What's Wrong With Stocks?

The 4th quarter GDP came in gangbusters this morning, at 5.7 percent. So what's the matter with stocks? They've been in a swoon for a couple of weeks, and yawned this morning at the GDP numbers.

The answer can only be that the market doesn't see the gangbuster improvement continuing for much longer. What's the problem?

Maybe it's as simple as one word: Taxes. David Malpass looks at the outlook for small business, the engine of growth and, especially, employment growth.

The fortunes of small businesses — perhaps more than any other commercial sector — are tied to rates of taxation on the individual. And individual income-tax rates are set to jump sharply at year-end when the Bush tax cuts of 2003 expire. Put another way, on January 1, 2011, the world’s biggest tax increase ever will arrive on the doorsteps of U.S. small businesses (and a great many others).

President Obama, on Wednesday night, was congratulating himself on high-speed rail in Florida and green jobs. That sort of thing may impress the mainstream media but it doesn't impress the markets. Fancy government infrastructure projects and technology subsidies don't necessarily translate into economic growth. They are, after all, money spent on special interest goodies. If they were such a good idea, then surely business would be right out there doing it without government subsidy.

So you can be pretty sure that government hasn't a clue when it comes to selecting projects that will get the economy going.

No, the likely cause of the market's swoon is taxes, and the radical uncertainty about taxes in the future. The Bush tax cuts are scheduled to expire at the end of 2010. But who really believes that Congress will really let them expire in total? With the prospect of total wipeout in November 2010 I would expect that the Democrats in Congress will suddenly discover that they really believe in the importance of small businesses, and that Joe the Plumber is a real cool guy after all.

Don't forget Joe the Plumber. He is important. Here was a guy who, on the face of it, was a loser. He was a guy that hoped one day to buy a small plumbing business. Sociologists call his type: aspirational. And Joe the Plumber reckoned that President Obama's tax plans were going to hurt him in the business he hoped to buy.

Would Joe Plumbing actually have been hit by Obama's tax plans? Who knows? But he thinks he would get hit, and that is what matters in politics.

Back in the mid to late 2000s the Democrats did a fine job of marginalizing Republicans as bigoted fundamentalists that wanted to subject the US to Biblical morality. Many secular business owners felt embarrassed at being associated with such knuckle-draggers.

But mild embarrassment is a small price to pay when they are raising your taxes by a record amount. Why, you can even get to feeling that those crazy Christians aren't so bad after all.

Anyway, the Massachusetts Miracle was not built upon the votes of fundamentalist Christians. It was built upon independents moving strongly from the Democratic column to the Republican column, and increased enthusiasm among regular Republican voters.

No doubt something will be done to sweeten the pot for businessmen this year. But meanwhile business owners all across America are confused. They don't know what to plan for.

And that is not good news for the economy.

There is no Plan B

A week ago conservatives were all in a tizzy that President Obama would do "pivot" and start triangulating, just like President Clinton did when he got into trouble in his first term.

But my takeaway from the president's first State of the Union speech is that there is no pivot. It may not be full steam ahead with the liberal agenda, but there is no turning back. Not yet.

I listened to Glenn Beck for a moment this morning, and he marveled at the ratings he was getting. Over 3 million real viewers, at 5pm Eastern, 2pm Pacific! Not prime time, not close to prime time. People are searching my stuff out, he exulted. They must be looking for what I'm selling.

And that's the point. America is in transition right now; it might look like a proverbial Chinese fire drill to liberals and the MSM. But we conservatives know what is happening. Pretty soon even liberals will be seeing a pattern.

Let's change the metaphor. We are seeing a bunch of small formations marching about the political battlefield right now. What is going on? What is the battle plan? That's the way it always looks before a major battle. And then one day the guns start to roar, and it all makes sense.

Based on his speech, President Obama doesn't see the need to change his battle plan, except to propose a derisive spending freeze that doesn't begin to roll back the huge increases in spending already in the can. That's fine, for his opponents. It means that when the deployment of forces becomes clear in September and October it will be too late to make a big change.

So the president still wants one last Big Push on health care. He still wants a push on clean energy and green jobs. He wants to throw more subsidies at the grossly oversubsidized college sector. No change. Full speed ahead.

I've written before that the welfare state will never get reformed. It will end when it hits the buffers at the end of the line, when it hits the wall.

What, you may ask, happens then? We have a recent example that gives us a clue. It happened after the fall of the Soviet Union. A Polish acquaintance told me it was sad: So many old people "eating the paint off the walls."

That's probably what will happen here when the government runs out of money. The failed government will just walk away from the old and the sick. That wouldn't matter for them if family and fraternal ties were strong. But the whole point of the welfare state is to loosen those ties, to let people neglect the hard work of family obligation and rely instead on the government dole.

So the people that will flourish after the fall will be people that didn't listen to and didn't believe the governing class's promises.

All government promises are worthless. They are made to win elections. That is all.

It was troubling that President Obama also seemed to go out of his way to insult Republicans, even in a speech that exalted the virtues of unity. And the dig at the Supreme Court's decision on Citizens United was clumsy.

In the coming months and years President Obama will have to be fast on his feet. For pretty soon Obama will be saying, as Claudius said in Hamlet:

When sorrows come, they come not single spies
But in battalions.

The speech occurs after the death of Polonius when Ophelia had gone mad.

But President Obama doesn't seem to see any single spies yet, let along whole battalions. He is just going on as the liberal scion, born and educated in the "educated class," as David Brooks call our liberal elite, doing the things that liberals do. The trouble with well-born scions is that they don't have the street smarts to navigate through the confusion and fear of troubled times.

That is the way that all dynasties fall. And the liberal dynasty of the educated class is no different.

Freezing What Mr. President?

You can tell that President Obama has been knocked onto his back foot. He's proposing a spending freeze. It will amount, apparently to $250 billion over 10 years.

Politicians always propose spending freezes when they get into a jam. It sounds good in a speech. But the key thing, of course, is "details to follow later."

Columnist Robert Samuelson isn't fooled. The spending freeze is "peanuts," a "rounding error." That's because federal spending in the next few years is estimated at about $3.5 trillion per year. A $35 billion spending cut per year would be one percent. And President Obama is proposing less than that.

Our good friends at usgovernmentspending.com show why this is derisive.

Take a look at the pie chart. The big chunks in the budget are Pensions, Health Care,and Defense. President Obama has taken these off the table. Welfare isn't going to go down, not until the economy picks up. So that means that the cuts are going to come from only 19 percent of the federal budget.

The real facts are that, in the long run, we've got to cut the "mandatory" entitlement programs. That's what President Obama was trying to do in a sneaky way with ObamaCare. He was trying to introduce rationing for Medicare. But the American people blew him away. They don't want rationing. Not yet.

But that's where the money is. Social Security and Medicare. And they will still be there next year. They will still be there in 2013 when the next president is unaugurated.

Anyone want to be president?

Obama's Bubble Politics

Politicians and pundits have had a grand old time recently, criticizing bankers and consumers for their reckless lending and borrowing. Just as they had a grand old time tarring all businessmen with the brush of Enron back in the tech bust of 2000-01.

Remember Enron? Seems like a faraway time from the trillion dollar deficits of 2010.

But now that we are seeing the Obama myth in free fall, after the year the locusts ate, it is time for knowing analysts to give their heads a knowing shake about the Obama political bubble.

As with credit bubbles, the Democrats did it to themselves.

The US is a center-right country. You can tell that from Gallup's poll of political orientation. Right now, the US is 40 percent conservative, 21 percent liberal, and the rest moderate. So for Democrats to get into power they need a meltdown like 2008. And they need to dissemble, to represent themselves as not really as liberal as they are.

Let's face it. The Democrats are masters at the art of appearing not quite as liberal as they really are. They field good conservative candidates to run in Republican districts. They have the mainstream media to pretend that liberals are really moderate. They have the schools to fill heads full of lefty mush. And at election time they can conjure up the votes to push the odd toss-up into the Dem column. Think Maria Cantwell (D-WA), Al Franken (D-MN), and the October surprise prosecution of Ted Stevens (R-AK).

But there's a problem with being too clever by half. You end up with a president and a Congress that don't represent America. You create a political bubble that, just like the Fannie Freddie credit bubble, is going to pop some day.

With Obama and the Democrats, that day is here.

The Dems did a fantastic job of contesting the legitimacy of the 2000 election. Then they did a fantastic job of harrying President Bush over Iraq. Then they did a fantastic job of critiquing the tired and corrupt Republicans in 2005-06. Then they did a fantastic job of getting conservative candidates to run for Congress in 2006 and 2008. Then they did a fantastic job, backed up by the MSM, of selling the left-liberal Obama as a moderate.

Now look what they've done. They've given the US a president and Congress way off the center-right center of gravity.

We all know what happens when you gun the housing market with cheap credit to unsustainable heights. You get a nasty collapse, much worse than you would have got without the preceding bubble. Housing prices go into the toilet.

Same thing in political bubbles. Now all the cunning poliltical leverage that the Democrats worked into the system over the last decade is unwinding. And that means that the defeats that the Democrats will suffer in 2010 will be worse than the normal mid-term correction. Maybe much worse.

Politicians are competitive chaps, and they fight hard to win their glittering prizes. But what the American people need is a government that reflects their mood. If they want some nice new programs, as they did in the 1998-2000 period, they should get them. If they want deficits cut and spending cut, as they do right now, they should get it.

Thinking long term, it does no good to game the system. What you need to do is persuade the American people, not just in a slick election campaign, but year in, year out, on the basics of what American stands for and what the government should do and not do.

Democrats are going to pay a frightful price for their bubble politics, and you ain't seen nothing yet.

Is Obama Serious?

The White House line after Massachusetts seems to be full speed ahead. That seems to be the usual Obama way, from the campaign through the first year. No change for the fiscal meltdown. No change to fight the recession. Just stay with the game plan.

Now, after three losses in a row, in states that voted for Obama in 2008, the Obama White House is again signaling no change in the agenda.

For Republicans and conservatives, the word is: Go ahead, make my day. Give us a Republican Congress in 2010.

As Mark Steyn wrote over the weekend, Obama ran for president "as something he’s not, and never has been: a post-partisan, centrist, transformative healer." But let's give him credit. He's governed as something he really is: a left-liberal big-government partisan.

That's fine. But the American people have just said, at the voting booth, that they don't like the real Obama one bit. The real Obama is not what independents voted for, not at all. They thought they were voting for the candidate that was presented to them: a post-partisan, post-racist, centrist.

In a way, you can understand that Obama could feel that he might as well stay true to his beliefs. Whatever he can get done, he gets done, and he nails it up on the barn wall as a win. Nothing ventured, nothing gained.

But there's a problem with that strategy. The ordinary Democratic officeholder that is facing reelection in November isn't going to go along. He or she is facing wipeout, and probably isn't going to want to go quietly.

That adds up to a split in the Democratic Party. And that is not going to be good for the president's agenda.

Of course, all the talk of fighting and staying the course may be bravado to keep the media busy while the president's team plans a pivot.

Or the president may be serious. The truth is that all his options are bad options, right now. The president faces an annus horribilis with nothing but bad news. Maybe the best thing to do is to hunker down and sweat it out.

But maybe, by hunkering down, he will lead the Democrats in Congress into an historic meltdown comparable to the 1938 mid-term elections when the Dems lost 80 seats in the House.

Noonan: Nuts vs. Creeps

It sounds like gang warfare, but Peggy Noonan has redefined the political arena. It's not the Dems vs. the Reps, she says, but the Nuts versus the Creeps.

Back in 2006 and 2008 the Democrats succeeded in persuading the voters that they were not so Nutty as the Creeps were creepy.

In 2008, the voters went for Mr. Obama thinking he was not a Nut but a cool and sober moderate of the center-left sort. In 2009 and 2010, they looked at his general governing attitudes as reflected in his preoccupations—health care, cap and trade—and their hidden, potential and obvious costs, and thought, "Uh-oh, he's a Nut!"

Enter Bob McDonnell, Chris Christie and Scott Brown.

But the Republican candidates in Virginia and New Jersey, and now Scott Brown in Massachusetts, did something amazing. They played the part of the Creep very badly!

They ran, if you like, as practical, pragmatic moderates, concerned about taxing and spending. Oh, and debt. I read someone this week who reminded me that ordinary Americans have had a terrible personal lesson on debt in the last couple of years. Naturally, they are concerned that the government hasn't learned the lessons they learned.

Personally, I think that the Creep image is unfair (but then, probably so is the Nut image.) The reason we had so much spending in the last decade was that, after the budget got balanced in 1998, American voters felt it was time for a little party. That's why Candidate Bush ran as a compassionate conservative in 2000. Green-eyeshade conservatism wasn't going to sell.

But the truth is that there is no such thing as a compassionate government. There is just taxing and spending. The core functions of government, as articulated by Britain's Norman Tebbit, are simple and have nothing to do with compassion.

It must provide not only external but internal security, allowing its citizens to go about their lawful businees freely, and criminal and civil justice systems as well as a currency and the regulatory and legislative infrastructure needed for agriculture, industry and trade.

But that is it. Everything else, from health care to education to infrastructure, is not a Must-have; it is a Nice-to-have.

In the Twenty Teens it is going to be back to basics: Cut taxes, cut spending, cut, cut, and cut again.

And over everything else will be this overarching question. Why do government employees earn 30, 40, even 50 percent more than comparable workers in the private sector?

When you ask that question, the political struggle ceases to be a question of the Nuts vs. the Creeps. It becomes the Makers vs. the Takers. That's a book, by the way, by Peter Schweizer: Makers and Takers: Why conservatives work harder, feel happier, have closer families, take fewer drugs, give more generously, value honesty more, are less materialistic and... Well, you get the picture.

Will They, Can They Change?

If you are a teabagging conservative, it seems obvious that the Democrats must change. The American people have taken a look at the Obama agenda and have decided that they don't want any part of it.

So, obviously, the Democrats will change, right?

Maybe not. Maybe they can't change. Maybe they are welded to their high-taxing, high-spending administrative state, and nothing can change them short of political Armageddon. For, as Daniel Henninger reminds us, the Democratic Party is nothing if not the political committee of the public sector as a whole.

It all started in 1962, according to Henninger.

In 1962, President John F. Kennedy planted the seeds that grew the modern Democratic Party. That year, JFK signed executive order 10988 allowing the unionization of the federal work force.

That political act set up the current public sector in which public employee unions feed money to Democratic politicians in return for favors.

They broke the public's bank. More than that, they entrenched a system of taking money from members' dues and spending it on political campaigns. Over time, this transformed the Democratic Party into a public-sector dependency.

If you've wondered why public sector employees earn something like 40 percent more than private sector employees, now you know.

On this political model it makes complete sense for the Democrats to propose a vast increase in the administrative supervision of health care. It will create more public sector jobs up and down the food chain, from academicians serving on comparative effectiveness committees to nurse's aides doing hospital donkey work.

Yes, you say, but all this saddles the American people with swingeing taxes and suffocating regulation and, in the end, doesn't really deliver much health care. Why would anyone do that?

So? What's the problem? It increases the number of public sector workers, and the number of votes for Democrats. And anyway, it's too late for the Democrats to stop now.

The great fear, for any independent or Republican, is that Democrats will trim their sails enough to convince the American people that they have heard their message. Yes, the president will say. We get it. And ordinary people, who just want to get on with their lives, will keep their Democratic congressman, and vote to give President Obama a second term.

But the president and his administration probably won't get it. Maybe they can't. To understand why, read the comments responding to David Brooks's New York Times article on "The Great Leviathan," where he argues that President Obama must stop acting the Hobbesian absolute monarch, and be a proper American leader. Says Brooks:

If I were President Obama, I would spend the next year showing how government can serve a humble, helpful and supportive role to the central institutions of American life. Even in blue states like Massachusetts, voters want a government that is energetic but limited — a servant, not a leviathan.

But the top commenters will have none of it. Things are such a mess after Bush that top-down dirigisme is essential, they say. You are a nice chap, says one commenter, but "your expression of respect for the American people at present is not justified."

See the mindset here? The American people cannot be trusted; they must be directed to do the right thing. Not coincidentally, it will be New York Times readers that will do most of the directing.

Leadership, they say, is mostly about selecting good people. Government comes down to staffing. And we know that the people Obama has appointed to executive positions in the federal government think and act like the Brooks article commenters. Just as the old landed aristocracy believed in "blood" our educated progressive class believes in intelligence and rational administration. Every problem needs a rational administrative solution. Every hammer needs a nail.

So the bad news, that the Obamis probably won't do their "pivot," is also the good news. Democrats won't really change. Not until it is too late.

As Lenin said: you can't make an omelette without breaking eggs. You won't get political change until the old regime hits the wall.

And maybe that's the best way to understand our liberal friends today. They are like the French aristocracy in the last years of the ancien regime. Even those that know that something is wrong just don't have a clue what to do about it.