Back in February 2009, the U.S. Congress passed an $862 billion "economic stimulus" bill to help the struggling American economy recover from the horrible financial crisis of 2007 and 2008. Right now, federal agencies are spending this stimulus money at the rate of approximately 196 million dollars an hour, and they will continue to spend it in staggering amounts up until the September 30, 2010 deadline. Unfortunately, instead of being spent on useful projects that would revitalize U.S. industry and put American workers back to work, much of this money is being flushed directly down the toilet on some of the most wasteful projects imaginable. The truth is that nobody is better at wasting money than the U.S. government. In fact, some of the things that the U.S. government has been spending money on are absolutely mind blowing.
The following are just some of the examples of "stimulus waste" that we have seen over the last 16 months....
*Florida Atlantic University in Boca Raton, Florida used $15,551 in stimulus money to pay two researchers to study how alcohol affects a mouse's motor functions.
*The U.S. government handed over a staggering $54 million in "stimulus cash" to Connecticut's politically-connected Mohegan Indian tribe, which runs one of the highest grossing casinos in the country.
*Syracuse professor of psychology Michael Carey received $219,000 in federal stimulus money for a study that examines the sex patterns of college women.
*$1.15 million in stimulus funds was allocated for the installation of a new guard rail around the non-existent Optima Lake in Oklahoma.
*Researchers at the State University of New York at Buffalo received $389,000 to pay 100 residents of Buffalo $45 each to record how much malt liquor they drink and how much pot they smoke each day. Instead of spending nearly $400,000, the U.S. government could have achieved the same goal by having a couple of scientists join a fraternity.
*$100,000 in federal stimulus funds were used for a martini bar and a brazilian steakhouse.
*A dinner cruise company in Chicago got nearly $1 million in stimulus funds to combat terrorism.
*$233,000 in stimulus money went to the University of California at San Diego to study why Africans vote.
*The Cactus Bug Project at the University Of Florida was allocated $325,394 in stimulus funds to study the mating decisions of cactus bugs. According to the project proposal, one of the questions that will be answered by the study is this: "Whether males with large weapons are more or less attractive to females."
*One Denver developer received $13 million in tax credits to construct a senior housing complex despite that fact that the same developer is being sued as a slumlord for running rodent-infested apartment buildings in the city of San Francisco.
*Sheltering Arms Senior Services was awarded a contract worth $22.3 million in stimulus money to weatherize homes for poor families in Houston, Texas - but a new report from Texas Watchdog says that the weatherization work was performed so badly that 33 of the 53 homes will need to be completely redone.
*A liberal theater in Minnesota named "In the Heart of the Beast" (in reference to a well known quote by communist radical Che Guevara) received $100,000 for socially conscious puppet shows.
*California's inspector general found that $1 million in stimulus funds for a program to give summer jobs to young people was improperly used for overhead expenses such as rent and utility bills.
*Landon Cox, a Duke University assistant professor of computer science, was awarded $498,000 in stimulus money to study Facebook.
*The town of Union, New York is being urged to spend $578,000 in stimulus money that it did not request for a homelessness problem that it claims it does not have.
*Lastly, who could forget the $3.4 million "ecopassage" to help turtles cross a highway in Tallahassee, Florida?
Yes, the U.S. government sure knows how to waste money.
And the truth is that there is simply no way that the U.S. government would have been able to accumulate a debt of over $13 trillion dollars (and growing exponentially) without being incredibly skilled at wasting money.
In fact, the Pentagon says that there are literally trillions of dollars that it cannot account for.
Now how in the world do you lose track of trillions of dollars?
That takes some major league incompetence.
It is enough to make you want to pull your hair out. We were once the wealthiest, most prosperous nation on the planet, but we have recklessly squandered our great wealth. Over and over we kept voting for corrupt politicians who endlessly wasted our money on the most ridiculous things.
So now we will pay the price.
We are already being taxed brutally, but because of all the debt our "leaders" have gotten us into we are going to be taxed even more. We did not demand accountability from our government, and so now we get to face the consequences.
But no amount of taxes will ever be enough for this government. If we give them more money they just take that as a signal to get into even more debt. As a nation we are on a path that can only be described as financial insanity.
So is there any hope that the U.S. government will stop wasting so much money? Not with the current collection of Republicans and Democrats that currently inhabit Washington D.C.
The truth is that both parties have been wasting our money for decades. Many politicians will often talk about the need to "control spending", but when time comes to do it very few of them are ever willing to take action.
So until the American people decide to start sending a different kind of politician to Washington D.C. we are probably going to continue to see huge mountains of money being wasted.
Wake up America.
Mortgage Horror Stories
Mortgage Horror Stories: The U.S. Housing Industry Will Never Recover If Qualified People Can't Get A Home Loan
Back about five or six years ago, when the housing bubble was still rising, just about anyone could get a mortgage. Lending institutions were handing out ridiculously bloated home loans to almost anyone who breathed. It didn't matter if you had a rotten credit history, it didn't matter if you didn't have a job and in some cases it didn't even matter if you had any income at all. It was basically an orgy of mortgage lending. But now the pendulum has swung 180 degrees in the other direction. Severely burned by the subprime mortgage crash, mortgage lending institutions have been seriously tightening their lending standards. As a result, in 2010 it is extremely difficult to get a home loan or a mortgage modification. In their determination not to get burned again, mortgage lenders have completely overreacted and now a lot of highly qualified people can't get a home loan.
This point was beautifully illustrated recently by one of our readers named John....
I was just turned down for a home loan. My credit score is 799, my wife’s 804. We had $40,000.00 to put down, which was almost 30%. BUT! Our bank turned down our application! Why? They required us to have 6 months “operating expenses” in the bank after all closing costs were covered. They came up with an arbitrary number on their own, based on our bills and such. We had that amount and more on top of our closing monies. Then why were we denied the loan? Several thousand dollars were from “cash” and the bank required that “cash” be in the bank for at least 60 days or they wouldn’t consider it fluid funding. Needless to say we didn’t make the closing date and are hiring an attorney to avoid being sued (by the seller).
A reader named distressedinbham on another website had an even more frustrating experience trying to get a home loan modification....
I am self-employed, have been all my life and have owned a home for 30 years. When I started my Loan Modification process in August of 09 I WAS NOT behind on any payments. I sent full documentation, over 150 pages, with the things they needed to verify my income. I am now 2 payments behind and I am getting nowhere. They keep flipping me between Loss Mitigation and Imminent Default, back and fourth month end month out. I made a habit of calling every week, then every two weeks just to be sure all was moving forward. From the middle of November I was told my file was with the underwriter and it would only be 30-60 days. I began automatically updating my income verification, verification that I still resided at the property and an updated 4506-T every month. In the middle of April a rep finally told me I was not in the loan modification process. In fact, that I had been denied on March 2. Keep in mind, I'm talking to these people every 2 weeks. She did a financial interview and sent me a new packet so that I could start all over, resubmitting all the documentation yet again. She told me she was my Account Manager. I completed the packet, called with a question (2 weeks later - over a week to receive the packet and another few days to complete it and gather all my documents again) and learned that my "Account Manager" was on maternity leave and I now didn't have an account manager. Also, I was told that I had received the incorrect packet...it was the old version rather than the updated version. She asked me to fax four or five pieces of information in the hopes it would, quote, "jump start my file back into the process" and said she we send me another packet. That was mid April. Here we sit, 2-1/2 months later, I have still not received anything in writing about my rejection. And, though I've now had people tell me on three separate occasions that I would receive a new packet, it has yet to show up on my door step. I asked several times why my application was denied and the answer I finally got last week was that it was because I was DELIQUENT in my payments. Call me crazy but I thought that was the whole point??!! I almost hired a third party but am so hesitant to take that step. Every time I get on the phone with them it takes an hour out of my day and I am usually so upset I find it difficult to work, so I just don't call. I'm going to sit back and regroup and decide what I need to do next.
The truth is that scenes such as these are being repeated over and over again across the United States right now.
Scott Stern, the CEO of Lenders One, says that a lot has changed since 2007....
"Lending standards have tightened dramatically between 2007 and 2009."
In an attempt to avoid the mistakes of the housing bubble, the mortgage industry has now created a situation where standards are so tight that the entire industry is freezing up.
In May, sales of new homes in the United States dropped to the lowest level ever recorded. To be more exact, new home sales dropped 32.7 percent to a seasonally adjusted annual rate of 300,000.
Keep in mind that a "normal" level for new homes sales is an annual rate of about 800,000.
New homes have never sold this slowly ever since the U.S. Commerce Department began tracking this data back in 1963.
Now, a lot of the drop in new home sales has to do with other factors, but certainly the fact that people are having such a hard time getting approved for loans is playing a role.
If large numbers of qualified people are getting turned down for mortgages that is going to suck a lot of money out of the marketplace.
And without enough qualified buyers, the U.S. housing industry is simply not going to recover.
But it isn't just a lack of qualified buyers that is the problem.
The truth is that the U.S. real estate market is a complete and total disaster right now and there is every indication that things are going to get even worse.
So what does all of this mean?
It means that it is going to remain very difficult to sell homes.
It means that prices are going to continue to come down.
It means that real estate agents will continue to suffer and there will continue to be high unemployment in the construction industry.
In fact, every industry that is highly dependent on the U.S. housing market is likely to continue to feel a lot of pain for a long time to come.
So do you have a mortgage horror story to share? If so, please feel free to leave it in a comment below.....
The Obama Tax Trap
The Obama Tax Trap
How some Republicans are preparing to walk right into it.
"'Next year when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits step up. Because I'm calling their bluff."That was President Barack Obama, the heretofore unknown deficit hawk, all but announcing the other day the tax trap that he's been laying for Republicans. From what we hear about intra-GOP debates, more than a few will be happy to walk right into it.
You don't need a Mensa IQ to figure this one out. Mr. Obama's plan has been to increase spending to new, and what he hopes will be permanent, heights. Then as the public and financial markets begin to fret about deficits and debt, he'll claim that the debt is "unsustainable" and that the only "responsible" policy is to raise taxes.
White House officials even talk privately about the galvanizing political benefit of a bond market crisis, which would force panicked Members of Congress to accept a big new value-added tax. The President's two looming tax reports—one from his deficit commission and the other from Paul Volcker's economic advisory group—are intended to propose a VAT and other tax options. Whatever their initial reception, the proposals will be there to be pulled from the shelf when the political moment is right.
Voila, Mr. Obama will have established a new spend-and-tax policy architecture that has the feds taking from 25% to 30% of GDP, up from the roughly 21% modern average.
***
This strategy explains why Mr. Obama is now starting to fret in public about deficits and debt. This week he even said reducing the debt will be "our project." Funny how debt seemed a lower priority when he was urging Congress to pass $862 billion in stimulus and $1 trillion in new health-care subsidies.
The Congressional Budget Office is contributing to this political drama by declaring this week that the "federal budget is on an unsustainable path." Of course, but why? The biggest reason is that Medicare and Medicaid keep rising at two to three times the rate of everything else in the economy and, as CBO explains, will eventually take up every dollar of tax revenues raised, leaving no money for anything else, including national defense.
"Slowing the growth rate of outlays for Medicare and Medicaid," advises CBO, "is the central long term challenge for federal fiscal policy." This is the same CBO that blessed ObamaCare's Medicaid expansion to 16 million more recipients.
What CBO's latest apocalyptic report doesn't stress is what we'd call the more important deficit in its forecast: the growth deficit. CBO predicts an annual rate of GDP growth of 2.2%. Yet since 1959 the U.S. economy has grown at an average rate of 3%, and during the 1980s and 1990s it was closer to 3.5%. The compounding effect of restoring this faster pace of growth would mean far more net national wealth and would certainly make debt repayment easier.
Even Mr. Obama's current spending level of 25% of GDP would be more manageable if the slow economic recovery weren't keeping tax revenue at unusual lows. In 2007, the economy threw off revenue of 18.5% of GDP. That fell to 14.8% in 2009 and may not be too much higher this year. The point is that there is no hope of balancing the federal budget without a return to higher levels of economic growth.
This is where Republicans need to maneuver around Mr. Obama's tax trap. He and his White House economists believe that taxes have little effect on growth so they can get revenues to 20% or 25% of GDP simply by raising tax rates or imposing a VAT. But if they're wrong about the impact of those taxes on a still-fragile economy recovery, they could keep the economy on a subpar growth path for years to come. We think the last thing the U.S. economy needs at the moment—and the worst policy for the deficit—is the big tax increase that will hit on January 1 with the expiration of the Bush tax cuts.
Yet we hear that even many Republicans are privately insisting that any extension of those Bush tax cuts must be "paid for" with other tax increases. Under Congress's perverse budget rules, extending those tax cuts will "cost" the Treasury revenue, even though extending those tax rates would only prevent a tax increase.
And because Congress still uses static revenue scoring—meaning no change in economic behavior from tax changes—the Joint Tax Committee thinks it will raise nearly $1 trillion over 10 years from the higher tax rates on incomes, dividends and capital gains. That's highly improbable. After those tax rates were cut in 2003, total federal tax revenue increased by 44%, or $743 billion, from 2003-2007.
In other words, Democrats have rigged the rules so that merely stopping a tax increase will be scored to increase the deficit. These are the same Democrats who haven't "paid for" trillions of spending in the last four years, but watch them soon denounce Republicans as fiscally irresponsible merely for trying to stop a tax increase. Orwell would love modern Washington.
If Republicans go along with this perverse pay-as-you-go logic, they will play into Mr. Obama's hands. He'll gladly offer to raise taxes on the wealthy in order to "pay for" extending the lower Bush rates on the middle class. Never mind that the tax increases on capital gains, dividends and income tax rates will do the most economic harm.
***
Republicans need to break out of their rhetorical preoccupation with debt and deficits, focusing their political aim instead on spending and above all on reviving economic growth. They should hold the line against all tax increases and begin to consider a menu of tax cuts to make the U.S. more competitive, especially if the economy continues to underperform.
Mr. Obama's strategy of spending our way to prosperity clearly hasn't worked, as the voters are coming to understand. But if the GOP policy response is merely to bemoan deficits, they will soon find themselves back at their historic stand as tax collectors for the welfare state. To avoid Mr. Obama's tax trap, Republicans also need a growth agenda.
A Cold Man's Warm Words
A Cold Man's Warm Words
Jefferson's tender lament didn't make it into the Declaration.
By PEGGY NOONAN
It was July 1, 2 ,3 and 4, 1776, in the State House in Philadelphia. America was being born. The Continental Congress was reviewing and editing the language of the proposed Declaration of Independence and Thomas Jefferson, its primary author, was suffering the death of a thousand cuts.
The tensions over slavery had been wrenching, terrible, and were resolved by brute calculation: to damn or outlaw it now would break fragile consensus, halt all momentum, and stop the creation of the United States. References to the slave trade were omitted, but the founders were not stupid men, and surely they knew their young nation would have its date with destiny; surely they heard in their silence the guns of Fort Sumter.
Still, in the end, the Congress would not produce only an act of the most enormous human and political significance, the creation of America, it would provide history with one of the few instances in which a work of true literary genius was produced, in essence, by committee. (The writing of the King James Bible is another.)
The beginning of the Declaration had a calm stateliness that signaled, subtly, that something huge is happening:
"When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to separate."
This gave a tone of moral modesty to an act, revolution, that is not a modest one. And it was an interesting modesty, expressing respect for the opinion of the world while assuming the whole world was watching. In time it would be. But that phrase, "a decent respect to the opinions of mankind" is still a marker, a reminder: We began with respect. America always gets in trouble when we forget that.
The second paragraph will, literally, live forever in the history of man. It still catches the throat:
"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.—That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed."
What followed was a list of grievances that made the case for separation from the mother country, and this part was fiery. Jefferson was a cold man who wrote with great feeling. He trained his eyes on the depredations of King George III: "He has plundered our seas, ravaged our coasts, burnt our towns. . . . He is at this time transporting large Armies of foreign Mercenaries to compete the work of death, desolation and tyranny . . ."
Members of the Congress read and reread, and the cutting commenced. Sometimes they cooled Jefferson down. He wrote that the king "suffered the administration of justice totally to cease in some of these states." They made it simpler: "He has obstructed the Administration of Justice."
"For Thomas Jefferson it became a painful ordeal, as change after change was called for and approximately a quarter of what he had written was cut entirely." I quote from the historian David McCullough's "John Adams," as I did last year at this time, because everything's there.
Jefferson looked on in silence. Mr. McCullough notes that there is no record that he uttered a word in protest or in defense of what he'd written. Benjamin Franklin, sitting nearby, comforted him: Edits often reduce things to their essence, don't fret. It was similar to the wisdom Scott Fitzgerald shared with the promising young novelist Thomas Wolfe 150 years later: Writers bleed over every cut, but at the end they don't miss what was removed, don't worry.
"Of more than eighty changes in Jefferson's draft during the time Congress deliberated, most were minor and served to improve it," writes Mr. McCullough. But one cut near the end was substantial, and its removal wounded Jefferson, who was right to be wounded, for some of those words should have stayed.
More Peggy Noonan
Jefferson had, in his bill of particulars against the king, taken a moment to incriminate the English people themselves—"our British brethren"—for allowing their king and Parliament to send over to America not only "soldiers of our own blood" but "foreign Mercenaries to invade and destroy us." This, he said, was at the heart of the tragedy of separation. "These facts have given the last stab to agonizing affection, and manly spirit bids us renounce forever" our old friends and brothers. "We must endeavor to forget our former love for them."
Well. Talk of love was a little much for the delegates. Love was not on their mind. The entire section was removed.
And so were the words that came next. But they should not have been, for they are the tenderest words.
Poignantly, with a plaintive sound, Jefferson addresses and gives voice to the human pain of parting: "We might have been a free and great people together."
What loss there is in those words, what humanity, and what realism, too.
"To write is to think, and to write well is to think well," David McCullough once said in conversation. Jefferson was thinking of the abrupt end of old ties, of self-defining ties, and, I suspect, that the pain of this had to be acknowledged. It is one thing to declare the case for freedom, and to make a fiery denunciation of abusive, autocratic and high-handed governance. But it is another thing, and an equally important one, to acknowledge the human implications of the break. These were our friends, our old relations; we were leaving them, ending the particular facts of our long relationship forever. We would feel it. Seventeen seventy-six was the beginning of a dream. But it was the end of one too. "We might have been a free and great people together."
It hurt Thomas Jefferson to see these words removed from his great document. And we know something about how he viewed his life, his own essence and meaning, from the words he directed that would, a half-century after 1776, be cut onto his tombstone. The first word after his name is "Author."
America and Britain did become great and free peoples together, and apart, bound by a special relationship our political leaders don't often speak of and should never let fade. You can't have enough old friends. There was the strange war of 1812, declared by America and waged here by England, which reinvaded, and burned our White House and Capitol. That was rude of them. But they got their heads handed to them in New Orleans and left, never to return as an army.
Even 1812 gave us something beautiful and tender. There was a bombardment at Fort McHenry. A young writer was watching, Francis Scott Key. He knew his country was imperiled. He watched the long night in hopes the fort had not fallen. And he saw it—the rocket's red glare, the bombs bursting in air, gave proof through the night that our flag was still there.
And so to all writers (would-be, occasional and professional) and all editors too, down through our history: Happy 234th Independence Day. And to our British cousins: Nice growing old with you.
Why Is the Gulf Cleanup So Slow?
There are obvious actions to speed things up, but the government oddly resists taking them.
By PAUL H. RUBIN
Destin, Fla.
As the oil spill continues and the cleanup lags, we must begin to ask difficult and uncomfortable questions. There does not seem to be much that anyone can do to stop the spill except dig a relief well, not due until August. But the cleanup is a different story. The press and Internet are full of straightforward suggestions for easy ways of improving the cleanup, but the federal government is resisting these remedies.
First, the Environmental Protection Agency can relax restrictions on the amount of oil in discharged water, currently limited to 15 parts per million. In normal times, this rule sensibly controls the amount of pollution that can be added to relatively clean ocean water. But this is not a normal time.
Various skimmers and tankers (some of them very large) are available that could eliminate most of the oil from seawater, discharging the mostly clean water while storing the oil onboard. While this would clean vast amounts of water efficiently, the EPA is unwilling to grant a temporary waiver of its regulations.
Next, the Obama administration can waive the Jones Act, which restricts foreign ships from operating in U.S. coastal waters. Many foreign countries (such as the Netherlands and Belgium) have ships and technologies that would greatly advance the cleanup. So far, the U.S. has refused to waive the restrictions of this law and allow these ships to participate in the effort.
The combination of these two regulations is delaying and may even prevent the world's largest skimmer, the Taiwanese owned "A Whale," from deploying. This 10-story high ship can remove almost as much oil in a day as has been removed in total—roughly 500,000 barrels of oily water per day. The tanker is steaming towards the Gulf, hoping it will receive Coast Guard and EPA approval before it arrives.
In addition, the federal government can free American-based skimmers. Of the 2,000 skimmers in the U.S. (not subject to the Jones Act or other restrictions), only 400 have been sent to the Gulf. Federal barriers have kept the others on stations elsewhere in case of other oil spills, despite the magnitude of the current crisis. The Coast Guard and the EPA issued a joint temporary rule suspending the regulation on June 29—more than 70 days after the spill.
The Obama administration can also permit more state and local initiatives. The media endlessly report stories of county and state officials applying federal permits to perform various actions, such as building sand berms around the Louisiana coast. In some cases, they were forbidden from acting. In others there have been extensive delays in obtaining permission.
As the government fails to implement such simple and straightforward remedies, one must ask why.
One possibility is sheer incompetence. Many critics of the president are fond of pointing out that he had no administrative or executive experience before taking office. But the government is full of competent people, and the military and Coast Guard can accomplish an assigned mission. In any case, several remedies require nothing more than getting out of the way.
Another possibility is that the administration places a higher priority on interests other than the fate of the Gulf, such as placating organized labor, which vigorously defends the Jones Act.
Finally there is the most pessimistic explanation—that the oil spill may be viewed as an opportunity, the way White House Chief of Staff Rahm Emanuel said back in February 2009, "You never want a serious crisis to go to waste." Many administration supporters are opposed to offshore oil drilling and are already employing the spill as a tool for achieving other goals. The websites of the Sierra Club, Friends of the Earth and Greenpeace, for example, all feature the oil spill as an argument for forbidding any further offshore drilling or for any use of fossil fuels at all. None mention the Jones Act.
To these organizations and perhaps to some in the administration, the oil spill may be a strategic justification in a larger battle. President Obama has already tried to severely limit drilling in the Gulf, using his Oval Office address on June 16 to demand that we "embrace a clean energy future." In the meantime, how about a cleaner Gulf?
Mr. Rubin, a professor of economics at Emory University, held several senior positions in the federal government in the 1980s. Since 1991 he has spent his summers on the Gulf.
The New Ideological Divide
The New Ideological Divide: Stimulators vs Austereians
Economies do not grow because consumers spend; consumers spend because economies grow.
Despite the apparent deficit-cutting solidarity that emerged from this weekend's G-20 meeting in Toronto, it is clear that the great powers of the industrialized world have not been this philosophically estranged since the end of the Cold War. Ironically, in this new contest, the former belligerents have switched sides - the capitalists are now the socialists, and vice versa.
We now are witnessing a struggle between two camps that I playfully call the "Stimulators" and the "Austereians." Both warn that a worldwide depression will ensue if governments now make the wrong choices: the Stimulators say the danger lies in spending too little and the Austereians from spending too much. Each side also has their own economic champion: the Stimulators follow the banner of Nobel Prize-winning economist Paul Krugman, while the Austereians are forming up behind the recently reformed former Fed Chairman Alan Greenspan. (It is cold comfort to witness "The Maestro" belatedly returning to the hard-money positions that characterized his earlier years.)
In a recent Wall Street Journal editorial, Greenspan argued that the best economic stimulus would be for the world's leading debtors (the United States, UK, Japan, Italy, et al) to rein in their budget deficits, a strategy dubbed "austerity" by the press. Greenspan explains that because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid- and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. Greenspan's Austereian view has been echoed loudly in the highest policy circles of Berlin, Ottawa, Moscow, Beijing, and Canberra.
Meanwhile, in several articles for his New York Times column, including one today, Krugman has argued that those who push for austerity in the face of recession are either doing so for political expediency or out of a "crazy" fealty to archaic economic views. Krugman has apparently judged inadequate the trillions of dollars worth of deficit spending unleashed by the United States and European governments in the last 24 months. He believes our only remedy is to spend more - no matter how much debt results. Absent this, he claims, millions of workers "will never work again." Unfortunately, Washington has clearly aligned itself with Krugman and the Stimulators.
Reading straight from the Keynesian playbook, Krugman argues that cutting government spending now will simply send the economy back into recession. He asserts that by flooding the economy with money, i.e. "stimulus," governments can encourage consumers to spend. Once the spending creates better conditions, so the argument goes, the economy will be better positioned to withstand the spending cuts, tax hikes, and higher interest rates necessary to address the staggering deficits left behind.
Krugman proposes an enticing argument that is nevertheless built on rubbish. Economies do not grow because consumers spend; consumers spend because economies grow [for a detailed explanation of how this works, read my latest book: How an Economy Grows]. Investment capital comes from savings, and when governments borrow, savings are diverted from private investment. While it is possible for governments to invest as well, it is much more likely that the money will be spent on entitlements or "invested" in projects that may be politically advantageous but economically useless.
Any money spent by governments is not available to the private sector to invest. The Stimulators don't make this connection because they believe money grows on trees and that a printing press is a legitimate creator of wealth. However, printing money merely encourages people to spend their savings now rather than wait for it to lose value through inflation. This is okay to Stimulators, because stimulating "demand" by any means necessary is the only goal they can see.
What really grows an economy is not more demand, but more supply [also explained in my book]. The Austereian argument is that reductions in government spending will allow the private sector to generate the additional supply of goods and services. Europe seems to understand this; unfortunately, the US does not. Judging by the recent weakness of the dollar - not only against gold, but other fiat currencies, including the pound and the euro - the markets are coming to the same conclusion.
As sovereign-debt worries initially spread throughout Europe, the dollar benefitted. However, now that Europe has demonstrated a willingness to reduce its debts, while we have committed to make ours even larger, the sovereign-debt worries are moving west.
If Greenspan and the Austereians are correct, the stimulus will fail and leave us in a much deeper hole. As long as governments create bigger deficits, we will never have a sustainable recovery. Instead, we will be chasing our tail, and wearing ourselves out in the process. When we finally realize the folly of this approach, the austerity measures that we will then be forced to adopt will make those currently proposed by the Europeans seem relatively painless.
My guess is that before year-end, our stimulus-induced recovery will falter, prompting Obama and Congress to administer even more stimulus. After all, the Stimulators have no other answer. However, given the adverse reaction this will produce in the currency and debt markets, this next jolt will likely vindicate the Austereians, as the world witnesses its greatest power careen into inflationary depression.
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