Why a Spending Bill Won't Cut It

Last night, I had to chuckle and cry at the same time as I watched Rachel Maddow's "Bull Puckey" speech.

Rachel's declarations about the job-creating values of spending are about as insightful as Janeane Garofalo's outburst on the radio in 2005, paraphrased thus: "... those free-market wackos with their 'invisible hand' mumbo jumbo."

Both ladies' understanding of the workings of the market typify the overconfidence of those who jump to conclusions without looking at the whole story.

Rachel claims that spending in and of itself is sufficient to create jobs and get the country out of a recession. Obama has embarrassed himself by making the same point. They have both overlooked that the statistical link between government spending and long-term job creation doesn't exist. To illustrate:

Spending:

Let's take an extreme and therefore abstract example. We can hire 15 million workers (10% workforce unemployed) to dig holes and fill them up. Cost: $800,000,000,000. 100% job creation. After the job is done, they go back on unemployment. Job creation for one year: 15 million. Job creation after one year and a half: Zero. Capital available for permanent job creation: X minus $800 billion. And don't give me the argument that the government intends to do more than just dig holes and fill them up. Building bridges and roads that we can't pay for is just as bad.


[Thanks to Swop.net for the photo.]

Permanent Job creation:

At the other extreme, let's say we do nothing, and therefore the government does not sap the marketplace of $800 billion. Cost: Zero. The money is thus available to businesses, small and large, to rev up their engines as this recession starts its uptick. Jobs created during one year: Admittedly, perhaps zero. Jobs created after one year and a half, or sometime thereafter: 7 million, year after year, as unemployment falls back to around 4% or less. These jobs are permanent.

The lenders of the $800 billion know this, as we will soon find out when the US government finds it harder and harder to finance its debt. Why isn't this difference clear to the President and to his supportive progressives? Because these people are short-sighted, and they grasp at whatever supports their political culture instead of looking at all the facts.

Rachel quotes Moody's statistics. Example: "Most Stimulative Spending: Non-refundable tax rebates: $1.00 = $1.02/economic activity. Infrastructure: $1.00 = $1.59/economic activity." These stats make no mention of the duration of job creation in each instance, what kind of jobs are created, and what money was used to do it. Statistics can be the best liars when you don't tell the whole story.

More twisted logic:

- Who will be employed on the construction sites of the Spending Package's bridges, railroads, and roads? Will the government try to pick and choose among the unemployed? Can legislators get the most expensive unemployed (Wall Street workers, lawyers, and others like them) onto the dirt? Does the construction industry worker deserve a job more than an investment banker or lawyer?

- Rachel says that people on unemployment don't spend. Isn't she forgetting that they receive unemployment benefits that are paid out of future income from existing tax structures and not borrowed 100% from the world's capital pool? Then she turns around and almost makes the argument that we should all go on Food Stamps. This is strange thinking.

- We are all (including me) complaining about the big bonuses and the Las Vegas junkets, but isn't this also spending a la Rachel? Aren't we forgetting that jets are made by American workers, that pilots fly those jets, and that lots of people work in Las Vegas? We are also forgetting that the rich spend a portion of those bonuses and invest the rest in things like the stock market, i.e. in the very same instruments that are in all of our 401(k)'s, which could use a little help right now. (Don't get me wrong, those bonuses give me goose bumps; but I believe their size was determined by excessive money and credit supply and by the competitive marketplace, not only by individual greed. See this post, for example.)

- We want to put American manufacturing back on track by recommending we all "buy American." Aren't we forgetting that if we refuse to buy foreign products, foreigners will refuse to buy ours? And that this type of thinking is what ultimately repressed the world economy in the 1930s?

- We want China to allow their currency to rise in value, but aren't we forgetting that for this to happen, China has to stop buying our debt? Do we really want that?

Much illogic should be examined here.

Why Isn't the Market Listening?

You've probably seen the Disney film, Fantasia, in the segment called The Sorcerer's Apprentice. Mickey Mouse is the apprentice, and he decides to use some of the sorcerer's magic while the boss is away. The experience is glorious, until he realizes that he can't control it any more and he finds himself drowning in a self-created flood.


[Thanks to Wikipedia.org for the illustration by S. Barth.]

Jean-Claude Trichet, the European Central Bank president, must see the market as a kind of sorcerer who is on his way home to save the day. As the Financial Times tells us (here and here), Mr. Trichet has called on financial markets to "help policymakers rebuild the levels of confidence in the banking system required to kick-start economic growth around the world." He "gave a stark warning to financial markets yesterday to stop putting pressure on banks to hold more capital."

But the market is not the sorcerer. It is the water--neither good nor bad, just flowing, or flooding, or drying up, doing what water does.

Trichet's jawboning reveals that politicians and their appointees, the quasi-government officials, are not part of the solution; they're part of the problem. They are Mickey.

It should be no surprise, then, that Mickey decided in 1913 to take over the powers of the sorcerer by turning a market-suggested financial-market-system convenience--the Federal Reserve clearing house set-up--into a powerful and politically expedient government-like macromanager of our money supply. Nor should it be a surprise when he ends up destroying our economy in the process. (See my article on the Fed, Page 1, Page 2, and Page 3 for more.) He's got the broom now, and things are getting out of hand. Mickey can call on every power he possesses, the water will never heed him.

We shouldn't be disappointed when ordinary humans fail at sorcery. It's not really their fault. Our government agents are themselves part of a bigger "market," in a sense. When we go to the polls and vote for more government intervention in our life, we are expressing our political "market" preference for government sorcery.

In our current crisis, here's an example that shows the pickle their in. This article in the FT says:

"Amid the recrimination and hand-wringing over the causes and consequences of the financial crisis, bankers and policymakers at the World Economic Forum in Davos have identified a new threat to global prosperity: the rise of financial protectionism. The huge state-backed bank bail-outs in Europe and the US, while necessary to prevent a collapse of confidence in the financial system, have forced banks to withdraw from overseas markets in order to concentrate their limited resources at home. ... The sharp reversal of capital flows appears at least partly due to political pressure on banks, especially those that have received large doses of state support, to sacrifice international operations in favour of maintaining lending to domestic consumers and companies. For governments attempting to explain their decision to commit hundreds of billions of taxpayers' money, this is an understandable response."

Likewise, when our factory workers start to hurt, the government becomes protectionist on that front as well. In 1930, Roosevelt's Congress, in response to public pressure to "do something," forced the market to "buy American" by passing the Smoot-Hawley Tariff Act. This Tariff turned out to be one of the main reasons the country didn't recover from the Great Depression until a decade later.

Here's more evidence of the public's growing protectionist spirit in the form of restrictions on purchases of steel with the stimulus package. (At press time, Obama seems to be rethinking this, but he will have to disappoint his base to do anything about it.)

Another example of forthcoming problems for the Sorcerer's Apprentice: The stimulus package won't work the way it's intended. You can't force banks to lend by throwing money at them, because as one banker put it, paraphrased by the Financial Times, "it is difficult to make loans to companies and individuals as most new lending would be loss-making and end up burdening their balance sheets with further writedowns." (FT Article.)

You can't buck the market. Nor can you force home buyers to buy when they know darn well prices will go down even more. Furthermore, when the government borrows money to spend on its own projects, it takes it away from the very people it is trying to help: capital-starved small businesses.

If we step back for a better perspective, clearly we are confronted with a culturo-political phenomenon: People have turned to government to cure a problem of government's own making. That's like asking Apprentice Mickey to solve the water problem.

There is one natural market phenomenon that will get Mickey back onto dry land in the longer run. It is a return to some form of a gold standard. This standard evolved in the marketplaces of the world over the centuries, and it would exist today if government agents had not decided to force their citizens to abandon it by declaring paper money to be our only legitimate legal tender.

A Bit of Humor about the Stimulus Package

Sometimes I manage to laugh at government's attempts to be useful. Here's my latest cartoon. (Click on the image for a larger version.)

"Keynesian Kool-Aid" -- Catchy Phrase for the Stimulus Package

Listen to this Cato podcast featuring Chris Edwards to get the proper perspective on the forthcoming "Stimulus Package" that President Bush, Treasury Secretary Paulson, Fed Chairman Bernanke, and Congress all seem in a hurry to put in place. It's a race to see who will get the Most Caring Politician prize.


[Thanks to Kraftfoods.com for the image.]

Edwards says this about government stimulus to the economy:

"I think that Mr. Bernanke has been drinking the same sort of Keynesian Kool-Aid that other prominent economists like Larry Summers have been drinking. I don't believe it works. I think it simply pushes debt onto future generations of Americans, so I actually think there is a moral question here. A stimulus package simply is the federal government borrowing more money, giving it to people now, just sort of randomly and then putting the tab on taxpayers and our children in the future. It seems to be very immoral for the federal government to go ahead and do this when frankly they have no idea what they are doing with the economy.

"Economists have a horrible track record on forecasting what the economy is going to do, even a few months ahead of time. This sort of stimulus package is just a shot in the dark, it's a big waste of money and it just increases the nation's debt."

Daniel Mitchell of Cato concurs, saying:

"Rebates are particularly disappointing because they resuscitate the discredited Keynesian notion that an economy benefits when the government borrows money from people in one sector of the economy and distributes it to people in another sector of the economy. Economic growth occurs when there is an increase in national income, not a redistribution of national income."

Finally, a little common sense. But that never stopped a politician, nor for that matter a Federal Reserve Board.

The same comments above could be applied to the Fed technique of issuing credit to the monetary system. It's really just robbing Future Peter to pay Present Paul. At some point, the credit tab must be paid.