.

I think that unless Obama makes a drastic change to his current philosophy and stops pandering to liberal special interest groups we are screwed way beyond what happened to Japan.

[HUSS]

Relax: There Will Be No Depression
Kenneth J. Gerbino
Archives
Kenneth J. Gerbino & Company
Jan 27, 2009

I want everyone to relax. You are being bombarded with numerous facts and figures that look pretty bad, but the facts are being interpreted with emotion and hype and hysteria. The predictive value of mis-emotion is usually chaos. There will be no Great Depression.

First, let's review what happened in the last few years in simple terms:

The Federal Reserve manipulated interest rates below the real market rate for over a decade, creating dislocations in the normal markets.
Low interest rates forced retirees and savers to abandon safe investments and buy into all sorts of higher risk investments, including the stock market. (As a grandmother of one of my employees said many years ago, "I can't afford to live on 3% interest when I use to get 6%"... a sad but true story).
Easy money created speculation and an artificial business expansion as the good times rolled.
The dot.com bubble was the first sign of trouble from the recent easy money regime. The solution: more easy money to bail out Wall Street and avert further panic.
Commercial banks are allowed to become investment banks as Glass-Steagall is repealed. Commercial banks can now invest and speculate globally outside of their normal areas of expertise.
Real estate booms, as new and creative ways to lend money appeared. Lending became a no brainer as loan packages could be sold away to another institution covered by a new insurance scheme (Credit Default Swaps). Therefore credit worthiness of customers became less important. Lenders became undisciplined. Who cared if the loan defaulted if the loan was "insured?"
Other exotic derivatives were concocted by the investment banks and commercial banks to make more fees and profits. Tried and true centuries old banking policies 101 were thrown out the window.
The government pressured financial institutions to lend money for homes to millions of borrowers who were not only unqualified but high credit risks.
The excessive and low interest rate loans for homes fueled an even more over-heated and extended housing boom and housing price inflation - creating a housing bubble.
The over-the-counter derivative market went beyond $300 trillion and no one cared. $400 trillion - no problem. $500 trillion - no big deal.
Wall Street and the establishment press and authorities did not pay attention to the hard money newsletter writers who were screaming bloody murder about derivatives: Schultz, Skousen, Dines, Wood, Daughty, Sinclair, Russell, Mauldin, Casey, Katz, Turk, Taylor, Adens, Coffins, Lundin, Morgan, Ruff, Roulston, Grandich, Nadler, Bonner, Day and others.
Complacency was everywhere. The Dow was over 14,000. Wall Street and Main Street thought the economy was "fine," paper money was "working" and debt levels were high but no big deal, the Fed was in control. So far so good.
The banking industry usually gets hit hard when the economy gets hit hard. But this time the major commercial banks were also speculating along with the investment banks.
Huge losses from leveraging and speculating in stock and bond markets as well as derivatives start showing up at the largest commercial and investment banks in the U.S. and abroad.
A national nightmare now is confronting Washington.
Global stock markets collapse and credit markets seize up everywhere. Many foreign countries are as bad off as the U.S.
The financial pyramid was brought on by easy money. We are now faced with global investment losses and economic numbers that are at dangerous levels, and foretell a drastic future.

But the future will be the exact opposite to what Wall Street and Main Street think will happen.

Why There Will be No Depression

The Fed, U.S. Treasury and foreign central banks will print their way out of the problem. A bad solution to a bad problem.
The U.S. is in a recession. This is the natural reaction following the huge economic paper money binge that has taken place the last 15 years. The major banks, insurance companies and investment houses are in real trouble. The pain is too much and the government will print the money to bail these institutions out.
3 million people are losing their homes. They should never have bought the homes in the first place. These people will go back to being renters. The homes are still there, they have economic value.
Investment bankers that busted Lehman, Bear Stearns and Merrill and lost their jobs will form hedge funds and buy many of these homes for 30 cents on the dollar. Then they will sell them in a few years for 50 cents on the dollar to people and other funds. Some people will move into a home and get a good bargain. Funds that buy these 50 cents on the dollar homes will sell them in 2-3 years for 70 cents on the dollar. Life goes on.
Banks and investment houses that lost money on these homes are already being bailed out. The losses are being covered by the printing press or debt from Washington.
Unemployment: This is bad. In the U.S. we are at 7.2% and going higher. We are not at 10.8% ('82 recession) or 9% ('74-'75 recession) and may not even get to these levels. Sophisticated investors say, "Unemployment is being low-balled by the government, it's much higher". I agree. But check out Shadow Government Statistics' website run by brilliant economist John Williams (who should be a White House Adviser). This shows that the "shadow or real" unemployment number could actually be 17%. Sounds like a disaster. But back in 1994, the "shadow" unemployment number was 15%. So what happened in 1994? GDP was up 6.2%. The S&P 500 the following year was up 34%. There was no Depression from this horrendous unemployment. Official U.S. unemployment hit an 8-year high in 1992 at 7.8%. The solution to this was a 14% increase in the money supply (M1) and the stock market went up 6%. Do not panic because of unemployment.
There are still 144 million people getting paychecks. This means the economy is not dead yet. They will either spend the money or save some of it. When they save it, sooner or later the banks will lend to someone to buy or build or invest in something.
The average wage earner in the U.S. makes $47,000 a year. Multiply this by a possible 12% official unemployment rate which would be considered a disaster in this country, and you have the following: 18 million people out of work. Using $47,000 per person, this would equal about $850 billion a year of lost income and GDP. That would be a huge hit to the economy.
But wait a minute. Unemployment insurance for a $47,000 worker is about $400 a week. That reduces the $850 billion considerably. Also, the Government will simply print more money to handle this. They could print half the amount of the possible lost GDP - $425 billion. Using Washington logic, this would effectively handle half the consequences of 18 million unemployed people. Then it would be like there were only 6% unemployed. Printing or borrowing $425 billion would not be difficult compared to what they are already doing.
The great recessions of 1974-5 and 1981-82 resulted in the following: GDP increasing on average 15% within 36 months, the stock market booming the following year, and unemployment going down dramatically the following two years. Why? Because they increased the money supply and "bailed out" everyone with paper money.
The 74-75 recession had an 85% (that is eighty five % and not a typo) decrease in the price of the average NYSE stock from the previous high in 1973 and the Dow was down 41%. In 1982, the Dow Jones dropped 34% from its previous high. Both these market wipe outs were handled by the money supply being increased by 12.6% in 18 months in 74-75 and 14% in the 81-82 period.
The money supply increases in 2009 and 2010 could reach 50%!
So far, with bailouts, guarantees, the stimulus packages, $2-3 trillion of new money is already a foregone conclusion. This will equal a 25-35% increase in the money supply. The U.S. government will print as much money as is needed. They have panicked and are now going overboard. It is obvious that whatever happened in the past is going to happen again.
This means that we are not going to have a Depression but a huge paper money induced boom. It will be artificial and inflationary. It is all in the works right now.
Finally, if we were going to have a so-called Depression, why is copper above $1.50? Copper for delivery in December of 2009 and 2010 is above $1.60! You have heard the expression Dr. Copper. It is because as this commodity goes - goes the industrial world. It has always been a great economic indicator. Copper prices would be at 60 cents if a Depression was coming. Copper above $1.50 is saying, despite all the horrendous layoffs and headlines, that there is a lot of life left in the global economic patient.
The financial system will be temporarily "saved" by paper money but working people and savers will be eventually crushed by this currency depreciation. Capitalism and free enterprise will get another bad rap when inflation rips through the system. Honest capitalism and classic free enterprise does not include paper money... the cause of all modern day economic problems.

What to Do

Expect Inflation not a Depression.
Expect a boom to start sooner than later.
Know the past and respect logic, not headlines.
Am I telling you all is OK? No. I am telling you things are as bad as you think. But the authorities are using this crisis to bail out the system with paper money and because of that, the economy will once again go into a so-called boom that will be very inflationary. If you think a Depression is coming you will have your assets in the wrong place at the wrong time.

What Happens Next

The economy stagnates for another 9-12 months then turns around.
Unemployment goes down with the induced economic upturn.
The stock market rallies but never gets above its old highs.
Inflation comes back with a vengeance.
Commodities resume their bull market and turn the deflationistas into inflation believers.
Interest rates will go up with inflation and probably to much higher levels.
The stock market will go down when interest rates start going up.
Long term bonds will become the worst investment in the world.
The dollar will go down but so will other currencies as many world governments print their way out of their economic woes as well.
Gold will go to new highs.
Housing and real estate will recover but higher interest rates will slow this sector down considerably in the future.
The gold and silver mining stocks will become the best performing sector on Wall Street for many years.
The price of oil will go up due to inflation and global production declines of 5-8% per year from most of the largest oil fields in the world.
The U.S. "recovery" will help the world recover and almost all countries will have another artificial economic expansion from all the paper money they have printed as well.
China and India will create more shortages of basic materials and commodities by the sheer size of the populations and their economic and industrial progress.
The U.S. will have even more economic dislocations from all the new paper money and debt taken on by Washington.
The country gets set up for the next horrible recession some time in about 3-4 years.
A Depression is impossible in the old sense of the word. If one describes a depression as the loss of purchasing power of the wage earner (a correct definition), then we have been in one for the past 50 years since wages have not kept up with the cost of living. But since everyone is thinking breadlines and the 1930's, I will stay with that picture for our definition. It is not going to happen.

Also, remember that the $2-3 trillion bail out numbers you are reading about can easily be bumped up to $4-5 trillion. Why not? The reason for the increase is simple... "We are heading into the Greatest Depression in history." As long as this misguided concept gets press and the NY Times, the media and politicians buy into it, then the government has a green light to create as much money as is needed.

[Crafty_Dog]

Good stuff from CATO:  Speaking Facts and Truth to Power:

http://www.cato.org/fiscalreality

[Body-by-Guinness]

More from CATO:

Economists against the Stimulus

Posted by David Boaz

Cato has just published a full-page ad in the New York Times with the names of some 200 economists, including some Nobel laureates and other highly respected scholars, who “do not believe that more government spending is a way to improve economic performance” — contrary to widespread claims that “Economists from across the political spectrum agree” on a massive fiscal stimulus package. Of course, many economists don’t like to sign joint statements, so this is only a fraction of stimulus opponents in the profession. Greg Mankiw pointed to a few noted skeptics last week:

In a TV interview last month, Vice President Joe Biden said the following:

Every economist, as I’ve said, from conservative to liberal, acknowledges that direct government spending on a direct program now is the best way to infuse economic growth and create jobs.

That statement is clearly false. As I have documented on this blog in recent weeks, skeptics about a spending stimulus include quite a few well-known economists, such as (in alphabetical order) Alberto Alesina, Robert Barro, Gary Becker, John Cochrane, Eugene Fama, Robert Lucas, Greg Mankiw, Kevin Murphy, Thomas Sargent, Harald Uhlig, and Luigi Zingales–and I am sure there many others as well. Regardless of whether one agrees with them on the merits of the case, it is hard to dispute that this list is pretty impressive, as judged by the standard objective criteria by which economists evaluate one another. If any university managed to hire all of them, it would immediately have a top ranked economics department.

And of course Mankiw’s list isn’t comprehensive. There’s also former Treasury economist Bruce Bartlett, former Yale professor Philip Levy, former Ohio State and Federal Reserve economist Alan Viard, Russell Roberts of George Mason, and many more. Under the current circumstances, plenty of economists are endorsing large fiscal stimulus programs. But it’s just not correct to claim that there’s any consensus or that “every economist . . . from conservative to liberal” supports the kind of massive spending program that the Obama-Biden administration has proposed.

http://www.cato-at-liberty.org/2009/01/28/economists-against-the-stimulus/

[Crafty_Dog]

And this from Supply Side Maestro Alan Reynolds:

$646,214 Per Government Job
by Alan Reynolds


Alan Reynolds is a senior fellow with the Cato Institute and the author of Income and Wealth (Greenwood Press, 2006).

Added to cato.org on January 28, 2009

This article appeared in The Wall Street Journal on January 28, 2009.

House Democrats propose to spend $550 billion of their two-year, $825 billion "stimulus bill" (the rest of it being tax cuts). Most of the spending is unlikely to be timely or temporary. Strangely, most of it is targeted toward sectors of the economy where unemployment is the lowest.

The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education -- sectors where relatively secure government jobs are also prevalent.


If the intent of the plan is to alleviate unemployment, why spend over half of the money on sectors where unemployment is lowest? Another 22.5% of the $550 billion would go to social programs, such as expanding food stamps and extending benefits for the unemployed and subsidizing their health insurance.

After subtracting what House Democrats hope to spend on government payrolls, health, education and welfare, only a fifth of the original $550 billion is left for notoriously slow infrastructure projects, such as rebuilding highways and the electricity grid.

The Obama administration claims the stimulus bill will "create or save three or four million jobs over the next two years . . . with over 90% [of those jobs] in the private sector." To prove it, they issued a report from Christina Romer, chairman of the Council of Economic Advisers, and Jared Bernstein, chief economic adviser to Vice President Joe Biden. Its key estimates, however, were simply lifted from an outdated paper by Mark Zandi of Moody's economy.com.

Mr. Zandi's current estimates have government employment growing by 330,400 over two years as a result of the House bill (compared with 244,000 in Bernstein-Romer paper). Yet even that updated figure still amounts to only 8.3% of total jobs added, even though state and local governments are to receive 39% of the funds ($214.5 billion). Spending $214.5 billion to create or save 330,400 government jobs implies that taxpayers are being asked to spend $646,214 per job.

Does that make sense?

Simulations with his macroeconomic model, according to Mr. Zandi, reveal that "every dollar spent on unemployment benefits generates an estimated $1.63 in near-term GDP." By contrast, such "multipliers" simulate that tax cuts for business or investors would add only 30-38 cents on the dollar.

But econometric models are parables, not facts. The big multipliers for transfer payments and tiny multipliers for capital taxes in Mr. Zandi's model reveal more about the way the model was constructed than about the way the economy works. If model builders make Keynesian assumptions, their model will generate Keynesian results. Yet as Harvard economist Robert Barro recently pointed out on this page, contemporary academic economic research does not support the multipliers used to justify the House stimulus bill.

In the March 2006 IMF Research Bulletin, economist Giovanni Ganelli summarized recent International Monetary Fund research on fiscal policy. Several studies find that reductions in government spending "can have expansionary effects, since they can contribute to a consumption and investment boom owing to altered expectations regarding future taxation."

A 2002 study of U.S. data by Roberto Perotti of Università Bocconi did find that the effect of debt-financed spending increases was somewhat positive, but the multiplier effect was much less than one. A 2004 IMF study of recessions in advanced economies likewise found that "multipliers are unlikely to exceed unity." A 2006 study of U.S. data by IMF economist Magda Kandil found the effect of "fiscal expansion appears insignificant on aggregate demand and economic activity."

In December 2008, the National Bureau of Economic Research published "What are the Effects of Fiscal Policy Shocks?" by Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago. "The best fiscal policy to stimulate the economy," they report, "is a deficit-financed tax cut," and "the long term costs of fiscal expansion through government spending are probably greater than the short term gains."

That's because "government spending shocks crowd out both residential and non-residential investment," while "the [positive] response of consumption is small and only significantly different from zero on impact" (i.e., temporarily). But suppose all of these recent studies were mistaken, and the House Democrats' spending spree worked as advertised. We're still left with three million jobs added or saved at a cost of $825 billion -- $275,000 per job.

In short, a growing body of evidence suggests that a dollar of extra spending is likely to lift nominal income by less than a dollar, arguably much less. Several studies suggest the multiplier may be less than zero after a couple of years, because private investment (including housing) eventually falls by more than government spending rises. Another $550 billion of deficit spending on top of a deficit already above $1 trillion is likely to prove more dangerous than helpful to an economy already overloaded with risky debt.

[HUSS]

Thoughts on the market
Lots of things going on today. The Fed confirmed its intention to keep short-term interest rates very low for quite some time. The House is supposed to vote on a mega "stimulus" bill today. Bond yields rose sharply, and the Treasury-TIPS spread widened further as inflation expectations increased. 3-mo. T-bill yields are now up to 0.17%. Volatility fell and swap, agency, and credit spreads fell. Commodity prices and the Baltic Dry Index rose, but gold fell and the dollar strengthened. The S&P 500 index only needs to rise as much tomorrow as it rose today (3.4%) in order to be in positive territory for the month of January. (And if that happens, the technical guys say that will be a very bullish sign for the rest of the year.)

Without trying to read too much into one day's market action, though, I think the message the market is sending us over the past month or two is that the economy is on the mend; that we have likely seen the worst of the economic news.

I don't think the stimulus bill is going to stimulate anything. Indeed, I think if it passes as is, then it will prove to be a drag on the economy because it will waste enormous amounts of economic resources. Plus, it will end up making the economy less efficient because government will control a larger portion of the economy. But since the market has been fearful of a massive expansion of government since before the election, the passage of a faux-stimulus bill won't necessarily be a negative for the market.

In the final analysis, the only way that government policy can make a significant difference to the economy is by changing incentives (e.g., raising or lowering tax rates in order to change the after-tax rewards to work, investment, and risk-taking). The stimulus bill currently under consideration won't do any of that. There's still a chance for some last-minute compromise that might prove significant—a cut in corporate tax rates, for example, would be hugely positive. But barring that, I think it's time to accept that many hundreds of billions of dollars are going to go down a rat-hole and we are going to be burdened by more government in the future. We are also likely to be burdened with higher inflation in the future, because it is likely that the Fed will not be able to reverse its massive monetary accommodation in a timely or proactive manner.

But we need to remember that Fed policy has been terribly erratic and misguided for at least the past decade, so this is nothing very new. The politicians will want the credit for an eventual recovery, but they will forget that bad policies (e.g., Freddie and Fannie, the Community Reinvestment Act, failures to exercise regulatory oversight, bungled takeovers of Wall Street firms and banks) are what got us into this mess in the first place.The stock market has made zero progress since 1997, and it wouldn't be crazy to blame it on a decade of bad fiscal and monetary policy.

If one is to be optimistic about the future, optimism must be based on an improvement in the economic fundamentals. This economy has an incredible ability to grow and overcome adversity. Recall, for example, that the 9/11 tragedy came almost at the very tail-end of the 2001 recession—it hardly registered on the GDP scale.

I've been documenting improvements in the fundamentals for quite some time now, and I think the seeds for a recovery have already been sown. Financial markets have digested the bulk of the subprime losses; massive deleveraging has already taken place; all measures of financial stress have declined significantly; housing prices have erased almost all of their excesses; asset prices in many markets have gone through wrenching adjustments; new signs of life are appearing every day.

So I still think we're on the path to recovery, and I am still optimistic, even though I view the stimulus bill as a massive boondoggle, a massive waste, a fountain of corruption, etc. It just means the future won't be as bright as it otherwise could have been. We are going to pay the price of decades of bad policies, and that price will be slower growth and living standards that don't rise as high as they otherwise might have. It's not a rosy picture, but it's not the end of the world by any stretch.

http://scottgrannis.blogspot.com/

[Body-by-Guinness]

January 27, 2009 2 Shevat 5769

What are they buying?

By Thomas Sowell


Everyone is talking about how much money the government is spending, but very little attention is being paid to where they are spending it or what they are buying with it.


The government is putting money into banks, even when the banks don't want it, in hopes that the banks will put it into circulation. But the latest statistics shows that banks are lending even less money now than they were before the government dumped all that cash on them.


Even if it had worked, putting cash into banks, in hopes that they would put it into circulation, seems a rather roundabout way of doing things, especially when the staggering sums of money involved are being justified as an "emergency" measure.


Spending money for infrastructure is another time-consuming way of dealing with what is called an immediate crisis. Infrastructure takes forever to plan, debate, and go through all sorts of hearings and adjudications, before getting approval to build from all the regulatory agencies involved.


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Out of $355 billion newly appropriated, the Congressional Budget Office estimates that only $26 billion will be spent this fiscal year and only $110 billion by the end of 2010.


Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire.


If you cut taxes tomorrow, people would have more money in their next paycheck, and it would probably be spent by the time they got that paycheck, through increased credit card purchases beforehand.


If all this sound and fury in Washington was about getting an economic crisis behind us, tax cuts could do that a lot faster.


None of this is rocket science. And Washington politicians are not all crazy, even if sometimes it looks that way. Often, what they say makes no sense because what they claim to be doing is not what they are actually doing.


No matter how many times President Barack Obama tells us that these "extraordinary times" call for "swift action," the kind of economic policies he is promoting take effect very slowly, no matter how quickly the legislation is rushed through Congress. It is the old Army game of hurry up and wait.


If the Beltway politicians aren't really trying to solve this crisis as quickly as they could, what are they trying to do?


One important clue may be a recent statement by President Obama's chief of staff, Rahm Emmanuel, that "A crisis is a terrible thing to waste."


This is the kind of cynical revelation that sometimes slips out, despite all the political pieties and spin. Crises have long been seen as great opportunities to expand the federal government's power while the people are too scared to object and before any opposition can get organized.


That is why there is such haste to do things that will take effect slowly.


What are the Beltway politicians buying with all the hundreds of billions of dollars they are spending? They are buying what politicians are most interested in— power.


In the name of protecting the taxpayers' investment, they are buying the power to tell General Motors how to make cars, banks how to bank and, before it is all over with, all sorts of other people how to do the work they specialize in, and for which members of Congress have no competence, much less expertise.


This administration and Congress are now in a position to do what Franklin D. Roosevelt did during the Great Depression of the 1930s— use a crisis of the times to create new institutions that will last for generations.


To this day, we are still subsidizing millionaires in agriculture because farmers were having a tough time in the 1930s. We have the Federal National Mortgage Association ("Fannie Mae") taking reckless chances in the housing market that have blown up in our faces today, because FDR decided to create a new federal housing agency in 1938.


Who knows what bright ideas this administration will turn into permanent institutions for our children and grandchildren to try to cope with?

http://www.jewishworldreview.com/cols/sowell012709.php3

[HUSS]

http://www.youtube.com/watch?v=TGuPKqbTZZE How long til this happens here?

[HUSS]

SEMA eNews, Vol. 12, No. 4 - Jan 29, 2009
Politicians Want to Use Tax Dollars to Crush Newer-Model Trucks and SUVs
SEMA Warns Lawmakers This Boondoggle Will Cost American Jobs


SEMA is opposing an effort by some Washington lawmakers to include a national car crushing program in the upcoming economic stimulus package. Vehicles targeted for the scrap pile will likely include Chevy Blazers, Silverados, S-10s and Tahoes; Dodge Dakotas and Rams; Ford Explorers and F-Series; Jeep Cherokees and Wranglers; and any other SUV or truck that obtains less than 18 mpg.

Under the plan, the federal government would pay a premium for '99 and newer cars. Click here to oppose the legislation.   

The so-called “Accelerated Retirement of Inefficient Vehicles Act” is "Cash for Clunkers" with a twist. Instead of focusing exclusively on old cars as is typical with scrappage programs, this bill will target any vehicle with lower fuel-economy ratings. Participants will receive a cash voucher to purchase a more fuel-efficient new car or used car (model year 2004 or later) or receive credit for the purchase of public transportation tickets.

Under the legislation, “fuel efficient” means at least 25% better mileage than the CAFE standard. It will be illegal to resell the scrapped vehicles. Bill sponsors want to destroy 4 million pickups and SUVs over the next four years. 

The program will fail to achieve its goal of improving fuel efficiency and stimulating car sales, but will increase unemployment and the cost of used cars and parts. Here’s why:

Given the minimal $1,500–$4,500 voucher value, the program will lure rarely driven second and third vehicles that have minimal impact on overall fuel economy and air pollution. This is not a wise investment of tax dollars.
The program will reduce the number of vehicles available for low-income individuals and drive up the cost of the remaining vehicles and repair parts. This is a basic supply-and-demand reality.
The program will remove the opportunity to market specialty products that are designed exclusively for the targeted pickups and SUVs, including equipment that increases engine performance and fuel mileage. Congress will be enacting a program to eliminate jobs and reduce business revenues in the automotive aftermarket.   
The idea that the trucks and SUVs must be scrapped in order to save energy is irrational. The program’s “carbon footprint” does not factor in the amount of energy and natural resources expended in manufacturing the existing car, spent scrapping it and manufacturing a replacement car.   
The program fails to acknowledge driver needs, such as the ability to transport a family, tow a trailer or rely upon the performance, safety and utility characteristics associated with the larger vehicles. Instead, these vehicles will be destroyed.
There is no evidence that the program will achieve the goal of boosting new-car sales or increasing fuel mileage. Many states have considered scrappage programs in the past as a way to help clean the air or increase mpg, but abandoned the effort because they simply don’t work. The programs are not cost-effective and do not achieve verifiable fuel economy or air-quality benefits.   
The program will hurt thousands of independent repair shops, auto restorers, customizers and their customers across the country that depend on the used-car market. This industry provides thousands of American jobs and generates millions of dollars in local, state and federal tax revenues.
“Our members, like all business entities, are suffering the effects of the stalled economy,” said Steve McDonald, SEMA vice president of government affairs. “In fact, for our members that market product for newer vehicles, we depend on a thriving and vibrant auto industry to create new business opportunities. We support efforts to spur new-car sales. We don’t, however, support public policy efforts that we are convinced don’t work and will waste tax dollars in the process.”

SEMA Urges You to Oppose This Legislation

Two lawmakers—Senator Diane Feinstein (D-CA) and Representative Henry Waxman (D-CA)—need to hear from SEMA members that their vehicle scrappage legislation is a waste of U.S. taxpayer dollars that will cost American jobs in the specialty auto market.

Click here for talking points and complete information to oppose the legislation.


Email a friend 

[Crafty_Dog]

What not to do: The British example

Americans are increasingly being caught between two irreconcilable schools of economics. The Keynesian-European Socialist school of thought that believes in government regulation, massive transfers of wealth via burdensome taxation, and a command-and-control economy dictated by politicians and bureaucrats; and the Friedrich Hayek-Capitalist school, which favors decreased regulation and taxation, incentives for markets and businesses, and leaving consumers to choose how they will spend (or save) their hard-earned money. The recent election of Barack Obama and large congressional majorities of Democrats has ushered in a new, and we hope short-lived, era of Keynesian thought whereby the government should stimulate economic growth and improve stability in the private sector (that was originally built through capitalism) by increasing government spending.

Britain, a follower of the Keynesian school of economics, experienced its first-ever economic contraction in 2008 (even considering the Great Depression) despite massive public spending. Indeed, in a thorough repudiation of Keynesian economics, the British government has outspent that of the United States and yet Britain still faces national bankruptcy, roiling unemployment and devastated commercial industries. Is it surprising, then, that no country has ever, in more than a century, successfully followed the Keynesian model and remained solvent?

Former British Prime Minister Margaret Thatcher once pithily noted that the primary problem with Keynesian Socialism is that eventually you run out of other people's money. The Keynesian Socialism that American Democrats are so eager to bring to our shores only hastens the depletion of funds and brings us closer to national bankruptcy. More telling still, when Thatcher came to power in 1979, she employed the Hayek model and dragged Britain out of an extended economic malaise that the Keynesians were unable to stop

[Crafty_Dog]

The silver lining to the faux-stimulus bill
It looks to me like the "stimulus" bill that passed the House is rapidly losing support. That's not surprising, since it was so absolutely awful. If this disgraceful display of politics run wild does not cast serious doubt on the seriousness of Congress and the intelligence of our new president, nothing will. And that is the good news, because only something this bad can mobilize support for something that does make sense. The Senate needs to do its job now, and recast this effort to help the economy using reason, experience and logic, rather than pure partisan politics. Above all, our senators need to focus on the fact that simply handing out money to favored constituents and creating vast new spending programs that will take years to deploy is the worst possible way to stimulate the economy. True stimulus needs to focus on changing people's incentives to work, invest, and take risk. That means tax cuts, not tax rebates, and any changes should apply to anyone or any company that pays taxes.

If we're lucky, the debate in the Senate might last long enough that we discover that a stimulus bill is not really necessary after all.

Ben Stein reminds us just how awful the current bill was:

Eight hours of debate in the HR to pass a bill spending $820 billion, or roughly $102 billion per hour of debate.

Only ten per cent of the "stimulus" to be spent on 2009.

Close to half goes to entities that sponsor or employ or both members of the Service Employees International Union, federal, state, and municipal employee unions, or other Democrat-controlled unions.

This bill is sent to Congress after Obama has been in office for seven days. It is 680 pages long. According to my calculations, not one member of Congress read the entire bill before this vote. Obviously, it would have been impossible, given his schedule, for President Obama to have read the entire bill.

For the amount spent we could have given every unemployed person in the United States roughly $75,000. We could give every person who had lost a job and is now passing through long-term unemployment of six months or longer roughly $300,000.

[JDN]

Rich got richer as their tax rates fell in Bush years, data show
Through the first six years of the Bush administration, the average rate paid by the 400 richest Americans dropped by a third to 17.2%, figures show.
Bloomberg News
January 31, 2009

The average tax rate paid by the richest 400 Americans fell by a third to 17.2% through the first six years of the Bush administration, and their average income doubled to $263.3 million, new data show.

The 17.2% in 2006 was the lowest since the Internal Revenue Service began tracking the 400 largest taxpayers in 1992, although they paid more tax on an inflation-adjusted basis than for any year since 2000.

The drop from 2001's tax rate of 22.9% was largely because of President Bush's push to cut tax rates on most capital gains to 15% in 2003.

Capital gains made up 63% of the richest 400 Americans' adjusted gross income in 2006, or a combined $66.1 billion, according to the data. In all, those taxpayers reported a combined $105.3 billion in adjusted gross income in 2006, the most recent year for which the IRS has data.

"The big explosion in income for this group is clearly on the capital gains side, although there are also sharp increases in dividend and interest income," said Dean Baker, co-director of the Center for Economic Policy and Research in Washington.

In addition, "they are realizing more of their gains due to the lower tax rate," Baker said.

The data may provide ammunition for Democrats such as House Speaker Nancy Pelosi of San Francisco who say they intend to increase the capital gains tax rate even as the credit crunch roils markets and is producing more investment losses than gains.

President Obama pledged during the presidential campaign to increase the rate.

[Body-by-Guinness]

March 5, 2001
The Truth About Tax Rates and The Politics of Class Warfare
by Daniel J. Mitchell, Ph.D.
Backgrounder #1415
 
President George W. Bush, holding firmly to his campaign commitment, has proposed a tax reform package that will strengthen America's economy. The across-the-board reductions in personal income tax rates he is seeking will increase incentives to work, save, and invest; and repealing the death tax will eliminate a pernicious form of double taxation while encouraging entrepreneurs and small-business owners to make decisions based on economic value instead of tax considerations.

These commonsense tax reforms are being criticized, however, by opponents of tax relief who claim that "only the rich" will benefit. Policymakers should ignore this class-warfare rhetoric. Unlike European welfare states crippled by redistributionist policies, the United States has prospered because success is admired rather than envied. But more needs to be done to redesign America's tax code so that barriers to upward mobility that remain are reduced. In other words, cutting taxes is not a policy for the rich, but a strategy that will help everyone else become rich or at least rise as far and as fast as their talent, ability, and willingness to work will take them.

The debate over tax "fairness" is not just an ethical battle between those who support a free-market economy and those who desire a welfare state. It is also an empirical battle based on numbers that often can be verified or disqualified. Not surprisingly, it turns out that many of the claims made by opponents of tax cuts do not withstand close scrutiny. For instance:

Myth: The rich do not pay their fair share of taxes and therefore should not get a significant share of a tax cut.

Reality: According to data from the Internal Revenue Service, 1 the top 1 percent of income earners pay nearly 35 percent of the income tax burden; the top 10 percent pay 65 percent; and the top 25 percent pay nearly 83 percent. The bottom 50 percent of income earners, on the other hand, pay barely 4 percent of income taxes. By definition, then, it is impossible to cut taxes without the so-called rich receiving a share of the benefits.



Myth: Lower tax rates will mean that the rich pay less.

Reality: This outcome depends on how much tax rates are reduced. History indicates that the revenue-maximizing rate is less than 30 percent. 2 In other words, when marginal rates are higher than 30 percent, the rich probably will pay more taxes if rates are lowered. The reason? There is less incentive to hide, shelter, or underreport income.

Consider what happened in the years following each of the three times Americans enjoyed significant tax rate reductions.

The 1920s: The top tax rate fell from 73 percent to 25 percent, yet the rich (in those days, individuals earning $50,000 or more) went from paying 44.2 percent of the tax burden in 1921 to paying more than 78 percent in 1928. 3

The 1960s: After President John F. Kennedy slashed the top tax rate from 91 percent to 70 percent, those making more than $50,000 annually saw their tax payments rise during the next three years by 57 percent and their share of the tax burden climb from 11.6 percent to 15.1 percent. 4

The 1980s: The top tax rate fell from 70 percent in 1980 to 28 percent in 1988 during the Reagan years. What happened to the "rich"? The top 1 percent went from shouldering 17.6 percent of the income tax burden in 1981 to paying 27.5 percent of the total in 1988. The top 10 percent saw their share of the burden climb from 48 percent in 1981 to 57.2 percent in 1988. 5


 
Myth: Reducing income tax rates will not help the poor.

Reality: It is true that the poor will not receive a tax cut when tax rates are reduced, but the reason is that they do not pay income taxes. This does not mean, however, that they will receive no benefits from a tax cut. Indeed, because they are on the lowest rungs of the economic ladder, they will be the biggest beneficiaries of the faster growth that follows a tax cut.

Myth: The payroll tax is the biggest imposition on low-income workers, so reducing income taxes will have little effect on their tax burden.

Reality: This actually is true, but it is not an argument against reducing income tax rates. Instead, it is a reason to reform the Social Security system so that lower-income workers can build wealth and enjoy a more comfortable retirement.

Myth: Only millionaires are concerned about the tax-the-rich issue.

Reality: Like fairness, "rich" is a subjective term, but the most common definition of "rich" in Washington is someone in the top 20 percent (or quintile) of income. Many Americans in this quintile hardly would qualify as rich, though, since the cutoff in 1999 for the top 20 percent of tax returns is $79,375 of household income. This quintile also includes many businesses--such as partnerships, sole proprietorships, and Subchapter S corporations--that use the personal income tax instead of the corporate income tax to file their returns. Most of these small-business owners do not satisfy the conventional definitions of wealthy, but most of them care greatly about tax reform and lowering tax rates. So do millions of middle-class families that are mischaracterized as rich by proponents of class warfare.

Myth: Lower tax rates mean the rich will get richer while the poor get poorer.

Reality: President Kennedy was right: A rising tide lifts all boats. Census Bureau data show that earnings for all income classes tend to rise and fall in unison. 6 In other words, economic policy either generates positive results, in which case all income classes benefit, or causes stagnation and decline, in which case all groups suffer. As Chart 3 illustrates, the high tax policies of the late 1970s and early 1990s are associated with weak economic performance, while the low tax rates of the 1980s are correlated with rising incomes for all quintiles. Likewise, all income groups enjoyed increases in income after the 1997 capital gains tax cut.

 


Myth: Lower tax rates will lead to a repeat of the failed policies of the 1980s.

Reality: In the 1980s, tax revenues climbed by 99.4 percent, much faster than was needed to keep pace with inflation. More important, the economy rebounded from the malaise of the 1970s. Indeed, the prosperity Americans enjoy today is a continuing legacy of the economic renaissance triggered by President Reagan's tax rate reductions. 7

Myth: Eliminating capital gains taxes, death taxes, the double taxation of dividends, or the double taxation of savings will merely create loopholes for the rich to exploit.

Reality: Existing provisions of the tax code dealing with capital have the effect of taxing income more than once. More specifically, they impose multiple layers of taxation on savings and investment. Defenders of the status quo can argue that these provisions are desirable. They can claim that the goal of income redistribution necessitates double taxation. They can even say that there is nothing morally wrong or economically destructive about discriminating against taxpayers who save and invest. They cannot argue legitimately, however, that elimination of double taxation
creates loopholes. Double taxation is a bias; adopting policies that tax income only once will institute fairness in the code.

Myth: Lower taxes on capital--savings and investment--represent "trickle down" economics.

Reality: Every economic theory, including Marxism, agrees that capital formation is the key to faster growth and higher standards of living. Increases in real wages over time are closely correlated with the average amount of capital available per worker. (See Chart 4.) In other words, if workers are paid on the basis of what they produce, it makes sense to adopt tax policies that encourage investment in the tools, equipment, machinery, and technology that help them produce more.



 
Myth: The death tax affects only the very rich.

Reality: Only 2 percent of deaths may result in an estate tax liability, but many more families are forced to engage in costly and inefficient tax planning in order to avoid the tax. The burden of the tax, however, extends beyond those who either face the tax or take steps to avoid it. The death tax affects every family that lives in a community where a family-owned business must be liquidated to pay the tax. The death tax affects every worker when investments are sent offshore as families seek to protect their assets from this unfair form of double taxation. And the death tax affects everyone who loses income because a significant amount of money is invested for tax-minimization and tax-avoidance purposes instead of wealth-creation purposes.

CONCLUSION

When politicians pit one group against another, the only winners are those who believe that more power should be concentrated in the federal government. The economic evidence clearly demonstrates that the U.S. economy will produce significant income gains for all Americans as long as appropriate policies are followed.

Marginal tax rate reductions and death tax repeal are examples of those policies. Yes, taxpayers will benefit, including some upper-income taxpayers, but the real winners will be Americans on the lower rungs of the economic ladder.

Daniel J. Mitchell, Ph.D., is McKenna Senior Fellow in Political Economy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Endnotes

1. Tax Foundation, "Distribution of the Federal Individual Income Tax," Special Report No. 101, November 2000.

2. The goal of legislators should not be to set the rate at the revenue-maximizing level; instead, they should lower rates even further to maximize growth. Regardless of the goal, however, it is self-defeating to set the top rate above the revenue-maximizing level.

3. Joint Economic Committee, "The Mellon and Kennedy Tax Cuts: A Review and Analysis," June 18, 1962.

4. Ibid.

5. Daniel J. Mitchell, "The Historical Lessons of Lower Tax Rates," Heritage Foundation Backgrounder No. 1086, July 19, 1996, p. 7.

6. U.S. Bureau of the Census, "Historical Income Tables--Families," Table F-3, Mean Income Received by Each Fifth and Top 5 Percent of Families (All Races): 1966 to 1999, at http://www.census.gov/hhes/income/histinc/f03.html.

7. Peter Sperry, "The Real Reagan Economic Record: Responsible and Successful Fiscal Policy," Heritage Foundation Backgrounder No. 1414, March 1, 2001.

[JDN]

Interesting...

Do you have anything recent?  I mean your article was published by the Heritage Foundation in 2001; early Bush
in response to critics of Bush's proposed income tax rate reduction plan.

My post was put out this week by Bloomberg News.  It simply evaluated the results (after the fact) of the first six years of Bush's tax cuts.
It seems what Dr. Mitchell thought would happen, didn't.  In fact, the truly rich benefited the most by Bush's tax cuts.

[Body-by-Guinness]

Yes, and it didn't omit more than half the story, that being that the "rich" pay a disproportionate percentage of taxes, and that disproportion rises as tax burden falls, and has done so for quite some time. Do you dispute the data?

If I find a more recent analysis I'll certainly post it, but, as you ought to know, it takes several years for tax and other economic data to be fully collated and hence you don't often see a thoughtful analysis until quite a few years after the reporting date. Perhaps you have more recent data that supports the soak the rich side?

[JDN]

I don't have more recent data that supports the soak the rich side; however my post's recent data implies that Bush soaked the poor and middle class.

As for "disproportionate percentage of taxes" that is a rather subjective term.  As an example, I have a friend who makes over 5 million a year.
IF we had a 50% tax bracket, his take home (excluding other taxes and deductions for simplification) would be $2.5 million per year.  And you could
say he paid $2.5 million in taxes. 

I also have a friend who makes approximately $20k per year.  Let's say you had a flat tax system and charged him 50% too; his tax would then be 10K.

As a percentage, it is proportional.  But as a total dollar amount, obviously disproportionate.  It depends upon how you want to analyze the numbers.
But take it one step further.  Fair; I am not sure.  My rich friend drives a Bentley; raise his taxes 10% and he would still drive a Bentley. My "poor" friend
drives a Honda Civic and can barely make the payments.  "Proportionate" as to ability to pay?  Or?  I don't know the answer, but it is complicated. 
And yes, I understand that my rich friend employees quite a few people and his wealth trickles down; but ...  I still say the answer is not easy...  But it is easy
for either side to slant the numbers to favor their argument.

[Body-by-Guinness]

Out of Gaps In Treaties, First Salvos Of Trade War
By Anthony Faiola
Washington Post Staff Writer
Sunday, February 1, 2009; A01

The world may be on the brink of a gentler kind of trade war.

In 1930, Congress fired the first shot in a protectionist battle that prolonged and deepened the Great Depression. After passing a bill aimed at saving American jobs by effectively barring 20,000 imported goods, including French dresses and Argentine butter, other nations retaliated by raising their own barriers on U.S. products, effectively bringing global commerce to a halt.

In the aftermath, organizations like the World Trade Organization sought to ensure that never happened again. Nations agreed to put on economic straitjackets permitting them to raise tariffs within hard-fought limits. That is likely to help prevent a repeat of the devastating and overt trade wars seen during the Great Depression, since it is now far harder for nations to increase tariffs on a wide array of imports at once.

But there remains a surprising amount of wiggle room in international trade and commerce treaties, and that, analysts say, is where the battle is now being fought as leaders worldwide face intense pressure at home to protect domestic jobs in the deepening financial crisis. They are engaging in a more subtle form of protectionism that often skirts those rules.

This weekend at the World Economic Forum in Davos, Switzerland, the annual event drawing the world's leaders, luminaries of industry, commerce and philanthropy, a host of dignitaries raised a crescendo of alarm over growing economic nationalism. "We will resolutely fight protectionism," Japanese Prime Minister Taro Aso told reporters there, giving voice to the general sentiment.

Yet even as leaders call for nations to do the right thing on the international stage, actually doing it at home is proving far tougher.

British Prime Minister Gordon Brown, for instance, delivered a particularly impassioned plea for nations to remain on the path of free trade yesterday. "This is not like the 1930s. The world can come together," he said. However, back in Britain, the government is directing British banks with global operations now being rescued with taxpayers' dollars to boost lending to British businesses and citizens first.

Although that may violate the spirit of globalization, current laws regulating financial commerce remain far behind those regulating manufactured goods. It is leaving countries where British banks did big business in the past -- particularly in Eastern Europe -- facing fewer and fewer options to cope with the global credit crunch.

"You're going to see a lot more rhetoric out of leaders against protectionism, but what really matters is their policies," said Simon Johnson, former chief economist at the International Monetary Fund and a professor of economics at MIT. "And there are worrying signs right now that they may not be so serious about stopping protectionism."

Additionally, the European Commission is reinstating subsidies on some dairy products to protect its farmers, targeting an area of trade law that remains highly contentious, open to interpretation and potentially damaging to developing countries. Analysts are also bracing for nations to make excessive use of the legal tools now available to them to fight unfair trade, such as filing anti-dumping cases before the WTO.

The nations that signed a Nov. 15 agreement at the G-20 summit in Washington promised to refrain from imposing "protectionist" measures for at least 12 months. Since then, however, a large number of signatory nations have broken that promise.

Current trade law is more strict on rich countries, granting more flexibility to developing nations to raise tariffs. Many are exercising those rights with gusto now. Indonesia last month raised new trade barriers on electronics, garments, toys, footwear and other imports. That is happening at a time when the IMF and World Bank say that global trade is set to shrink for the first time since 1982.

In the United States, a move to greatly expand Buy American provisions as part of the $819 billion fiscal stimulus package has generated shock waves in other countries, with Canadian and European officials in particular rising up in protest. The provision, passed by the House on Wednesday, would mostly bar foreign steel and iron from the infrastructure projects laid out in the stimulus package. A Senate version still being considered goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

Yet depending on how the language on a Buy American provision may ultimately read, experts on trade law say it remains unclear whether it would categorically violate a WTO agreement on government procurement the United States signed in 1996.

"There are lots of institutional firewalls to prevent trade wars that exist today that did not exist during the Great Depression," said Gary Hufbauer, senior fellow with the Peterson Institute for International Economics. "That could help now. But there is still a lot of room for damage, maybe pretty bad damage, that can be done in the gray area of the rules."

Although the legality of the Buy American provision may be in question, that might not prevent a potentially dramatic series of countermeasures by America's trading partners if it is passed and signed by President Obama. For that reason, analysts are seeing it as a major test for Obama, arguing it could signal that the United States may be changing course from a decades-long embrace of free trade because times are now too tough to maintain that path.

"I hope the senators will be wise enough . . . to make sure the U.S. complies with its international obligations," said Pascal Lamy, the head of the World Trade Organization, in Davos yesterday.

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/31/AR2009013101895.html?hpid=topnews

[HUSS]

http://www.guardian.co.uk/business/dan-roberts-on-business-blog/interactive/2009/jan/29/financial-pyramid

[Crafty_Dog]

Woof Huss:

Local custom is to put a sentence or three with a URL describing its contents and why you think it worthy of our time, etc.

Thanks,
Marc

[Crafty_Dog]

$3 Trillion Gov't Overdose Must Be Stopped
By LAWRENCE KUDLOW | Posted Friday, January 30, 2009 4:20 PM PT

Last week's House tally on the Democratic stimulus package, where not a single Republican voted in favor, was another shot across the bow for this incredibly unmanageable $900 billion behemoth of a program that truly will not stimulate the economy.

Sure, the Democrats won on a party-line count. But Team Obama is now regrouping in the face of mounting criticism of this package.

GOP economist Martin Feldstein revoked his prior support of a stimulus plan in Wednesday's Washington Post.

"In its current form," Feldstein wrote, "(The plan) does too little to raise national spending and employment. It would be better for the Senate to delay legislation for a month, or even two, if that's what it takes to produce a much better bill. We cannot afford an $800 billion mistake."

Clinton economic adviser Alice Rivlin made the same point in testimony before the House Budget Committee. Her message: Divide up the package and slow down the process.

And Sen. Richard Shelby told CNBC that Washington should "shelve the stimulus package" and instead attack the banking and credit problem first — probably with a government-sponsored bad bank that would relieve financial institutions from their toxic-asset problem. Mr. Shelby believes the credit crunch remains the biggest obstacle to economic recovery.

Later in the day when I interviewed Senate Republican leader Mitch McConnell, he agreed with Shelby that the stimulus plan should be shelved.

For the first time — as far as I know — McConnell pledged to vote no on the package. Instead he wants larger tax cuts and smaller spending. McConnell might be willing to change his mind if the package changes, but he told me he didn't expect that to happen.

And in what may prove to be the biggest stimulus-package hurdle of all, news reports suggest that Team Obama is contemplating as much as $2 trillion in TARP additions to rescue the banking system in one form or another. That would be $2 trillion on top of the nearly $1 trillion stimulus package.

Government spending, deficits and debt creation of this magnitude are simply unheard of. So the added TARP money will surely imperil the entire stimulus package as taxpayers around the country begin to digest the enormity of these proposed government actions.

Financing of this type would not only destroy the U.S. fiscal position for years to come, it could destroy the dollar in the process.

What's more, the likelihood of massive tax increases — which at some point will become front and center in this gargantuan funding operation — would doom the economy for decades.

By the way, Scott Rasmussen's latest poll shows that already — before the new TARP money is included — public support for the humongous stimulus package has dropped to 42%.

It remains to be seen whether Republicans can in fact stop the stimulus package, but that certainly would be a very good idea. The long-run financial consequences will certainly force higher future tax rates — a prosperity killer feared by Arthur Laffer.

And while all the social spending gets baked into the long-run budget baseline, the short-run implications of the plan have little economic-growth potential.

Meanwhile, there's no shortage of alternative tax proposals that would truly re-ignite the economy.

Former Ronald Reagan and George W. Bush economist Larry Lindsey criticized the Democrat package in Wednesday's Wall Street Journal, describing it as "heavily weighted toward direct government spending, transfers to state and local governments, and tax changes that have virtually no effect on marginal tax rates."

Instead, Lindsey proposes a big payroll tax cut that would slice three points off the rate for both employer and employee.

Rush Limbaugh also made an appearance in the Journal. He has a clever idea to give Obama 54% of the $900 billion package — equating that amount to the new president's electoral majority — while 46%, which was John McCain's electoral tally, would go to a plan that would halve the U.S. corporate tax rate and provide a capital-gains tax holiday for one year, after which the investment tax would drop to 10%.

It was Sen. McCain on Fox News a week ago Sunday who started the stimulus revolt when he said he couldn't support the package and called for less spending along with a large corporate tax cut.

Over in the House, Republican leaders John Boehner and Eric Cantor have successfully launched an opposition drumbeat by attacking congressional Democrats rather than directly hitting President Obama.

Now all eyes will turn to Republican Senate leader Mitch McConnell to see if he can keep up this drumbeat.

Will common-sense Americans really support a massive overdose of government run amok? I seriously doubt it. This whole story has to be completely rethought.

Copyright 2008 Creators Syndicate, Inc
 

[Body-by-Guinness]

How Government Prolonged the Depression
Policies that decreased competition in product and labor markets were especially destructive.
By HAROLD L. COLE and LEE E. OHANIAN

The New Deal is widely perceived to have ended the Great Depression, and this has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that FDR's policies shortened the Depression, or that similar policies will pull our nation out of its current economic downturn.

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.

Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery. Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933. And it wasn't just work that remained scarce during the New Deal. Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita nonresidential investment averaged about 60% below trend. The Great Depression clearly continued long after FDR took office.

Why wasn't the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.

So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.

The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.

These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.

These policies continued even after the NIRA was declared unconstitutional in 1935. There was no antitrust activity after the NIRA, despite overwhelming FTC evidence of price-fixing and production limits in many industries, and the National Labor Relations Act of 1935 gave unions substantial collective-bargaining power. While not permitted under federal law, the sit-down strike, in which workers were occupied factories and shut down production, was tolerated by governors in a number of states and was used with great success against major employers, including General Motors in 1937.

The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court's 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing. The "recession in a depression" thus was not the result of a reversal of New Deal policies, as argued by some, but rather a deepening of New Deal polices that raised wages even further above their competitive levels, and which further prevented the normal forces of supply and demand from restoring full employment. Our research indicates that New Deal labor and industrial policies prolonged the Depression by seven years.

By the late 1930s, New Deal policies did begin to reverse, which coincided with the beginning of the recovery. In a 1938 speech, FDR acknowledged that the American economy had become a "concealed cartel system like Europe," which led the Justice Department to reinitiate antitrust prosecution. And union bargaining power was significantly reduced, first by the Supreme Court's ruling that the sit-down strike was illegal, and further reduced during World War II by the National War Labor Board (NWLB), in which large union wage settlements were limited by the NWLB to cost-of-living increases. The wartime economic boom reflected not only the enormous resource drain of military spending, but also the erosion of New Deal labor and industrial policies.

By 1947, through a combination of NWLB wage restrictions and rapid productivity growth, we have calculated that the large gap between manufacturing wages and productivity that emerged during the New Deal had nearly been eliminated. And since that time, wages have never approached the severely distorted levels that prevailed under the New Deal, nor has the country suffered from such abysmally low employment.

The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.

President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive. Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.

Mr. Cole is professor of economics at the University of Pennsylvania. Mr. Ohanian is professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA.

http://online.wsj.com/article/SB123353276749137485.html

[DougMacG]

Obama Should Channel Harding, Not FDR
By Matt Kibbe

In the first half of last century two presidents inherited recessionary economies from their predecessors. Both campaigned on smaller government, and both blamed the profligate ways of the previous president for their economic problems. One ended the recession in less than three years; the other lengthened it by seven. One responded with laissez-faire capitalism; the other with unprecedented government expansion. Scholars rank one among the worst presidents ever; the other they rank as one of the best. These two men are Warren Harding and Franklin D. Roosevelt.

Warren Harding was elected president in 1920 at the end of World War I, directly following the popular Woodrow Wilson. Harding inherited an economy transitioning away from wartime production as well as decreasing international demand for many American goods that had driven economic growth during the war. American factories were retooling and soldiers were coming home looking for work. The nation's output, by some measures, fell as much as 24 percent and unemployment more than doubled between 1920 and 1921. Between 1919 and 1921, farm income had dropped by 40 percent. The country was falling deep into recession.

Instead of bailing out failing businesses, expanding government, and redistributing taxpayer money with a "stimulus" plan, Harding responded by cutting spending and removing burdensome regulations and taxes. During his campaign, he argued, "We need vastly more freedom than we do regulation." In stark contrast with the Bush-Obama response of ever-more government spending and debt, Harding had federal spending cut in half between 1920 and 1922 and ultimately ran a surplus.

As a result, the recession that started in 1920 ended before 1923. Lower taxes and reduced regulation helped America's economy quickly adjust after the war as entrepreneurs and capital were freed to create jobs and push the economy to recover. Harding's free market policies lead to the Roaring Twenties, known for technological advances, women's rights, the explosion of the middle class, and some of the most rapid economic growth in American history. Still, he is ranked as one of the worst presidents by many in academia's ivory tower.

Franklin D. Roosevelt became president in 1933, following Herbert Hoover. Hoover raised taxes, increased government spending, regulated industry, and increased tariffs as the country went into recession. Despite this long list of big government, anti-market policies, Hoover is often mistakenly thought of as a laissez-faire capitalist. Government spending skyrocketed during Hoover's term in office from just 11 percent of GDP in 1928 to over 20 percent before he was done. FDR simply followed in Hoover's anti-market pro-spending footsteps and maintained the size of government around 19 percent of GDP until World War II, when it went much higher.

A recent study by UCLA economists Harold L. Cole and Lee E. Ohanian show that FDR lengthened the Great Depression by seven years with his anti-market "stimulus" policies. They write that prior to FDR's interventions, "The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies." Somehow, though, FDR is considered one of the best presidents in the history of the country, despite the millions of people out of work and in the breadlines. Hoover is rightfully considered one of the worst, but perhaps FDR should be, too. As Rexford Guy Tugwell, one of Roosevelt's top advisors commented, "We didn't admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started."

President Obama has taken office as our country stands at a crossroads where the laws enacted in the next few weeks could lead our country to prosperity or to ruin. Whose steps will he follow? Warren Harding got government out of the way of business in 1920 to unleash the market economy and launch the Roaring Twenties. FDR tripled taxes, regulated business, and massively expanded the role of government in our lives resulting in the longest and deepest recession this country has ever experienced.

President Obama has mentioned his fondness for FDR. Let's hope he soon comes to prefer Harding.
Matt Kibbe is president of the FreedomWorks Foundation.

[DougMacG]

Finally getting to the post recently from BBG - Daniel J. Mitchell is spot-on.  He provides the data that demonstrates that the plight of the poor and the plight of the middle class and the plight of the rich are infinitely and irreversibly intertwined.  The mantra that the 'rich are getting richer' is a meaningless, selective judgment.  More accurate would be to notice that 'these are good economic times, all groups are prospering'.

Look at the chart.  Who gets hurt the most when that rich aren't getting richer?  The line consistently shows that the lower incomes earners gets hurt later, deeper and longer during downturns than the higher income earners.  Pro-growth policies help the poor the most, assuming the goal is to avoid being poor!

The criticism was whether the data was up to date.  IT WAS A HALF CENTURY STUDY.  Do we need more recent data for the Law of Gravity?

Meanwhile, the Bloomberg piece twists a good story upside down.  The rich got richer during good economic times.  Really!? Do you know anyone who thought the second million was not easier and faster than their first - especially during good economic times.  Maybe the kids finished college and they had more to invest, maybe they learned something with the earlier business or investment success.  Maybe because of past success they had more to invest. WHY IS IT BAD that they made more money?

And why is it any of our business?  Which article in the constitution says spread the wealth and limit people's upside??

Specifically, Bloomberg wrote:  "Rich got richer as their tax rates fell in Bush years, data show"

 - That is 100% media spin.  Fact is that the "America got Wealthier Because Punitive Marginal Tax Rates Were Eased - Across the Board!"  It wasn't just the rich that got richer.  Who are they trying to fool?

Next we hear about the richest Americans.  The increased income and increased revenue to the Treasury is a HUGE success story.  The revenues were beating forecasts by more than $100 Billion per year, growing at as much as 15% per year!  How do you spin that into BAD NEWS???

Bloomberg tells you the change in income for "the richest 400", but they don't tell you that the people who make up the richest 400 changes very quickly, as do the magic quintiles.  They hate telling you that it isn't the same people just a few years later.  The new rich make more money, more quickly than in the past because they inventing for, or selling into, a more prosperous world.  Why is that a bad thing?

Capital Gains reductions accounted for most of the economic surge, according to Bloomberg.  No worry:
Candidate Obama promised to restore the punitive rates.

[Body-by-Guinness]

IT WAS A HALF CENTURY STUDY.

Heh. Rock on, Doug

While launching their soak the rich schemes, save for those members of their ranks whose oversights are suddenly reconciled upon nomination, and spending hundreds of billions of dollars they don't have, the Democrats have a third prong with which to address the current economic climate: Trade War! I say we award them the hat trick and hope they, dare I say, move on.


Good News and Bad News on Trade

Matt Welch | February 4, 2009, 8:24am

The good news: "President Obama to water down 'Buy American' plan after EU trade war threat," headlines The Times of London.

"I agree that we can't send a protectionist message," he said in an interview with Fox TV. "I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we're just looking after ourselves and not concerned with world trade."
The bad news: What kind of historically illiterate, economically retrograde, and bogusly populist jerktards would even CONSIDER, for just one second, that a reasonable approach to this Great Depression 2.0 they keep telling us about is reviving the ghost of Smoot-Hawley? Not only are Democrats and their already unbearable apologists grossly misusing the analogy of Herbert Hoover (much in the way many continue to pretend that George W. Bush was a deregulation zealot), they're now going ahead and aping the 31st president's worst policies.

And don't let Obama's above-it-all filibustering fool you: As Reason has been documenting for two years, the president ran and won a campaign that on a daily basis bashed trade agreements, particularly with troubled Mexico and anxious China. And his party found success swapping its pro-trade stance of the mid-'90s for cheapjack "Buy America" bullshit in the late aughts. Former Reason editor Virginia Postrel points to one of many truly horrible possible consequences of a more protectionist America:

A trade war threatens to exacerbate the single largest danger in the worldwide downturn: that a serious contraction in China will lead to domestic unrest and that that the Chinese government will engage in military aggression to focus frustration outward.

http://www.reason.com/blog/show/131484.html

[Crafty_Dog]

I agree strongly about the risks of protectionism, trade wars, beggar-thy-neighbor devaluations.

In his brilliant "The War the World Works" Jude Wanniski has the most insightful analysis of the causes of the Great Depression that I have ever seen.  Bottom line-- fragmentation of the world economy via protectionism, trade wars, beggar-thy-neighbor devaluations and FDR's liberal fascist economic policies.

[Body-by-Guinness]

http://www.reason.com/news/show/131487.html


No New Deals

Let entrepreneurs and innovation stimulate the economy

Shikha Dalmia | February 4, 2009

There is one thing that's giving political momentum to the Bush-Obama multi-trillion bailout/stimulus spending spree, and it is not a superior understanding of how to fix the ailing economy. It is fear. "Nameless, unreasoning, unjustified terror," as FDR once said.

The economy is in terrible shape. Financial markets are in a deep freeze. The stock market has lost over 40 percent of its value from the Dow's peak last year and 401(k) portfolios are shrinking. Unemployment is rising to levels not seen in 25 years. Companies—big and small—are downsizing or, worse, shuttering their doors completely. And home foreclosure rates are reaching record highs.

Under such circumstances, the fear is that we might well reach the point of no return—or, as a CNN anchor recently put it, face permanent "economic catastrophe."

But it's as likely that government intervention might well delay the recovery process, just as it did in the 1930s when a combination of spending and regulations unleashed by FDR's New Deal turned a recession into a prolonged depression.

Rather than a time for panicked reactions, this is the time to fully understand a lesson of history: The rubble of every recession contains the seeds of its own regeneration. Physical and human capital of dying economic sectors don't vanish with them. These assets—equipment, property, workers—are re-released into the economy, where entrepreneurs, unless thwarted by taxes and regulations, scoop them up and inevitably find more productive uses for them. In the process, new companies are born and new jobs created—offering, over time, far better returns and wages than before.

This is not idle, theoretical speculation.

On a micro level, consider the Pony Express, which was the UPS of 1860. The company cut down delivery time for coast-to-coast mail from six weeks to 10 days by using horse riders instead of ships going around South America. It was wildly successful, but only for about a year. Then commercial telegraph came along, and the company went belly up. Hundreds of workers lost their jobs at a time when civil war was starting, a major recession was brewing after a European bubble in railroads burst, and unemployment was soaring as immigrants from Ireland and elsewhere were coming in droves. But according to Saddles and Spurs, a rare group biography that traces the fortunes of the laid-off riders, all of them found equal or better jobs, in the burgeoning telegraph industry, rodeos and other shows, and as scouts in the Union Army.

On the macro level, consider the experience of the U.S. steel industry in the 20th century and the tech sector at the start of the 21st century. Both went through brutal downsizings that eventually strengthened the American economy and led to generally higher living standards.

Until about 1945, Big Steel—consisting of companies such as U.S. Steel that produced steel from iron ore in large mills—dominated the world market, producing about half of the global steel output. This hegemony, notes University of Dayton economic historain Larry Schweikart, led the industry to precisely the same vices that are responsible for torpedoing the Detroit-based car makers today: bloated corporate bureaucracies; a pampered, unionized workforce with unsustainable legacy costs; and inefficient production methods.

By the 1960s, Big Steel was facing stiff competition from overseas producers, first from Japan and Europe and then from Third World countries such as Brazil. About a quarter of American steel producers went bankrupt between 1974 and 1987. The industry's global market share shrank to 11 percent and employment dropped from 2.5 million in 1974 to 1 million in 1997. But this fight for survival, spanning decades and several recessions, eventually restored the overall industry to profitability. Led by companies such as Nucor, domestic steel makers discovered new ways to turn scrap into steel in sleeker, smaller factories called "mini-mills," using non-unionized workers and a leaner management team.

The physical and human resources that the steel industry squeezed out in its quest for more efficiency didn't simply go up in smoke. They were utilized by other sectors of the economy. For example, employment in the plastics industry, which replaced steel for some uses, grew over 18 percent between 1980 and 2006.

If American-owned automakers are among the loudest voices demanding a bailout from the Bush administration right now, American steel makers are among the loudest voices demanding massive stimulus spending (on schools, roads, bridges, rapid transit, and other steel-intensive projects) from the Obama administration. But if the industry emerged stronger without artificial measures to boost demand for steel once, there is no reason to believe that it won't do so now.

An arguably more stunning comeback involves the dot-com industry. After the 2000 stock market crash, hundreds of Silicon Valley startups collapsed, throwing thousands of highly paid computer professionals out of work. However, within a few short years the industry began to recover, reabsorbing many of the laid-off workers.

One reason for the industry's quick recovery, according to Todd Zywicki, an economist at the George Mason University, was that it was able to rapidly redeploy its resources away from failing enterprises toward more promising ones. Unlike traditional industries, much of the dot-com sector was financed not by debt from bond holders but venture capitalists with equity stakes. This meant that when these companies started showing signs of trouble, their financiers were able to cut their losses and seed other ventures without getting bogged down in time-consuming bankruptcy proceedings.

What's more, they did so at a time when there was a glut of computer talent, not to mention cheap office space, equipment, and other physical assets—all of which positioned them for future success. "If Washington had appointed itself in charge of saving the industry, it would have declared AOL too big to fail," comments Zywicki. "The net effect would have been to retard the advance of broadband and we would all still be using slow-speed dial up to access the Internet."

These are tough economic times and it is impossible to know in advance where the next telegraphic or broadband revolution will come from to drive us out of recession. But the American economy has demonstrated awesome powers of self-correction when its entrepreneurs are left alone to blaze new trails—without a panicked Washington pushing them off course.

FDR famously proclaimed that we have nothing to fear but fear itself. That, and a government that will get in the way of an economic recovery.
Shikha Dalmia is a senior analyst at Reason Foundation.

[G M]

http://hotair.com/archives/2009/02/04/obama-retreats-on-trade-war/

Run away-run away!

[Crafty_Dog]

Its just like during the Michigan primaries.  Hot Air is right that is vapidity is showing.   I fear we are in for one helluva ride.

[JDN]

A column in today's Business section of the LA Times written by Michael Hilzik.


What in heaven's name does Senate Minority Leader Mitch McConnell have against honeybees?
That question haunted my days after I saw the Kentucky Republican on TV fulminating about a provision he found in the proposed government stimulus package. The provision, he said, would provide $150 million for "honeybee insurance."
"This is nonsense," he said, as if he took it personally. You had to think he got stung as a kid or maybe caught a local swarm in the act of recruiting aphids for Al Qaeda.
So I resolved to get to the bottom of this scandalous expenditure.

But first, a little background.
McConnell's Sunday appearance on CBS' "Face the Nation" was part of a full-scale GOP assault on the Obama administration's stimulus bill, which was passed last week by the House with zero Republican support. The package is being debated this week in the Senate. The GOP, as I write, is thinking about a filibuster.

Yet the Republicans seem to have trouble coming up with more than irrelevant or trivial arguments. Appearing on ABC on Sunday, Sen. Jim DeMint (R-S.C.), for instance, owned up to calling the stimulus plan the "worst plan since the 16th Amendment paved the way for the income tax."
Because the 16th Amendment was ratified in 1913, this rather dated DeMint's mind-set. In any event, he didn't offer a proposal on how to fund the government, including his paycheck, without an income tax. He just complained that the stimulus plan involved a lot of spending. He would prefer that it all be in tax cuts,apparently on the grounds that the tax cuts enacted under the Bush administration in 2001 bequeathed to us an economy that has performed so well.

On NBC, Sen. Kay Bailey Hutchison (R-Texas), said she wanted the bill to have more spending on infrastructure, but she wanted it to be on military infrastructure, even though much of that winds up as scrap metal in Iraq and Afghanistan, not bridges and schoolhouses in the United States.
She said she would strip from the bill all the "social spending that is not going to create jobs," but when pressed by Sen. John F. Kerry (D-Mass.), her on-air debating partner, she agreed to preserve some social spending, such as unemployment benefits. The effect of this exchange was to leave Hutchison sounding as though she made up her position as she went along.

Very little of these discussions addressed the principle underlying the stimulus bill. The idea is that when the private sector withdraws from the economy by cutting back on capital spending and laying off workers, it is up to the government to take up the slack, if necessary via deficit spending.

This isn't radical thinking. It's endorsed by, among others, Martin Feldstein, who was Ronald Reagan's chief economic advisor and is consistently voted by his peers as the Economist Least Likely to be Mistaken for a Democrat. Feldstein opposes most of the tax cuts favored by the GOP, especially business tax cuts. To be fair, he isn't entirely enamored of President Obama's proposal -- he thinks it should spend more on programs that will produce more short-term employment and less on open-ended programs.

Yet the plan before the Senate includes hundreds of billions of dollars in near-term programs and projects. There's $90 billion for school construction and renovation and educational grants and $79 billion for state educational programs, most of which would be spent within two years. Of the $27 billion for highway construction, most would be spent within four years.

The bill also appropriates billions for the kind of forward-looking projects we've neglected during the last two decades, such as broadband infrastructure, water and anti-pollution programs, and alternative energy research, which will produce long-term economic benefits for the entire country.

Is it possible to slip pork into a bill this massive? Well, duh. But pork is often in the eye of the beholder. House Republicans this week released a list of $19 billion in provisions they called "wasteful" (i.e., 2% of the total package). But the list includes numerous projects that many Americans would support and that would plainly stimulate our limping construction and manufacturing sectors. For example, the purchase of new computers and vehicles for federal agencies, the building of fire stations and other public facilities, and the upgrade of rail lines.

Is this the best the GOP can come up with? Or are Republicans just determined to undermine the recovery effort? It's hard to disagree with Obama's complaint that "modest differences" over the package are being inflated to stall the whole program.

That brings us to McConnell and his problem with "honeybee insurance." It turns out that the Senate minority leader took his cue from Neil Cavuto of Fox News, who has been carrying on about the topic for more than a week. Their campaign was joined Tuesday by Sen. David Vitter (R-La.), who stood on the floor of the chamber challenging "any member to come and explain what that provision was."
I'm no senator, but I'm pleased to inform Vitter that it is, in fact, a disaster insurance program for all livestock producers. Beekeepers obviously would be minor beneficiaries next to, say, cattle ranchers, so it's a tad bit dishonest to label the whole program "honeybee insurance."

The provision simply continues a program enacted by Congress last year, overriding a veto by President Bush. In other words, the Senate voted on it twice in 2008 -- once to enact and once to override. Connoisseurs of political comedy will see the punch line coming: McConnell and Vitter voted yea both times.

So it turns out that McConnell isn't really against honeybees. He's only using them to pretend that he's got a principled objection to a stimulus plan aimed at pulling the country out of the most severe recession in decades.

The honeybees, and the rest of us, are merely collateral damage.

[Body-by-Guinness]

Oh it's just honey bees people are objecting to amid the 900 billion whatever that's being kicked around? Could have sworn I've seen other objections, like this one:

February 05, 2009, 4:00 a.m.

50 De-Stimulating Facts
Chapter and verse on a bad bill.

By Stephen Spruiell & Kevin Williamson

Senate Democrats acknowledged Wednesday that they do not have the votes to pass the stimulus bill in its current form. This is unexpected good news. The House passed the stimulus package with zero Republican votes (and even a few Democratic defections), but few expected Senate Republicans (of whom there are only 41) to present a unified front. A few moderate Democrats have reportedly joined them.

The idea that the government can spend the economy out of a recession is highly questionable, and even with Senate moderates pushing for changes, the current package is unlikely to see much improvement. Nevertheless, this presents an opportunity to remove some of the most egregious spending, to shrink some programs, and to add guidelines where the initial bill called for a blank check. Here are 50 of the most outrageous items in the stimulus package:


VARIOUS LEFT-WINGERY
The easiest targets in the stimulus bill are the ones that were clearly thrown in as a sop to one liberal cause or another, even though the proposed spending would have little to no stimulative effect. The National Endowment for the Arts, for example, is in line for $50 million, increasing its total budget by a third. The unemployed can fill their days attending abstract-film festivals and sitar concerts.

Then there are the usual welfare-expansion programs that sound nice but repeatedly fail cost-benefit analyses. The bill provides $380 million to set up a rainy-day fund for a nutrition program that serves low-income women and children, and $300 million for grants to combat violence against women. Laudable goals, perhaps, but where’s the economic stimulus? And the bill would double the amount spent on federal child-care subsidies. Brian Riedl, a budget expert with the Heritage Foundation, quips, “Maybe it’s to help future Obama cabinet secretaries, so that they don’t have to pay taxes on their nannies.”

Perhaps spending $6 billion on university building projects will put some unemployed construction workers to work, but how does a $15 billion expansion of the Pell Grant program meet the standard of “temporary, timely, and targeted”? Another provision would allocate an extra $1.2 billion to a “youth” summer-jobs program—and increase the age-eligibility limit from 21 to 24. Federal job-training programs—despite a long track record of failure—come in for $4 billion total in additional funding through the stimulus.

Of course, it wouldn’t be a liberal wish list if it didn’t include something for ACORN, and sure enough, there is $5.2 billion for community-development block grants and “neighborhood stabilization activities,” which ACORN is eligible to apply for. Finally, the bill allocates $650 million for activities related to the switch from analog to digital TV, including $90 million to educate “vulnerable populations” that they need to go out and get their converter boxes or lose their TV signals. Obviously, this is stimulative stuff: Any economist will tell you that you can’t get higher productivity and economic growth without access to reruns of Family Feud.

Summary:
$50 million for the National Endowment for the Arts
$380 million in the Senate bill for the Women, Infants and Children program
$300 million for grants to combat violence against women
$2 billion for federal child-care block grants
$6 billion for university building projects
$15 billion for boosting Pell Grant college scholarships
$4 billion for job-training programs, including $1.2 billion for “youths” up to the age of 24
$1 billion for community-development block grants
$4.2 billion for “neighborhood stabilization activities”
$650 million for digital-TV coupons; $90 million to educate “vulnerable populations”


POORLY DESIGNED TAX RELIEF
The stimulus package’s tax provisions are poorly designed and should be replaced with something closer to what the Republican Study Committee in the House has proposed. Obama would extend some of the business tax credits included in the stimulus bill Congress passed about a year ago, and this is good as far as it goes. The RSC plan, however, also calls for a cut in the corporate-tax rate that could be expected to boost wages, lower prices, and increase profits, stimulating economic activity across the board.

The RSC plan also calls for a 5 percent across-the-board income-tax cut, which would increase productivity by providing additional incentives to save, work, and invest. An across-the-board payroll-tax cut might make even more sense, especially for low- to middle-income workers who don’t make enough to pay income taxes. Obama’s “Making Work Pay” tax credit is aimed at helping these workers, but it uses a rebate check instead of a rate cut. Rebate checks are not effective stimulus, as we discovered last spring: They might boost consumption, a little, but that’s all they do.
Finally, the RSC proposal provides direct tax relief to strapped families by expanding the child tax credit, reducing taxes on parents’ investment in the next generation of taxpayers. Obama’s expansion of the child tax credit is not nearly as ambitious. Overall, his plan adds up to a lot of forgone revenue without much stimulus to show for it. Senators should push for the tax relief to be better designed.

Summary:
$15 billion for business-loss carry-backs
$145 billion for “Making Work Pay” tax credits
$83 billion for the earned income credit


STIMULUS FOR THE GOVERNMENT
Even as their budgets were growing robustly during the Bush administration, many federal agencies couldn’t find the money to keep up with repairs—at least that’s the conclusion one is forced to draw from looking at the stimulus bill. Apparently the entire capital is a shambles. Congress has already removed $200 million to fix up the National Mall after word of that provision leaked out and attracted scorn. But one fixture of the mall—the Smithsonian—dodged the ax: It’s slated to receive $150 million for renovations.

The stimulus package is packed with approximately $7 billion worth of federal building projects, including $34 million to fix up the Commerce Department, $500 million for improvements to National Institutes of Health facilities, and $44 million for repairs at the Department of Agriculture. The Agriculture Department would also get $350 million for new computers—the better to calculate all the new farm subsidies in the bill (see “Pure pork” below).

One theme in this bill is superfluous spending items coated with green sugar to make them more palatable. Both NASA and NOAA come in for appropriations that properly belong in the regular budget, but this spending apparently qualifies for the stimulus bill because part of the money from each allocation is reserved for climate-change research. For instance, the bill grants NASA $450 million, but it states that the agency must spend at least $200 million on “climate-research missions,” which raises the question: Is there global warming in space?

The bottom line is that there is a way to fund government agencies, and that is the federal budget, not an “emergency” stimulus package. As Riedl puts it, “Amount allocated to the Census Bureau? $1 billion. Jobs created? None.”

Summary:
$150 million for the Smithsonian
$34 million to renovate the Department of Commerce headquarters
$500 million for improvement projects for National Institutes of Health facilities
$44 million for repairs to Department of Agriculture headquarters
$350 million for Agriculture Department computers
$88 million to help move the Public Health Service into a new building
$448 million for constructing a new Homeland Security Department headquarters
$600 million to convert the federal auto fleet to hybrids
$450 million for NASA (carve-out for “climate-research missions”)
$600 million for NOAA (carve-out for “climate modeling”)
$1 billion for the Census Bureau


INCOME TRANSFERS
A big chunk of the stimulus package is designed not to create wealth but to spread it around. It contains $89 billion in Medicaid extensions and $36 billion in expanded unemployment benefits—and this is in addition to the state-budget bailout (see “Rewarding state irresponsibility” below).

The Medicaid extension is structured as a temporary increase in the federal match, but make no mistake: Like many spending increases in the stimulus package, this one has a good chance of becoming permanent. As for extending unemployment benefits through the downturn, it might be a good idea for other reasons, but it wouldn’t stimulate economic growth: It would provide an incentive for job-seekers to delay reentry into the workforce.

Summary:
$89 billion for Medicaid
$30 billion for COBRA insurance extension
$36 billion for expanded unemployment benefits
$20 billion for food stamps


PURE PORK
The problem with trying to spend $1 trillion quickly is that you end up wasting a lot of it. Take, for instance, the proposed $4.5 billion addition to the U.S. Army Corps of Engineers budget. Not only does this effectively double the Corps’ budget overnight, but it adds to the Corps’ $3.2 billion unobligated balance—money that has been appropriated, but that the Corps has not yet figured out how to spend. Keep in mind, this is an agency that is often criticized for wasting taxpayers’ money. “They cannot spend that money wisely,” says Steve Ellis of Taxpayers for Common Sense. “I don’t even think they can spend that much money unwisely.”

Speaking of spending money unwisely, the stimulus bill adds another $850 million for Amtrak, the railroad that can’t turn a profit. There’s also $1.7 billion for “critical deferred maintenance needs” in the National Park System, and $55 million for the preservation of historic landmarks. Also, the U.S. Coast Guard needs $87 million for a polar icebreaking ship—maybe global warming isn’t working fast enough.

It should come as no surprise that rural communities—those parts of the nation that were hardest hit by rampant real-estate speculation and the collapse of the investment-banking industry—are in dire need of an additional $7.6 billion for “advancement programs.” Congress passed a $300 billion farm bill last year, but apparently that wasn’t enough. This bill provides additional subsidies for farmers, including $150 million for producers of livestock, honeybees, and farm-raised fish.

Summary:
$4.5 billion for U.S. Army Corps of Engineers
$850 million for Amtrak
$87 million for a polar icebreaking ship
$1.7 billion for the National Park System
$55 million for Historic Preservation Fund
$7.6 billion for “rural community advancement programs”
$150 million for agricultural-commodity purchases
$150 million for “producers of livestock, honeybees, and farm-raised fish”


RENEWABLE WASTE
Open up the section of the stimulus devoted to renewable energy and what you find is anti-stimulus: billions of dollars allocated to money-losing technologies that have not proven cost-efficient despite decades of government support. “Green energy” is not a new idea, Riedl points out. The government has poured billions into loan-guarantees and subsidies and has even mandated the use of ethanol in gasoline, to no avail. “It is the triumph of hope over experience,” he says, “to think that the next $20 billion will magically transform the economy.”

Many of the renewable-energy projects in the stimulus bill are duplicative. It sets aside $3.5 billion for energy efficiency and conservation block grants, and $3.4 billion for the State Energy Program. What’s the difference? Well, energy efficiency and conservation block grants “assist eligible entities in implementing energy efficiency and conservation strategies,” while the State Energy Program “provides funding to states to design and carry out their own energy efficiency and renewable energy programs.”

While some programs would spend lavishly on technologies that are proven failures, others would spend too little to make a difference. The stimulus would spend $4.5 billion to modernize the nation’s electricity grid. But as Robert Samuelson has pointed out, “An industry study in 2004—surely outdated—put the price tag of modernizing the grid at $165 billion.” Most important, the stimulus bill is not the place to make these changes. There is a regular authorization process for energy spending; Obama is just trying to take a shortcut around it.

Summary:
$2 billion for renewable-energy research ($400 million for global-warming research)
$2 billion for a “clean coal” power plant in Illinois
$6.2 billion for the Weatherization Assistance Program
$3.5 billion for energy-efficiency and conservation block grants
$3.4 billion for the State Energy Program
$200 million for state and local electric-transport projects
$300 million for energy-efficient-appliance rebate programs
$400 million for hybrid cars for state and local governments
$1 billion for the manufacturing of advanced batteries
$1.5 billion for green-technology loan guarantees
$8 billion for innovative-technology loan-guarantee program
$2.4 billion for carbon-capture demonstration projects
$4.5 billion for electricity grid


REWARDING STATE IRRESPONSIBILITY
One of the ugliest aspects of the stimulus package is a bailout for spendthrift state legislatures. Remember the old fable about the ant and the grasshopper? In Aesop’s version, the happy-go-lucky grasshopper realizes the error of his ways when winter comes and he goes hungry while the industrious ant lives on his stores. In Obama’s version, the federal government levies a tax on the ant and redistributes his wealth to the party-hearty grasshopper, who just happens to belong to a government-employees’ union. This happens through something called the “State Fiscal Stabilization Fund,” by which taxpayers in the states that have exercised financial discipline are raided to subsidize Democratic-leaning Electoral College powerhouses—e.g., California—that have spent their way into big trouble.

The state-bailout fund has a built-in provision to channel the money to the Democrats’ most reliable group of campaign donors: the teachers’ unions. The current bill requires that a fixed percentage of the bailout money go toward ensuring that school budgets are not reduced below 2006 levels. Given that the fastest-growing segment of public-school expense is administrators’ salaries—not teachers’ pay, not direct spending on classroom learning—this is a requirement that has almost nothing to do with ensuring high-quality education and everything to do with ensuring that the school bureaucracy continues to be a cash cow for Democrats.

Setting aside this obvious sop to Democratic constituencies, the State Fiscal Stabilization Fund is problematic in that it creates a moral hazard by punishing the thrifty to subsidize the extravagant. California, which has suffered the fiscal one-two punch of a liberal, populist Republican governor and a spendthrift Democratic legislature, is in the worst shape, but even this fiduciary felon would have only to scale back spending to Gray Davis–era levels to eliminate its looming deficit. (The Davis years are not remembered as being especially austere.) Pennsylvania is looking to offload much of its bloated corrections-system budget onto Uncle Sam in order to shunt funds to Gov. Ed Rendell’s allies at the county-government level, who will use that largesse to put off making hard budgetary calls and necessary reforms. Alaska is looking for a billion bucks, including $630 million for transportation projects—not a great sign for the state that brought us the “Bridge to Nowhere” fiasco.

Other features leap out: Of the $4 billion set aside for the Community Oriented Policing Services—COPS—program, half is allocated for communities of fewer than 150,000 people. That’s $2 billion to fight nonexistent crime waves in places like Frog Suck, Wyo., and Hoople, N.D.

The great French economist Frédéric Bastiat called politics “the great fiction through which everybody endeavors to live at the expense of everybody else.” But who pays for the state bailout? Savers will pay to bail out spenders, and future generations will pay to bail out the undisciplined present.

In sum, this is an $80 billion boondoggle that is going to reward the irresponsible and help state governments evade a needed reordering of their financial priorities. And the money has to come from somewhere: At best, we’re just shifting money around from jurisdiction to jurisdiction, robbing a relatively prudent Cheyenne to pay an incontinent Albany. If we want more ants and fewer grasshoppers, let the prodigal governors get a little hungry.

Summary:
$79 billion for State Fiscal Stabilization Fund

— Stephen Spruiell is a staff reporter for National Review Online. Kevin Williamson is a deputy managing editor of National Review.
National Review Online - http://article.nationalreview.com/?q=YjcyODIyZGM2MGU1ZDdkNDgxZDc3OTNjYjM4ZDY1ODI=

[Body-by-Guinness]

Second post.

And some economists who don't support the Keynesian pap BHO and the LA Times is spouting:

"There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy."

— PRESIDENT-ELECT BARACK OBAMA, JANUARY 9 , 2009

With all due respect Mr. President, that is not true.

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

Burton Abrams, Univ. of Delaware
Douglas Adie, Ohio University
Ryan Amacher, Univ. of Texas at Arlington
J.J. Arias, Georgia College & State University
Howard Baetjer, Jr., Towson University
Stacie Beck, Univ. of Delaware
Don Bellante, Univ. of South Florida
James Bennett, George Mason University
Bruce Benson, Florida State University
Sanjai Bhagat, Univ. of Colorado at Boulder
Mark Bils, Univ. of Rochester
Alberto Bisin, New York University
Walter Block, Loyola University New Orleans
Cecil Bohanon, Ball State University
Michele Boldrin, Washington University in St. Louis
Donald Booth, Chapman University
Michael Bordo, Rutgers University
Samuel Bostaph, Univ. of Dallas
Scott Bradford, Brigham Young University
Genevieve Briand, Eastern Washington University
George Brower, Moravian College
James Buchanan, Nobel laureate
Richard Burdekin, Claremont McKenna College
Henry Butler, Northwestern University
William Butos, Trinity College
Peter Calcagno, College of Charleston
Bryan Caplan, George Mason University
Art Carden, Rhodes College
James Cardon, Brigham Young University
Dustin Chambers, Salisbury University
Emily Chamlee-Wright, Beloit College
V.V. Chari, Univ. of Minnesota
Barry Chiswick, Univ. of Illinois at Chicago
Lawrence Cima, John Carroll University
J.R. Clark, Univ. of Tennessee at Chattanooga
Gian Luca Clementi, New York University
R. Morris Coats, Nicholls State University
John Cochran, Metropolitan State College
John Cochrane, Univ. of Chicago
John Cogan, Hoover Institution, Stanford University
John Coleman, Duke University
Boyd Collier, Tarleton State University
Robert Collinge, Univ. of Texas at San Antonio
Lee Coppock, Univ. of Virginia
Mario Crucini, Vanderbilt University
Christopher Culp, Univ. of Chicago
Kirby Cundiff, Northeastern State University
Antony Davies, Duquesne University
John Dawson, Appalachian State University
Clarence Deitsch, Ball State University
Arthur Diamond, Jr., Univ. of Nebraska at Omaha
John Dobra, Univ. of Nevada, Reno
James Dorn, Towson University
Christopher Douglas, Univ. of Michigan, Flint
Floyd Duncan, Virginia Military Institute
Francis Egan, Trinity College
John Egger, Towson University
Kenneth Elzinga, Univ. of Virginia
Paul Evans, Ohio State University
Eugene Fama, Univ. of Chicago
W. Ken Farr, Georgia College & State University
Hartmut Fischer, Univ. of San Francisco
Fred Foldvary, Santa Clara University
Murray Frank, Univ. of Minnesota
Peter Frank, Wingate University
Timothy Fuerst, Bowling Green State University
B. Delworth Gardner, Brigham Young University
John Garen, Univ. of Kentucky
Rick Geddes, Cornell University
Aaron Gellman, Northwestern University
William Gerdes, Clarke College
Michael Gibbs, Univ. of Chicago
Stephan Gohmann, Univ. of Louisville
Rodolfo Gonzalez, San Jose State University
Richard Gordon, Penn State University
Peter Gordon, Univ. of Southern California
Ernie Goss, Creighton University
Paul Gregory, Univ. of Houston
Earl Grinols, Baylor University
Daniel Gropper, Auburn University
R.W. Hafer, Southern Illinois
University, Edwardsville
Arthur Hall, Univ. of Kansas
Steve Hanke, Johns Hopkins
Stephen Happel, Arizona State University
Frank Hefner, College of Charleston
Ronald Heiner, George Mason University
David Henderson, Hoover Institution, Stanford University
Robert Herren, North Dakota State University
Gailen Hite, Columbia University
Steven Horwitz, St. Lawrence University
John Howe, Univ. of Missouri, Columbia
Jeffrey Hummel, San Jose State University
Bruce Hutchinson, Univ. of Tennessee at Chattanooga
Brian Jacobsen, Wisconsin Lutheran College
Jason Johnston, Univ. of Pennsylvania
Boyan Jovanovic, New York University
Jonathan Karpoff, Univ. of Washington
Barry Keating, Univ. of Notre Dame
Naveen Khanna, Michigan State University
Nicholas Kiefer, Cornell University
Daniel Klein, George Mason University
Paul Koch, Univ. of Kansas
Narayana Kocherlakota, Univ. of Minnesota
Marek Kolar, Delta College
Roger Koppl, Fairleigh Dickinson University
Kishore Kulkarni, Metropolitan State College of Denver
Deepak Lal, UCLA
George Langelett, South Dakota State University
James Larriviere, Spring Hill College
Robert Lawson, Auburn University
John Levendis, Loyola University New Orleans
David Levine, Washington University in St. Louis
Peter Lewin, Univ. of Texas at Dallas
Dean Lillard, Cornell University
Zheng Liu, Emory University
Alan Lockard, Binghampton University
Edward Lopez, San Jose State University
John Lunn, Hope College
Glenn MacDonald, Washington
University in St. Louis
Michael Marlow, California
Polytechnic State University
Deryl Martin, Tennessee Tech University
Dale Matcheck, Northwood University
Deirdre McCloskey, Univ. of Illinois, Chicago
John McDermott, Univ. of South Carolina
Joseph McGarrity, Univ. of Central Arkansas
Roger Meiners, Univ. of Texas at Arlington
Allan Meltzer, Carnegie Mellon University
John Merrifield, Univ. of Texas at San Antonio
James Miller III, George Mason University
Jeffrey Miron, Harvard University
Thomas Moeller, Texas Christian University
John Moorhouse, Wake Forest University
Andrea Moro, Vanderbilt University
Andrew Morriss, Univ. of Illinois at Urbana-Champaign
Michael Munger, Duke University
Kevin Murphy, Univ. of Southern California
Richard Muth, Emory University
Charles Nelson, Univ. of Washington
Seth Norton, Wheaton College
Lee Ohanian, Univ. of California, Los Angeles
Lydia Ortega, San Jose State University
Evan Osborne, Wright State University
Randall Parker, East Carolina University
Donald Parsons, George Washington University
Sam Peltzman, Univ. of Chicago
Mark Perry, Univ. of Michigan, Flint
Christopher Phelan, Univ. of Minnesota
Gordon Phillips, Univ. of Maryland
Michael Pippenger, Univ. of Alaska, Fairbanks
Tomasz Piskorski, Columbia University
Brennan Platt, Brigham Young University
Joseph Pomykala, Towson University
William Poole, Univ. of Delaware
Barry Poulson, Univ. of Colorado at Boulder
Benjamin Powell, Suffolk University
Edward Prescott, Nobel laureate
Gary Quinlivan, Saint Vincent College
Reza Ramazani, Saint Michael's College
Adriano Rampini, Duke University
Eric Rasmusen, Indiana University
Mario Rizzo, New York University
Richard Roll, Univ. of California, Los Angeles
Robert Rossana, Wayne State University
James Roumasset, Univ. of Hawaii at Manoa
John Rowe, Univ. of South Florida
Charles Rowley, George Mason University
Juan Rubio-Ramirez, Duke University
Roy Ruffin, Univ. of Houston
Kevin Salyer, Univ. of California, Davis
Pavel Savor, Univ. of Pennsylvania
Ronald Schmidt, Univ. of Rochester
Carlos Seiglie, Rutgers University
William Shughart II, Univ. of Mississippi
Charles Skipton, Univ. of Tampa
James Smith, Western Carolina University
Vernon Smith, Nobel laureate
Lawrence Southwick, Jr., Univ. at Buffalo
Dean Stansel, Florida Gulf Coast University
Houston Stokes, Univ. of Illinois at Chicago
Brian Strow, Western Kentucky University
Shirley Svorny, California State
University, Northridge
John Tatom, Indiana State University
Wade Thomas, State University of New York at Oneonta
Henry Thompson, Auburn University
Alex Tokarev, The King's College
Edward Tower, Duke University
Leo Troy, Rutgers University
David Tuerck, Suffolk University
Charlotte Twight, Boise State University
Kamal Upadhyaya, Univ. of New Haven
Charles Upton, Kent State University
T. Norman Van Cott, Ball State University
Richard Vedder, Ohio University
Richard Wagner, George Mason University
Douglas M. Walker, College of Charleston
Douglas O. Walker, Regent University
Christopher Westley, Jacksonville State University
Lawrence White, Univ. of Missouri at St. Louis
Walter Williams, George Mason University
Doug Wills, Univ. of Washington Tacoma
Dennis Wilson, Western Kentucky University
Gary Wolfram, Hillsdale College
Huizhong Zhou, Western Michigan University
Additional economists who have signed the statement

Lee Adkins, Oklahoma State University
William Albrecht, Univ. of Iowa
Donald Alexander, Western Michigan University
Geoffrey Andron, Austin Community College
Nathan Ashby, Univ. of Texas at El Paso
George Averitt, Purdue North Central University
Charles Baird, California State University, East Bay
Timothy Bastian, Creighton University
John Bethune, Barton College
Robert Bise, Orange Coast College
Karl Borden, University of Nebraska
Donald Boudreaux, George Mason University
Ivan Brick, Rutgers University
Phil Bryson, Brigham Young University
Richard Burkhauser, Cornell University
Edwin Burton, Univ. of Virginia
Jim Butkiewicz, Univ. of Delaware
Richard Cebula, Armstrong Atlantic State University
Don Chance, Louisiana State University
Robert Chatfield, Univ. of Nevada, Las Vegas
Lloyd Cohen, George Mason University
Peter Colwell, Univ. of Illinois at Urbana-Champaign
Michael Connolly, Univ. of Miami
Jim Couch, Univ. of North Alabama
Eleanor Craig, Univ. of Delaware
Michael Daniels, Columbus State University
A. Edward Day, Univ. of Texas at Dallas
Stephen Dempsey, Univ. of Vermont
Allan DeSerpa, Arizona State University
William Dewald, Ohio State University
Jeff Dorfman, Univ. of Georgia
Lanny Ebenstein, Univ. of California, Santa Barbara
Michael Erickson, The College of Idaho
Jack Estill, San Jose State University
Dorla Evans, Univ. of Alabama in Huntsville
Frank Falero, California State University, Bakersfield
Daniel Feenberg, National Bureau of Economic Research
Eric Fisher, California Polytechnic State University
Arthur Fleisher, Metropolitan State College of Denver
William Ford, Middle Tennessee State University
Ralph Frasca, Univ. of Dayton
Joseph Giacalone, St. John's University
Adam Gifford, California State Unviersity, Northridge
Otis Gilley, Louisiana Tech University
J. Edward Graham, University of North Carolina at Wilmington
Richard Grant, Lipscomb University
Gauri-Shankar Guha, Arkansas State University
Darren Gulla, Univ. of Kentucky
Dennis Halcoussis, California State University, Northridge
Richard Hart, Miami University
James Hartley, Mount Holyoke College
Thomas Hazlett, George Mason University
Scott Hein, Texas Tech University
Bradley Hobbs, Florida Gulf Coast University
John Hoehn, Michigan State University
Daniel Houser, George Mason University
Thomas Howard, University of Denver
Chris Hughen, Univ. of Denver
Marcus Ingram, Univ. of Tampa
Joseph Jadlow, Oklahoma State University
Sherry Jarrell, Wake Forest University
Carrie Kerekes, Florida Gulf Coast University
Robert Krol, California State University, Northridge
James Kurre, Penn State Erie
Tom Lehman, Indiana Wesleyan University
W. Cris Lewis, Utah State University
Stan Liebowitz, Univ. of Texas at Dallas
Anthony Losasso, Univ. of Illinois at Chicago
John Lott, Jr., Univ. of Maryland
Keith Malone, Univ. of North Alabama
Henry Manne, George Mason University
Richard Marcus, Univ. of Wisconsin-Milwaukee
Timothy Mathews, Kennesaw State University
John Matsusaka, Univ. of Southern California
Thomas Mayor, Univ. of Houston
W. Douglas McMillin, Louisiana State University
Mario Miranda, The Ohio State University
Ed Miseta, Penn State Erie
James Moncur, Univ. of Hawaii at Manoa
Charles Moss, Univ. of Florida
Tim Muris, George Mason University
John Murray, Univ. of Toledo
David Mustard, Univ. of Georgia
Steven Myers, Univ. of Akron
Dhananjay Nanda, University of Miami
Stephen Parente, Univ. of Minnesota
Allen Parkman, Univ. of New Mexico
Douglas Patterson, Virginia Polytechnic Institute and University
Timothy Perri, Appalachian State University
Mark Pingle, Univ. of Nevada, Reno
Ivan Pongracic, Hillsdale College
Richard Rawlins, Missouri Southern State University
Thomas Rhee, California State University, Long Beach
Christine Ries, Georgia Institute of Technology
Nancy Roberts, Arizona State University
Larry Ross, Univ. of Alaska Anchorage
Timothy Roth, Univ. of Texas at El Paso
Atulya Sarin, Santa Clara University
Thomas Saving, Texas A&M University
Eric Schansberg, Indiana University Southeast
John Seater, North Carolina University
Alan Shapiro, Univ. of Southern California
Frank Spreng, McKendree University
Judith Staley Brenneke, John Carroll University
John E. Stapleford, Eastern University
Courtenay Stone, Ball State University
Avanidhar Subrahmanyam, UCLA
Scott Sumner, Bentley University
Clifford Thies, Shenandoah University
William Trumbull, West Virginia University
Gustavo Ventura, Univ. of Iowa
Marc Weidenmier, Claremont McKenna College
Robert Whaples, Wake Forest University
Gene Wunder, Washburn University
John Zdanowicz, Florida International University
Jerry Zimmerman, Univ. of Rochester
Joseph Zoric, Franciscan University of Steubenville

[Body-by-Guinness]

And a third post from the economist mentioned in the LA Times Piece. Though it indeed calls for spending, the targeted, productive, and quickly introduced funds the author calls for are clearly lacking in what the Democrats seek to foist.

The Stimulus Plan We Need Now
The President-Elect Won't Have to Wait Till January to Act
By Martin Feldstein
Thursday, October 30, 2008; A23

Further legislation to deal with the economic crisis should not wait until the new president takes office. Fortunately, the president-elect will be a senator and can propose legislation without waiting to be sworn in as president. Immediately after Nov. 4, the winner could, and should, take the lead in the legislative process.

The economy faces two separate problems: the downward spiral of home prices, which hangs over the financial markets, and the decline in aggregate spending, which could cause a deep and prolonged recession.

Home prices have already fallen about 25 percent from their peak in 2006, and experts say they must fall an additional 10 to 15 percent to get back to pre-bubble levels. But they could fall much further than that as a result of mortgage defaults and foreclosures. Further declines from the current level would increase the number of homeowners whose mortgages exceed the value of their homes, creating a strong incentive to default. Defaults and the resulting foreclosures would put more homes on the market, driving down prices even more.

And this fear of a deep drop in home prices depresses the value of mortgage-backed securities, contributing to the difficulty that banks are having raising funds and to their reluctance to make loans.

Although home prices must get back to pre-bubble levels, Congress should enact policies to reduce defaults that could drive prices down much further. Direct help to the 12 million homeowners who already have negative equity in their homes could help to stop foreclosures. But it is important for Congress to go further and stop declining prices from pushing a large portion of the other 37 million homeowners with mortgages into negative equity, which could tempt them to default. The mortgage replacement loan plan that I suggested in June, essentially a congressionally enacted mortgage "firewall" to prevent prices from dropping too far, is one possible way to do that.

Falling home prices have already reduced homeowner wealth by about $3 trillion; the stock market decline has cut wealth by an additional $8 trillion. This reduced household wealth is causing consumers to cut spending, leading to lower employment, lower incomes and, therefore, further cuts in consumer spending.

Other components of aggregate demand are also falling. The decline in consumer spending will lead to less business investment in plants and equipment. And the recession in Europe and Japan will further reduce our net exports.

With the Fed's benchmark interest rate down to 1 percent, there is no scope for an easier monetary policy to stop the downward spiral in aggregate demand.

Another round of one-time tax rebates won't do the job. The rebates that Congress enacted this spring failed to stimulate consumer spending: More than 80 percent of tax rebate dollars were saved or used to pay down existing debt.

The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.

A fiscal package of $100 billion is not likely to be large enough to revive the economy. The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.

The president-elect should focus on developing a mechanism for identifying and funding spending initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. Any plan to finance this spending by raising taxes, even if postponed, as Sen. Barack Obama has suggested, would hurt the recovery by causing affected taxpayers to cut their spending now.

The increased government spending should include not only money for infrastructure such as bridges and roads but also for a wide range of equipment. Rebuilding some of the military capacity that has been depleted by the wars in Iraq and Afghanistan could be done relatively quickly and should be part of the overall package.

Although the economy is facing severe challenges, the president-elect can turn the situation around by introducing legislation to deal with the downward spiral in home prices and with the declining level of aggregate demand. It is important that such legislation be enacted as quickly as possible.

The writer, an economics professor at Harvard University and an adviser to the McCain campaign, is president emeritus of the National Bureau of Economic Research.

[HUSS]

http://www.cnbc.com/id/29032370
 
"This recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse," Obama wrote in the op-ed titled, "The Action Americans Need."   

[HUSS]

Go through and read the comments, its sad how many people are willing to give up their freedom to a larger govt in exchange for the perception of safety.


Is Britain running out of food? Is GM the only answer to reports of future food shortages in Britain, or would some sensible belt-tightening fix the problem?
Comments (14) 
GM crops: a controversial answer to food shortages. Photograph: Barry Batchelor/PA

An end to cheap food and the likelihood of food crises hitting Britain unless we reform the agricultural sector, is the print media's take on the long-awaited report on food security from think-tank Chatham House, published yesterday.

But - predictably - it isn't as simple as that. The shock headline that Britain now imports 51% of its food doesn't actually say much about our self-sufficiency, or our ability to deal with a severe food crisis (and indeed, the report's authors say they have not predicted any such fate for Britain). We buy in food, but we export a lot too. Scotland turns 60% of its wheat into whisky - but that's not a bad thing for the food economy or for human happiness.

When it comes to meeting our food needs (see DEFRA's statistics) we are in fact a much healthier 60% self-sufficient, and if you look at foodstuffs which it is possible to produce in Britain that figure rises to 73%. These figures are higher now than in almost any decade in the 20th century.

There's no doubt that globally prices will continue to rise, and that food shortages are one of the grave, interlinked challenges that face us this century, but it really isn't as dire in Britain as it is in, say, parts of Africa. Is this report proof that we have to rush and embrace GM, as the Observer's science editor Robin McKie suggests?

Our food economy looks far less healthy than it could because of our demands for exotica (salad all year round, cheap fruit from the tropics, protein from the other side of the planet) and our fabulous capacity for waste. 30% of our food is thrown away according to the government's WRAP project - largely by supermarkets and food processors, but also by individuals, as Tony Naylor's piece for this blog today demonstrates. Sort these out and in this country we would be more capable of feeding ourselves.

And there may lie the most interesting potential solution: one of the Chatham House report's most striking statistics concerns the dire state of our agricultural economy, with 63% of our farms unable to make "good" profit margins. Who's to blame? The reports doesn't directly finger the big retailers, but it does point out the undesirability of having 4 companies control 75% of food retail and continually strive to drive down farm-gate prices.

This chimes with a piece in this month's Prospect magazine, where the right-wing thinker Phillip Blond's prescription for a radical "red Tory" manifesto includes breaking up Tesco for the good of consumers, producers, high streets and jobs.

So - is a Britain self-sufficient in food possible, or even desirable? Could you cut out Chilean asparagus and New Zealand lamb? How about bananas? A lot of poorer countries need to sell fresh food to us. Would you be prepared to pay more for your food if it guaranteed getting British farming back on its feet? And is GM really the answer?

http://www.guardian.co.uk/lifeandstyle/wordofmouth/2009/feb/03/chatham-house-britain-food-shortage

[HUSS]

There seems to be a massive push for global unity and the redistribution of wealth.



Fisheries Collapse Imperils Developing Nations’ Food, Jobs

http://www.bloomberg.com/apps/news?pid=20601086&sid=az0dHysHjvPs&refer=latin_america

By Jeremy van Loon and Alex Emery

Feb. 5 (Bloomberg) -- The risk of fisheries collapsing in Peru, the world’s largest fishmeal producer, and developing nations such as Senegal that depend on fish for both food and jobs means economic hardship as climate change threatens fishing grounds.

About 33 countries in Latin America, Africa and Asia are “highly vulnerable” to rising ocean temperatures, changes in river flows and less precipitation, said Allison Perry of the World Fish Center, who co-wrote a study that looked at the economic risks to fisheries in countries affected by changing weather.

The world’s poorest countries are less able to adapt to these changes because they lack the financial resources to replace a food source and an industry that contributes more to economic activity than in wealthier nations. “Many of these countries are simply not in a position to adapt and implement measures,” Perry said.

Peru exports mainly to China, Spain and the U.S. The South American nation boosted fishing exports last year by 23 percent to a record $2.4 billion, including $1.4 billion in fishmeal. While anchovy is its main export, Peru has been working to diversify into frozen, fresh and canned fish exports, including squid and shrimp.

Fishing is Peru’s fourth-biggest export earner after mining, oil and gas with about 145,000 people out of a population of 28 million making a living off the industry, government data shows.

Senegal, a country with a per capita gross domestic product of about $1,000, relies on its fishery for a fifth of its exports. At the same time, fish provides 43 percent of the animal protein for the average Senegalese, Perry said in an interview.

The bleaching of coral reefs, home to many species of tropical fish, rising temperatures in lakes and less precipitation are harming both freshwater and marine fisheries worldwide, she said.

Atlantic Sturgeon’s Extinction

Fisheries are already suffering from over-exploitation of fish stocks with the extinction of the Atlantic sturgeon in the U.S.’s Chesapeake Bay. While the impact of climate change on fisheries will be more severe in higher latitudes, it is poorer countries closer to the equator that are less prepared to cope, Perry said.

More than half of the world’s fisheries are exploited beyond their harvest capacity, threatening to reduce fish stocks to dangerous levels, the UN’s Environment Program said. About 2.6 billion people’s main source of protein comes from fish, UNEP said.

Global warming and climate change put additional stresses on fishing grounds and may destroy commercial fisheries in the coming years as ocean currents are disrupted and seas become more acidic, UNEP reported last year. Oceans are absorbing rising levels of carbon dioxide, raising their acidity levels, while global warming increases surface temperatures. Both harm fish populations.

[HUSS]

http://www.startribune.com/nation/39123382.html?elr=KArksLckD8EQDUoaEyqyP4O:DW3ckUiD3aPc:_Yyc:aUUsZ

China declares emergency in areas where drought threatens crops; 4 million lack drinking water

Associated Press

Last update: February 5, 2009 - 4:13 AM


BEIJING - China declared an emergency Thursday in eight provinces suffering a serious drought that has left nearly 4 million people without proper drinking water and is threatening millions of acres of crops.

The Office of State Flood Control and Drought Relief posted a notice on its Web site declaring the situation a level-two emergency on the country's four-level scale. It called it a drought "rarely seen in history."

The official Xinhua News Agency reported that President Hu Jintao and Premier Wen Jiabao had ordered all-out efforts to fight the drought at a Cabinet meeting Thursday. It said the government had allocated 400 million yuan ($58.5 million) for relief work.

China suffers from an uneven distribution of its water resources. Weather patterns in the arid north and flood-prone south cost the government tens of millions of dollars in lost productivity each year.

The latest drought began in November and has affected 24 million acres (9.73 million hectares) of crops, one-third of them seriously, Xinhua said. Most of the hardest-hit provinces were in northern China, with several in the east.

In recent days, news broadcasts have shown dry, cracked farm fields and crops withering in the ground.

Almost half of the wheat-growing areas in the eight provinces — Hebei, Shanxi, Anhui, Jiangsu, Henan, Shandong, Shaanxi and Gansu — were threatened, Xinhua said, while nearly 4 million people lacked proper drinking water.

The official China Daily newspaper, citing meteorological authorities in Henan, said it was the worst drought in Henan since 1951 and that the province, a major supplier of winter wheat, had gone 105 consecutive days without rain.

But some relief may be in sight. Weather forecasts call for rain and snow in some of the stricken areas beginning Saturday.

[HUSS]

http://www.youtube.com/watch?v=aOyyRhJRsy8

The British government faces an excruciating choice. It cannot let Royal Bank of Scotland and its fellow mega-banks go to the wall. Yet it risks being swamped by the massive foreign debts of these lenders if it takes on their dollar, euro and yen exposure by opting for full nationalisation. Britain has foreign reserves of under $61bn dollars (£43.7bn), less than Malaysia or Thailand. The foreign liabilities of the UK banks are $4.4 trillion – or twice annual GDP – according to the Bank of England. The mismatch is perilous.It is why sterling has crashed 10 cents from $1.49 to $1.39 against the dollar in two days. The markets have given their verdict on Gordon Brown’s latest effort to “save the world”.If Britain walked away from UK banks’ $4.4 trillion of foreign liabilities – worth eight times Lehman Brothers – it would destroy the credibility of the City and take the whole world into deeper depression.

“The UK cannot go down that route because it would set off an asset price death spiral,” said Marc Ostwald, a bond expert at Monument Securities. “The Western banking system is already on life support. That would turn it off altogether.”

http://www.timesonline.co.uk/tol/comment/article5559773.ece

Jim Rogers: 'Sell any sterling you might have. It's finished'

http://www.independent.co.uk/news/business/news/jim-rogers-sell-any-sterling-you-might-have-its-finished-1452384.html

They don’t know what they’re doing, do they? I am of the opinion they know exactly what they are doing! With every step taken by the Government as it tries frantically to prop up the British banking system, this central truth becomes ever more obvious.Yesterday marked a new low for all involved, even by the standards of this crisis.

Britons woke to news of the enormity of the fresh horrors in store. Despite all the sophistry and outdated boom-era terminology from experts, I think a far greater number of people than is imagined grasp at root what is happening here. If this is the way to implement a new world order, then it will be born from this economic catastrophe.

[Crafty_Dog]

Huss:

Sorry to be anal again, but wouldn't that post about China be better in the China thread?   

[HUSS]

Huss:

Sorry to be anal again, but wouldn't that post about China be better in the China thread?   

on its own, of course.  But with in the context of the other articles it leads me to beleive that there are those out there that are attempting to tie all these events together into a super crisis in an effort to push a whole new system on us all.

[Crafty_Dog]

By GEORGE MELLOAN
As Congress blithely ushers its trillion dollar "stimulus" package toward law and the U.S. Treasury prepares to begin writing checks on this vast new appropriation, it might be wise to ask a simple question: Who's going to finance it?

 
Chad CroweThat might seem like a no-brainer, which perhaps explains why no one has bothered to ask. Treasury securities are selling at high prices and finding buyers even though yields are low, hovering below 3% for 10-year notes. Congress is able to assure itself that it will finance the stimulus with cheap credit. But how long will credit be cheap? Will it still be when the Treasury is scrounging around in the international credit markets six months or a year from now? That seems highly unlikely.

Let's have a look at the credit market. Treasurys have been strong because the stock market collapse and the mortgage-backed securities fiasco sent the whole world running for safety. The best looking port in the storm, as usual, was U.S. Treasury paper. That is what gave the dollar and Treasury securities the lift they now enjoy.

But that surge was a one-time event and doesn't necessarily mean that a big new batch of Treasury securities will find an equally strong market. Most likely it won't as the global economy spirals downward.

The Opinion Journal Widget
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For one thing, a very important cycle has been interrupted by the crash. For years, the U.S. has run large trade deficits with China and Japan and those two countries have invested their surpluses mostly in U.S. Treasury securities. Their holdings are enormous: As of Nov. 30 last year, China held $682 billion in Treasurys, a sharp rise from $459 billion a year earlier. Japan had reduced its holdings, to $577 billion from $590 billion a year earlier, but remains a huge creditor. The two account for almost 65% of total Treasury securities held by foreign owners, 19% of the total U.S. national debt, and over 30% of Treasurys held by the public.

In the lush years of the U.S. credit boom, it was rationalized that this circular arrangement was good for all concerned. Exports fueled China's rapid economic growth and created jobs for its huge work force, American workers could raise their living standards by buying cheap Chinese goods. China's dollar surplus gave the U.S. Treasury a captive pool of investment to finance congressional deficits. It was argued, persuasively, that China and Japan had no choice but to buy U.S. bonds if they wanted to keep their exports to the U.S. flowing. They also would hurt their own interests if they tried to unload Treasurys because that would send the value of their remaining holdings down.

But what if they stopped buying bonds not out of choice but because they were out of money? The virtuous circle so much praised would be broken. Something like that seems to be happening now. As the recession deepens, U.S. consumers are spending less, even on cheap Chinese goods and certainly on Japanese cars and electronic products. Japan, already a smaller market for U.S. debt last November, is now suffering what some have described as "free fall" in industrial production. Its two champions, Toyota and Sony, are faltering badly. China's growth also is slowing, and it is plagued by rising unemployment.

American officials seem not to have noticed this abrupt and dangerous change in global patterns of trade and finance. The new Treasury secretary, Timothy Geithner, at his Senate confirmation hearing harped on that old Treasury mantra about China "manipulating" its currency to gain trade advantage. Vice President Joe Biden followed up with a further lecture to the Chinese but said the U.S. will not move "unilaterally" to keep out Chinese exports. One would hope not "unilaterally" or any other way if the U.S. hopes to keep flogging its Treasurys to the Chinese.

The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion this fiscal year. That's more than double the $455 billion deficit posted for fiscal 2008, and some private estimates put the likely outcome even higher. That will drive up interest costs in the federal budget even if Treasury yields stay low. But if a drop in world market demand for Treasurys sends borrowing costs upward, there could be a ballooning of the interest cost line in the budget that will worsen an already frightening outlook. Credit for the rest of the economy will become more dear as well, worsening the recession. Treasury's Wednesday announcement that it will sell a record $67 billion in notes and bonds next week and $493 billion in this quarter weakened Treasury prices, revealing market sensitivity to heavy financing.

So what is the outlook? The stimulus package is rolling through Congress like an express train packed with goodies, so an enormous deficit seems to be a given. Entitlements will go up instead of being brought under better control, auguring big future deficits. Where will the Treasury find all those trillions in a depressed world economy?

There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more.

And what will be the result? Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next.

Even when the economy and the securities markets are sluggish, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.

Inflation is the product of the demand for money as well as of the supply. And if the Fed finances federal deficits in a moribund economy, it can create more money than the economy can use. The result is "stagflation," a term coined to describe the 1970s experience. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package.

Mr. Melloan is a former deputy editor of the Journal's editorial page.

 

[Body-by-Guinness]

February 6, 2009
Welfare Spendathon: House Stimulus Bill Will Cost Taxpayers $787 Billion in New Welfare Spending
by Robert E. Rector
WebMemo #2276
The recently passed U.S. House of Representatives stimulus bill contains $816 billion in new spending and tax cuts. Of this sum, $264 billion (32 percent) is new means-tested welfare spending. This represents about $6,700 in new welfare spending for every poor person in the U.S.

But this welfare spending is only the tip of the iceberg. The bill sets in motion another $523 billion in new welfare spending that is hidden by budgetary gimmicks. If the bill is enacted, the total 10-year extra welfare cost is likely to be $787 billion.

The claim that Congress is temporarily increasing welfare spending for Keynesian purposes (to spark the economy by boosting consumer spending) is a red herring. The real goal is to get "the camel's nose under the tent" for a massive permanent expansion of the welfare state.

In the first year after enactment of the stimulus bill, federal welfare spending will explode upward by more than 20 percent, rising from $491 billion in FY 2008 to $601 billion in FY 2009. This one-year explosion in welfare spending is, by far, the largest in U.S. history. But spending will continue to rise even further in future years. The stimulus bill is a welfare spendathon, a massive down payment on Obama's promise to "spread the wealth."

Once the hidden welfare spending in the bill is counted, the total 10-year fiscal burden (added to the national debt) will not be $816 billion, as claimed, but $1.34 trillion. This amounts to $17,400 for each household paying income tax in the U.S.

Even without the extra spending in the stimulus bill, means-tested welfare spending is already at a historic high and growing rapidly. In 2008, federal, state, and local means-tested spending hit $679 billion per year. Without any legislative expansions, given historic rates of growth in welfare programs, federal, state, and local means-tested welfare spending over the next decade will total $8.97 trillion. The House stimulus bill adds another $787 billion to this total, yielding a 10-year total of $9.8 trillion. The total 10-year cost of means-tested welfare will then amount to $127,000 for each household paying federal income tax.

The Current Welfare System

Means-tested welfare spending programs give cash, food, housing, medical care, and targeted social services to poor and low income persons. In a means-tested program, benefits are limited to persons below a specified income level. The cutoff income level varies from program to program but is typically less than 150 percent of poverty, or around $33,000 per year for a family of four.

For example, food stamps and public housing are means-tested (or limited to lower-income persons) while Social Security and postal service are not. Means-tested welfare also includes "refundable" tax credits. With a refundable credit program, the government gives cash grants to persons who owe no income tax. Like conventional means-tested programs, refundable credits give aid to poor and lower income persons. Federal welfare spending also includes targeted grants to schools with large numbers of poor students. (This is a relatively small portion of overall federal welfare spending.)

The federal government runs over 50 means-tested welfare programs, including Temporary Assistance to Needy Families; Medicaid, food stamps; the Earned Income Tax Credit (EITC); the Women, Infants, and Children food program; public housing; Section 8 housing; the Community Development Block Grant; the Social Services Block Grant; and Head Start.

New Welfare in the Stimulus Bill

The House stimulus bill overtly increases federal welfare spending by $264 billion. Most of this spending will occur in the first two years after passage. For example, if enacted, the House stimulus bill will spend an additional $88 billion in means-tested welfare aid in FY 2009, an increase of more than 20 percent above prior spending levels. Federal welfare spending (including small increases built into existing law) will rise from $491 billion in FY 2008 to $601 billion in FY 2009. This one-year spending explosion (by far the largest in U.S. history) will not be a byproduct of unemployment generated by the recession but the result of a deliberate expansion of welfare eligibility and benefits by President Obama and Congress.

Camel's Nose in the Tent

While $264 billion in new welfare spending may seem like a lot, it is only the tip of the iceberg. If the stimulus bill is enacted, the real long-term increase will be far higher. This is because the stimulus bill pretends that most of its welfare benefit increases will lapse after two years. In fact, both Congress and President Obama intend for most of these increases to become permanent.[1] The claim that Congress is temporarily increasing welfare spending for Keynesian purposes (to spark the economy by boosting consumer spending) is a red herring. The real goal is a permanent expansion of the welfare system.

The notion that Congress intends to temporarily increase Pell grants and EITC benefit levels for just two years and then allow benefits to fall back to their original status is out of touch with Washington reality. Any Congressman who, two years from now, suggests that the new welfare spending be allowed to lapse to pre-stimulus levels would be pilloried for slashing welfare.

"Spread the Wealth" Tax Credit

A major new welfare program in the stimulus bill is Obama's "Make Work Pay" refundable tax credit. This credit represents a fundamental shift in welfare policy. At a cost of around $23 billion per year, this credit will provide up to $500 in cash to low income adults who pay no income taxes. For the first time, the government will give significant cash to able-bodied adults without dependent children. Since most of these individuals have little apparent need for assistance, the new credit represents "spreading the wealth" for its own sake.

The lack of connection between this credit and "economic stimulus" is evident in the fact that the first payments under the program will not be made until April 2010.[2] This refundable credit is not included in the stimulus bill because of its "stimulus" effect. Instead, the inclusion of this new welfare program makes good on an Obama presidential campaign promise. While the stimulus bill claims this new credit will terminate after two years, President Obama and the congressional leadership clearly intend it to be a permanent part of a new, much larger welfare state.

Hidden Welfare Spending

There are another six welfare expansions in the stimulus bill that will almost certainly become permanent if the bill is enacted. These include expansions to food stamps, the EITC, the refundable child credit, Medicaid eligibility standards, Pell grants, and Title I education grants. Added to the "Make Work Pay" refundable credit, the aggregate annual cost of these welfare expansions will be nearly $60 billion per year.

The claim that these welfare expansions in the stimulus bill will lapse after two years is a political gimmick designed to hide their true cost from the taxpayer. If these welfare expansions are made permanent--as history indicates they will--the welfare cost of the stimulus will rise another $523 billion over 10 years.[3] The total 10-year cost of welfare increases in the bill will not be $264 billion but $787 billion. The overall 10-year fiscal burden of the bill (added to the national debt) will not be $814 billion but $1.34 trillion.

Welfare Spending Already at Historic High

Even without the stimulus bill, means-tested welfare spending in the U.S. is already at a historic high and growing rapidly. In 2008, federal, state, and local means-tested spending hit $679 billion per year. This vast outlay was the result of a fairly steady growth in welfare spending over the last two decades and is not a temporary surge due to the recession.[4] Without any legislative expansions, given historic rates of growth in welfare programs, federal, state, and local means-tested welfare spending over the next decade will total $8.97 trillion.[5] The House stimulus bill will add another $787 billion to this total, yielding a 10-year total of $9.8 trillion. The total 10-year cost of means-tested welfare will amount to $127,000 for each household paying federal income tax.

A Trojan Horse

The welfare provisions in the Senate stimulus bill are very similar to those in the House bill. Both bills use the idea of economic stimulus as a Trojan horse to conceal massive, permanent increases in the U.S. welfare system. The goal of the bills is "spreading the wealth," not reviving the economy.

Robert E. Rector is Senior Research Fellow in the Domestic Policy Studies Department and Katherine Bradley is a Research Fellow in the DeVos Center for Religion and Civil Society, at The Heritage Foundation.


[1]The one exception is the increase Federal Medical Assistance Percentage (FMAP) in the Medicaid. The House bill temporarily increases the FMAP which determines the share of Medicaid spending paid by the federal government, resulting in a cost of $88 billion to the federal government over two years. This expenditure represents a massive financial bailout of state governments. It is likely to result in some increase in aggregate Medicaid spending and some displacement of state Medicaid spending; the increase in FMAP is unlikely to become permanent.

[2]The other refundable credits in the bill will also have little spending effect before 2010.

[3]Assumes a 4 percent annual increase in the outlays of these provisions.

[4]Many conservatives have fooled themselves into thinking that the growth of the welfare state was ended by the "welfare reform" of 1996. In fact, welfare reform affected only one federal welfare program out of 50; the rest of the welfare state was unaffected.

[5] Assumes a 5 percent annual growth in current outlays; this is less than the historic average.

http://www.heritage.org/Research/Economy/wm2276.cfm

[SB_Mig]

The right-wing New Deal conniption fit

For the editors of the Wall Street Journal, the spectacle of a major government spending program aimed at combating a severe recession is evidently a nightmare beyond belief, complete with a popular interventionist-leaning president, Democratic majorities in both the Senate and the House, and, scariest of all, a legion of zombie back-from-the-dead Keynesian economist holy warriors. How else to explain the paper's increasingly shrill declarations that the New Deal absolutely, positively did not work?

The latest salvo came Monday morning in a piece by two economists, Harold L. Cole and Lee. E. Ohanian: "How Government Prolonged the Depression."

Defenders of the New Deal will find much to argue with in Cole and Ohanion's account, but for simplicity's sake, I am going to zero in on just one point -- the impact of the New Deal on unemployment.

Cole and Ohanian:

    The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office.

How can one make this claim? Unemployment reached 25 percent in the Great Depression, and fell steadily until World War II (although there were some bumps up along the way). Ah, but the revisionist position is that unemployment did not fall as much as it should have. And this argument is based on an interesting interpretation of the available data. As Amity Shlaes, currently the premier anti-New Deal historical revisionist writing for a popular audience, explained proudly in her own Wall Street Journal opinion piece in November, "The Krugman Recipe for Depression," a necessary step is to not count as employed those people in "temporary jobs in emergency programs."

That means, everyone who got a job during the Great Depression via the Works Progress Administration (WPA) or Civilian Conservation Corps (CCC), or any other of Roosevelt's popular New Deal workfare programs, doesn't get counted as employed in the statistics used by Cole, Ohanian and Shlaes.

Let us reflect, for a moment, on what the men and women employed by those programs achieved (aside from earning cash to buy food and pay for shelter, of course). In his paper, "Time for a New, New Deal," Marshall Auerback (pointed to by economist James Galbraith) summarizes:

    The government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York's Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown.

    It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country's entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.

In other words, millions of men and women earned a living wage and self-respect and contributed mightily to the national infrastructure. But, according to the statistics as interpreted on the Wall Street Journal editorial page, they were unemployed.

Way back in 1976, economist Michael Darby exposed the absurdity of not counting WPA workers as "employed" in his paper "Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934-1941." More than 30 years ago, Darby observed that correctly counting those 3 and a half million people as employed workers effectively debunked "the 'un-fact' that recovery was extremely slow from 1934 through 1941. From 1933 to 1936, the corrected unemployment rate fell by nearly 5 percentage points per year..."

Shlaes dismisses Darby's reappraisal of Great Depression unemployment statistics by arguing that "to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects."

Of course, some would argue that "masking the anxiety" of workers who did not know how they were going to feed their children or put a roof over their heads is precisely the job of government in times of great economic turmoil. And that, really, is where the whole project of New Deal revisionism breaks down.

The bottom line conservative position on the New Deal is that, theoretically speaking, the economy would have returned to "normal" more quickly if FDR had refrained from interfering with the workings of the free market through his vast array of interventionist programs. Sadly for them, we never got a chance to find out, because the situation in 1933, when Roosevelt took office, demanded government action. Twenty-five percent of the nation was unemployed. Human suffering was immense. If the market had been left to work its problems out all by itself, further suffering in the near term would have been unimaginable. And not just unimaginable -- but also politically unacceptable.

If the New Deal actually extended the Great Depression, we might wonder, why was Roosevelt reelected three times? One explanation would be that the general public is an idiot, and I must confess, I've leaned toward that point of view myself after viewing the aftermath of Election Day in the U.S. on a number of occasions over the last three decades. But another explanation could be that a majority of voters experienced material improvements in the quality of their lives as a result of New Deal programs. This is a point of enduring frustration to conservatives, and they've expended vast effort over the years in their attempt to rewrite history and convince us that what our grandparents knew was wrong -- to the point that they've even tried to tell us that the people who built the fantastic Art Deco structures at the high school my daughter is currently attending were "unemployed."

I do not think those workers would have agreed.

Andrew Leonard

[G M]

If "giving" everyone a government job is so great, then why not "give" everyone a free house and a million dollars as well? Now that would be a stimulus!