Don’t let them scare you into socialism

In at least three public appearances yesterday, Barack Obama cried that our economic troubles would turn into a catastrophe if we don’t pass his “stimulus” bill. Other Democrats are making the same pitch, including Nancy Pelosi’s statement that “500 million Americans will lose their jobs every month.”

On Friday morning, we received an employment report that was even worse than bad expectations. Payrolls were down by 598,000 jobs, the most in almost 35 years, and much worse than the Bloomberg consensus estimate of 540,000 jobs. The last two months’ employment numbers were also revised lower. The unemployment rate rose to 7.6%, the highest since 1992.

One of the only places which increased hiring was government. You know what that means: They’ll need to charge you more to cover their vote-buying schemes, even as you worry about whether you’ll have a job in a month. At least the US Postal Service is looking to cut its employment costs.

There is no doubt that the economy is in disastrous shape, and as I’ve argued recently I don’t think this recession will stop before becoming the worst since the depression. But that doesn’t mean the answer is a government spending binge that largely replicates the fiscal failure of the Bush Administration.

While running for election, Barack Obama and other Democrats rightly decried the increase in the deficit under so-called conservative George W. Bush. And now they want to nearly triple it with one piece of legislation. It’s true, the National Debt nearly doubled under George W. Bush, something for which he should be deeply ashamed. But the Democrats’ proposals for this year combined with lower tax revenue due to the recession will likely increase the debt by more than twice Bush’s worst year while making government permanently more expensive.

In fact, the Congressional Budget Office recently sent a letter to Senator Judd Gregg, with their analysis of the economic effect of the current Senate stimulus bill. Basically it says there would probably be a modest economic improvement from the bill starting in 2010 (not 2009!), dropping each year after, to the point that within a decade, “the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals…CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net. H.R. 1, as passed by the House, would have similar long-run effects.” In other words, the Democrats are trying to sell us candy in the short term, forgetting about the rotting teeth we’ll then have for the rest of our lives. They’re trying to sell us a brief “artificial” bump in the economy in return for putting a wet blanket on the economy for who knows many many years in the future. (Even the least educated politician in DC should know that socialist economies have always underperformed our economy. OK, that’s far too generous to our politicians. But we know it, and we should make sure they’re reminded.)

(See more about the CBO letter at the end of this note.)

It was also helpful to hear this from The Chosen One, after hearing criticism that the “stimulus” bill was really just a spending bill: “What do you think a stimulus is? That’s the whole point.”  In a Keynsian sense, he’s right, but it’s also a huge political loser for him, I believe, as the average American is woken up to realize that very fact.  Most people probably believe government can wave a wand, change a rate, or perform some other feat of prestidigitation and change economic growth.  When you make it clear to them that the proposal revolves around taking their money — or their children’s money — the picture begins to crystallize in their heads.  And it’s not a pretty picture.

Recessions, especially deep ones like this, are a terrible thing. The only thing worse than letting the market sort it out and stabilize over time would be to pass a “stimulus” bill which not only hardly contains any “stimulus” (if you really believe you can stimulate the economy by draining money from the private sector) but it also contains many billions of dollars of pork and socialism, from unproven and inefficient alternative energy spending to a giant step toward socialized medicine.

It’s interesting to hear Obama’s other argument: “We won” so we’re going to do what we want to. He seems truly to believe that the “change” people voted for was to massively increase government spending even while it seems clear that people abandoned the GOP in large part because they didn’t curtail spending.

Some sort of stimulus bill will almost certainly be passed. The Senate Republicans in particular have two choices. One: “Work with” the Dems, tinkering around the edges. Two: Act like the House Republicans and “just say no” to the whole thing. It’s in part a political bet. If the economy improves (which would be in spite of, not because of, the “stimulus” and Republicans had nothing to do with the bill, they stand some real political risk. But, if as seems more likely to me, the economy doesn’t recover quickly, just as much of FDR’s New Deal prolonged the depression, the GOP would stand to gain much politically by trying to kill the whole bill, or forcing the Dems to start over and come back with something 1/3 of the size and mostly pork- and socialism-free. Beyond the political aspect, that is the best outcome for the nation among the things that might have some chance of happening.

(Although I was very tough on John McCain during the election season, especially considering he was the GOP nominee, I want to congratulate him on at least trying to bring a bill that is less than half the size of the Democrats’ bill.  It’s also interesting to note that McCain’s proposal got 40 votes in the Senate, maybe showing somewhat more cohesiveness among Senate Republicans than we’re used to seeing.)

Note: For those of you interested in more of the CBO’s comments, the letter to Senator Gregg is a good read. Here is a very important section:

In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth as government bonds rather than in a form that can be used to finance private investment, the increased debt would tend to reduce the stock of productive capital. In economic parlance, the debt would “crowd out” private investment. (Crowding out is unlikely to occur in the short run under current conditions, because most firms are lowering investment in response to reduced demand, which stimulus can offset in part.) CBO’s basic assumption is that, in the long run, each dollar of additional debt crowds out about a third of a dollar’s worth of private domestic capital (with the remainder of the rise in debt offset by increases in private saving and inflows of foreign capital).


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