Jay Reding.com

Mitch Berg takes a rhetorical baseball bat to a Star-Tribune op-ed calling for a new New Deal. Columnist Bob MacLean thinks that the US badly needs a make-work program to “rebuild infrastructure”—a theory which Berg manages to tear apart with aplomb. The columnist suggests the following:

Let’s use the $150 billion currently proposed for rebates and corporate welfare to instead fund an 18-month infrastructure and government-efficiency initiative. This initiative — call it IGE — would be a contemporary version of the indisputably successful WPA program launched in 1935 by presidential order to cure economic depression.

First of all, the idea that the WPA was “indisputably successful” is wrong—in fact, there’s been a significant amount of economic research supporting the contention that the New Deal in fact made the Great Depression worse by preventing the normal market mechanisms from restoring normal employment. In fact, throughout the Depression and the height of the New Deal, unemployment remained incredibly high. For those who could get jobs, wages were propped artificially but that came at the expense of wider employment—the lowest the unemployment rate ever got during the New Deal period was around 14%, and in fact unemployment peaked again in the late 1930s despite all of Roosevelt’s programs. What truly ended the Great Depression was not the New Deal but the outbreak of World War II.

Even if we ignore the data and take the popular view, MacLean’s argument still doesn’t make much sense. Berg points out the obvious: do we really want unemployed mortgage brokers and software engineers either doing engineering inspections or digging ditches? Either you’re taking skilled labor and making it do unskilled work or taking skilled labor and putting it into a position where all those skills are wasted. It makes absolutely no sense, and it’s why such programs are completely worthless as an economic stimulus. How do you advance an economy by taking skilled labor and turning it into unskilled labor? The short answer is you don’t. Digging ditches does not prepare a worker for competing in the 21st Century.

Then there’s the fact that this is an 18 month program. If the real purpose is to reduce unemployment over the long term, then what’s the point? You’ve taken people with marketable skills and taken them out of the skilled labor pool for 18 months, putting them even further behind. The fatal flaw in this theory is the completely ridiculous assumption that the amount of productive work in digging ditches for 18 months is greater than the amount of productive work that people could get in the free market. That’s not a very intelligent argument, and it belies the kind of economic illiteracy seen frequently from the left.

If the goal was really to reduce unemployment, there’s a case to be made for funding worker retraining programs to increase the pool of skilled workers. If the goal is to increase domestic employment in unskilled or semi-skilled labor, the quickest way to do that is to start enforcing immigration laws—the effects of that alone would be a dramatic increase in the number of open jobs.

Instead, this is an example of trying to return America to the days when Fabian socialism was an active part of American politics—which is why we constantly hear the drumbeat of economic despair from the left. If there’s a crisis, then their radical ideas can have more of a purchase. When things are looking up, there’s less of a need for radical government intervention. Ironically, the party that once said “we have nothing to fear but fear itself” now has an economic position that requires scaring the American people into accepting radical policies.

Dave Kopel blasts into the Bush-Pelosi “stimulus package” at The Volokh Conspiracy:

Here’s how to deal with a recession: A federal government which is already spending more than its income should borrow even more money, so as to give lots of people a tax rebate. This is the bipartisan plan of President Bush and Congress. They are taking a leaf from the presidency of Jimmy Carter.

Even accounting for inflation, the Bush-Reid-Pelosi rebate is far more profligate than the proposed Carter rebate of 1977. But the two rebates appear to be based on the same demand-side principles.

He’s right on that. The “stimulus package” is great politics, but absolutely horrendous policy. When we’re already running the budget into the ground, the last thing this country should be doing is trying to jump-start the economy by giving everyone a check. It’s a bit of “bread and circuses” politics that demonstrates just how economically illiterate the government is.

Middle class voters are feeling a squeeze, but that’s a symptom of a larger problem. The reason why the dollar is falling and the markets are volitile is because the US is on an economically unsustainable course: we’re spending too much, regulating too much and we have a massive entitlement crisis looming and no one has the political will to touch it. When even the French are being more fiscally responsible than we are there is a serious problem.

A realistic stimulus plan would involve significant cuts in spending, making the current tax rates permanent, and structural economic reforms like ensuring that depreciation tables don’t artificially increase the taxable assets of a business. However, none of those things are particularly “sexy” and don’t have much impact to the average voter. So instead, President Bush and Congress are planning to bribe the American people.

In the end, this plan is ultimately self-defeating. We can’t get out a problem created by fiscal profligacy by being even more profligate—and while a tax rebate check is a nice thing to have, it’s not going to have the long-term effect necessary to lift the economy. Even if we do get some economic stability in the next few months, that’s more likely due to the sub-prime crisis easing rather than some government check.

This isn’t a stimulus package, it’s a bribe, and while it may be politically popular, it’s not going to fix our underlying economic problems.

Larry Kudlow has effusive praise for the Fed’s massive rate cut which slashed interest rates this morning.

I’m not so sure. Right now the markets are panicking, and such a massive rate cut reinforces the idea that there’s some major short-term problem on the horizon. We got into this mess because of over-lending, and it’s hard to imagine how over-lending will get us out of it. The markets are correcting, which is what a market should do in this situation. What I’m concerned about is that the Fed has bought into the panic psychology and is trying to get a quick fix in that will make things worse rather than letting the storm pass.

A rate cut and an economic stimulus package are both short-term solutions that will only blunt the effects of an economic downturn. We have a set of policies that are based on trying to calm fears in an election year rather than making the set of structural reforms that would actually solve the underlying problems in the US economy.

There are things that can be done—such as reducing taxes on business assets, fixing depreciation tables and reducing unnecessary regulation. Instead, we’ll get a “stimulus” in the form of a couple hundred dollars in tax rebates that will end up being used to pay down credit cards and the like. Depreciation tables don’t make for good campaign ads, but tax rebates do, even though tax rebates don’t do anything to fix recessions.

The fundamentals of the US economy remain strong, but the Fed keeps sending the wrong signal and is feeding the global panic. Even if an additional shot of liquidity is the right prescription, the Fed’s dramatic rate cut may only make nervous investors even more skittish rather than reassuring them into stopping the fall of global markets.

Glenn Reynolds republishes an interesting email on how Sarbanes-Oxley compliance impacts technical workers:

It got much worse after Sarbanes-Oxley. Suddenly we revamped all our processes to include “separation of duties” and other constraints ostensibly to prevent the merest possibility of fraud. But not really of course: really to provide ass-coverage at every level. But this applies as well in all sorts of situations where fraud is not an issue, like developers testing their code. The effect where I work has been disastrous.

People respond to incentives, and incentives were distorted at every level by SOX requirements.

That’s precisely the problem. Sarbanes-Oxley was the financial equivalent of the PATRIOT Act—a piece of federal legislation rushed through in the face of a crisis that gave broad powers to federal agencies with little oversight so that Congress could say that they “did something.” Even while both were reactions to legitimate crises, their effects have far-reaching well beyond their original purposes. SOX has added millions of compliance costs to all sorts of businesses, and it’s small- to medium-sized businesses that bear the brunt of this. IBM can pay millions for regulatory compliance. Joe’s Computer Equipment cannot.

Congress needs to consider the economic effects of legislation like SOX first. The problem is that nobody actually reads these bills, and even if they did they don’t have the analytic will to understand them. Congresspeople, being politicians, tend to react to emotional stories rather than hard data. Congressional staffers tend to do the same. It’s hard to concern yourself about future competitiveness when you have to deal with constituents who lost all their money to Enron.

The sad part of all this is that things have to get markedly worse before they’re at all likely to get better. Congress will only react when there’s a crisis. A political Machiavellian would try to manufacture one, but even when there’s a real crisis on the horizon, Congress doesn’t react unless it’s imminent. (Think Social Security.) Things won’t get better until Asia starts eating America’s lunch. Even worse is that the day in which that starts happening may be within our lifetimes.

Ed Morrissey finds that financial advisors are worried about a Democrat in the White House more than the housing bubble bursting:

[Advisors are] less concerned about recession than dealing with the economic policies of a new Clinton administration. They fear that a big increase in taxes will erode equity investments, especially given the proclivity of Democrats to target equity funds for new taxes to pay for their increased spending. Eighty-one percent feel that Democrats will raise capital gains taxes, income taxes, and dividends.

In the Financial Times, left-wing Representative Barney Frank gives them plenty of reason to be afraid. Rep. Frank wants to turn back the clock on 20 years of strong economic growth and wants to increase the regulatory strictures that threaten the future of the US economy:

Democrats believe that government’s role as regulator is essential in maintaining confidence in the integrity and fairness of markets, and we believe that economic growth alone is not enough to reverse unacceptable levels of income inequality. In the wake of the subprime mortgage crisis, credit markets round the world contracted sharply in response to concerns among market participants about the value of exotic and opaque securities being offered in largely unregulated secondary markets. This staggering implosion and its damaging and widespread reverberations make it clear that a mature capitalist economy is as likely to suffer from too little regulation as from too much.

The reality is that the US economy is highly over-regulated, especially in the wake of Sarbanes-Oxley, which created massive new regulatory structures without much consideration of their impacts. This is a global economy. Jobs which could be created here can just as easily be created in London, Dubai or Hong Kong. The more we add to the regulatory burden, the more incentives there are for companies to create jobs elsewhere. The more regulatory burdens put on small businesses, the lower job growth. The US has the second-highest corporate tax rate in the industrialized world—even socialist Sweden does not tax corporations at the rates we do.

With increasing unemployment and a falling dollar, the very last thing that government should be doing is adding more anchors to economic growth. There is an inverse relationship between burdensome regulation and economic growth. It is somewhat ironic that just as a center-right movement towards more economic freedom seems to be sweeping Europe that opportunistic politicians in the United States would be charting a retrograde course.

There are two major burdens to America’s future: one is regulation, and the other is a failing educational system. Politicians like Rep. Frank are making these problems even worse. It’s hardly surprising why financial advisors would fear a Democratic sweep in Washington: if the Democrats embraced such bad economic advice, our current economic problems could easily be just the beginning of the story.