Transparency, As Promised

As I've stated before, I wanted very much for President Obama to bring true change to Washington - much-needed change, to a place deeply mired in lobby-driven graft, the good-old-boy network, shameless self-interest, and partisan divisiveness. I truly did. But given the events of his first few weeks in office, I'm afraid that he's made good on one of his campaign promises, one that we previously had reason to doubt he'd keep:

Increased transparency.

The early returns on this promise were ... well, less than promising. He signed the Lily Ledbetter Fair Pay Act without posting it on the White House website for five days, so that we the people could review it, even though he'd promised during the transition to do so with all non-emergency legislation that was presented for his signature. And we still don't know what the heck Tim Geithner's planning to do with the second half of the TARP money. I'm not sure Tim does, either.

But especially seeing what's in the President's proposed budget, and after a few other little items that have come up in the early days of the new administration, his agenda appears increasingly transparent.

Consider these things. After his first Commerce appointee had to withdraw in the midst of a scandal - and only after the porkulus bill passed the Senate by the narrowest of margins, requiring three GOP senators to cross the line in order to secure passage - President Obama saw the handwriting on the wall: he couldn't count on blind bipartisan support for everything he wanted to do, as fiscally conservative Republican senators would actually demand to read spending bills before voting on them. So if the Democrats are to make sure their agenda is pushed through without opposition, they must increase their majority in the Senate.

So the President appointed a GOP senator, fiscal conservative Judd Gregg, to Commerce. Sen. Gregg agreed, but only if his state's Democrat governor would agree to appoint a Republican to replace him.

So she did - a RINO who would certainly side with the Democrats on every vote.

Now, that in and of itself doesn't necessarily tell us much. But at the same time, the President announced that the census - which has always fallen under the purview of the Commerce Department - would be taken from Commerce, with responsibility for it coming directly under the White House staff.

Why is that important? The census determines Congressional district boundaries, and its manipulation can provide opportunities to gerrymander, so that a party that controls, say, the White House and both houses of Congress can stack the odds in favor of maintaining or increasing its majority in the House.

Any such attempts on the part of the administration would undoubtedly have met with resistance from Commerce Secretary Gregg. So after the Senator saw the underlying intent of the move, and after he saw how close the porkulus vote was, he withdrew his candidacy for the Commerce vote and stayed put in the Senate to fight the good fight.

Fast forward to this week, when it was announced that the Senate had passed legislation to allow voters in the District of Columbia - who vote heavily Democratic - to elect a Representative to the House. Now, the bill also gives an extra seat to Utah, and it expands the electoral college to add one more elector - also from Utah - which will end the scenario where there could be an electoral tie, as the total number of electoral votes is now odd. Utah is a red state, so its inclusion was a move to win Republican votes for the bill. But still, only six GOP senators voted in its favor. (To throw the GOP an extra bone, the bill rescinded DC's tough gun laws, but that provision will be dropped in the House version that will be voted on next week, since the Democratic majority in the House is so large that its version won't need that sweetener.)

This really isn't a huge deal, as the additional seats should cancel each other out in the House. What's significant about it is that the Constitution only provides representation for states, and DC isn't a state. So the Constitution would have to be amended for the bill to be legal. And I'm not arguing that DC's residents - who pay taxes, after all - shouldn't have representation; we fought a revolution on that very basis. Again, taken of itself, this isn't really all that signficant. But stay with me; these things all need to be taken together.

Now let's look at the budget (which I promised yesterday to do, but as I reviewed it, decided it's actually part of a bigger story).

In the face of the worst recession since possibly the 1930s (President Obama certainly has gone on record stating he believes so), and with a massive, pork-laden spending-bill-wolf-in-"stimulus"-sheep's-clothing already passed, on top of a huge inherited deficit, and with more bailouts in the offing (just this week, another $25 billion to Citigroup, another $15 billion possibly to AIG, and another $22 billion possibly to Chrysler and GM), the President proposed a break-the-bank budget that is full of left-agenda spending.

Spending on education. Spending on nationalizing health care. Spending on "clean energy." Bad ideas? Not necessarily, in and of themselves. It will depend on the execution.

But in the face of the current economic malaise, and the huge debt the US is taking on, these things should wait.

Heck, even Mexico's president gets that. After President Obama told Presidente Calderon that the US' top priority in terms of its relationship with it southern neighbor would be immigration reform, Mr. Calderon acknowledged that immigration reform would be beneficial to both nations. "But," he went on to say, "the best thing that President Obama and his government could do in favor of Mexico and the region is to solve the economic problem in the US."

He gets it. Why don't we? Priority one in this country should be the economy, and everthing else that costs money should take a back seat until that's fixed.

The budget also calls for the end of the Bush tax cuts. Again, not necessarily bad in isolation. But FDR showed us in 1937 what happens when you hike taxes in the middle of a deep economic downturn: you prolong it and worsen it.

What is becoming increasingly apparent - transparent, if you will - is that, after eight years of frustration under the Bush administration, after eight years of seething rage at Karl Rove's permanent majority agenda, the Dems are swinging the pendulum the opposite way, and hard.

They want to create their own permanent majority, through gerrymandering, both existing and additive. They want to pursue their long-desired agenda items of health care nationalization, entitlement expansion, wealth transference, etc.

Now, it's hard to blame them. The past eight years were certainly divisive in this country, although the responsibility for that is equally shared on both sides of the aisle; let's not forget that the outgoing Clinton administration thumbed its nose at Bush even as he was being sworn in, by trashing the White House, holding a press conference at the Andrews AFB send-off to try to upstage the inauguration, etc. And this came on the heels of the bitterness over Al Gore losing his lawsuit to win the 2000 election.

The great divide was born then; it only briefly healed after 9/11. President Bush most certainly squandered the unity dividend that followed that tragedy, especially with the invasion of Iraq. But the healing post-9/11 was tenuous in Washington, even if it wasn't in homes throughout the nation. Sen. Clinton used the terror attacks on her newly-adopted state to increase her visibility, and there was immediate - though muted - criticism of President Bush for some aspects of the response.

Still, the Democrats frustration, and their desire to finally get to spend as much money as they wanted on their pet projects, is understandable. And not everything they want to do is a bad idea, as I've said. But the massive bailout mania that began last year under the Bush administration, which was anything but fiscally conservative, paved the way for additional massive spending on anything and everything. In an environment where trillion is the new billion, the American people seemed almost numb to the idea of doubling a deficit that was already going to be double last year's record shortfall.

So it appears that this administration and Congress are returning to the old "tax and spend" model. And I'm not applying that moniker either exclusively nor universally to Democrats. Both Bush administrations lived up to it, and I wouldn't call President Clinton a tax and spend Democrat.

Maybe he was, at the core; maybe he wanted to be. But he at least understood, being sworn into office on the heels of a recession and during a still-anemic recovery, that "it's the economy, stupid." So if he was a tax-and-spender, he buried his tendencies and sought to strengthen the economy and use the peace dividend and low interest rates to balance the budget.

This lot doesn't have that resolve, or else they don't get the importance of economic matters. So they're going to spend as much as they want on what they want, taking steps along the way to try to ensure their ability to continue to do so after future elections - economy be damned.

I, for one, could live with a little less transparency. There are some truths that I'd just rather not know.

As for the budget itself, the proposed $634 billion in spending on health care nationalization is but a "down payment" - the full cost is projected to be a trillion dollars, and we all know what will happen to that estimate when all the spending's done.

The additional $750 billion in aid to the banks - which is being gobbled up even as I type - may not be necessary, according to administration officials; it's being referred to as a "placeholder" in the budget, in the event it's deemed necessary. In Washington, we all know what that means: it will most assuredly get spent, one way or the other, even if its purpose has to be shifted to an ancillary one. And it will become part of the base line for next year's budget, which will increase it.

Reaction to the budget is predictably mixed - divided would be a better term to use. Naturally, many (myself included), armed with a full understanding of exactly what brought us to the brink of economic ruin, are aghast at such huge deficit spending on pet projects at such a time as this.

Others think it's fine. Here's a quote from one American interviewed by Reuters:

"I like Obama, so I am willing to be cautiously optimistic. If anyone has a shot at creating a budget that will be good (with) good priorities, he's got the best chance."

Really? How do we know this? Is it true merely because we like the guy? Does he honestly have the most experience, the greatest wisdom, in crafting a budget? Has he ever had to do anything more than vote on a budget in his life?

Translation: "Had John McCain been elected President, and proposed a budget full of tax cuts and defense spending that would result in a two trillion dollar deficit, I'd be screaming to the rafters about fiscal irresponsibility."

We remain divided. And a house divided against itself cannot stand.

How Do You Spell Relief?

Okay, time to dig into this foreclosure relief plan - something I had meant to do earlier in the week, but wanted to tackle the address to Congress while it was still fresh. So I'll cover this today, and hopefully get to the new budget next.

But first, a brief rant on a somewhat related topic. After selling off Monday, the market rallied back Tuesday - in spite of bad economic data - on a comment during Helicopter Ben Bernanke's Congressional testimony that the economy might start to recover this year. Of course, he hedged his statement mightily, noting that such a scenario assumes the banking sector can be stabilized by then.

Seriously, why would anyone listen to this guy at this point? Isn't this the same Ben Bernanke that about a year ago said the subprime contagion could be contained, and appeared unlikely to spill over to the broader economy? If Ben couldn't see this coming, he can't see five inches in front of his nose. So let's not place too much stock in his prognostications regarding where the economy's headed next.

On to Jim Cramer, Bubblevision's blowhard-in-chief. After fawning over Sheila Bair last night, he commented that the government has to force banks to make loans, because if a bank offers credit cards, and its model says not to issue them if unemployment hits 10%, then it won’t issue them when unemployment hits 10%, which it’s close to doing.

To which I respond, "Duh."

Likewise, he said no bank would want to make a home equity loan in this environment, which is also true. So he says the government HAS to force the banks to do so.

Okay, let’s follow that to its conclusion: the government forces the bank to make the loan. Because of high unemployment and still-falling house prices, the loans default. The bank loses money, but presumably a condition of the government forcing it to make the loans is a backstop from the government – if not, the government will just bail them out once the losses threaten to make them insolvent.

So why doesn’t the government just eliminate all banks and start issuing credit cards and HELOCs itself, to the people who can’t afford to pay them back, funded by those of us who can (for now)? And this clown has a TV show, while you and I have to work for a living.

Rant over.

The $75 billion mortgage relief plan unveiled in Mesa, Arizona last week is supposed to help up to 9 million homeowners avoid foreclosure. (There's that "up to" qualifier again, which means that if one homeowner is helped, the plan worked.) Wait - that's $8,333 per homeowner. Is that really going to stave off foreclosure? Looking at another order of magnitude, the US housing market has lost over $6 trillion in value since the bubble burst, and most estimates indicate that the bleeding is just half-done. So throwing 1.25% of that loss at the problem will produce a fix?

The plan is supposed to help two broad groups of homeowners. The first - "up to" 5 million homeowners - are people whose home value has fallen to the point that they can't qualify for a conforming refi. So the plan would basically relax the Fannie/Freddie conforming qualifications so they can, providing low-cost mortgages - the rate being subsidized by those of us who responsibly bought no more house than they could afford, with a large enough down payment to insulate ourselves from falling prices - which will reduce their monthly payment.

The trouble with this notion is that the problem with those folks isn't the monthly payment, it's the home value, and I'll dig into that momentarily. Studies have shown that up to 80% of homeowners will simply walk away from the home if its value falls 20% below the mortgage balance, even if they can comfortably make the monthly payment on the current mortgage. Why?

Because the bubble led people to believe that the home is just another investment, and people tend to bail out of investments when their losses reach a critical point. Whereas the rest of us see the house as a place to live, and recognize that, just as it was folly to think real estate values would rise forever, it's folly to think they won't eventually - in the long run - recover. So we simply plan to stay put and not sell until they do.

So what those people need - absent discipline and fiscal responsibility, which apparently are only useful in speeches these days - is principal reduction, not payment reduction. And that's not part of the plan.

The second group the plan is supposed to help - "up to" 4 million homeowners - are those facing foreclosure because of job loss or other recession-related impacts, or because of resets on ARMs.

You know, foreclosures as a result of job loss are tragic, but they happen. Always have, always will. I remember, as an S&L examiner in the Rust Belt in the late '70s, entire communities where people left "jingle mail" in the mailbox and moved to where the jobs were, after they lost theirs. It's a fact of life, and those people didn't get bailed out.

Moreover, if you get an ARM, you should know the rate can go up. If you can't afford the higher payment - or if you assumed real estate values would go up forever and interest rates wouldn't, and you could refi at a lower fixed rate later - then I'm sorry to say, you're at risk of losing your house.

President Obama was adamant that none of the money would go to speculators, or to people who "knowingly bought more house than they could afford." Let's see how this works in practice:

Lender: "Okay, first question: are you going to live in this house, or are you a speculator looking to flip it?"

Well, what do you think the answer's going to be? I know of at least one individual who bought a second home during the bubble as an investment, and told the lender he was going to live in it, to get a lower rate. Is the government going to verify this information? If so, how?

Lender: "Second question: did you knowingly buy more house than you could afford?"

Again, guess what the answer will be? "Uh, gee, no, I had no idea that my income as a fry cook at Wendy's (which I lied about on the application) wasn't sufficient to afford a 5,000 square foot McMansion with Italian marble floors, five bedrooms, a media room, and a swimming pool."

At least Bair and others have since acknowledged that some of the money will wind up in the hands of the wrongdoers. But she took it a step further down the path toward communism (we're getting past socialization now), saying that was okay - necessary, in fact: we need to just bail out everybody facing foreclosure, moral hazard be damned.

Not on my dime, sister.

President Obama's justification for the plan was that foreclosures hurt everybody; when half the people on your street get booted out of their homes, and those homes stand vacant and neglected, it hurts everybody's property values. True - temporarily. But not everybody is irresponsible enough to walk when that happens. The vast majority of us pay our mortgage bills on time, and plan to stay in our houses until the value recovers, at least.

The notion is that preventing foreclosures can "put a floor under housing prices," a concept that I've been ranting about since it became part of the new-speak of the new Amerika.

Let me put it simply: a house is an asset. Asset prices are predominantly governed by the laws of supply and demand. The supply of available new homes for sale just hit a record 13.3 months, thanks to rampant over-building that was slow to be corrected (the norm is about 5 months). And the supply of existing homes, while off its recent record, did tick up in January, to 9.6 months, or about double the norm for resales.

Until there is sufficient demand to meet the supply, housing prices will fall. At equilibrium, there will be enough truly qualified buyers to arrest the free-fall. It is impossible to put a floor under prices; they have to reach their natural floor.

Another problem with the plan is that it's only intended for those not yet delinquent on their loans. Yet the current default rate continues to escalate. And the plan won't apply to jumbo loans, on which the default rate is also beginning to climb rapidly.

Meanwhile, Fannie and Freddie are raising fees and down payment requirements for purchase mortgages, and upping points for below-prime FICO scores. That'll help.

Also - as I predicted - the bond market has begun to react to Washington's spending spree, with yields rising this week as issuance ramps up, and also in response to the $1.7 trillion deficit projected this year after the release of the President's new budget, which calls for spending pell-mell on health care reform, clean energy (a black hole for investment dollars), and green stuff (ecologically speaking). That will keep mortgage rates from coming down, because the mortgages will have to be packaged and sold to investors in order to have the liquidity to underwrite them, and investors demand a spread to Treasury yields to buy mortgage-backed securities.

I like what Weiss Research had to say about the plan:

"Foreclosures are actually resulting in overpriced homes burdened with too much debt being moved into the hands of new buyers, who are paying drastically reduced prices. They can therefore purchase using a traditional mortgage ... Delaying and dragging out the downturn ... will arguably work against the market healing."

But of course, we can't afford to let the market heal. We must act swiftly and boldly.

"Fine Speech. Now What Do We Do?"

As I noted in a previous post, I'll take any opportunity to quote a line from "Braveheart," especially one uttered by Steven the Irishman.

The reference is, of course, to President Obama's first address to Congress last night. Yes, he sure turns a pretty phrase - he could make "I'm going to kill you, painfully and slowly," sound like a sugar-coated opus of love and affection.

Or, "I'm going to bury you, your children and your grandchildren in a mountain of debt from which you'll never recover, and may very well sacrifice US sovereignty in the bargain."

I liked his speech at first. He started by frankly acknowledging the seriousness of the economic crisis we're engaged in, and tossed in a resolute affirmation that we, the greatest nation on earth, will recover, and "emerge stronger than before."

And he alluded to where the responsibility for this calamity truly lies: in excessive borrowing and spending, from households to companies to the Beltway:

"Now, if we're honest with ourselves, we'll admit that for too long, we have not always met (our) responsibilities - as a government or as a people. I say this not to lay blame or to look backwards, but because it is only by understanding how we arrived at this moment that we'll be able to lift ourselves out of this predicament."

At this point, I was cheering him. This seemed like the perfect set-up for a discourse on the fiscal responsibility that will be necessary for all of us, and particularly for our federal government, if we are to have any hope of a lasting recovery. And as he continued, he seemed to be heading in just that direction:

"The fact is, our economy did not fall into decline overnight. Nor did all our problems begin when the housing market collapsed or the stock market sank. We have known for decades that our survival depends on ..."

What next? "... breaking the habits of excessive consumerism funded by back-breaking debt burdens that threaten the solvency of our banking system and choke off credit"?

Nope. Instead we got a segue into how the root of the problem is that we're importing more oil than ever before (not true; oil imports have fallen since peaking in 2005, and are projected to continue to moderate), the high cost of health care eats up too much of our savings (true, but so does the high cost of excessive credit balances - and if the emphasis is on savings, why not incent that, instead of more borrowing and spending?), that our schools do not adequately prepare our children to compete in a global economy (true again, but with China and India being the primary countries nipping at our heels and importing our jobs, and with the savings rates in those countries in double-digits, why not start by teaching financial literacy in our schools?).

Then came a call to act "boldly and wisely." I'm beginning to suffer a Pavlovian cringe every time he says that, because I fear what's coming after. At least he didn't say "urgently" this time.

We got more fluff about the mythical 3.5 million jobs that the porkulus bill will save or create. That's not going to happen. We got a reminder that 95% of Americans will receive a "tax cut" this year, in the form of an extra $13 a week not withheld from our paychecks - money that, of course, we're encouraged to spend immediately.

He promised us that Vice President Biden would lead a "tough, unprecedented oversight effort - because nobody messes with Joe." That brought the Dems to their feet, applauding VP Biden, who remained seated, leading me to want to yell, "Stand up, Joe!" Yes, that the same Joe Biden who voted for the no-strings-attached TARP without reservation will be leading the effort to oversee how the porkulus funds are spent will have me sleeping better at night. With the help of a little scotch.

He also promised a website, recovery.gov (created at what cost, I pondered) to help us watch how our tax dollars are being spent.

I don't need that website. I can just walk into my bathroom, flush the toilet, and watch what happens.

He then went on to talk about how important it is to un-freeze credit, so that we can borrow more money to buy more stuff. I've preached the sermon on that topic often enough that no one reading this needs to be subjected to a re-hash. Just remember what I've said before, or read my past posts.

He talked about his housing rescue plan, which I'll address in detail in an upcoming post, hopefully within the next day or two.

He acknowledged that the recovery plan will require "significant resources from the federal goverment (read: China) - and yes, probably more than we've already set aside." Instead of that recovery.gov website, how about a Jerry Lewis-style tote board that tracks the tax dollars we're going to be spending, assuming we have access to sufficient computing power to turn over the numbers as fast as the dollars flow?

Then it was time to talk about the budget that he's going to be submitting to Congress. He called it "a blueprint for our future." I'm guessing that when we get a look at this blueprint, we'll realize that it is the architectural map for a very large prison, one from which escape may prove impossible.

The prison will have three foundations: energy spending, health care spending, and education spending. All noble concepts, if one trusts the government to be able to pull them off without making things even worse, and to lay out the spending plans without packing the required bills with pork. But the bottom line is that the three cornerstones of this building (don't they need four?) will be spending, spending and spending.

Oh, but wait - he also promised to halve the deficit by the end of his first term (this after expressing pride in passing the "recovery plan free of earmarks," to which I must point out that the emperor is embarrassingly naked). He said they've already identified two trillion dollars that can be cut from wasteful government programs (which led me to ponder how many of those he voted in favor of as a US Senator) in the next decade.

Okay, let's do the math: that's savings of $200 billion a year for the next ten years. Mark my words, this year's deficit will exceed $1.5 trillion, and may reach $2 trillion, and next year's will be worse. It's going to be hard to halve that in four years by knocking off 10% a year, while additional massive spending is undertaken. My projection is the deficit will still exceed a trillion dollars by the end of his first term, and may be double that, or more.

He promised to end wasteful education programs and agribusiness subsidies, but those will just be replaced - if not increased - with new education programs and other subsidies. It's a zero-sum game.

The rest of the address was fluff. It sounded pretty, but the proof will be in the pudding, and I'm guessing it will be a pretty fat-laden concoction, and one with a very high menu price.

I'd rather pass on dessert; I'm feeling a bit queasy.

By The Formula

Let's talk GDP, in particular the role of government spending and how it impacts it.

First, here is the equation for how GDP (gross domestic product, the preferred measure of a country's economic output):

GDP = C + I + G + (X-M)
where:
C = consumption
I = gross private investment
G = government spending
X = exports
M = imports

Consumption is what the private sector spends on stuff: necessities like food, rent, and medical expenses, but also iPods, BMWs and espresso machines.

Gross private investment is what companies and individuals invest in the economy. Whether it's a business buying a new copier, a company building a new plant, or you or me buying shares of Google, it's included here. (New home purchases fall into this category too.) It's called "gross" because depreciation on that copier or plant is not counted against the value.

Government spending should be pretty doggone obvious at this point, and exports and imports are intuitive.

So basically, it's what we spend, both in the public and private sectors, what we invest, and what we make and sell abroad minus what we buy that's made abroad. Makes sense, right?

Okay, let's make some observations. First, our economy, since the late 1980s, has been driven by the "C" component. It wasn't always this way, though, so don't let the newbies in Washington and the talking heads on Bubblevision fool you. Most of them think US economic history started in the mid-'90s. Every sustainable period of growth in this country has begun when the savings rate was high. "I" is the engine of economic growth. "C," when pursued too long, requires increasing amounts of credit to sustain it, until the leverage becomes unbearable and the house of cards collapses.

Second, the net exports equation (X-M) has been negative for some time now. It was the only thing keeping economic growth positive for the first half of last year, as the cheap dollar boosted exports while our weakening economy was generating less demand for imports. But when the biggest economy in the world exhibits contracting consumption, other economies are going to slow too, and even faster, because they're smaller and more dependent on the US market. For all the talk of de-linking in the global economy, the old truism still holds: when the US sneezes, the world catches a cold.

But all the boost in net exports did was make a big negative number a smaller negative number - in other words, we still had/have a trade deficit. It just became less of a drag on GDP than usual, and made tepid growth look a little better.

Another thing that can artificially inflate GDP is when "I" is too high relative to "C." I don't mean this in terms of saving and investing in long-term growth, but in producing right now. That results in an inventory build-up, and can make GDP positive all by itself (as almost happened in the third quarter of last year, when GDP declined by 0.5%, and inventories grew 0.8%). But it's not healthy; it demands an ultimate reduction in output to reduce the inventory overhang, unless demand turns around quickly. And we're headed for even worse news to come: not only did the inventory growth in the third quarter approach 1%, it was 1.3% in the fourth quarter, when GDP contracted by 3.8%. So, had inventories been flat in the second half of 2008, GDP would have fallen by 1.3% and 5.1% in the third and fourth quarters, respectively.

To clear that run-up in inventories will require a correction that will make first- and probably second-quarter GDP look like crap. It will take a while; inventories are falling rapidly as companies scale back, but sales are falling even faster, as the inventory-to-sales ratio continues to rise. We'll see this persist through at least this quarter.

Okay, now for the economics lesson in all this. What happens when "I" and "C" go in the crapper? Keynesians think you can just boost "G" to offset it. The thinking is that this will provide jobs, infrastructure improvements, yadda yadda yadda. There are several problems with this thinking, especially in the current environment.

First, that's going to take a might big boost in "G." GDP in the fourth quarter was a little over $14 trillion. "C" accounted for about $10 trillion of that, "I," another $2 trillion, and net exports subtracted a half-trillion. Now, let's say "C" and "I" fall at their prevailing rates all year. That's a trillion-dollar hit to GDP. So the government is trying to replace it, dollar-for-dollar, with "G."

The problem is that private capital is far more efficient than government capital. That's why we're unlikely to see a multiplier effect from this, where a buck of government spending produces greater economic benefit, say, a buck-and-a-half's worth.

Especially with this bill.

Also, there's the deficit. Again, we're creating more problems than we'll solve (not hard, since the latter number is zero) by doubling a deficit that's already double the previous record.

Finally, it's just another Ponzi scheme. We wrench the money out of taxpayers' wallets - maybe several generations' worth - and give it to the government to spend as they will, to replace the free-choice saving and investing and spending decisions those individuals would otherwise make with their hard-earned money.

By definition according to the GDP formula, we gain nothing as an economy. But we lose free choice as citizens.

Debunking a Myth

How many jobs will the massive deficit spending bill create? Four million? Three-point-five million? Two million? Three million? What's the number this week?

Quick aside: I asked my D2 football buddies to help me come up with a better acronym for the bill. Some gems: Every Republican Resisted Our Ruin, or ERROR (only true for the House version); When Even Lazy Folks Are Rewarded Evenly, or WELFARE; and Federal Assistance In Leveraging Ourselves Up a Trillion, or FAILOUT. Probably the funniest one was "Economic Rescue Plan," submitted by a Kool-Aid junkie. But the best thus far is one I submitted myself:

Federal Oversized Omnibus Keynesian-Economics Disaster, or FOOKED. Pardon the irreverence, but as a Scotsman, and a member of clan Wallace to boot, Braveheart is my favorite film. And I've always loved the line from Stephen the Irishman:

"God tells me He can get me out of this mess, but He's pretty sure you're fooked."

As are we all, now that the FOOKED has passed.

Anyway, back to the jobs claim, which I've promised I'd get around to debunking for a while now.

The first reason we should be skeptical of this number is that President Obama first threw it out (to the best of my knowledge) during the transition, when he said we needed a plan to create three million jobs. Then it was four million. Then he clarified it to say "create or save" those jobs. All of this without any semblance of a plan. Then, when the plan is thrown together and shoved down our throats with little or no notice, without it having been read by a single lawmaker who voted for or against it, it magically promises to create exactly that many jobs. Miraculous.

Oh, but wait - it was the original version, valued at $838 billion, that would create or save 4 million jobs. Now, after it's been reduced to $787 billion - a reduction of 6% - the job creation/salvation has been pared to 3.5 million - a reduction of 12.5%. Now why would President Obama applaud the reduction of $60 billion in spending when its effect would be to reduce job creation by twice the percentage reduction in spending, when he said in his recent press briefing that the primary metric for whether his plan was working would be the creation of 4 million - okay, now 3.5 million - jobs?

I'll tell you why. Because the job creation line all along has been pure fabrication.

First, if your goal is to create 4 million jobs, step one is to say, "Okay, how do we create those jobs?" Then, you have experts who answer that question. Once you have the answer, you say, "Okay, what's that gonna cost?"

Instead, this is how the current administration and Congress have approached the economic crisis. They asked a bunch of Keynesian economists, "How much government spending do we need to throw at this economy to replace the lack of private investment and consumer demand (more on the GDP equation in my next post)?" Those Keynesians said, "Gee, about $800 billion to $1 trillion." The administration said, "Crap! I don't know if the fiscal conservatives will buy into that. Probably the most we can get passed is $775 billion. But we'll see what we can do."

So, post-election, President Obama told Nancy Pelosi and her band of merry men to figure out how to spend $800 billion-plus. And Nancy went to her cabal and said, "What do you want?" Well, what they wanted was everything they had tried to run past President Bush, but he'd either vetoed or threatened to veto. What they wanted was every spending initiative, every wealth transfer program, every pro-labor and anti-business plan that they'd dreamed of ramming down the collective American throat since 1994, the last time their party had controlled the White House and both houses of Congress. So they porked it up, and hit the magic number. Then, miraculously, they said it would create or save 4 million - er, 3.5 million jobs.

Even their pet economist, neo-Keynesian Mark Zandi, disagrees.

Okay, so much for the seat-of-the-pants view. Without creating an economic model based on this bill - which still boasts a readership of zero, as far as I know - let's break down the job stats from recessions past.

I looked at all recessions in the post-war era, examining what President was in power, the number of jobs lost during the recession, the cause and severity of the recession, and the number of jobs created during the subsequent recovery, paying note to the President in power during that recovery.

Two caveats: first, recessions are typically not caused by a President. To wit, anyone who blames the current recession on Bush is a partisan, economically-ignorant nincompoop. Presidents can ease them or exacerbate them, but they rarely, rarely cause them.

And second, let's not forget orders of magnitude here - growth in population, growth in the labor force due to the growing inclusion of women since the post-war era, etc. None of which I accounted for in terms of presenting the data as a percentage of the labor force, out of sheer laziness. I've looked at the data on a relative basis, but I'm not taking the time to break it down as such. Any thinking person should be able to figure out the validity of the concept.

On to the analysis. Let's do this president-by-president. First up: Good ol' Harry Truman, a local boy.

Harry, a Dem, faced a mild, classic business cycle recession beginning in November 1948 and ending in October 1949, during which 2.3 million jobs were lost. The recovery in jobs began immediately, and lasted through his first term and his second, a span that saw 7.2 million jobs created, or more than 3 times the number lost during the '48-49 recession. Harry's job-creation magic? The continuation of the baby-boom expansion, and the Korean War build-up.

Next up: Ike's post-Korean-War recession of July '53-May '54, another mild one (Ike was a Republican). About 1.6 million jobs were lost - a third fewer than during the previous downturn. But by July 1957 - several months into Ike's second term - some 4.2 million jobs, or about 2.5 times as many as were lost in the preceding recession, had been added. Why? Continuation of the baby boom, primarily, plus natural recovery from a recession. Ike didn't undertake any crazy stimulus plans.

In August 1957, Ike faced another recession, this one brought on by tight monetary policy coming out of the recovery from the prior recession (recall that this was prior to the monetarist Fed era that began with Paul Volcker, and thus tight policy would have been achieved by contracting the money supply). That was a serious recession that resulted in 2.1 million jobs lost in ten months.

Yet, 23 months later, the economy had added 3.4 million jobs, or more than 1.5 times what had been lost in the recession.

Once more, in April 1960, Ike faced another challenging recession, again of the classic business cycle variety, that saw some 900,000 jobs lost in 11 months, by which time JFK was our President.

Tragically, JFK would not live to see our next recession. By the time of his assassination, the total jobs gained would be 3.7 million, or nearly four times those lost in the prior recession. The next recession wouldn't even start on his successor's watch, but did begin shortly thereafter, due in part to Johnson's policies.

That recession would begin in December 1969, under President Nixon, again due primarily to tight monetary policy in the pre-monetarist era. It lasted exactly one year, and was relatively mild, with job losses totaling 680,000. By October 1972, we had replaced 4.3 million jobs - 4-5 times the number of jobs lost.

The early '70s oil shock brought another serious downturn, commencing during Nixon's second term, in November 1973, and ending 17 months later, after his fall from grace, during Ford's ill-fated partial term. Just under a million jobs were shed, and even though four million were added in the remaining 22 months of Ford's term, hyperinflation from continued stresses in the price of oil resulted in his defeat at the hands of Jimmy Carter.

Carter appointed Paul Volcker as Fed Chair, and the crusty monetarist changed the face of Fed policy. In doing so, he applied significant, harsh discipline to the economy in his successful bid to thwart inflation. Partly as a result of that, partly due to the Iranian hostage crisis and another oil shock, the economy entered a severe recession in 1980 that lasted 35 months and saw 1.9 million jobs lost. By the recession's end, Ronald Reagan would be president.

In the 23 months from the end of that deep recession to Reagan's re-election, some 6.8 million jobs were created. Again, Reagan didn't undertake any massive stimulus. He did ratchet up military spending in the wake of the Iranian hostage crisis and in the face of an escalating Cold War, but that wasn't a huge job creator. He did cut taxes, which may have contributed to job growth. During his second term, another 11.5 million jobs were added, and there were no recessions.

That helped his veep, Poppy Bush, succeed him. But the S&L crisis would bring another serious downturn on Bush's watch, and 1.3 million jobs were lost in nine months. The "jobless recovery" that ensued, with job growth lagging economic recovery, led to Bush's defeat by Bill Clinton. By the time of the election, job growth was just 1.2 million, or less than the job losses of the credit-driven recession.

During Clinton's first term, 11.5 million jobs were added, a similar result to Reagan's second term. But once more, Clinton didn't undertake any huge stimulus effort - he didn't have to; economic recovery and job growth were already underway when he took the reins. His advisers - particularly George Stephanopolous, who authored the campaign mantra of "It's the economy, stupid" - wisely steered him to pro-business policies that would avoid tilting the US economy back into recession. He balanced the budget, largely through military spending cuts enabled by the ending of the Cold War, and aided by then-historically-low interest rates. He did hike taxes, but that didn't turn out to be a job-killer.

Clinton's second term almost paralleled his first: 11.3 million jobs created, and no recession. But there were cracks in the foundation. Much of the job creation came in the first three years of his second term, fueled by the dot-com bubble. Those jobs were added by companies that would ultimately fail. In the final year of his second term, the bubble had burst, and only 1.7 million jobs were added - about half or less the number created in each of the previous three years.

Again, Clinton had little to do with this period of job growth - no massive stimulus spending, etc. One could argue that his impact came in reversing his original decision to replace Alan Greenspan as Fed Chairman with Keynesian Alan Blinder, whom Clinton had appointed as vice-chair with the promise of the chairmanship when Greenspan's current term ended. But, not wanting to rock the economic boat, Clinton broke his promise to Blinder, who left the Fed and returned to academia.

Greenspan, of course, made the first of his major policy blunders in 1998, fueling the dot-com bubble with too-easy money. By this time, he had come full circle from his disciplined, conservative days. He had become a political animal, and owed Clinton a favor. He also had become afraid of his own shadow, and was thus prone to knee-jerk reactions.

In any event, Clinton left office on the dawn of a new recession, one that "W" would inherit. It was a mild one, lasting nine months - exacerbated in the latter portion by the 9/11 terror attacks - during which 1.6 million jobs were lost. By the end of his first term, a little less than that had been added, but he still managed to win re-election. During the first three years of his second term, 5.6 million more jobs would be added, once again due to a Greenspan-created asset bubble, this time in housing.

The NBER's official start date for the current recession is December 2007, and since then 3.5 million jobs have been lost - the most in the post-war era in a single year, but let's remember that the labor force has grown tremendously since then; on a percentage basis, thus far this downturn is less severe in terms of the labor market impact than the early '80s recession.

Yet, the fear-mongers in Washington led us to believe that this was going to be the next Great Depression if they didn't throw a trillion dollars of non-stimulative spending at it - spending laid out in a bill that nobody even read before voting to pass it.

What, then, does our little trip down memory lane tell us?

Not much.

And that's the point. There's little evidence that huge stimulus programs create permanent, viable private-sector jobs. There is evidence that tax cuts do, but Clinton's tax hikes didn't prevent job growth during his first term on the order of Reagan's second, even though Reagan cut taxes. True, FDR's 1937 tax hike proved a job-killer, but it isn't always the case - it depends on prevailing economic circumstances at the time.

The bottom line is this: if 4 million jobs are added to the US economy during President Obama's first term, it will be a happy coincidence, not part of a grand design, because there is no grand design. Once more, hope is not a plan.

And not only will it be a happy coincidence, it will be a complete shock. It's not likely to happen. In fact, by the time this recession ends, I will be surprised if we can add enough jobs in the next eight years to replace those lost.

Well, Crap ...

It passed. The massive deficit spending bill passed. I knew it would, but still ... This morning I heard a clip on the news: "When President Obama signs the spending bill, it will become the law of the land." That's when it hit me.

Interest rates are going up. Taxes and inflation, too. My daughter and her friends are going to be saddled with this mess for years to come. And we just extended the economic malaise from a couple years to a decade.

This thing was nothing more than the Dems finally getting the White House and both houses of Congress, and getting everything they've been pining for since 1994. The final bill was over 1,000 pages, and it was delivered to lawmakers late Thursday night. Not one person who voted for it read the whole bill - not one! They're spending a trillion dollars of our money (with interest), and they didn't even read the bill before they voted on it! Unconscionable!

It will not stimulate the economy. It may bankrupt a nation. Moody's is looking at the US Treasury credit rating - we may get downgraded. The Fed is talking to four primary dealers to add to the group that participates in Treasury auctions - they're worried that the current cabal isn't big enough to move all the paper they need to move. The bond market traditionally closes at 2:00 pm Eastern on the Friday before every Monday holiday, plus Good Friday, Christmas Eve, and the days before and after Thanksgiving. They're considering eliminating the early closes, for fear that without the extra trading time they can't move all the paper they're going to print. This is unprecedented. And at the same time, China, our biggest buyer, is doubling the frequency of its own three-month bills - so it's going to be a net issuer, not a net buyer.

Rates will go up. I will make money off that. I just hope it's enough to offset the higher inflation and taxes I'll be facing. I may defect.

Kudos to the House Republicans for standing against this, as well as the handful of brave, fiscally conservative Democrats who crossed the line - at significant political risk. Clearly the "Blue Dogs" are a thing of the past. Shame on the three Republican Senators who voted for this bill. This isn't a partisan thing; shame on any elected official who will vote to spend a trillion dollars of our money and our kids' money, without even reading the bill to see what's in it.

So much for the President's transition promise to place all non-emergency bills on the White House website for five days before he'll sign it. This porkulus will get signed stat. Besides, that promise was broken with the first piece of legislation he put his signature on. And few of us would have the time to read 1,000 pages in five days. And even if we did and found a bunch of stuff we didn't like, nobody would listen to us anyway.

And, the White House provided a plane - on the taxpayer's dime - to fly the deciding vote back to the Senate from his home state, where he'd been attending his mother's funeral. And the Senate extended voting hours to accommodate his return.

There is so much wrong with this, I don't know where to begin - nor do I know where it will end. I only know it won't end well.

Crap.

Next post, I'll address the promise of creating 4 million jobs (or 3.5 million or whatever the number is this week).

Voodoo Economics Redux

First, an apology. A couple of readers have commented that this blog's posts often get a bit long-winded, and I wholeheartedly concur. I'll try to do better. But please understand the reasons for my wordiness. First, sometimes I'm responding to a subject that is itself long-winded, as was the case with the last post. And second, I'm often trying to explain macroeconomic issues, which I find are understood by few but misunderstood by many. And I realize that there are some people reading who, while they're highly knowledgeable about many things, may not be that well-versed in these topics. So I try to explain things in terms that anyone can understand, which requires thoroughness.

On to the topic at hand. As the debate rages over whether tax cuts alone are sufficient to reverse this recession (they're not, and nothing else is, either), the talk inevitably turns to "trickle-down economics," popularized as "Reaganomics" under that President's administration, which were famously called "voodoo economics" by his primary foe, George H.W. Bush, who would later become his veep, then his successor.

First, a partial defense. Trickle-down economics holds that if you cut taxes for corporations and the wealthiest Americans, the economy gets the most benefit. Corporations can use those tax cuts to invest and grow, providing much-needed jobs, which provide more income for people to spend, thus stimulating the economy. And those in the higher tax brackets are often small business owners operating out of their own personal balance sheets, so they too can use the tax savings to grow and hire people.

In addition, those at lower income levels are more likely to save or pare down debt during lean times, so cutting their taxes doesn't stimulate spending as much. Higher-bracket people have more savings, and more discretionary income, and thus are more likely to spend their tax savings.

Now, readers of this blog know that I don't buy into the notion that consumption is the engine of economic growth. But trickle-down still works under my view, as it provides jobs that will allow people to save, not just spend. And the higher-bracket beneficiaries of a tax cut will invest in stocks, which gives companies more capital to invest and expand and create jobs.

Now, trickle-down isn't an end-all, be-all. It's a theory, and like all other economic theories, it works very well - in theory. But theories work because they make basic assumptions that are held constant - for example, the assumption that if the government enacts those tax cuts, it will exercise fiscal responsibility and restraint to avoid building deficits.

That, of course, didn't happen under Reagan. Part of the reason was the significant build-up in defense spending, which helped end the Cold War and bring down the Iron Curtain - a significantly positive outcome. And an outcome that paved the way for President Clinton to balance the budget, largely through reduced military spending since the threat of the Cold War had ended, and aided by low interest rates throughout his two terms that reduced the funding cost on the federal debt dramatically, after Paul Volcker had tamed hyperinflation in the early '80s.

But President Reagan's two terms also coincided with a Democratic majority in the House of Representatives for both terms, and in the Senate for two of his eight years in office. So compromises were made, as is always the case in Washington, between tax cuts and spending, and deficits resulted. I'm not finger-pointing here; such compromise is business as usual in Washington when power is divided between the parties in terms of control of the executive and legislative branches.

So far all we know, the Reagan era might have resulted in the same, or worse, deficits had his party controlled Congress all eight years. But by the same token, that scenario could have proved trickle-down economics to be a smashing success. We'll never know, and that's the problem with applying economic theories to the reality of American politics and its influence on government - the variables can't be controlled, so we can't really test the theories.

Now, Poppy Bush was no fiscal conservative in my view, nor was his son. Bill Clinton appears to have been, but again, his balancing of the budget was aided by the framework laid before his terms, and the GOP controlled both the House and the Senate for six of his eight years in office.

Here's my point regarding trickle-down economics: it's back, raised to an exponent. Now, before you call me crazy, this is my premise.

In my view, the federal government is at the top of the pecking order, economically speaking. It sits above both corporations and the wealthy, even though elections are too heavily influenced these days by both.

My rationale is simple: the government has taxing authority; it can regulate businesses; and it can print money. Corporations and rich people can't do those things. They are at the mercy of the government, which, as Gerald Ford wisely observed, is big enough to take away everything you have if it's big enough to give you everything you want.

So throwing money at the federal government to undertake massive spending is trickle-down economics on the highest order. We expect it to trickle down to businesses, the wealthy and the not-so-wealthy alike, the states, our schools, and so on. It's trickle-down theory from the top, instead of from the second and third tiers.

Can it work? Maybe. But only if it's applied prudently and responsibly, and only if we have the money to spend anyway. If we don't, we create larger problems down the road than we can possibly solve in the short-term. And if it's spent on the wrong things, we solve nothing in the short-term, and still create the long-term problems of higher interest rates, higher taxes, and a devalued currency, which leads to higher inflation.

Given the current proposed massive deficit spending bill, and the items therein, I'll leave it to you to draw your own conclusions as to whether it's going to work this time.

A Not-So-Ready For Prime-Time Player

Monday night I watched President Obama's first prime-time press briefing. I came away from it concerned. I'll make a couple of general observations first, then dig into the details. Sorry this is a bit long-winded, but then, so was he.

First, while President Obama is an excellent speaker, he needs a script to really shine. Chris Matthews' man-crush fawning notwithstanding, the President's answers were rambling, and in one instance (the Iran question), he seemed at a total loss.

Second, is it just me, or does Helen Thomas remind you of Aunt Bethany from "Christmas Vacation?" As she kept trying to ask follow-up questions, I kept waiting for Bill Hickey to shout, "Good grief, Bethany, shuddup already!"

On to the meat. The President started out with an eight-minute speech, then took questions. I'll address highlights of the speech, then dissect each Q&A.

"I took a trip to Elkhart, Indiana today ... In one year, the unemployment rate (there) went from 4.7% to 15.3%. Companies that have sustained this community for years are shedding jobs at an alarming speed."

I'm very familiar with Elkhart; my brother lived in nearby Goshen for 30 years. Elkhart is the RV manufacturing capital of America. Last summer, gas prices went up to more than $4 a gallon. Gee ... could there be some correlation there? Using Elkhart as the poster child for the credit crisis is like using Tim Geithner as the poster child for taxpayer responsibility.

"... the food banks (in Elkhart) don't have enough to meet the demand."

I'd have loved it if the President had taken this opportunity to ask people to pitch in and help, like he said we all should do when he was campaigning - maybe even post the address of the Elkhart food bank. Instead, he wants the good people of Elkhart and the rest of America to become addicted to government largess, like so many crack addicts. I'd be happy to send a check to an Elkhart food bank. In fact, I think I will. You can, too - go to www.feedindiana.org. You can donate online. I wonder if the President left a check before he got back on Air Force One, or if he was content to just use the community as a political prop to sell his agenda.

"... (the spending bill) will save or create up to 4 million jobs."

We've heard this for a while now, and I promise to address the myth in an upcoming post. Though he did say "up to," so it could create one job and he'd be right. This claim is a classic example of being long on goals, and short on the "how."

"... the federal government is the only entity left with the resources to jolt our economy back to life."

Um, excuse me, Mr. President, but America's broke. Our national debt is approaching GDP, our deficit is going to be a record percent of GDP, and our "resources" are going to have to increasingly come from China.

"It is only the government that can break the vicious cycle where lost jobs lead to people spending less money, which leads to even more layoffs."

Really? How? Are you going to repeat President Bush's post-9/11 urge to "do your business, all over the country?" Are you going to send the National Guard to my house to drag me to the mall and MAKE me spend? People spending too much money created this debacle, sir.

And how about the vicious cycle where deficit spending leads to more debt issuance, which leads to higher interest rates and taxes, which reduces spending and borrowing, which leads to more layoffs, which leads to more deficit spending? That's a little more dangerous, methinks.

"These steps will put more money in the pockets of those Americans who are most likely to spend it."

First, sir, you should incent savings, not spending. And second, do you really think the people lower on the economic totem pole are going to spend their money? In many instances, they're the ones most vulnerable to job loss, they lack the savings to cover themselves in a crisis, and they would have the most difficulty paying their bills if something happened to their jobs. They're far more likely to hoard whatever largess they receive than to spend it, and rightly so.

"... tax cuts alone can't solve all of our economic problems ... We have tried that strategy, time and time again. And it's only helped lead us to the crisis we face right now."

Mr. President, while I'll grant you that tax cuts alone won't solve all economic problems, if you truly believe that tax cuts have led us to the crisis we face now, you really don't understand this crisis at all, with all due respect. The Tax Reform Act of 1986 had the greatest impact on this crisis of any tax action, and that was only in an ancillary way, when it created the mortgage-backed bond structure known as the REMIC, which allowed for much greater securitization of mortgages, packaged into much more risky securities. But that wasn't really a tax cut, per se.

"More than 90% of the jobs created by this plan will be in the private sector. They're not going to be make-work jobs but jobs doing the work that America desperately needs done, jobs rebuilding our crumbling roads and bridges, repairing our dangerously deficient dams and levees, so that we don't face another Katrina."

I've been to the Gulf twice to do hurricane relief work, and I saw considerable damage that was totally unrelated to the levees. And I would never use that unfortunate catastrophe in a political sales pitch. I think it's as shameful to do that as to use Elkhart for the same purpose.

But, as for these much-needed jobs - then what? When the roads and bridges and dams and levees are repaired, what happens to those jobs? And I'm wary when you tell us that these are going to be private-sector jobs, because that means the government is going to contract them out. And we all know what spectacular bargains the government gets when it hands out contracts, right? Remember the $600 toilet seats? We'll get millions of dollars worth of good out of billions of dollars of spending.

"They'll be jobs creating ... 21st century classrooms, libraries and labs for millions of children across America."

Like in Milwaukee, which is slated to get some $80 million to build new schools. Never mind that enrollments are down, and the school district there has 15 vacant schools already. Sure, some money could be spent upgrading or rebuilding existing schools there. But $80 million? Again, on government contract?

"What it does not contain, however, is a single pet project, not a single earmark ..."

Riiiight. Like that polar bear exhibit at the zoo in Providence, Rhode Island, whose Senator said it was an absolute necessity.

"I can't tell you for sure that everything in this plan will work exactly as we hope, but I can tell you with complete confidence that a failure to act will only deepen this crisis ..."

Well, sir, "hope" is not a plan. And if you don't know it will work, how do you know the crisis won't deepen anyway? You sure didn't convince the stock market.

"... all countries are watching and waiting for us to lead."

Yes, and if you read the comments from world leaders attending the summit in Davos recently, you know that they are extremely concerned about the massive deficit spending we're undertaking, and about our record debt issuance to fund it crowding out the rest of the world's access to capital.

"It's a responsibility that this generation did not ask for, but one that we must accept for the future of our children and our grandchildren."

Well, by borrowing massive amounts of money to throw at the items in this bill - 90% of which will do little, if anything, to stimulate the economy - we are not taking responsibility at all, and we are mortgaging the future of our children and our grandchildren.

On to the questions, of which I'm just including the salient points.

"Earlier today in Indiana you said something striking. You said that this nation could end up in a crisis, without action, that we would be unable to reverse. Can you talk about what you know or what you're hearing that would lead you to say that our recession might be permanent when others in our history have not?"

This was a great question, as it caught the President red-handed at fear-mongering.

"No, no, no, no. I think that what I've said is what other economists have said ... that if you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of."

No, no, no, no, Mr. President, you actually said that without action, we would be unable to reverse the crisis we'd find ourselves in.

"We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough, and as a consequence they suffered what was called the "lost decade," where essentially for the entire '90s, they did not see any significant economic growth."

Japan didn't act boldly or swiftly enough? Well, perhaps. They cut their overnight lending rate to zero within 17 months after their housing bubble burst, and they took a cautious, piece-meal approach to bailing out their banks. We cut our rate to zero in December of last year, nearly two years after year-over-year home price appreciation went negative, because our Fed Chairman thought the housing collapsed could be "contained." And our approach to the banks has been cautious and piece-meal, and Mr. Geithner's lack of clarity yesterday indicated that approach is not changing - and again, the market reaction should tell us something.

"... we focus on housing and how are we going to help homeowners ... who are still making their mortgage payments but are seeing their property values decline."

Yes, Mr. President - just how are we going to stop property values from declining further? This one puzzles me every time I hear a politician bang the table and say, "We've got to put a floor under home prices!" How do you legislate an asset value? As a student of economics, I'll be most interested in the answer.

Next question: "What is your strategy for engaging Iran?"

Honestly, as he stammered his way through this one, I kept waiting for him to say "Iran is near the Iraq, or something." He looked like he wanted to use his Phone-A-Friend, and call Joe Biden. I don't think foreign policy is going to prove to be his long suit.

Next was the bipartisanship question, where he was basically asked if he was surprised by the lack of bipartisan support for the spending bill.

"... there have been a lot of bad habits built up here in Washington."

Indeed - habits that you yourself had, as a US Senator. Didn't you make a big deal of how often Sen. McCain voted with President Bush, and how often you voted against him? I'm as sick of partisanship as anyone, but I'm not sure you're the guy to end those bad habits.

He went on to cite the three Republicans he appointed to his cabinet, "something that is unprecedented." Well, let's put an asterisk by that last one: he had originally tipped Bill Richardson for Commerce, but there was this little scandal Gov. Richardson had to deal with. So he appointed a Republican Senator from a state with a Democrat Governor, who will likely appoint another Democrat as the replacement, strengthening the Democrats' majority in the Senate. Crafty move, that. But bipartisan? Not so much. Nor was the infamous "I won" comment, for that matter.

He also noted, "there seems to be a set of folks who ... believe that we should just do nothing." Not in Washington, there aren't. I've said that, but the President doesn't listen to me that I know of. Not one GOP congressperson advocated doing "nothing." They just wanted to do the right thing.

"... what I've been concerned about is some of the language that's been used suggesting that this is full of pork ... when I hear that from folks who presided over a doubling of the national debt ... I just want them not to engage in some revisionist history."

As a US Senator, did you not also preside over a doubling of the national debt, Mr. President? Did you vote against every single appropriation bill during your short tenure in the Senate? Similarly, he said, "I inherited the deficit that we have right now." Well then, sir, perhaps you shouldn't have voted for the TARP, which more than doubled it.

"... although there are some programs in there that I think are good policy, some of them aren't job creators. I think it's perfectly legitimate to say that those programs should be out of this particular recovery package, and we can deal with them later."

Fine, sir. Get out your red pen, then, because there's about $750 billion left in there that meets that definition.

Regarding the $6.7 billion dollars to make federal buildings more energy-efficient: "We're creating jobs immediately by retrofitting these buildings ... and we are saving taxpayers ... potentially $2 billion."

Again, what happens to those jobs once the retrofitting's done? And how is spending $6.7 billion to save $2 billion good fiscal policy?

"... maybe philosophically you just don't think that the federal government should be involved in energy policy. I happen to disagree with that. I think that's the reason why we find ourselves importing more foreign oil right now that we did back in the early '70s."

Or, it could be because we have more people living in this country than we did then, and more cars on the road.

Next up was Chuck Todd of NBC. When President Obama said, "Where's Chuck?" I was reminded of then-Sen. Biden's infamous "Stand up, Chuck!" Chuck asked the $800 billion question:

"In your opening remarks, you talked about that if your plan works the way you want it to work, it's going to increase consumer spending. But isn't consumer spending, or over-spending, how we got into this mess? And if people get money back into their pockets, do you not want them saving it or paying down debt first, before they start spending money?"

The response: "Well, first of all, I don't think it's accurate to say that consumer spending got us into this mess. What got us into this mess initially were banks taking exorbitant, wild risks with other people's monies, based on shaky assets."

I must admit, at this, I was yelling at the TV set. Mr. President, exactly what in the love of Pete do you think collateralized those assets that made them so "shaky," and that caused them to represent such "exorbitant, wild risks?" BAD LOANS, made to people who shouldn't have been borrowing that money to spend when they couldn't afford to pay it back in the first place.

He was either deliberately misleading the American people on this one, or woefully ignorant of the causes of the current crisis and the nature of the challenges facing our banking system. Either way, I am most worried by this response.

He went on: "Now, you are making a legitimate point, Chuck, about the fact that our savings rate has declined. And this economy has been driven by consumer spending for a very long time. And that's not going to be sustainable. You know, if all we're doing is spending ... then over time, other countries are going to get tired of lending us money. And eventually the party's going to be over. Well, in fact, the party now is over."

At this point I'm with him. The party is indeed over, as other countries are indeed tired of lending us money. But then he took an entirely irrational turn:

"And so the sequence of how we're approaching this is as follows. Our immediate job is to stop the downward spiral. And that means putting money into consumers' pockets. It means loosening up credit."

Huh? He seemed to acknowledge that we cannot sustain an economy built on no savings and borrowing to consume more, and that the party is over. Then, he advocates refilling the punch bowl by putting money in CONSUMERS' pockets (note that he made no mention of savers) and loosening up credit, so they can re-leverage. Consumer credit balances have fallen in the US for an unprecedented three consecutive months - a very good trend, given our track record. His solution, apparently, is to reverse that and go back to building the house of cards whose crumbling has led the global economy to the brink of disaster.

Not once did he mention savings. He said that "even if you're a fiscal conservative" - an apparent acknowledgement that he is not - "the biggest problem we're going to have, with our federal budget, is if we continue a situation in which there are no tax revenues, because economic growth is plummeting at the same time as we've got more demands for unemployment insurance; we've got more demands for people who've lost their health care, more demand for food stamps."

Well, why not CUT THE FAT, then, and we'll have ample money for food stamps and health care and unemployment insurance. I'm too lazy to do the research on this, but I'll bet my tax bill that the pork in the federal budget - even before this massive deficit spending bill - is many times the amount we need to spend on those things.

He said that Americans are "not engaging in a lot of long-term financial planning" right now. I disagree. Facing the passage of this monster, I'm planning for double-digit interest rates and crushing tax rates in the not too distant future.

The next question, from a Bloomberg reporter, made me laugh, because she started out with, "Many experts, from Nouriel Roubini to Senator Schumer, have said that it will cost the government more than a trillion dollars to really fix the financial system."

Chuck Schumer is an economic expert on the order of Nouriel Roubini, who predicted this catastrophe? Chuck Schumer is an economic expert, period? To even mention Chuck Schumer in the same sentence as Nouriel Roubini when discussing economic expertise is akin to tossing a Pop Warner League pine-rider in with Walter Payton when discussing football prowess. Please, ma'am - Sen. Schumer's ego doesn't need inflating any more than the next asset bubble.

She went on: "During the campaign, you promised the American people that you won't just tell them what they want to hear, but what they need to hear. Won't the government need far more than the $350 billion that's remaining in the financial rescue fund to really solve the credit crisis?"

"Well, the credit crisis is real. And it's not over. I mean, we averted catastrophe by passing the TARP legislation." Really? How's Citi's stock faring? "... because of a lack of clarity and consistency in how it was applied, a lack of oversight in ... in ... in how the money went out, we didn't get as big of a bang for the buck as we should have."

True that. So again, why did you vote for it? It was rushed through in haste, with no strings attached. I said this a long time ago on this very blog: the simple fact that Hank Paulson insisted on immunity from legal action when he pushed for the TARP's passage should have been the first clue to any thinking person that it wasn't going to be applied prudently.

He went on to say that Mr. Geithner would be "coming up with the best possible plan to use this money wisely, in a way that's transparent ... But my instruction to him has been let's get this right, let's create a template in which we're restoring market confidence. And the reason that's so important is because we don't know yet whether we're going to need additional money or how much additional money we'll need until we've seen how successful we are at restoring a sense of confidence in a marketplace that the federal government and the Federal Reserve Bank and the FDIC, working in concert, know what they're doing."

Well. I'd have to say we're going to need a LOT more money, judging from the no-confidence vote the market handed Mr. Geithner yesterday. He is indeed following in the footsteps of Mr. Paulson, whose speeches launched many a bloodbath in the equity market last year. His plans are certainly transparent, though; you can see right through them, like a sheet of Glad Wrap.

The next - and final - question was a follow-up to that one, asking what metrics the American people should use to gauge the success of the administration's programs (the spending bill and the bank rescue effort). The answer:

"... my initial measure of success is creating or saving 4 million jobs." Dang it, the phonograph needle is stuck again! But that's a pretty safe metric. It will take a long time before we create or save 4 million jobs in this economy, especially since job market recovery typically lags economic recovery, sometimes by years - recall the "jobless recovery" from the '90-91 recession, when we didn't start seeing meaningful job growth until late 1992. So he's effectively saying, "Give me until then to determine whether my schemes worked," laying the groundwork for a second term.

"Step number two, are we seeing the credit markets operate effectively?" Well, again, that will have to happen long before the job market recovers, so it really ought to be step one. "Part of the problem in Elkhart that I heard about today was the fact that this is the RV capital of America. You've got a bunch of RV companies that have customers who want to purchase RVs, but even though their credit is good, they can't get the loan."

Part of THAT problem is that the definition of "good credit" has changed since the loose-credit days of the housing bubble, and that is a move in the right direction. The other part is that banks are more reluctant to make so-called "toy loans" - RVs, ATVs, motorcycles, snowmobiles - in a recession. The collateral is harder to move than a car or a house if it has to be repossessed. If those people truly do have "good credit" - not by the lax standards of 2005, but by today's return to prudent lending practices - they can certainly get a home mortgage or a car loan, assuming they make a reasonable and prudent down payment.

He made one more reference to stabilizing housing values, which again, I'm anxious to see put into practice. House prices will stabilize when we clear the current inventory glut and return to equilibrium, and not before.

I will give him credit for the candor of one of his final comments: "... this year is going to be a difficult year ..." And the passage of his massive deficit spending bill will ensure that the next several years are going to be difficult years, at best.

A Brave New World

Or, perhaps more appropriately, a new world for the brave. Only for the brave. You've gotta be brave, to face what's coming.

We seem to be re-defining things in Washington, and it's really confusing. I finally got the math side of things: trillion is the new billion, etc., as noted in a previous post. Now, I'm working on the new lexicon. There seem to be some new etymological equalities and other realities that need to be worked through. I'll do my best to help.

Hope=Fear
"We gather because we have chosen hope over fear." -President Barack Obama, in his inaugural speech.

"Endless delay and paralysis in Washington in the face of this crisis will bring only deepening disaster." -President Barack Obama, in a speech today in Elkhart, Indiana.

Gee, "deepening disaster" doesn't sound like hope to me. It sounds like fear-mongering. I guess it's only fear-mongering when we're talking about the threat of terrorism, not economic cataclysm.

Piecemeal does not equal piecemeal if it's done all at once
Former Treasury Secretary Hank Paulson has been criticized - rightly so - for trying first one thing, then another, then another, to un-freeze credit markets, save the banking system, and halt the recession.

New Treasury Secretary Timothy Geithner is going to roll out his bank-rescue plan to deploy the second tranche of the TARP tomorrow. His plan is widely expected to be a three-pronged approach. Isn't that the same thing Paulson did - throw several things at the wall and hope they work? The only difference is that Paulson waited to see whether the first thing worked before moving on to the next thing. Geithner's going to throw his things at the wall all at once. I guess the definition of "piecemeal" is a matter of timing.

Spending=Stimulus
"So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is? (Laughter and applause.) That's the whole point. No, seriously. (Laughter.) That's the point. (Applause.)" -President Barack Obama, speaking to Congress last Thursday.

Really, Mr. President? Spending is stimulus? Okay, thanks for the clarification. I'm going to try this out on my wife: "Honey, I need to buy a new Vox AC30 hand-wired amp to stimulate my guitar playing." I'll let you know how it works out.

How to jump-start a car
Some Democratic Congresswoman - I don't recall which one, but she was from somewhere up north where it gets cold and cars won't start - made the analogy that the economy is like a car that won't start, saying that when that happens, you have to jump-start the car.

Okay, fine. But when the "economic stimulus" component of the spending bill is only 10% of the trillion-dollar total to be spent, the analogy is like hooking the car up to a nuclear power plant. Or, more accurately, to a nuclear bomb, since most of the inherent power is designed to do something quite different than bring a dead battery to life, and risks blowing the car to smithereens.

A 70% chance of success is a good bet
"If we do everything right, if we do it with absolute certainty, there's still a 30% chance we're going to get it wrong." -Vice President Joe Biden, speaking to House Democrats at their spa retreat (more on that below).

My good friend and wealth manager Rick Maner of Aspen Wealth Management put it this way: "Can you imagine what would happen in my business if I told somebody ... "we gotta do something and there's a 30% chance you’ll lose everything ... but trust me."

A spa retreat in the middle of an economic crisis, using taxpayer money, is only wrong when private industry does it
CNN's Campbell Brown, in her "Cutting Through the Bull" piece, recently reported that Congressional Democrats and Republicans both went on retreats at posh DC-area spa resorts - something they do every year, and something that's only partly taxpayer-funded, but still. You can check out the story here: http://www.cnn.com/2009/POLITICS/02/05/campbell.brown.congress/index.html.

What don't these guys get that AIG, Citigroup and Wells Fargo got? Wells Fargo defended their planned Vegas boondoggle by saying it was part of their culture, for which they got slapped around in the media - rightly so. But Congress gets a pass.

Pay caps are only a good idea for private industry
Both Barney Frank and Tim Geithner recently said they want to extend the proposed $500,000 annual pay caps for executives of banks receiving bailout money to all US businesses. Can you say, "totalitarianism?" Yet, Barney recently voted himself a pay raise, even though he and his ilk contributed mightily to the current economic calamity.

Barney, let me make one thing perfectly clear: you work for me, dude. I pay your salary. And even though I don't make anywhere near a half-mil a year, you can cap my pay just as soon as you cap yours. And while you're at it, cancel your next spa retreat.

Mister, We Could Use a Man Like Herbert Hoover Again

I'm cutting and pasting today's post from a little back-and-forth from my favorite football message board, where, during the boring off-season, we tend to talk about anything and everything and even nothing. (Though I will say that my beloved Gorillas had just a killer recruiting season - gotta love a sophomore 340-lb. DL who originally signed with Miami, reshirted there, then played a year of juco ball - woo hoo!)

Anyway, here's the guy's question, which was in response to my continued assertion that our best course of action is to NOT throw money at this recession, but just let it run its natural course:

"What was the unemployment rate back during the Depression when Hoover kept insisting that everything was okay and didn't do anything? It was at least 30%.

The unemployment rate is on a fast rise now. IF we let everything fail like you say we should...what DO YOU think the unemployment rate would be and how do you help those people?

This is why I see this as one big vicious circle."

And my response, wherein I alluded to an earlier response regarding Hoover by another poster; the original questioner had also asked another proponent of letting free markets correct themselves whether he'd be willing to let those who lost their jobs if we "do nothing" pitch tents on his lawn, hence my final comment:

"First, Jake's right - Hoover did try some things, but he didn't want to throw the New Deal at the situation. He was right, as the New Deal prolonged the Depression for at least 8 years. We'll never know how long it truly could have gone, as WWII saved FDR's bacon (pun intended). We don't want that to happen again, or at least I don't.

Second, unemployment peaked in 1933 at 25%. And yes, it's on the rise now. But it's alarmist to think that it would go anywhere near that rate if we didn't pass the spending bill. We're at 7.6% according to this morning's BLS report. We could hit 9%, maybe 10% if we left things alone. But let's not forget that the labor force has grown by 30% over the last couple of decades, as I noted in another thread. Right now, accounting for that growth, this isn't even as bad as the early 90s recession in terms of the labor market, let alone those of the prior three decades. So to suggest that we're approaching Great Depression conditions is just buying into the fear-mongering coming out of Washington this week in an effort to rush to judgment on a trillion dollars worth of pork, which will not save those jobs we wish to protect.

As I also noted in another thread, it is indeed a vicious circle. IF we pass this bill, the cycle will spiral out of control, and then we are indeed at risk of seeing another Great Depression, with the joblessness associated with that one. A key difference between then and now is that in 1933, FDR's first year in office, the deficit was 4.6% of GDP, thus FDR had some wiggle room to deficit spend without totally killing the US economy (at least, we think - again, we'll never know what would have happened if WWII hadn't saved the day).

The FY09 deficit - even before the spending bill - is going to be a trillion dollars, or about 7.2% of GDP, assuming it only contracts 3% from 4Q08 levels, which is a generous assumption. With the spending bill (which likely isn't the end of the failout mania) you can double that - yes, double it - to about 14.5% of GDP. True, we hit nearly double that in 1943, but 14.2% would be nearly double the highest rate of deficit to GDP in a non-war year. It was 7.1% in 1946, when we were still recovering from the war spending buildup, but by the next year we were running a surplus.

We don't have a world war to bail us out this time - at least, I hope we don't. We don't have the government encouraging US citizens to fund the debt build-up by buying war bonds, etc. And - another real key difference - we were far and away the dominant player, by an order of magnitude, in the global debt game. Now, the field of play is significantly more crowded, and there is much keener competition for a dwindling number of investment dollars. I don't think anyone in Washington has the first bloody clue what will likely happen to interest rates in the current global environment if we go to 14% of GDP for the deficit. And, a final key difference: back then we were on the gold standard. There were tangible assets backing our currency. Now, there is not.

Our national debt is now about $10.7 trillion. The spending bill would take it to more than $12 trillion, with interest (at today's rates - again, they're going higher fast if this thing passes, so the funding costs are underestimated). GDP is going to be less than $14 trillion by year-end, again assuming just a 3% drop from 4Q08. That puts debt-to-GDP at nearly 90%. Add another trillion in spending, or shave another trillion off output, and we are insolvent. We were nowhere near these levels during the depression, so continued spending, while proving ultimately disastrous to the economy, didn't pose the risk to economic sovereignty that it does today.

Let's also take a look at FDR's full response. In 1937, when GDP had risen 63% from FDR's first year in office due to his massive spending (remember that government spending is a component of GDP, so it was purely debt-funded growth), he had to raise taxes to try to bring down some of the deficit he'd built up - it reached $4.3B in 1936, or a then-unmanageable 5% of GDP. But remember, that GDP figure was inflated by government spending, which was a whopping 15.6% of output, so the deficit was really more like 6% of GDP. So raise taxes he did, with catastrophic results: GDP actually fell in '38, and by the next year was only back to '37 levels. So his tax hike created the "Depression within the Depression," choking off growth for two years.

Well, guess what? Today government spending already contributes more than 20% to GDP. That means that a tax hike is already due. With the spending bill, government's share will rise for '09 to about 30% of GDP. So if this bill passes, a massive tax increase is forthcoming, probably within two years. The peak tax rate during the Depression was 79%.

So to answer your original question, yes, anyone who loses their job in this economy, assuming we drop the spending bill, is more than welcome to camp out on my lawn, so long as you are equally willing to pay my interest charges and my tax bill, until the budget is balanced, if it passes. Deal?"

I should have added that while the employment situation is nowhere near Great Depression levels, our debt situation is, possibly even worse. That is precisely why, this time, it's best to let the economy suffer while we reduce the debt burden, rather than increase the debt burden to save the economy. From the starting point at which we find ourselves today, it will have quite the opposite effect.

Finally, regarding my "vicious circle" reference to another thread, here it is:

"Talk about vicious circles:

1. Spend a bunch of money we don't have on stuff that won't solve the credit crisis we're in.
2. Float a couple trillion in Treasury debt in a single year - that would far and away be a record, you know - to fund said spending.
3. Watch long-term interest rates go up when inflation gets factored into the bid, not to mention the crowding out concept since every other country in the world will be doing the same, and the pool of investors is shrinking dramatically since every country is borrowing, none are lending through buying bonds, and the banks that might otherwise buy the debt are broke. And, not to mention the higher risk premium when suddenly the US Treasury is in hock up to its eyeballs and the national debt exceeds GDP.
4. When long-term Treasury yields go up, watch credit card, auto loan and mortgage rates go up.
5. With nobody able to afford a mortgage, watch home prices fall further.
6. Watch foreclosures and auto loan and credit card defaults go higher still.
7. Watch more banks fail.
8. Watch credit get even tighter.
9. Lather, rinse and repeat."

I can't wait until football season.

"Spendulus," and Other Rants

I'm going to start and finish nice today.

First - brace yourselves - I'm going to give Nancy Pelosi a free pass on something she said.

Yesterday, she reportedly slipped up when discussing the massive deficit spending bill (let's just start calling it the MDSB, for short), when she said that the US economy is losing 500 million jobs a month.

Now, I'm not for one minute suggesting that there isn't a fairly strong likelihood that the Speaker doesn't have a clue what she's talking about when she weighs in on matters economic. But I'm inclined to give her a pass on her order-of-magnitude error.

See, in Washington, trillion is the new billion, billion is the new million, million is the new thousand. Rep. Pelosi is likely so caught up in the conversion that such an error is understandable.

************

On to the MDSB. A Wall Street Journal piece dated January 28 found a number of items in the bill that just don't seem to have much stimulative impact. To wit:

-$1 billion for Amtrak, "the federal railroad that hasn't turned a profit in 40 years." Maybe they need to upgrade the Acera Express train that carries Vice President Biden from his Delaware home to the capitol.
-$50 million "for that great engine of job creation, the National Endowment for the Arts." Though with my daughter entering college next fall to major in Commercial Art, hey, if it improves her job outlook, I'm all for it - though by its very nature, "commercial" art is more likely to create job opportunities anyway, even without spending millions on the NEA.
-$650 million more to pay for digital TV conversion coupons. Maybe if enough TV screens went blank in this company, the couch taters would go out and do something productive for the economy.
-$6 billion on mass transit. Now, I've heard arguments that this will reduce commuting costs and thereby put more cash in households' pockets, cash they can go out and spend buying more stuff they don't need, thus stimulating the economy and creating jobs making said stuff. Yeah, in China maybe. That's falling back on the old thinking that got us into this mess, that spending is the engine of growth. Plus, the WSJ writer notes that "most urban transit systems are so badly managed that their fares cover less than half of their costs. Howerver, the people who operate these systems belong to public-employee unions that are campaign contributors to ... guess which party?" But I suppose we're to believe that if we throw a huge pile of cash at them, they'll start operating more efficiently.
-$600 million for the federal government to buy new cars. The Journal notes that Washington "already spends $3 billion a year on its fleet of 600,000 vehicles." Maybe this is a subversive way of giving Detroit enough cash to cover its burn rate for another month or two.
-$7 billion to modernize federal buildings and facilities. Didn't John Thain come under fire for spending a million bucks to "modernize" his office?
-$66 billion for education, but with the stipulation that "no recipient ... shall use such funds to provide financial assistance to students to attend private elementary or secondary schools." So the only teachers that would benefit from the increased spending would be ... you guessed it, union members. Two teachers in Alabama filed suit against the NEA when they uncovered a plot that, in violation of union rules, was diverting members' dues into the NEA's PAC, which contributed heavily to the Obama campaign.

The WSJ went on to rightly question whether these increases in non-stimulative spending would "become part of the annual 'budget baseline' that Congress uses as the new floor when calculating how much to increase spending the following year." I concur with the writer that it's highly unlikely lawmakers will seek to cut spending on these programs once the economic ship rights (if it ever does, assuming passing of the MDSB).

The writer did identify some things that are much-needed - the kinds of things President Obama has cited when he talks about the urgent necessity of the MDSB:

-$30 billion for infrastructure repairs, like fixing bridges or improving highways. President Obama did use the tragic Minneapolis bridge collapse to his political advantage the other day in selling the MDSB.
-$40 billion for broadband and electric grid development (which my scientifically-minded friends tell me is a good thing), airports (and anything that will make the unfriendly skies more friendly, I'm all for), and clean water projects.
-$20 billion in tax cuts, which truly are stimulative.

Add it all up, and what do you get? About $90 billion of spending on projects that will actually stimulate the economy, though as the Journal piece points out, "Peter Orszag, the President's new budget director, told Congress a year ago, 'even those [public works] that are "on the shelf" generally cannot be undertaken quickly enough to provide timely stimulus to the economy.'"

That's $90 billion, folks - nine-oh. Just 10% of the $900 billion MDSB. But again, trillion is the new billion in Washington. Guess we should just be thankful it's not $90 trillion. Might as well be.

************

Speaking of the MDSB's size, remember during the transition when the Obama team was said to be looking at $775 billion, because they wanted $800 billion to a trillion, but they thought there'd be resistance to a number that big? Now, after deliberations by Senate Dems, the original $819 billion proposal has swollen to more than $900 billion. Are we surprised?

The reason the Obama camp wanted $800 billion to a trillion is because a bunch of Chicken Little-esque Keynesian economists told them it would take a package that big to provide meaningful stimulus to the US economy. Never mind that some 300 economists recently signed their names to full-page ads in newspapers across the nation, purchased by the Cato Institute, with the headline, "With all due respect, Mr. President, that is not true," in response to the rookie President's claim that there was "no disagreement" that such massive spending was necessary (it would have been 301 had they asked me, but given that the list included several Nobel laureates, it's weighty enough without little old me on the roster).

So apparently they wanted "a really big number," but they could only find about $90 billion that would really stimulate the economy. So they pumped the sucker full of pork until it hit their range.

Remind you of anything? Like the Treasury's justification for the size of the TARP: "The number's not based on anything, we just wanted to throw out a really big number."

************

Another WSJ op-ed piece broke down the targets of the stimulus by industry. Excluding tax cuts, the MDSB - the earlier version that was $825 billion, that is - amounted to $550 billion in spending. Some 39% of that is directed toward state and local governments, where the unemployment rate was just 2.3% in December. Another 17.3% is earmarked for health and education, where unemployment was 3.8%. By comparison, joblessness in manufacturing and construction were 8.3% and 15.2%, respectively.

The support for the MDSB's "stimulus" impact was based largely on calculations made by Washington's new favorite economist, economy.com's Mark Zandi. Astute readers will recall that Mark was the recent topic of a post on this blog, where I referred to him as "Economist Lite - a third less knowledgeable than your regular economist."

That might have been generous on my part.

From the WSJ:

"Mr. Zandi's current estimates have government employment growing by 330,400 over two years as a result of the House bill ... 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."

Hey, I tried to tell you, Mark's not very adept at number-crunching.

The WSJ goes on:

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."

So, so true. For the economics-challenged, here's a more real-world explanation of the above, in the form of a question: in the middle of an economic crisis, who's likely to spend more money, thus stimulating demand and creating jobs - people drawing unemployment benefits, or businesses and investors?

Here's a simpler explanation: Mark Zandi is a deficit-loving idiot who finally has Washington's ear, and he's making the most of it. He's certainly stimulating his own bottom line.

But an IMF economist in 2006 noted that "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.'"

Translation: if Washington spends a trillion bucks on top of a trillion-dollar deficit, every business and employed individual is going to tighten up the purse strings mightily in preparation for the inevitable massive tax increase.

************

Yesterday I praised President Obama's new casual approach to life in the White House. Today, I read something about it that raised my hackles. Granted, he didn't say it, but it reflects an aspect of the man that came under fire during his campaign, after he made the seemingly elitist "bitter people cling to their guns and their God" remark.

A news article discussing the new President's habitual tardiness compared it to that of President Clinton. The article quoted one Presidential historian as saying such disregard for punctuality means one of two things: "Bad organization that can be corrected, or arrogance. It sounds to me like this is arrogance." Okay, but that's just his opinion.

But a former advisor to President Clinton said, "I would make the opposite observation. I would say that taking time to accommodate your schedule to regular citizens is not an act of arrogance. It's an act of humility."

What??!!

President Obama, sir, I sincerely hope this man does not speak for you. Because I would politely remind you that this "regular citizen" pays your salary. You work for me; you may be the President, but I am a shareholder. And I will hold you accountable. So plan on regularly taking the time to tell me what you're doing with my money.

************

As promised, I'll finish on a nice note. I found another thing that President Obama is doing that I like: he's expanding the role of the White House Office of Faith-Based Initiatives created by President Bush. I'll reserve further judgment until I find out just what he plans to do with it. But it's a positive move, thus far.