Why The Economy Sucks

The news on the economy continues to be bleak—while unemployment is down from nearly hitting double digits, it’s still stuck well above the historical average. GDP growth continues to be sluggish. Businesses are skittish about hiring, which only adds to the troubles. Despite the yearly promises from the Obama Administration about a “recovery summer” (this year’s theme: “third time’s the charm, right?”) this summer is not looking to have much more economic growth than past summers. To put it succinctly: this economy blows.

But why? What is it that’s keeping the economy in the doldrums?

President Obama has his answer: it’s all George W. Bush’s fault. And a plurality of Americans even agree with that. The problem with that theory is Bush hasn’t been President for almost four years and all the things that he did that were supposedly so terrible (Foreign wars! Tax cuts for the rich! Wasteful government spending!) have all been ratified by the Obama Administration.

They’re All Keynesians Now

The other theory popular on the Democratic side and advanced by people like New York Times columnist Paul Krugman is that what we really need is massive government spending – or what economists would call “Keynesian stimulus.”

Keynesianism is named (appropriately enough) for John Maynard Keynes, a British economist and one of the most crucial (if frequently wrong) economic minds of the 20th Century. While Keynesian economic theory is far more advanced than could be explained in a blog post (no less one that anyone would want to read), the sort of “dimestore Keynesianism” that’s popular among today’s Democrats involves the simple theory that government spending produces economic growth.

Here’s how that theory is supposed to work: it posits that the reason why the economy sucks is because of a lack of “aggregate demand.” What that means in more conventional terms is that people aren’t buying enough shiznit. And because people aren’t buying enough shiznit, factories that make said shiznit aren’t running and are laying people off, and the economy is swirling the toilet.

That sounds pretty convincing at first blush – the reason why the economy sucks is because a lack of demand. It’s simple, it’s intuitive, but as I’ll get to later, it’s also wrong.

But first let’s look to what the dimestore Keynesians think is the solution. And they say that if the problem is a lack of aggregate demand, let’s stimulate demand! We take all those unemployed workers and we put them to work on “shovel-ready” jobs. They work for 8 hours a day repairing infrastructure and the government gives them a paycheck for it. Then, they go out and spend that paycheck, which creates demand. Suddenly those people are buying shiznit again, and the shiznit factories are producing their shiznit again, and the economy restarts.

Again, on the surface this all makes sense – it’s a nice and simple description of the problem, it’s a nice and simple solution, and maybe it just might work.

But it doesn’t.

The Economy Is Turning Japanese

In fact, we know that demand stimulus doesn’t work. It’s been tried before. In the 1990s, Japan’s economy took a nosedive after a major financial crisis and a housing bubble. (Sound familiar?) So the Japanese government engaged in a massive orgy of spending. (Sound familiar again?—and I mean the spending part, not the “Japanese orgy” part…) And what was the result? The Japanese economy went into a “lost decade” in which economic growth stagnated.

In 2009, President Obama passed the American Reinvestment and Recovery Act that was supposed to have created thousands of “shovel-ready” jobs and get the economy moving again. Obviously, it didn’t. Instead, unemployment continued to increase at a much higher rate than predicted. Even President Obama was forced to admit that those “shovel-ready jobs” weren’t exactly “shovel ready.” The stimulus didn’t produce the kind of job growth or GDP growth that President Obama promised. But why?

On the surface, Keynesianism makes sense, if you want to get the economy moving, get people jobs and get them to spend money. But once you scratch the surface, it all falls apart. Reason explains why in discussing the Japanese stimulus efforts:

In an attempt to encourage growth, the Japanese embarked on a massive, multi-billion-yen infrastructure program. They built roads, bridges, and airports, all with the goal of creating jobs and reviving the economy. This didn’t work either.

During the 1990s, Japan passed 10 fiscal stimulus packages, focused largely on public works, totaling more than ¥120 trillion ($1.4 trillion in today’s dollars). When one construction plan failed to stimulate economic growth, another was tried. Those plans did not succeed in reviving the economy, but they did saddle the nation with a mountain of IOUs that helped postpone recovery for years. Including “off-budget” borrowing, Japan’s debt was estimated to exceed 200 percent of GDP in 2001.

Construction plans often set job growth targets but rarely focused on project prices. From 1992 to 1999, the Japanese government spent more than $500 billion (in today’s dollars) on public works projects. Yet the construction jobs were not long-term and did not lead to sustained economic growth. Public debt sky-rocketed, unemployment actually doubled from 2.3 percent to 5 percent, and the economy remained stagnant. As Gavan McCormack, a historian at Australian National University, noted in his 1996 book The Emptiness of Japanese Affluence, “The construction state is in some respects akin to the military-industrial complex in Cold War America (or the Soviet Union), sucking in the country’s wealth, consuming it inefficiently, growing like a cancer and bequeathing both fiscal crisis and environmental devastation.” The government failed to properly identify which projects should be pursued, ignoring demand signals that the private sector is better at recognizing and responding to.

Taking Keynes To The Woodshed

So we know that Keynesian stimulus didn’t work in Japan and it didn’t work here in 2009. The passage above gives us some reasons why. Stimulus spending doesn’t work because of the way government spends money. Government does not spend money based on an economic calculus, they spend it based on a political calculus. This difference is crucial to understanding why most attempts at government intervention in the economy fails.

In a normal market, goods and services are allocated based on price signals. How does the economy know what to produce and how much of it? It’s all based on prices: when there’s too little of something the price shoots up—suddenly it makes sense to produce more of it. Then when there’s too much, the prices fall again. Supply and demand will, under normal circumstances, find an equilibrium.

The problem with government spending is that it doesn’t follow the rules of supply and demand. If a powerful Senator from South Dakota says that we need a six-lane superhighway between Podunk and East Armpit, that Senator can have the political clout to make it happen. The problem with that is that suddenly the government is spending millions to build a six-lane superhighway that isn’t actually needed and won’t produce economic growth over the long term.

“But wait!,” the Keynesians say, “Doesn’t building that six-lane superhighway to Warehouse 13 mean that workers will be employed and then they’ll have money to spend, creating economic growth?” The answer is yes, you’ll be paying people, but you won’t get economic growth from it. Why? Because the only way the government has money to spend is taxation or borrowing—so for every dollar you spend on that six-lane superhighway, you have to either take a dollar from elsewhere or borrow it and pay it back with interest.

There’s also a phenomenon called “crowding out.” This article explains the “crowding out” effect of stimulus spending in some detail. The short version is that if you take a dollar from the private sector and devote it to public spending, that’s a dollar that the private sector doesn’t have to spend. In other words, the government isn’t doing anything new, it’s just taking spending that the private sector would have done and doing itself. The net economic impact is, to put it in highly technical terms, bupkis. And if you assume that government spending is less efficient than private spending—and you should for the reasons above—the net economic impact is negative.

“But wait!” say the Keynesians again, “What about the infamous Keynesian multiplier?” The Keynesian multiplier is the theory that $1 in government spending produces more than $1 in economic growth. And whenever you hear President Obama argue that the stimulus saved “3 million jobs” and the like, here’s how he arrived at that conclusion. He had the Congressional Budget Office (CBO) assume that certain government programs had Keynesian multipliers, and then calculate based on what was spent in stimulus funds. So if you assume that infrastructure spending produces $2 in growth for every $1 spent, magically the stimulus was a fantastic success.

But the Keynesian multiplier is a myth: because of the inefficiencies in government spending and “crowding out,” the assumption that $1 in Keynesian spending produces at least $2 in economic growth is a very bad assumption to make. More rigorous studies have said that the real Keynesian multiplier ranges from zero to just over 1—which supports the idea that stimulus doesn’t produce growth over the long term.

And here is the other problem: when you try to “stimulate demand” in this way, what happens when the stimulus ends? The only thing propping up that artificial demand was government spending—and once the government spending ends, so does the stimulus. The conventional Keynesian theory is that the economy would come back, and once it did the government could retract the stimulus payments. But as Japan found out, that never happens. Stimulus becomes a vicious circle because once the stimulus ends the economy takes a nosedive—which just produces the argument that we need more stimulus to fix it. And indeed, you have Paul Krugman making the argument that we need more stimulus to get the economy moving, and if all else fails maybe we can hope for an alien invasion to get it. Someone has watched Watchmen one too many times.

The Myth Of Austerity

But the dimestore Keynesians have one more argument up their sleeves: they say that lowering government spending certainly won’t work, and will make things worse. They look to Europe, where they argue that the EU’s austerity has caused even more problems for the Eurozone. If Europe has been cutting government spending and Europe is now an economic basketcase, doesn’t that mean that fiscal austerity is a bad idea?

There are two problems with that argument: first, European governments really haven’t slashed spending as Krugman intimates they have. Except for Greece (which had little choice), most European countries have only slowed the rate of spending growth rather than cutting spending. That’s hardly “austerity” any more than only getting a 2% raise is a “pay cut.”

Second, Europe did something else that would depress economic growth—they raised taxes. European countries raised income taxes, their Value Added Taxes (VATs), and taxes on business. And sure enough, raising taxes when businesses and consumers are already feeling the pain of a recession is not a smart idea in the slightest. But the dimestore Keynesians propose doing the same thing: increasing government spending and raising taxes to pay for it. What Europe shows is not that austerity is a bad idea, it’s that government spending and tax increases are. What Krugman is doing is applying exactly the opposite message than what Europe is telling us. And the old saying goes, those who fail to learn from history are condemned to repeat it.

So, How Do We Fix This Mess?

So far I’ve been painting a pretty bleak picture: we can’t use government spending to get us out of this mess. The preferred Keynesian solution of raising taxes to stimulate aggregate demand won’t work because government spending doesn’t produce lasting economic growth. So, what can we do to get out of this hole?

Ultimately, what we need is to encourage economic growth in the private sector. But that’s not something that can be done with government policy—other than a policy of getting the hell out of the way. Government can offer tax credits for R&D and the like, but even that is an example of government picking winners and losers, which doesn’t have a particularly sterling record.

The most important thing is for the government to get its fiscal house in order. We can’t grow the economy with a huge amount of public debt hanging over our heads. We need to cut spending in real terms, not just slow the rate of increase. We need to pay down our national debt, not add to it. If we want to get more revenue into the hands of the government we need to increase growth rather than taxes. Has this been done before? Yes—and quite successfully. But that is a post for another day…

Getting To A Real Stimulus

Carl J. Schramm has a great piece on why the real focus on stimulating the economy should be on growing the entrepreneurial class:

Only private enterprise — in particular high-growth start-ups — will create the jobs and the wealth to right America’s listing economy. That is, if we let them.

What our economy most needs is another outbreak of entrepreneurial energy. It is waiting to happen all around us. As people face layoffs, many take with them wonderful ideas for entirely new products and services. Layoffs are tough, but they need not spell doom. The average age of those who found high-tech companies in this country is 39. In fact, twice as many founders are older than 50 as are younger than 25. The end of one career can be the beginning of another.

Some people getting pink slips might have ideas that could become entire new industries. Indeed, some of America’s largest and most successful firms were started in recessions or bear markets or both — including General Electric (founded in the wake of the Panic of 1873), IBM (started in the last year of the recession that followed the Panic of 1893), United Technologies (same year as the 1929 crash), Microsoft (1975 depth of “stagflation”) and Guess (1981, worst post-World War II recession to date).

He’s absolutely right—in a normal recession, the way to rebuild is through what Joseph Schumpeter called the process of “creative destruction”. Basically, the old system that had failed is replaced at the grass roots with a new system—new businesses, new ways of doing things, new technologies. Those new businesses form the basis for not only an economic recovery, but a stronger economy.

That is, so long as government doesn’t try to prop up the old, unsustainable system.

Schramm is right: what we so desperately need now is not more bailouts, but more creative destruction. The seeds for our economic renewal are being planted all around us. The future is not with General Motors, it’s with Tesla Motors and Aptera Motors. There are a million garage inventors out there who right now are creating advances that will fundamentally change our world.

34 years ago on this date, a group of these inventors met in Menlo Park, California. This was deep in another recession. They were visionaries and dreamers who didn’t have the backing of government research programs or big corporations. They were the Homebrew Computer Club, and if that meeting had never happened, your iPod, iPhone, and probably even your PC would likely never had existed.

Now, imagine an alternate reality in which the government, concerned about the very real environmental impact of all these people working with heavy metals and dangerous components, decided to heavily regulate or even ban their use. The only way to build a computer would be to get a government license and go through an elaborate set of “safeguards” to prevent any potentially hazardous materials from being introduced into the environment. There would, of course, be major fines for violating these rules. If a young Steve Wozniak’s first Apple I prototype fizzled, it would cost him $25,000 to properly dispose of it.

Would Wozniak and Jobs have gone on to found Apple? Would the Mac I’m using to write this post have existed? Almost certainly not. Our world would have no iPods, no iPhones, and the Internet would remain a military communications network accessible only be a handful of tightly controlled machines. The microcomputer revolution would have been strangled in its crib.

The hypothetical government regulations weren’t all that unreasonable—early computers were filled with all sorts of dangerous contaminants, from lead to PCBs. One could have made a perfectly reasonable case for doing exactly what the government did in that hypothetical—and people do much the same all the time.

Yet the results would have been a much weaker economy and a much less prosperous world. Without the Homebrew Computer Club, there would have been no Apple Computers—and Apple employs tens of thousands of Americans today.

That is why we need entrepreneurs in this country. That is why a top-down program will never work. When government picks winners and losers, they will inevitably pick some of them wrong. In fact, they are quite likely to get all of them wrong. The “winners” in a top-down system will be the firms with the most political clout. Such a system rewards the ones with the most lobbyists, not the best ideas.

Right now businesses are scaling back. It’s not just Obama’s promise to increase the highest marginal tax rates, it’s also his promise to raise the cap on FICA and reduce the phase-outs on crucial deductions. Add to that an increasing state and local tax burden, and the very class of people most likely to give us those future jobs are hurting and expecting to hurt even more.

A real stimulus would be to get government as far out of the way as possible. That means government should promote innovation from the bottom up rather than the top down. We need more tax credits for American small businesses—the employers of half of the American workforce. We need fewer painful regulations that that end up hurting entire industries. We need to ensure that people like those visionaries who met in Menlo Park 34 years ago have a chance to bring their dreams to fruition.

Scramm goes further with even more substantive ideas for beating this recession: a payroll tax holiday, exempting new business owners from capital gains, cross-state purchasing of health plans, and other very strong and very achievable ideas for rebuilding this economy. These are ideas that should take precedence over yet another top-down bailout of industries that have already failed.

Creative destruction is really just creative reconstruction. America needs to look forward, not try to prop up a system that just isn’t working. Government is the friend of big business, and efforts to regulate benefit those with the biggest lobbyists who can influence the rules and grease the right palms. If we want a better future, it will come not from the top down, but from the bottom up. Schramm is right: entrepreneurs are the key to getting out of this mess. If we’re not going to give them the opportunity to succeed, then we are potentially losing the chance for the next Apple, Microsoft, or even General Electric to transform our future for the better.

We’re All Merrily Skipping Down The Road To Serfdom

For those who want to know what our future will look like, here’s a brief preview. F.A. Hayek’s brilliant The Road to Serfdom in a short illustrated form.

I’ve never been more bleak about the future of this country. The road to serfdom isn’t obvious. Nobody intentionally elects a dictator for the purpose of electing a dictator. Instead they pour the ill-conceived hopes and dreams into a Leader who promises them the world so long as they give him the power to create it.

Now, I don’t necessarily think that Barack Obama is a dictator. But the point is that he doesn’t have to be. He’s just creating the ideal conditions for one. What truly saddens me, what truly sickens me, is if that Obama passed the “Fairness Doctrine” to silence his critics, created “civilian work corps” to put an army of young men and women into his service, and arrested business owners, nearly half of the county would go along. Nearly half are so filled with irrational love for Obama that they’d let him become a Caesar. It isn’t about issues, it isn’t about the country, it’s about some gauzy notion of “hope.”

To hell with “hope.”

As Charles Murray says, everything Obama is promising has already been tried and failed. There’s nothing new. This isn’t “change we can believe in” this is “I can say whatever the hell I want and you simpletons will slurp it up.” It’s the wish list of every statist in the last 40 years, and it represents a radical and dangerous turn away from tested principles and towards abject statism.

Universal healthcare? It means the government will have to ration what we get. That’s the only way such a system can possibly work. Even worse, it doesn’t scale up at all. Which means America’s larger population will make the endemic and innate problem with universal healthcare worse than in a smaller country like Sweden or even Canada. Which means that we had better get used to dying in lines, and forget risky or experimental treatments.

Universal college education? For most people, a four-year college degree is a waste of time and money. I believe in a liberal arts education, but I’m not so arrogant as to say that it’s right for everyone. But now Obama will make the value of that degree effectively zero—and a four-year college degree is already worth nowhere near what people pay for it. My suspicion is that the real reason for this is ideological: make everyone go through the like-minded public university system and you’ll have an ideologically “pure” citizenry. Even if that’s not the plan, that will be the effect. A better solution would be to make our existing system actually work, but that doesn’t concentrate any political power into the President’s hands.

A cap-and-trade system for carbon emissions? It’s already been tried and failed. It’s a way of creating a stealth tax increase on energy consumption. A more honest approach would be to just slap a tax on energy. But Obama doesn’t want to be honest, he wants to play to the mob. That cap-and-trade programs hurt the Third World doesn’t seem to matter.

I don’t like to ascribe the worst motives for people, but even so President Obama is taking this country farther down the Road to Serfdom than it even has been. It may take decades for America to recover from what he is doing. He is pouring sugar into the engine of American prosperity, and we will suffer for it.

I love this country. I want this country to succeed, regardless of who is the occupant of the Oval Office or what party is in power. But the end result of what Obama wants will be a United States that is following the disastrous path of statism. At best America will suffer a “Lost Decade” like Japan.

At worst? America takes the road to serfdom to its inevitable conclusion.

I wish this were merely sour political grapes. But the future of this country truly is in deep peril. The way to the future is through individualism, hard work, limited government, thrift, ingenuity, and political pluralism. Today, we have a President who wants a cradle-to-the-grave welfare state and has the audacity to not only hope for one, but to say it in no uncertain terms.

I fear that if we continue down this road, the future will belong to India and China, while this nation lives out its twilight years in increasing obsolescence.

We Need Real Jobs

Bob Herbert writes in The New York Times that that what America needs to recover from the recession are more jobs. On that point, he’s absolutely right. The problem is that the jobs he would choose to create won’t do anything to help the economy. Like a good Times columnist, his preferred solution is more government intervention:

What Americans need is new employment on a massive scale, and one of the most effective ways to get that started is to invest extraordinary amounts in the nation’s infrastructure, to rebuild America in a way that creates a world-class platform for a sustainable 21st-century economy.

President Obama’s stimulus package is just a first step in the government’s effort to stabilizing the hemorrhaging economy. It contains infrastructure spending, but nothing comparable to the vast amounts it will take to make the desperately needed improvements.

Funds spent on those improvements, which will have to be made sooner or later, are also cracker-jack investments in putting people to work. The idea that the government is spending trillions on wars, bank bailouts, tax cuts, and so on, while still neglecting its infrastructure needs — and at a time when Americans are desperate for jobs — is mind-boggling.

Here’s the problem with that line of argument. What we need is not a bunch of make work jobs. Exactly what would Mr. Herbert’s plan look like? Should we take an unemployed financial analyst from Manhattan, hand him a shovel and have him dig a ditch or fix potholes on I-95? Is that really an effective use of his skills? Of course it isn’t&madash;it’s a waste of human capital.

We do need to fix infrastructure, but don’t kid yourself that doing so will make a bit of difference in job growth. Unless we want to start building roadways to the moon, there’s just no reason for millions of people to pick up shovels for all those “shovel ready” projects. What stimulus infrastructure spending produces is very limited and not terrifically effective.

Here’s where the standard argument about government jobs comes in: “but you’ve built a road!” they exclaim. Great, you have a road. Does that mean anyone will use that road? Sure, that road would be nice for all the trucks that aren’t going anywhere to take all the goods that aren’t being produced, but here in the real world just building a road produces a strip of concrete that may or may not get used. “If you build it, they will come” is a line from a movie, it’s not a theory of economics.

So, what do we really need? We really do need jobs, and we really do need infrastructure fixes. But those are two different problem with two different solutions.

If we want to get out of this mess, we need to tear down walls rather than build them up. The first bill that President Obama signed into law was an act that dramatically expanded liability for employers. You want to create jobs? Try not hobbling the people who create them.

Instead, Congress continues to punish American small businesses at every turn with higher taxes, more regulation, and expanded liability. If you’re a small business owner, now is the last time that you’re thinking about expanding your business. Yet now is also the time when we most need new job creation. Congress and the President continue to put policies in place that harm job creation, then they wonder why the economy is swirling the tubes. Then their solution to the problem is to punish the creators more with even more regulation while lavishing more and more money on the irresponsible.

If job creation is the goal, then Congress should start making it easier for small businesses to start and become big businesses. There are a number of ways to do this. For one, President Obama could sign an Executive Order today that nullifies regulations that harm small businesses—it wouldn’t solve all the problems caused by over-regulation, but it would certainly help. He could then push Congress to pass regulation that would shield small businesses from the biggest liability-increasing laws like the Lily Ledbetter Act. If you’re going to punish business for their excesses, at least punish the people with the deep pockets rather than tilting the playing field more and more against the little guy.

The next step is an across-the-board cut to the corporate tax rate to 25%. The U.S. has the highest corporate tax rates in the developed world—even Sweden has a lower corporate tax rate. Alternately, small businesses (with 25 or fewer employees) should not pay corporate taxes at all. While small businesses can elect to become Subchapter S corporations that make their income exempt from federal taxes, that rule puts more hurdles in their way. Why bother making small businesses jump through the hoops of a Subchapter S election rather than simply getting rid of all the headaches? Small businesses should not be punished with either double taxation or having to elect to go Subchapter S—the process should be as simple as possible.

Forget bailing out the Big Three auto companies. They’re dinosaurs. It’s like giving a bailout to the horse-drawn carriage industry in 1920. Somewhere in a garage an American inventor is coming up with the next revolution in transportation, free of the restraints of conventional thinking. I’d rather throw a few hundred grand to a hundred garage labs than a few billion to the dinosaurs. If just one of those innovators pans out, a new industry is born. HP, Apple, Microsoft, and even Google started not as the product of giant government R&D programs, but in garages and college campuses. You want the most bang for your stimulus dollar? Then give it to the little guys with the big ideas, not the big guys who are too constrained by their own bureaucratic inertia to revolutionize American industry.

We’re not going to fix America’s problem by repairing bridges and digging ditches. Most of our infrastructure problem should be solved by just shifting our priorities. Yes, it’s nice to have millions for the arts. But we also have to fix bridges, and we have to start making rational choices about how we spend our money. If we want to repair American infrastructure, we should do that, but it should be done in as apolitical a way as possible. That means saying that we are not going to spend millions on bike path or “community centers” that only help a small number of people. Instead, we’re going to fix the big problems like failing airports, falling bridges, and chemical plants that might as well have a “BOMB ME” sign painted on them. That means insulating these decisions from Congress, who have every incentive to put the needs of their campaign contributors above the public good.

If we want to fix the economy, we can’t follow Herbert’s single-minded focus on government as the solution to every problem. The reason why things are so bad is that our private-sector is failing. Neglecting the real engine of growth—private-sector, small-business jobs—is only going to make this recession turn into a full-blown depression.

This is the 21st Century. We can’t play with the handbook of the 1930s. If we want a 21st Century economy, we have to look beyond the top-down centralized approach and start looking at the economy in the same way we look at the Internet. Instead of a “central server” in Washington, we need a “cloud” economy that spurs innovation. Centralized networks are slow, inefficient, insecure, and costly. Distributed networks are fast, resilient, efficient, and effective. Our economy is the same way. If we’re to build a better future for ourselves and our children, we have to concentrate not on centralizing economic power, but putting it back into the hands of the people who create jobs that last.

Krugman’s Fantasy World

Francis Cianfrocca has an interesting critical look at why Paul Krugman’s call for a massive Keynesian stimulus is the wrong policy. His thesis is right: Krugman and many other economists are stuck in a world of rigid mathematical models that have little bearing on the way the world actually works—which is one of the causes of this mess in the first place. Those models keep getting proven wrong, but Krugman’s ideology is blinding him to their faults.

Take Krugman’s belief in the “Keynesian multiplier”. The Keynesian multiplier argues that for every dollar spend in government infrastructure spending, $1.50 in economic growth is realized. If this seems like “voodoo economics” to you, it’s because it largely is. Why sound investments can produce economic multipliers, the chances of the government making those sound investments is rather small.

The Keynesian multiplier might work if government was good at allocating investments in a rational manner. The problem is that government is based on political realities rather than economic ones. So, instead of allocating money on a rational basis (i.e. to where it’s actually needed), Congress allocates money based on the political clout of the campaign contributors. So, there’s no Keynesian multiplier in practice even if all of Krugman’s models say that there should be one: the government’s political mode of allocating resources is not economically efficient, and never will be. As Cianfrocca notes, the real problem is much different:

Let’s note that Krugman is a sober, first-rate economist, but also a woolly-eyed, low-grade political hack. He firmly believes that government is better qualified than private actors to direct the country’s economy, and has advocated a Federal government share of 28% of GDP, compared to the current 22% or so. Since he understands economic efficiency as few do, the conclusion is that he’s committed to the social outcomes that come with government control, as opposed to the free-marketer’s commitment to maximizing utility. But that’s a side point.

But why is the economy performing below capacity in the first place? Many reasons, too many to list here. And why won’t it simply recover on its own, as it has many times in the past? Here things get a bit more interesting. Like many economists, Krugman points to Keynes’s “paradox of thrift”: in uncertain times, ordinary people defer consumption and businesses postpone investments. The economy shrinks below capacity, because of people’s desire to save money.

It’s hard to escape the sense that the best economists and the President of the United States are blaming ordinary people for the economic crisis. If only we’d spend our money instead of save it, we wouldn’t be in such a big mess.

Cianfrocca goes on to argue that the “stimulus” won’t work because people don’t want to spend right now—the intuitively know that they are overleveraged and the country is highly overleveraged, and all this spending is just going to make things worse. Cianfrocca is right on that point.

He’s right because perceptions matter. He correctly points out that all this public indebtedness is exacerbating people’s own personal fears. Only 38% of people believe the stimulus will aid the economy, and that number will drop over time as the stimulus fails to produce any lasting growth. The more consumers feel like the economy is going down the tubes, the less they will spend. The less consumers spend, the fewer businesses will stay afloat, pushing unemployment up and feeding the cycle even more.

That doesn’t even count the pernicious effect of government regulation and liability rules which further decrease business’ willingness to invest and create new jobs. With passage of laws like the Lily Ledbetter Fair Pay Act, businesses may now be sued for alleged paycheck discrimination stemming out of events that happened years in the past. This makes every employee a potential timebomb and increases the overall cost of labor. The more Congress kowtows to the unions and enacts “employee-friendly” bills, the more likely it is that jobs will be lost. This spurs Congress to legislate even more to “save jobs” and the cycle continues. The resurgence of union political power could not come at a worse time.

Krugman’s fantasy world in which government rationally allocates money so that it grows the economy has little to do with the realities of our political system. Instead, what Krugman proposes will further erode public confidence in our government. The stimulus bill is an example of Congress giving special breaks to those with the most influence—and those with the most influence tend to be rich special interests rather than small businesses or ordinary citizens. People feel that their government is broken, and they are right.

No matter what the mathematical models predict, psychology is crucial. Krugman’s fantasy is a fantasy because he makes basic and incorrect assumptions about the way the economy functions. His Keynesian spending will not fix the “paradox of thrift” because part of what is fueling people’s unwillingness to spend is the state of government finances. Borrowing trillions more and running up the national debt is not going to make that better, it will make it much, much worse.

A real stimulus would involve the same sort of conditions we regularly impose on other countries in our situation. If we were Argentina, the IMF would be telling us to slash our spending and get our balance sheets in order. That we’re perfectly comfortable telling other countries to go through painful austerity while our government does the opposite sends exactly the wrong message. That isn’t to say government spending is all bad, but the first order of business should be to more rationally allocate the spending we have without adding trillions more in debt.

What is most dangerous about Krugman’s fantasy is that it will never end. The more existing stimulus measures push down the economy, the more Krugman would call for yet more spending. The result would be the same as it always has been: massive hyperinflation due to massive public debt. Krugman’s policies won’t work, and Krugman’s natural response to their failure would be to call for ever more.

We can’t indulge in such fantasies. Desperate times call for desperate measures, and unless we start austerity measures now, the pain is only going to get worse.

Andrew Sullivan’s Further Descent Into Hackery

Andrew Sullivan went from being an astute conservative columnist to a frothing partisan hack somewhere around the 2004 elections. His latest column in The Sunday Times amply demonstrates his fall into hackery. Now, because the Republicans have the sheer audacity to defy the Leader and go against a budget-busting spending bill in a time of fiscal turmoil, they are akin to the Taliban.

So much for not questioning the patriotism of others.

For instance, Sullivan makes this blatantly silly argument:

From the outset, the Republicans in Washington pored over the bill to find trivial issues to make hay with. They found some small funding for HIV and sexually transmitted diseases prevention; they jumped up and down about renovating the national mall; they went nuts over a proposal – wait for it – to make some government buildings more energy-efficient; they acted as if green research and federal funds for new school building were the equivalent of funding terrorism. And this after eight years in which they managed to turn a surplus into a trillion-dollar deficit and added a cool $32 trillion to the debt the next generation will have to pay for. Every now and again their chutzpah and narcissism take one’s breath away. But it’s all they seem to know.

Which conveniently ignores the very nature of the bill—a trillion-dollar giveaway to Democratic special interests. It is hardly “narcissistic” or an act of “chutzpah” to cry foul when the Treasury is being raided in a time when America’s debts are already threatening our fiscal future. But Sullivans M.O. is already well established—Republicans are always evil schemers seeking to establish their own power while the Obama Administration is always pure of heart. His simple morality play has little to do with reality, but it is a constant struggle for Mr. Sullivan to ignore what is in front of his nose.

The Republicans are an opposition party, and they have finally rediscovered the idea that they are supposed to be the party of small and responsible government. Apparently to Sullivan, their job now is to roll over at acquiesce to whatever the Great Obama wishes them to do. That someone who so frequently quotes George Orwell cannot see the Orwellian implications of our times is distressing.

That Sullivan adds some faint condemnation of the Democrats is only due to it allowing him to show how magnanimous and post-partisan the Obama Administration is. That the Obama Administration is attempting to politicize the Census is ignored. That the Obama Administration’s attempts at partisan “compromise” is largely window dressing is ignored. The ethical scandals that surround the Obama Administration is immaterial to Sullivan’s worldview. The resignation of Sen. Gregg as Commerce Secretary? To Sullivan, this had nothing to do with the Obama Administration’s evisceration of the post in favor of having Rahm Emmanuel run the show, it was clearly an act by the Republican base.

Sullivan is capable of deep though, but he choses not to exercise it, instead going for the rhetoric of a third-string Daily Kos blogger. How tiresome must it be to be yet another unquestioning mouthpiece for the Obama Administration. One would think it to be intellectually deadening after a while. But perhaps Mr. Sullivan has become tired of thinking and would rather trade his insightfulness and relevance for the adulation of the “netroots” mob.

The loss of such a formerly insightful thinker, alas, diminishes our political rhetoric at a time when it’s at one of its lows.

‘Shovel Ready’ BS

Popular Mechanics has a great piece on the myth of “shovel ready” infrastructure projects:

The programs that would meet the bill’s 90-day restriction are, for the most part, an unappealing mix of projects that were either shelved after being fully designed and engineered, and have since become outmoded or irrelevant, or projects with limited scope and ambition. No one’s building a smart electric grid or revamping a water system on 90 days notice. The best example of a shovel-ready project, and what engineers believe could become the biggest recipient of the transportation-related portion of the bill’s funding, is road resurfacing—important maintenance work, but not a meaningful way to rein in a national infrastructure crisis. “In developing countries, there are roads that are so bad, they create congestion, because drivers are constantly forced to slow down,” says David Levinson, an associate professor in the University of Minnesota’s civil engineering department. “That’s not the case here. If the road’s a little bit rougher, drivers will feel it, but that’s not going to cause you to go any slower. So the economic benefit of those projects is pretty low.”

That might be acceptable to people focused purely on fostering rapid job growth‹but, ironically, such stimulus spending could fall short on that measure, as well. “In the 1930s, when you were literally building with shovels, that might have made sense. That was largely unskilled labor. Today, it’s blue collar, but it’s not unskilled,” Levinson says. “The guy brushing the asphalt back and forth is unskilled, but the guy operating the steamroller isn’t. And there’s an assumption out there that construction workers are interchangeable between residential and highway projects. But a carpenter isn’t a whole lot of help in building a road.”

It’s ironic given the I-35W bridge collapse being used as a symbol of America’s “failing infrastructure”—that collapse was the result of a design flaw that should have been spotted in the design phase. And what is our reaction to such problems? Push through a bunch of projects in a hurry rather than perform the sort of painstaking design that needs to be done before a project is truly “shovel ready.”

There is some wisdom to spending on infrastructure, but let us be honest. It won’t make a dent in the unemployment rate unless you believe that you can take a stockbroker and put her into a bulldozer and call that good enough. It won’t stimulate the economy because the money will go to government contractors who are the least affected by the economic slowdown. And what stimulus it does produce won’t be likely to come about until well after the slowdown is past. Justifying this sort of spending on the grounds of economic stimulus isn’t realistic.

If we want to spend money on infrastructure, we should do it right. That means assessing our needs in a realistic manner, spending only on projects that will make a real difference, having a realistic plan to build these projects, building them right the first time, and having a competitive bidding process to make sure that money isn’t being funneled to campaign contributors.

This bill is not about stimulus. It’s about the Democratic Party looting the future to pay off their political supporters. It is nearly 100% pure pork that will saddle the future with at least another $1,000,000,000,000 in debt—not counting interest. Even the Congressional Budget Office finds that the “stimulus” bill will just shift the costs to future generations. We can’t rob Peter to pay Paul and expect to get away with it. Recent history should demonstrate all too well why such ideas don’t work.

We need a real stimulus package, not an act of wanton irresponsibility. If President Obama were to demonstrate real leadership, he would tell Reid and Pelosi to stop playing childish partisan games and send him a bill that is nothing but stimulus and no pork—and if they refuse, he should veto it. We need real infrastructure repair, not political cronyism. The only shovel that’s ready to go is the shovel needed to clear out all the B.S. surrounding this bill.

Obama Digs A Hole For The Economy

President-Elect Obama has chosen to embrace some of the worst economic thinking in his recently announced economic recovery plan. The buzzword he’s following is “infrastructure”—and it’s a strategy that is doomed to fail.

Reason‘s Nick Gillespie sarcastically looks at the plan:

When the history of this awful moment of bailout hysteria is written, there’ll be a chapter or 20 on the complete bogosity of what might call “the infrastructure flim-flam”—the idea that government can boostrap the economy out its funk by hiring two guys to dig a hole and a couple more to fill it in.

Don’t you see? It’s the perfect plan!, as Batman’s Riddler might exclaim. In fact, one only wonders why they don’t hire three guys to fill the holes, thereby cutting unemployment to negative-something.

There are so many flaws with Obama’s plan that one hardly knows where to begin. For one, there’s no way to “create” 2.5 million jobs through infrastructure improvements alone. Unless Obama wants to pave over Iowa, there isn’t going to be enough work to make a significant dent.

Then there’s the issue of the utility of taking a bunch of unemployed stockbrokers and autoworkers and having them pour concrete or lay cable—they’re not trained for either, and it doesn’t help them build the skills they need for the future. It’s busy-work, and it’s economically counter-productive. Something like job retraining would be valuable, not more government-run “public works” projects.

There’s also the fact that if you believe that government is more efficient at allocating goods and services than the private sector, you probably missed the whole “collapse of the Soviet Union” thing. Who will decide what “infrastructure” gets built where? A bunch of Washington nomenklatura? That creates a system where superhighways get built in places where politically powerful Congresscritters live while real needs go unmet. Government is simply not designed to do what Obama wants it to do, and as much hyperbole is there is about Obama being a “socialist” in this case his policies are the sort of thing we’d see from the leader of some banana republic. Economic troubles? Just round up some plebs and have them start digging ditches.

The Obama plan is not a viable solution. We do need better infrastructure, but not through wasteful, inefficient, and crude make-work programs. There is no future in the American economy if we start making our workers dig ditches or pour concrete rather than innovate in nanotechnology, alternative energy, or space. We need an economy for the 21st Century, and Obama keeps playing from the dusty playbook of the 1930s.

What should Obama do? What we need in this country is a high-tech economy. We need more civil engineers to design all those bridges. We need more innovation, more risk-taking, and more entrepreneurialism. What can government do? It can incentivize innovation and risk-taking. If you’re a college student and you want to be a civil engineer? Graduate in engineering and go into government service for 5 years, and you get your college loans forgiven. Obama should direct NASA to give a $1 billion prize to the first company that can demonstrate a workable prototype for a replacement for the Space Shuttle. (Limited versions of such a prize system are already in place, and helping generate high-tech jobs.) Instead of another government make-work project to lay fiber-optic cable, Obama should incentivize companies to develop wireless technologies that can help remove the need for physical connections. These are just a few examples of what would be a, dare I say it, progressive approach to this economic crisis.

But Obama, listening to the radicals of his party, is not really a “progressive” in this sense. He has picked up the failed FDR playbook and seems hell-bent on making the economy worse by embracing the same failed plans as before. We cannot bootstrap a modern economy through government spending. If that were true, the Third World wouldn’t be the Third World. Government spending always comes with prohibitively high administrative costs that creates a severe dead-weight loss on the economy. It is always less efficient than a market-based approach.

Government has a role, but it is a limited one. It can incentivize innovation, but it shouldn’t be in the business of picking winners and losers. It can support the development of a healthy economy, but it cannot create one by fiat. It can help regulate the marketplace, but it can also stifle the entrepreneurial spirit. It is a tool, like a hammer, but you shouldn’t use a hammer to fix a watch.

Obama’s economic plan is based on a fundamentally flawed view of government and the economy. No matter how well thought-out it may be, it will never achieve its objectives because of that basic flaw. Now, more than ever, we need to embrace what actually has worked, not reach back to the failures of the past. The process of economic transformation can be painful, in what the great economist Joseph Schumpeter called the process of “creative destruction”—but without that creative destruction we cannot move forward. Obama wants to move us back to the socialized economy that devastated Britain in the 1970s. If he wants to give us the “change we need” then he must realize that change cannot come from a government program, but from allowing ordinary men and women the opportunity to take risks, innovate, and succeed.

Following In The Footsteps Of Carter?

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.

That’s Not Quite The Right Kind Of Stimulus

From this FARK thread comes the ultimate idea for what to do with that upcoming “economic stimulus” check:

I’m going to go stimulate the economy. For $300, I’m going to give the economy such a stimulating that I leave it quivering and panting for breath, drops of sweat running down its spine, flush with endorphins and ready for a nice long cuddle. But because it’s only $300, the economy isn’t going to get its cuddle. Instead, I’m going to check my watch, touch the economy gently on the cheek and say that I had a wonderful time, but that it’s time for me to go. I will walk out, leaving the economy lying there feeling ultimately unfulfilled and a little bit ashamed of itself.