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Stimulating A Government That WorksIt’s called the “stimulus” and it’s the rebirth of the “new big old thing” in Economics. The problem with Economicsis that despite all the solemnity and statistics the average Economics professor can muster, it remains less a sciencethan an art. Scientists can develop theories and then validate them. Einstein’s theory of relativity was followed by a burst of experimental activity in 1916. Economics, however, has so many factors that any “experiment” per se can be instantly discounted due to any number of compromising conditions.In the field of economics Keynesian policies fell out of favor in the 1970s, as government spending was blamed for helping to spur inflation around the world. Monetary policy became the rage and that is why we heard so much of Alan Greenspan and his raising and lowering of interest rates. Well that idea died last year when the effectiveinterest rate was lowered to zero and the economy continued to tank.So with the global economic turmoil being compared to the 1930s, Economists have dusted off the old Keynes playbook and government spending is once again back in vogue. British economist John Maynard Keynes(pronounced "canes"), argued that governments should fight the Great Depression in the 1930s with heavy spending.With consumer and business spending so weak, he argued, governments had to boost demand directly. There is evena particular formula for how much one should spend and the Obama stimulus bill falls into that parameter of whatthat number is. Will it work? Some economists think so, but unfortunately a lot more don’t – note the list the CatoInstitute published in today’s WSJ (February 9, 2009). The ones who think so usually have some connection togovernment or are Obama cheerleaders like Paul Krugman who writes for the NY Times (I like the Times baseballwriters though -- better than the Post, but I digress).I think it could work, were the Stimulus Bill to be more faithful to Keynesian theory by having the governmentspending support projects that will have an effect on the private economy. Unfortunately the government spending isgoing to support, well, government.Here are some of the more blatant examples of the “self-stimulus” that the Dems are planning to foist on anunsuspecting public:“Title VI, Financial Services and General Government, says that "not less than $6,000,000,000shall be used for construction, repair, and alteration of Federal buildings." There's enough moneythere to name a building after every Member of Congress.The Bureau of Land Management gets $325,000,000 to spend fixing federal land, including "trailrepair" and "remediation of abandoned mines or well sites," no doubt left over from the 19th-century land rush.The Centers for Disease Control and Prevention are getting $462,000,000 for "equipment,construction, and renovation of facilities, including necessary repairs and improvements to leasedlaboratories."The National Institute of Standards gets $357,000,000 for the "construction of research facilities."The Oceanic and Atmospheric Administration gets $427,000,000 for that. The country is in aneconomic meltdown and the federal government is redecorating.The FBI gets $75,000,000 for ‘salaries and expenses.’ Inside the $6,200,000,000 WeatherizationAssistance Program one finds ‘expenses’ of $500,000,000. How many bureaucrats does it take to‘expense’ a half-billion dollars?The current, Senate-amended version now lists ‘an additional amount to be deposited in theFederal Buildings Fund, $9,048,000,000.’ Of this, ‘not less than $6,000,000,000 shall be availablefor measures necessary to convert GSA facilities to High-Performance Green Buildings.’ High performance?”I should point out that “unsuspecting public” is a relative term. As this rotting fish gets aired out, more and more willrealize that the Dems have taken a national crisis (hell a world crisis) and used it to write a Christmas tree dreamwish list for the last twenty-five years they’ve been out of power. No time like the present, as they say. In about ayear the results will be in, Ms. Pelosi will be in the minority again, Mr. Obama will realize the promise of his presidency was killed by his nitwit political friends and we will have a Republican majority that will have lived

through these times with a humbled remembrance of their last shameful turn in power. One can only hope (I’m notholding my breath on that one).Then perhaps we can get on with the business of governing properly. Or the groundwork will be laid for a third partyalternative to these clowns and their culture of incompetency. We need a government that works, said PresidentObama on his Inauguration Day, and he raised a standard that the rats in his own party have now scurried under.He’s a very bright man and will hopefully learn from this sad chapter in our history.The next chapter begins in another year or so when a runaway inflation has gripped the country. People forgetRonald Reagan took office in the late ‘70’s when inflation was at 19 percent. Inflation is a thief, it steals from thecommon man and cripples his livelihood. According to George Melloan those days are coming back:“Treasurys (Treasury notes) 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 thestorm, as usual, was U.S. Treasury paper. That is what gave the dollar and Treasury securities thelift they now enjoy.But that surge was a one-time event and doesn't necessarily mean that a big new batch of Treasurysecurities will find an equally strong market. Most likely it won't as the global economy spiralsdownward.For one thing, a very important cycle has been interrupted by the crash. For years, the U.S. has runlarge trade deficits with China and Japan and those two countries have invested their surplusesmostly in U.S. Treasury securities. Their holdings are enormous: As of Nov. 30 last year, Chinaheld $682 billion in Treasurys, a sharp rise from $459 billion a year earlier. Japan had reduced itsholdings, to $577 billion from $590 billion a year earlier, but remains a huge creditor. The twoaccount 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 wasgood for all concerned. Exports fueled China's rapid economic growth and created jobs for itshuge work force, American workers could raise their living standards by buying cheap Chinesegoods. China's dollar surplus gave the U.S. Treasury a captive pool of investment to financecongressional deficits. It was argued, persuasively, that China and Japan had no choice but to buyU.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? Thevirtuous 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 andcertainly on Japanese cars and electronic products. Japan, already a smaller market for U.S. debtlast 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.… The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion thisfiscal 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 willworsen 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 insteadof being brought under better control, auguring big future deficits. Where will the Treasury find allthose trillions in a depressed world economy?

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Stimulating a Government That Works

America's greatest sports icon and future Hall of Famer looks at the yawning crypt of the “stimulus” and the rebirth of the “new big old thing” in Economics, that old gay cabal... (More)

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