Why Isn't Stimulus Working?

Supply-sider extraordinaire Alan Reynolds says that the verdict over the Obama stimulus is simple. Stimulus is Snake-oil. It never works. And it didn't work in the 1930s, despite the testimony of two generations of Keynesians.

Guess what, he writes. The so-called FDR stimulus wasn't anything like the Obama stimulus.

The budget deficit peaked at 5.9 percent of GDP in 1934, falling to 4 percent in 1935. Today, the Congressional Budget Office adjusts such deficits for the impact of recession, which would convert the deficits of 1934-35 into cyclically adjusted surpluses. That is, the US economy grew by 10.9 percent in 1934 and 8.9 percent in 1935 without any "fiscal stimulus."

Today's budget deficit is somewhere north of 9 percent of GDP.

The argument over Keynesian stimulus depends on what you think is the problem when there's a downturn in the economy.

The Keynesians argue that the problem in a recession is a lack of aggregate demand. Pump out some stimulus and you'll revive demand and restore the economy to the status quo ante.

The opposing argument, advanced by the Austrian School of economics, is that the problem in a recession is the collapse of the capital investments made in the previous boom. A recession is the period of adjustment during which the bad investments made in the previous unsustainable boom are liquidated.

Actually, other peoples' bad investments aren't that much of a problem unless they were financed with borrowed money. Why is that? Simple. If you make a bad investment with your own money, you don't have to liquidate and sell at a loss. If you make a bad investment with borrowed money, there is hell to pay.

Suppose you save money for 20 years and then go out and buy a house for cash at the top of a boom. House prices go down 20 percent and you lose your job. Now you have lost 20 percent of your investment. You have a problem. But you suck it in and carry on. You take a lower-paying job, of course, but that's ok because you don't have a big mortgage.

Suppose you go out and buy a house with 10 percent down at the top of a boom. House prices go down 20 percent and you lose your job. Now you have lost all your investment. Plus you have defaulted on your mortgage and lost your house. Plus you (and millions of others) have reneged on your promises and put the bank underwater. Taking a lower-paying job won't help because you need the income from the high-paying job to make the mortgage payments. Now you are broke and the bank has a problem. Not just the bank but the whole financial system.

Hey, this finance business ain't that hard.

There is nothing magical about Keynesian stimulus. It is just the way that governments always act. Rulers like to concentrate all the resources of society on one big thing. Maybe it is a war. Maybe it is a mega-project to go to the moon, or to give everyone a low-money-down mortgage, or health insurance. Either way, the ruler commandeers the financial system and orders everyone to pull together for the Big Push. It works for a year or two until everyone has to get back to ordinary life: making a living and paying for the kids' education. Then we are all screwed.

The problem the US faces is not a lack of aggregate demand, whatever that means. The problem is that millions of people got in way over their head in the housing market. They borrowed money that they couldn't afford to repay unless house prices went up forever. When people can't repay their debts it puts the whole financial system at risk. It doesn't matter whether the millions of people did this because of greedy bankers (the Democratic line) or stupid government housing subsidies (the Republican line).

The question is: how do we go forward?

The simple answer for us today that we can't go forward until we have liquidated the bad real-estate investments made in the great housing boom.

And it doesn't seem that a big stimulus is going to do a thing to solve that problem.

Mr. President: your turn.

Rhett Butler Conservatism

Liberals are still playing the race card. Hey, it's not personal; they think all conservatives are racists.

But Gerard Alexander in the Washington Post wants to persuade liberals that, rationally, you could argue that conservatives aren't racists, not really. Even if there are good reasons for thinking that we are. It wasn't just Nixon and the Southern Strategy that brought the South into the Republican camp. According to Haley Barbour, it was the young activists like him that first moved to the Republicans in 1968. The older generation came later, if at all.

But I think that this is all vieux jeux. (Or as Rush would say, liberals playing out of a 30-year-old playbook.) We conservatives are past caring whether liberals think we are racists. All the emotional race-card manipulations of little Miss Scarlett O'Liberal have got us to the point where we don't care any more.

Call us racists, why don't you. Frankly my dear, I don't give a damn. That's what Rhett Butler conservatives think. And those are the moderate ones. There are Breitbart conservatives too, and they are what you might call Eff You conservatives. They believe in throwing the race card right back in the liberals' faces.

Shannon Love at the ChicagoBoyz has a better idea. His argument arises out of the visceral hatred liberals have for Sarah Palin. He reckons that it is status anxiety. Leftists have a "vastly superior understanding of everything compared to ordinary people." Therefore there cannot be a Sarah Palin, an ordinary person juumped up into a national politician. Why, she doesn't even read the New York Times, dahling.

The left has had a bad experience since the 1960s when lefties last had a shred of a reason to believe that they had a special knowledge.

The Great Society failed, the ’70s were an overall train wreck and the once great Democratic cities of the Northeast collapsed. People voted with their feet again but this time migrating from blue areas to red areas. In this process the left lost its meritorious claim to status.

But at least liberals know that they are better than conservatives because conservatives are racists!

Otherwise, Rhett, where shall I go? What shall I do?

Frankly my dear, I don't give a damn.

Government's Poisoned Chalice

The record of the last century is stark. Everything the government has gotten into it has screwed up. Royally.

Want to talk about education? Things are so bad that we are now starting to wonder whether college is really worth it.

Homeownership? Government has been encouraging home ownership for nearly 100 years. The result is that fewer Americans own their own homes than Canadians.

If you look at all the areas of public life that are screwed up, government is in the middle of it. And it all started, in every case, with the best intentions.

Government decided to get involved in education, to educate our children. Yet government has loved education to death. Maybe 150 years ago education was a little rude and crude. But now we incarcerate all our children in government educational facilities complete with metal detectors. It is incredibly expensive yet about 15 percent of adults are "below-basic" in literacy and numeracy. Fifty percent of kids entering college require remedial courses. Government has loved education to death.

A century ago government got interested in homeownership. It pushed lenders to offer riskier loans and then people lost their over-leveraged homes in the Great Depression. It solved that problem by making it even easier to borrow money on a house. The result is a huge overbuilding and overpricing of homes that all came crashing down in the last two years. It has loved home-owners to death.

There are the workers. It was 150 years ago that "educated youth and middle-class intellectuals" got all worked up about the workers. The workers were having a hard time in the middle of the greatest migration ever, from the country to the city. They started suffering and dying in public, while the peasants had been starving for thousands of years in private. So government decided to help the workers. They gave their labor unions special exemption from laws against monopoly, and looked the other way when they descended to thuggery. They stopped child labor. They regulated hours of work. Then they gave the workers "benefits" like health insurance and pensions and unemployment pay. Only the workers didn't own these benefits. They got them from loving politicians. Now the great industrial corporations are dying, throttled by their labor unions and work rules, and government workers are paid 50 or 100 percent more than private sector workers. Government has loved labor to death.

Then there are African Americans. First we enslaved them, then we liberated them, then we Jim Crowed them, then we segregated them, then we integrated them, then we affirmative actioned them. So now about 70 percent of African American children are born to a single parent, and more African American men are in jail than in college. We have loved African Americans to death.

In fact, there's a good argument that when government comes calling with a a communion cup of government spending and political patronage there is only one thing to do. Dash the poisoned chalice to the ground before a drop passes your lips.

There are only two things that government can do. It can do force and it can do compulsion. It amounts to the same thing. If it's a question of forcing a foreign power to respect American power, government can do it, albeit at enormous expense.

If it's a question of beating up rowdy young lower-class males, government can do that too.

But when it comes to making a society, government is helpless. Because society is not a question of force, it is a question of cooperation, of nudging, of influence, of somehow getting people to do the right thing short of forcing them.

In the face-to-face society, we get people to do the right thing with a frown and a shake of the head. Let's check with Rodney Stark in Discovering God.

Social life is only possible to the extent that groups exert social control--collective efforts to ensure conformity to the moral standards of the group... So, from infancy humans are raised to believe that the norms of their group are the "right" way to behave and are trained to conform.

But as society becomes larger we need formal methods of control.

Formal social control is expensive--contrast the cost of dirty looks from neighbors with that of maintaining a police officer.

When humans start living in towns and cities, the detection of violations of moral standards becomes a problem. People can be anonymous in the city, and soon find that nobody will know of their evil misdeeds.

Enter "sin," invented during the Axial Age in the millennium before Christ. It solved the problem of misdeeds in the anonymous city. Your neighbors may not know of your misdeeds, but God will know! God will punish misdeeds, and even if you manage to avoid paying for your misdeeds in this life, God will punish you in the next one. Pretty clever, as long as people believe in God, of course.

Our age is an age that has tried to abolish sin. Of course, it has not worked. In some cases sin has been smuggled in the back door, where "sexual harassment" has replaced the disapproval of the cad. But mostly sin has been replaced with a gigantic government bureaucracy empowered to look into every crevice of your life to detect evildoing.

Bureaucracy is not society. Heavy-handed law enforcement is not a replacement for self-responsible freedom. In life after liberalism we must find a new code so that most of the time social control stops short of force, what we so charmingly call "law enforcement."

Now, I wonder what that might be? I wonder if anyone has invented it already. I wonder if it is working, already, around us every day, only we just don't appreciate it.

What do you think?

Cue Roy Orbison: "It's Over!"

Back in the early Sixties when I was a teenager in Britland, the weirdest thing imaginable was the wailing falsetto of Roy Orbison and the naive puppy love-songs of the Everly Brothers. For a Brit kid, it seemed to come from another world.

We now know, of course, thanks to President Obama, that those country boys came from the world of God and guns bitter-enders.

But I think that Roy Orbison may be getting the last laugh. I'm starting to think that is is time to cue up "It's Over" on President Obama and the Two Years of Folly.

Roy Orbison Performs “It's Over”

Somehow, over the Labor Day Weekend the earth moved, and so the usual fluff from the MSM pundits just reads as laughable. Here is what RealClearPolitics dragged up today:

GOP Caused Economic Uncertainty - Mark Schmitt, American Prospect

Obama Needs to Fire Up His Base - Joe Conason, New York Observer

What Ever Happened to Obama's Army? - Jay Newton-Small, Time

Obama's Finally Speaking Like a Democrat - Bob Shrum, The Week

Obama Should Follow in FDR's Footsteps - Nick Taylor, Los Angeles Times

Koch Fires Back at The New Yorker - Elaine Lafferty, The Daily Beast

Do you get the feeling that these chaps are just out of it?

Meanwhile conservative pundits are smelling blood in the water.

The Nanny State Has Blown the Bank - David Warren, Ottawa Citizen

America's Public Servants Are Now Its Masters - Mort Zuckerman, FT

Dems Across the Country Running from Obama - Kimberley Strassel, WSJ

The Lost Communicator - Michael Gerson, Washington Post

Obama's Looking More Like Hoover Than FDR - Jonah Goldberg, NRO

It's Jonah's piece that I like best. He's discussing the collapse of the great liberal myth:

The creation myth of the modern Democratic party goes something like this: After years of capitalist excess, exemplified by Hoover's "market fundamentalism," Franklin Delano Roosevelt introduced reasonable and pragmatic reforms that not only conquered the Great Depression but "saved democracy" itself.

When FDR & Co did this number on the American people it was a tour de force of political myth-making. And it has lasted right up to the present, because there was always a cadre of liberal opinion hegemonists available to ram it down the throats of the American people one more time.

But now it looks like the "narrative" of the current Great Recession will go rather differently. Somehow, I suspect that the Democrats will get the blame. Why? Well here's my guess.

In the Great Depression the government's stupid response with the NRA wage and price controls, the WPA the CCC was disastrous. Not to mention the Wagner Act that boosted wage rates and Social Security that created a whole new tax on labor. But people felt that it was all helping people like them. It showed, in the classic line, that government "cared about people like me."

Here's the problem with Obamanomics. People don't think it helps "people like me." The money is all going to help union construction workers and unionized government workers. Not "people like me."

Yep. Obamanomics has all been about helping the Democratic base, and screw the moderates that actually elected President Obama.

It takes a level of political stupidity far deeper than the notorious stupidity of President Bush to execute an agenda like that. But President Obama and his crew were up to the challenge.

And that's why it's time to sing "It's Over."

Now the Dog's Being Hunted

My old Greek pal George Maroutsos had a saying that no doubt originates in ancient Greek mythology.

"You can't tell a dog when it's out hunting," he would say. "You can only tell how good it is when it is being hunted."

In the long-ago days when Candidate Obama and then President Obama was out hunting, we dog fanciers knew that we couldn't yet tell what he was made of.

But now that the Labor Day polls have spoken and we know that the Democrats are in a rerun of the 1854 mid-terms, we can start to get an idea.

What's that? 1854 mid-terms? Michael Barone takes the credit for that one. You see, in 1854 Sen. Stephen Douglas (D-IL), pushed the Kansas-Nebraska Act through a very Democratic Congress. He figured that letting Kansas and Nebraska decide for themselves whether to allow slavery would put the issue to bed. It turned out he was wrong. Instead, he lit the fire for the Civil War. The Republican Party emerged out of the ruins of the Whig Party, and Democrats lost 76 seats in a 250 seat Congress that year.

Now that he is in trouble, what is President Obama doing? He is getting out into the old union heartlands of the rust belt and doing the populist thing. He is doing what a politicians does; he is dividing the voters into Us and Them. He is talking trash talk to the union working stiffs.

Now the president is in political trouble. Now the Democrats running in swing districts don't want him anywhere near them. Now Democrats are not uttering a whisper about ObamaCare on the stump.

Now we are getting to see the real Obama. He is not really bad, not evil. He turns out to be an ordinary politician that has read his polls and has determined that there is only one thing he can do this Fall that will help Democrats. He must go out an rouse up the old union base and get them to the polls to limit the GOP pickup in normally safe Democratic districts.

It means, of course, that this practical politician has written off the moderate middle, the chaps and chapettes that got him elected back in 2008. It means that the Democrats are in worse trouble than we can possibly imagine. It means that you young chaps are going to experience an election that you can talk about to your grandchildren.

(As for those of us that already have grandchildren, I suggest we tell them to pay attention, because this is new, and hip, and exciting, and has never happened before in the history of the earth.)

After the deluge, in January, we will see how good the president is with a Congress that wants to repeal everything he has done in the last two years.

How well will he perform? My guess is: not too well. I have a feeling that President Obama is a good hunter, but not very good when he's being hunted.

I, Economy vs. I, Government

We are having, this fall, a national conversation. It is one that liberals would rather we didn't. That's because, as Attorney General Eric Holder might say, we are cowards.

The conversation is about the limits of government. What should government do, and what shouldn't it do?

Conservatives say that government should be limited. It should do defense and policing and law, and very little else. When it gets beyond the area of force, the defense against enemies foreign and domestic, it makes a mess. That's because government turns everything it touches into a contest of power. It always gets to be a fight to see who gets to wield the power of the state.

Jonah Goldberg has a column today, "I, Market Economy," that tells why government makes such a mess with everything it does. Why? Because everything that we make in the world is unbelievably complex. Take the pencil.

“I am a lead pencil — the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.” It is one of the most simple objects in human civilization. And yet, “not a single person on the face of this earth knows how to make me.”

Even a product as simple as a lead pencil is a product of a vast collaboration of producers and experts and middlemen and consumers and prices advertised and prices paid.

The lessons one can draw from this fact are humbling. For starters, any healthy civilization, never mind any healthy economy, involves unfathomably vast amounts of harmonious cooperation.

But government isn't harmonious cooperation. Government is force.

Government says: this is the way we are going to do education, so fall into line. But Mr. President! Over here! We've got an idea we would like to try out! Forget it, pal. Come back in ten years when you've got a political movement, and you can move the needle on my next election.

With I, Government, there is only one way, and that way is the way of the most political powerful coalition. With I, Economy, there are a million ways. Mostly, of course, the market economy follows the big bucks. Millions of people want Wal-Mart's Always Low Prices. But some people want quirky old-fashioned bow ties. And they get them--off the internet. Millions of people want fast food good and cheap. They get it, at McDonalds. But some people want fresh food grown locally. They get it--in some liberal enclave at an organic food cooperative.

In I, Government, the ruling coalition gets its way, and that's it until the revolution. In I, Economy, the majority gets its way. But so does the minority. And there is always room for a nobody to find a niche that nobody ever thought of. It always looks like the big boys run the show. But below the radar the next Bill Gates or Steve Jobs is working away to change the world.

I, Government likes to wield power. But its power is always the power of the gun and the billy club. All it can do is bruise and intimidate. That's why government always mucks up the economy. All taxes and all credit manipulations hurt the economy. But if you keep tax rates down, and money sound, the damage that government's billy club does is minimized.

President Obama wants to raise income taxes on the rich, from about 35 percent on marginal income to about 40 percent. And he wants to raise the FICA tax too.

You can talk all you like, Mr. President, about sharing the wealth, and that at some point you don't need any more money. But when you are taxing at 25, 30, 35, 40 percent of marginal income you are laying about you with a billy club and you are bruising the harmonious cooperation of the market economy.

Progressives, Goldberg concludes, like to say that "we're all in it together." Another progressive line is the idea of shared sacrifice. These communitarian notions are best applied in a crisis when people willing stop what they are doing to devote themselves completely to helping their neighbors in distress.

But what progressives fail to see is that the market economy is a day-to-day realization of "we're all in it together." We are all out there trying to make a living and learning every day that earning a living means giving other people what they want. We must each of us sacrifice our druthers--our dreams and fantasies--in order to serve other people and thereby earn a living.

Some day, humans will discover a method of social cooperation far better than the market economy. But here's a nickel that says that it won't be a government scheme to "share the wealth."

Democrats Betray Creative Class

Ever since the emergence of the Christian Right in the 1970s Democrats have been able to stigmatize socially-conservative Americans as narrow-minded and bigoted. This has helped them to a large share of the "creative class," Americans who don't think much about social and moral issues, but sense that traditional values crimp their freedom to live a life of

wholehearted dedication to a freely chosen course or cause, and not to any truth anchored in a collectivity or a world beyond the individual[.]

That quote is from Existentialism vs. Marxism by George Novak. So we should recognize that creative Americans are existentialists of a kind.

For years Democrats managed to create a divide between "creative" Americans and "traditional" Americans. If you were young and educated you probably didn't want to be counted as a traditional American.

Just to be on the safe side, liberal professors and administrators made colleges into sexual free-fire zones, always a winner with the young set.

Creative Americans come in different shapes and sizes, but obviously there is a divide between the economically creative, i.e. business owners, and the culturally creative, i.e., artists, writers, academicians. Democrats have owned the culturally creative for decades, but in recent years they have managed to detach the business class from their natural home in the economically conservative and now unfashionably cultural conservative Republican Party.

In the 2000s the young generation of entrepreneurs clearly got persuaded that they didn't need the embarrassing Republican Party. The Clintonesque New Democrats understood business and had moved away from knee-jerk liberalism. And after the Reagan and Bush tax rate cuts, who needed the Republicans?

People like Richard Florida started writing books about the creative class that lived and worked in "ideopolises." John B. Judis and Ruy Teixeira wrote a book about The Emerging Democratic Majority that would center on minorities, young people, and the creative class.

This strategy worked like a champ while people believed that the Democrats were economically centrist and socially liberal. But people don't believe that any more.

The economic meltdown and the proposed huge expansion of big government has been a wakeup call for the economic creative class. Now all of a sudden economic issues matter to them. And the embarrassment of the Christian Right doesn't seem quite so important.

This is the great achievement of President Obama. He has thrown away the economic creative class. If he had governed from the center, done Clintonesque New Democrat things to the economy, and put off the nationalization of health care till the economy had improved, then he would have had the creative class for a generation.

But now he has thrown it all away.

Of course, the reality is that the Democrats were never really "New Democrats." They were faking it back in the 1990s because that was the only way they could get elected.

Then they got back into power in 2006 on the back of the second term mid-term election syndrome. They could talk about an unpopular war and corruption and family values and get elected to a majority in Congress.

After 2008 with a Democratic president and big majorities in Congress they decided that they should go for the big one: health care. Big controversial entitlements never get repealed. After all, in 1936 they got Social Security. In 1965 they got Medicare. This time they would do ObamaCare and in ten years everyone would love them.

When generals do that sort of thing they are accused of trying to fight the last war.

We conservatives should thank our lucky stars for Obama. He has sent a whole generation of Americans back into the Republican tent. He's made them see that tax policy and spending policy and credit policy really matter. He's probably inoculated them for a generation. In fact there's a possibility that we may even be able to do something about entitlement reform in the aftermath of Obama.

There's a good chance that we are looking at a generation of Republican majorities.

Everything will be practical and sensible until a new generation arises that knew not Obama.

But that's in the long run, and in the long run we are all dead. As the childless John Maynard Keynes said.