No, he can’t

Not a great slogan when there’s a pile of crap up ahead

November 6, 2012 gave generations of American history students yet unborn a new standard exam question: how did one of the most ineffectual presidents in US history get re-elected?

Across the OECD countries since the financial crisis hit in 2008 incumbents have had a tough time. Britain, Spain, France, Italy Greece and Ireland have ditched leaders. How did Barack Obama buck this trend?

The pattern has been that economic realities have forced big-spending, heavily-indebted Western governments of whatever stripe to adopt some measure of spending restraint. Even when, as in Spain and France, parties have been elected in opposition to so-called austerity they have been forced into it once in office by the remorseless reality of economics.

Electorates haven’t liked this. They still appear to believe, as the current travails of Britain’s coalition and plummeting popularity of President Hollande show, that there is a magic money tree somewhere, that plenty can return and cruel financial reality be banished simply by ticking a different box on a ballot paper.

Whereas other elections since 2008 have pitched an “austerity incumbent” against a “fantasyland challenger”, in America the roles were reversed. Obama, the incumbent, peddled fantasy; his challenger, Mitt Romney, offered some semblance of reality. Looked at this way the post-2008 pattern was maintained: the fantasy candidate won.

But it won’t make any difference. The people who celebrated Obama’s victory, thinking they had saved entitlement programmes like Medicare, Medicaid and Social Security from Republican cuts, are deluding themselves. America’s unfunded liabilities, including these programmes, rose by $11 trillion last year to $222 trillion. To put that in context, the entire US economy is just $15 trillion, of which $3 trillion a year is paid in tax. If you expropriated all the wealth of the richest 400 Americans, as some Obama supporters appear to suggest, the $1.7 trillion you would get wouldn’t make a dent.

Those programmes will not be saved by Obama’s waffle. They will die because there is no money to pay for them and there won’t be, no matter which box you tick. That is the lesson of the last few years and it is one the US is going to learn. The laws of economics have a habit of being enforced with the doggedness of Inspector Javert and the merciless brutality of Dirty Harry.

This article originally appeared in Standpoint

Obama’s economic failure

Forward!

For a man famed for his rhetoric the tweet was simplicity itself: “Four more years”. Indeed, I thought, four more years of high unemployment and economic stagnation.

For the second time Barack Obama had beaten an opponent who understood more about economics than he did. In 2008 John McCain admitted he didn’t “really understand economics” yet in June that year he said,

“We are borrowing from foreign lenders to buy oil from foreign producers. In the world’s capital markets, often we are even borrowing Saudi money for Saudi oil. For them, the happy result is that they are both supplier and creditor to the most productive economy on earth. For us, the result is both dependency and debt. Over time, in interest payments, we lose trillions of dollars that could have been better invested in American enterprises. And we lose value in the dollar itself, as our debt portfolio undermines confidence in the American economy”

Intuitively, McCain had grasped that America could not keep swapping devalued dollars for foreign goods and services.

Obama, meanwhile, gave a speech saying

“I’m not talking about a budget deficit. I’m not talking about a trade deficit. I’m not talking about a deficit of good ideas or new plans. I’m talking about a moral deficit. I’m talking about an empathy deficit”

So Obama had named five deficits, only three of which were real, and he was going to talk about the two that weren’t. This was typical of the sort of overripe guff soaring rhetoric which enraptures Obama’s supporters. It makes you feel good as long as you don’t try to figure out what it means.

And again, this year, Mitt Romney gave a speech saying

“I met with (former head of Goldman Sachs and the New York Federal Reserve John Whitehead), and he said as soon as the Fed stops buying all the debt that we’re issuing—which they’ve been doing, the Fed’s buying like three-quarters of the debt that America issues. He said, once that’s over, he said we’re going to have a failed Treasury auction, interest rates are going to have to go up. We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.” It’s just made up money, and this does not augur well for our economic future.”

Romney was dead right about the parlous state of US finances but, in the same speech, he made his remark about ‘the 47 percent’ and this was drowned out.

Obama, meanwhile, released an ad saying

“Now Governor Romney believes that with even bigger tax cuts for the wealthy, and fewer regulations on Wall Street, all of us will prosper. In other words, he’d double down on the same trickle-down policies that led to the crisis in the first place

Obama thinks this despite the fact that Bush’s deficits were driven by spending increases and not tax rises. There is no mention of loose Federal Reserve monetary policy. There is no mention of political action which pushed banks to lend to marginal borrowers.

Obama’s faulty prognosis follows from his faulty diagnosis. America, he believes, can tax and spend its way back to prosperity.

Well, he tried the spending. In February 2009 the $831 billion American Recovery and Reinvestment Act came before Congress. If the ARRA was passed, President Obama promised, unemployment would peak at 8 percent in late 2009 and would fall to a little over 5.1 percent by October 2012. He painted a doomsday scenario if the ARRA wasn’t passed; unemployment would peak at 9 percent in 2009 and by October 2012 would still be at 5.5 percent.

The act was passed. Unemployment peaked at 10 percent in October 2009 and in October 2012 was 7.9 percent. In other words, even with Obama’s $831 billion package, unemployment peaked later, peaked higher, and remains higher than in the doomsday scenario he said would befall America if the ARRA wasn’t passed. Unemployment was wedged above 8 percent for 43 consecutive months, the longest period since the Great Depression. The American economy underperformed even Obama’s own worst case scenario.

But even these dreadful figures might not tell us the whole story. America’s unemployment figures are notorious for their unreliability. Those who just stop looking for work are not counted as unemployed. So many Americans lost hope of finding a job in Obama’s America that in September 2012 the Labor Force Participation Rate fell to its lowest since 1981. If the LFPR was the same as when Obama took office unemployment would be a staggering 10.6 percent.

And even this might understate matters. If unemployment was measured now the same way it was in the 1930s, today’s level would be higher than in any single year of the Great Depression. That is why Obama didn’t run on his record; it’s awful. Instead his pitch was ‘Give a guy a second chance’ like some desperate ex-boyfriend.

And now he’s going to try taxing. But here’s the problem: last year the Federal government’s unfunded liabilities, which includes Social Security, Medicare, and Medicaid, all programs Obama has no plans to reform, increased by $11 trillion to $222 trillion. To put this in context, the entire American economy is just $15 trillion. If you expropriated the entire wealth of the richest 400 Americans and left them on food stamps you would take $1.7 trillion – it wouldn’t make a dent. All Americans will face huge tax rises.

F. Scott Fitzgerald said that there are no second acts in American lives. Obama must hope he was wrong. As Jay Leno put it, “Economists say we’re heading for a fiscal cliff and we elected a guy whose campaign slogan is ‘Forward!’” Barack Obama: the Thelma and Louise President.

This article originally appeared at The Commentator

Crisis of statism, not capitalism

In search of that magic money tree

t might not have been the ‘crisis of capitalism’ which some have been waiting so long for, but it is widely thought that the last few years certainly represent a “crisis of capitalism”. But if you think of capitalism as a system whereby profits and losses acting unhindered by the hand of government guide capital to its most productive uses, this is difficult to sustain.

The sectors which blew up and took the rest of the economy with them were riddled with intervention. Banks have their capital adequacy rates set and their bad investments covered by government. The housing market is kept inflated with all manner of tax breaks and politically motivated distortions like Fannie Mae, Freddie Mac, and the Community Reinvestment Act. Behind it all interest rates are set by a small panel of political appointees, much as the price of alum keys was set in the Soviet Union.

But as we see violence on the streets of Athens and Madrid, the Occupy protests in the United States, and unadulterated rage on the pages of The Guardian’s Comment is Free (Cif), there is certainly some sort of crisis afoot. It is, however, a crisis of big government.

Over the last few decades governments throughout the western world have made extravagant spending commitments. In Ireland the welfare budget was tripled. In Greece pastry chefs, radio announcers, hairdressers, and steam bath masseurs were included among 600 professions deemed so “arduous and perilous” that workers could retire at 50 on a state pension of 95 percent of their final salary.

But it wasn’t just small basket case economies doing it; big basket case economies were doing it too. France decided that its workers could work no more than 35 hours a week and still generate the wealth to pay for everyone to retire at 60 and spend a third of their lives as state pensioners. In the United States the Bush administration launched the largest expansion of Federal spending since Lyndon Johnson’s Great Society program of the 1960s. In Britain the Labour government increased spending by more than half in six years.

As long as you didn’t look either too closely or too far ahead, these massive spending commitments looked just about affordable as long as there was plenty of money to spend. And there was. In Britain tax receipts rose by 40 percent between 2001 and 2007. In the United States, Federal tax revenues rose by 30 percent between 2000 and 2007. French tax revenue increased by 30 percent between 2002 and 2008.

But these were the effects of the bubble. These were taxes swelled by property values, house sales, and bank profits on those house sales and the myriad ancillary transactions such as securitisation. With the bursting of that bubble that wealth is gone, if it was even there in first place, and it is not coming back. Nor should it.

That does mean, however, that lots of the extravagant government spending promises made before the bust now stand revealed for what they are; unaffordable in the absence of bubble taxation. And given the undesirability of bubbles, that just makes them unaffordable full stop. No amount of general strikes, protesting, occupying, or posting on CiF will change that. We do not have a mighty oak of a money tree, but a bunce bonsai and, in truth, that’s all we ever did have.

Since the crisis hit we have seen both the unavoidability of this truth and the reluctance of electorates to accept it. In the last few years the voters of Greece, Spain, and France have voted out ‘austerity’ governments only to have ‘austerity’ visited upon them anyway by their replacements (at least they were asked, unlike the Italians). There is a very good chance that this November and in May 2015 the voters of the United States and United Kingdom will discover that reality doesn’t just disappear because you tick a box marked ‘Obama’ or ‘Miliband’.

The amount of money spent by the government has grown inexorably. We have reached its limit. In Britain, since 1964, whether top rates of tax have been at 83 percent, as in the 1970s, or 40 percent, the percentage of national income paid in taxes has never exceeded 38% of GDP.

Whatever the designs of the politicians, the social democrats, the Labour party, the Guardian, or Polly Toynbee, the British people, collectively and unconsciously, seem to have decided that they are not willing to fund a state sector any bigger than this. When the share of state spending as a share of GDP reaches 45 percent or 50 percent, as it has recently, the only way is down. That is where we are now.

If the extravagant spending promises of politicians outstrip both the capabilities of even a well-functioning capitalism to generate the necessary wealth and the public’s willingness to pay for it, that is not capitalism’s crisis, but a crisis of big government. Its time is up.

This article first appeared at The Commentator

Bernanke stuck in a bunker

…QE4, QE5, QE6…

At a celebration of Milton Friedman’s 90th birthday in 2002, Ben Bernanke, then a newly appointed member of the Federal Reserve Board of Governors, said “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again”

Bernanke thought Milton had been right about the Great Depression. Until the early 1960s the common interpretation of the Depression was the Keynesian one, such as that put forward by Peter Temin, where a switch in “animal spirits” had caused aggregate demand to collapse. Then, in 1963, Friedman and his colleague Anna Schwartz produced a radical new interpretation in A Monetary History of the United States, 1867 to 1960.

In this mammoth, exhaustively researched book, Friedman and Schwartz argued that far from money being “neutral”, as was thought at the time, fluctuations in the money supply were closely linked to fluctuations in output. So, if you wanted to stabilise output you had to stabilise the money supply. Monetarism was born.

But the book’s centrepiece – so much so that it was released separately as a book in itself – was that covering the onset of the Depression, “The Great Contraction”. Here, Friedman and Schwartz claimed that a common or garden down turn (brought on by the tightening of monetary policy from 1928 which, they said, had triggered the Wall Street Crash) was turned into a Depression by the Federal Reserve allowing the money supply to shrink by a third between 1929 and 1933.

This, it was argued, had increased the real debt burden of businesses and individuals. As the money supply fell so did prices, this was deflation. Anyone who had debt to service had to service debts of fixed nominal amounts which had grown in real terms as the deflation set in, with money which had shrunk in value at the same time.

Though Friedman subsequently became linked with the fight against inflation he was also concerned about deflation. Friedman argued that a money supply which neither shrank nor grew too fast was needed to bring about the monetary stability which he saw a necessary precondition for economic stability.

So while, in the 1970s, Friedman advocated slowing the increase in the money supply to tame inflation, in the early stages of the Depression, he and Schwartz argued, the Federal Reserve should have fought deflation by expanding the money supply.

That the Federal Reserve didn’t do this was, to Friedman, the cause of the Depression. It was the supposed truth of this insight that Bernanke was acknowledging in 2002.

Ben Bernanke spent his academic career studying the Depression from a Friedmanite perspective, producing a dull but worthy book on the subject. When he took over from Alan Greenspan at the Federal Reserve in February 2006 the Great Moderation was still in full swing but when the downturn came in 2008 it would have been hard to find a more qualified man to have at the helm. It was a case of cometh the man cometh the hour.

In September 2008 Lehman Brothers collapsed, banks everywhere looked vulnerable and began hoarding cash. The US broad money supply collapsed. Bernanke acted quickly to apply the lessons of the Depression he had learned from Friedman. As one reviewer of his book put it, “He is practicing today what he preached in his book: Flood the system with money to avoid a depression.”

The Fed Funds rate, which had already been reduced from 5.25 percent in early 2007 to 2 percent when Lehman tanked, was cut further to a range between 0 percent and 0.25 percent by the end of 2008 where it remains today. Still, the money supply contracted.

In November 2008 Bernanke launched QE1. Changes in the Fed Funds rate are facilitated by the buying and selling of short term dated securities to alter short term interest rates. Quantitative Easing works the same way except via the purchase of long term dated securities so as to bring down longer term interest rates.

QE1 was an unprecedented attempt to infuse tottering banks with liquidity and shore up the money supply. By the time it came to an end in March 2010 the Federal Reserve had bought $1.75 trillion of mortgage-backed securities.

But still the money supply kept falling so in November 2010 Bernanke initiated QE2 which involved the purchase of $600 billion of Treasury securities. By the time QE2 docked in June 2011 the money supply had stopped shrinking. Indeed, it had returned to fairly brisk growth. Bernanke had made the moves straight out of Friedman’s playbook and staved off deflation.

But, apart from the Federal debt, the money supply was all that was experiencing brisk growth. GDP was slowing and unemployment remained stuck over 8 percent. Bernanke, with a theory of fighting inflation, was now coming under pressure to boost growth and employment.

He took over a year to arrive at his decision but last week Bernanke rolled the dice on QE3, an open ended commitment to spend 40 billion newly created dollars a month on mortgage backed assets until, well, until something turns up.

If you are going to do a job you need the appropriate tools. QE and the mass monetary intervention executed so far by Bernanke were designed to stop the money supply contracting. Eventually it did. But the money supply is not now contracting, it is growing. QE is totally inappropriate now even on Monetarist grounds.

In desperation, with the economy stagnating and fiscal policy at its capacity, Bernanke, to the great relief of the Obama administration, is deploying a policy tool conceived and designed to achieve stability of the money stock, to boost the real variables of output and employment. Increasingly Bernanke resembles a golfer with one club. He’s stuck in a bunker and all he has is a driver.

This article originally appeared at The Commentator

The polarization of politics: Let’s mingle more

My captain, my captain

As a Trekkie I was keen to watch Patrick Stewart, late of the Starship Enterprise, boldly going on the BBC’s Hardtalk. Stewart is a man I greatly admire not only for pulling off the impossible and filling Captain Kirk’s seat, but for an acting career that spans Sejanus in I, Claudius and a hypersexed version of himself in Extras.

So it was disappointing to actually see Stewart in action. I knew he was a Labour supporter; he’s a Yorkshireman and luvvie after all. But he went further. He said he actually feels “uncomfortable” around Conservatives. This was yet another manifestation of a depressing trend. People are increasingly unable to tolerate anyone whose politics aren’t just like theirs.

The trend is further developed in the United States than in Britain. In the US the tone of political debate is frequently poisonous. From the right you have ‘conservatives’ accusing ‘liberals’ of wanting to destroy America. From the left you get ‘liberals’ accusing ‘conservatives’ of wanting to grind everyone else into poverty. To each their opponents are not merely wrong, not simply possessed of a different philosophy, but are actually evil. Neither side recognises any common ground at all with the other.

We have not been free of this in Britain. In 1945 Winston Churchill warned that if Labour won the election Clement Atlee would usher in a British “Gestapo” and opposition to Margaret Thatcher frequently scaled quite epic heights of demented lunacy. It still does.

But this was the exception in Britain, perhaps because figures like Harold Wilson, Edward Heath, John Major, or Tony Blair drew most of their flack from their supposed supporters. Enoch Powell could disagree utterly with both Tony Benn and Michael Foot yet maintain warmer personal relations with either than Foot and Benn could manage with each other.

This has been changing. As the coalition undertakes to slow the growth in government debt so that it only doubles in five years, some on the Left have reacted as though civilization is about to end. Worse, they attribute it, as in America, not merely to error or possession of a different philosophy, but to evil itself.

Polly Toynbee, a trail blazer for the New Nastiness in British political discourse, described the popular proposal to cap Housing Benefit to a still pretty generous £400 a week for a four-bedroom property and £250 a week for a two-bedroom home as the Tories’ “final solution for the poor”, seeing in the cuddly Grant Shapps the echo of Heydrich and Himmler.

I am quite sure that someone of a left wing persuasion reading this will respond that the Right does plenty of it too. No doubt the Daily Mail and Peter Hitchens will be mentioned. And they may well be right. I concede the distinct possibility that both sides are as bad as each other but I shan’t find any comfort in it.

The rhetoric of someone like Toynbee and her counterparts on the Right is harmful. If, for example, you are a Guardian reader who accepts Toynbee’s view of the world then, by extension, you must consider people like me, as an occasional supporter of the Conservative Party, a crypto-Nazi.

If this sounds as ridiculous as it ought to then stick Toynbee in the bin. If, however, you do accept her world view that the coalition is evil and acting out of spite then you can understand why someone like Patrick Stewart would feel uncomfortable around Conservatives, even ones like me who wear plastic pointed ears from time to time. We’re Nazis, after all.

This matters. Democracies work because every few years, at election time, the losing party hands power to the winning party on the understanding that, at the next election, power will be handed back to them if they are successful. This is only possible because the parties consider themselves part of the same polity. If they don’t, if they see no common ground, then the basis for electoral democracy breaks down. In many places around the world elections are accompanied by fraud or violence precisely because this common polity doesn’t exist.

This also gives some clue as to where this bitterness comes from. Governments are now, increasingly, mechanisms by which wealth is transferred around society. Unlike wealth creation, which can generate wealth which didn’t previously exist and make everyone better off, wealth transfer is always a zero sum game; one party can only benefit to the extent that some else loses. Wealth creation creates winners. Wealth transfer creates losers as well.

And, as governments grow, so does their role as wealth transferors, increasing the number of both winners and losers in the zero sum game of government. Bitterness grows alongside.

I have a great many friends who would describe themselves as being of a left wing persuasion so I can see what people like Stewart are missing out on. Because I know lefties personally and not solely from the pages of the Mail I know that they don’t all want to put me in a Gulag run by Harriet Harman. And I hope that, from knowing me, they realise that not all ‘right wingers’ want to feast on the carcasses of the poor. Each of us thinks the other is wrong; neither thinks the other is evil.

What is under threat in Britain, and almost dead in America, is this sense of commonality, of being part of a shared polity with people we disagree with, but who are, for the most part, just as sincere and well-motivated as we are. And we won’t keep it if, like Patrick Stewart, we seal ourselves off from those we disagree with.

We need to mingle more, not less. Unless you think Picard was a better captain than Kirk, then I really will never talk to you again.

This article originally appeared at The Commentator

It’s anything but the economy, stupid

Wrigley Field, Chicago, 2040 AD

Walking around the ruins of the old Roman town of St Albans can make you feel like Shelley’s “traveller from an antique land”. As you look down into the remains of the Roman amphitheatre, where the town’s inhabitants flocked in the second and third centuries AD, you wonder what those people thought and talked about as Roman Britain approached its collapse.

You’d like to think they talked about that looming collapse. Perhaps they did. It was, after all, the existential issue of the day. But looking at behaviour in another, contemporary, troubled great power, you do wonder.

The United States government hasn’t balanced its budget since 2001. In the past ten years, starting in 2002 when Republicans controlled the Congress and the White House, Federal government debt has more than doubled from $6.5 trillion to over $15 trillion, or nearly $51,000 for every US citizen. Since September 2007 that debt has been increasing by nearly $3.9 billion a day. The Congressional Budget Office reported last week that in 2012 the Federal government’s debt increased by over a trillion dollars for the fourth year running.

Over the same ten year period the dollar has lost about 25 percent of its value. The rampant credit creation of the Federal Reserve which fuelled the housing bubble has created $1.4 trillion of new base money since 2000. At the moment most of this is sitting on banks’ balance sheets but if it emerges into the wider economy the US will have an inflation crisis.

Likewise, if the foreigners who hold nearly a third of America’s debt decide to dump these depreciating assets, the dollar will collapse.

These are the existential issues for the United States as November’s presidential election nears. But to look at the media you’d never know it.

Instead the American media has lately been preoccupied with a fast food chicken chain. More precisely, it has been preoccupied with what the president of that chain thinks of gay marriage.

“Who cares?” might have been the appropriate response. If you’re a Chick-fil-A shareholder and you don’t agree with him, sell up and invest somewhere else. If you’re a customer, go and buy your artery clogging food down the street. Capitalism, more so than any other system, gives you scope to exercise your morality.

Instead the views of one guy became a minutely discussed national news event. Democrats in a number of cities called for local branches of Chick-fil-A to be shut down, a curious course of action in the face of high unemployment. Supporters of Dan Cathy’s views had a Chick-fil-A Appreciation Day where they filled their faces to show solidarity. They should have called it Cholesterol for Christ.

Then, last week, media attention fixed upon the previously little known Republican Representative from Missouri, Todd Akin. In an interview with a local TV station Akin aired the unusual view that women couldn’t become pregnant through “legitimate rape”.

Worryingly Akin sits on the House Science Committee. This provides yet another argument for leaving more to free markets and less to government. Under free markets science ends up in the hands of people like Bill Gates and Steve Jobs. Only government could put someone like Akin in charge of science.

Neither gay marriage nor rape should be belittled as issues. Laurie Penny, not someone I’m given to quoting approvingly, noted in a moving blogpost that between ten and twenty percent of women in America have experienced rape, 90,000 in 2008 alone. This is awful and ought to be tackled.

But neither should silly remarks from a silly man like Todd Akin drown out the great existential issue in American politics: the economy.

And America’s solvency ought to matter to everybody. It ought to matter to Democrats who care about redistribution of wealth: watch your economy disappear over a cliff and then try and redistribute nothing; see how far that gets you.

It ought to matter to neo-conservatives: America’s economic wellbeing is a sine qua non of American strength. The United States did not become rich because it had powerful armed forces; it got powerful armed forces because it was rich. If the wealth goes so does the power.

And, most importantly, it ought to matter to every ordinary American citizen who will suffer if the economy continues on its current, Hellenic path.

But instead of this discussion we have the ongoing row about Mitt Romney’s taxes. With unemployment stuck above 8 percent and poverty at record levels, Obama’s supporters are trying to turn an election that should be about how much money Americans have in their pockets into one about how much money Mitt Romney has in his.

President Obama’s economic track record has been dismal so you can’t blame him for running away from it. Bill Clinton’s strategist James Carville famously said it was “The economy, stupid” but Obama and his supporters are desperately trying to shift the focus of this election to anything but. And the Republicans have been lead-footed enough to let them.

Ultimately, Americans have a decision to make. What matters most: Tax returns or job reports?

This article originally appeared at The Commentator

Barack Brewster’s Millions

Who ya gonna call in November?

Films have often been vehicles for communicating complex ideas and philosophies in coded parables. The dreary films of Marxist filmmaker Ken Loach aren’t much more fun than ploughing through all three volumes of Das Kapital but they do, at least, take less time.

When, in The Shootist, John Wayne’s character, J B Books, says “I won’t be wronged, I won’t be insulted, and I won’t be laid a hand on. I don’t do these things to other people, and I require the same from them”, he was saying roughly what it took Robert Nozick 300 pages to say in Anarchy, State, and Utopia.

But I wasn’t expecting any such heft when I sat down to watch Brewster’s Millions at the weekend. As a child of the 1980s I might have seen this film around 20 times but this time I noticed something new in it; it is a parable for Keynesian economics.

It tells the story of washed up baseball player, Montgomery Brewster (Richard Pryor), who is left $300 million by an eccentric relative. There is one catch: first he has to spend $30 million in 30 days with absolutely nothing to show for it; “you’re not allowed to own any assets. No houses, no cars, no jewelry. Nothing but the clothes on your back!”

Brewster uses a raft of tricks to spend this money, some of which will be oddly familiar to anyone who has been watching economic policy making over the last few years.

Brewster’s first act is to go on a hiring spree offering vastly inflated wages. No, not public sector employees, but a team of security guards. Later he gets into his very own crackpot environmental, or ‘green tech’, scheme when he buys an iceberg with the aim of floating it to the Middle East to bring relief to supposedly drought stricken Arabian farmers.

“What thirsty Arab farmers?” his friend Spike (John Candy) asks, “There aren’t any, because there aren’t any farmers in the desert!” If only John Candy had been on hand before Barack Obama blew $535 million on Solyndra.

Finally he hosts an expensive exhibition game between his old team, the Hackensack Bulls, and the New York Yankees. The Bulls are kitted out in new uniforms and flown in by helicopter. Brewster should, of course, have re-designated some of the major roads in New York as special lanes for his game; then he could have wasted as much money as the London Olympics.

If it sounds fanciful to see any economics in this flurry of pointless spending, consider the words of John Maynard Keynes himself:

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is”

A different attitude to wealth creation is on display in one of the classics of 1980s cinema, Ghostbusters.

Three government employees spend their days trying to seduce their students with phony experiments and running away from ghosts. When this dismal level of productivity proves too low even for the public sector they are sacked and go private, though not without misgivings.

As Ray Stanz (Dan Aykroyd) warns Peter Venkman (Bill Murray), “Personally, I liked the university. They gave us money and facilities. We didn’t have to produce anything! You’ve never been out of college. You don’t know what it’s like out there. I’ve worked in the private sector. They expect results.”

Spotting a gap in the market (“We are on the threshold of establishing the indispensable defense science of the next decade. Professional paranormal investigations and eliminations. The franchise rights alone will make us rich beyond our wildest dreams”) the three borrow some money and set up the Ghostbusters.

Soon they are raking in $5,000 a night, getting coverage from Larry King and Time magazine, and taking on a black member of staff, no affirmative action needed.

Then up pops Walter Peck of the Environmental Protection Agency. “I want to know more about what you do here” he demands. “Frankly, there have been a lot of wild stories in the media and we want to assess for any possible environmental impact from your operation, for instance, the presence of noxious, possibly hazardous waste chemicals in your basement. Now you either show me what’s down there or I come back with a court order!”

With Venkman an unlikely John Galt the government steps in, shuts down the thriving private sector enterprise, and the town is flooded with ghosts.

Where Brewster’s Millions is an object lesson in the wasteful uselessness of Keynesian economics, Ghostbusters is one of the most pro free market films ever made, a hymn to the genius of capitalism and the clumsy damage wrought by government.

Or, to quote another economist, Milton Friedman, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand”

These differing attitudes are on display in the US Presidential election. With the American economy slowing to stall speedthe question each of the candidates must answer is “Where is the growth going to come from?”

With his background in law and ‘community organising’ it’s no surprise that Barack ‘Brewster’ Obama doesn’t know, pinning his hopes on ever more government spending of the Solyndra sort.

Mitt ‘Venkman’ Romney, by contrast, is at least paying lip service to private sector led growth of the Bain Capital sort. The difference is that Bain made money and Solyndra went bust. Do Americans want their economy run by Monty Brewster or the Ghostbusters? That will be the question this November

This article originally appeared at The Commentator

The charts that could doom Obama

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Know any good removal men?

In February 2009, less than a month after Barack Obama was sworn in as President, the $831 billion American Recovery and Reinvestment Act came before Congress. If the ARRA was passed, President Obama promised, unemployment would peak at 8 percent in late 2009 and would have fallen to a little over 5.5 percent by May 2012. President Obama painted a doomsday scenario if the ARRA wasn’t passed; unemployment would peak at 9 percent in 2009 and by May 2012 would still be at 6 percent.

President Obama got his Act and the graph below shows what Americans got for their $831 billion.

Unemployment peaked at 10 percent in October 2009 and in May 2012 was 8.2 percent. In other words, even with Obama’s $831 billion package, unemployment peaked later, peaked higher, and remains higher than in the doomsday scenario he said would befall America if the ARRA wasn’t passed. The American economy outperformed even President Obama’s own worst case scenario. The Republicans should send a copy of this chart to every household in the United States. 

To call the ARRA ‘stimulus’ is surely a mistake; it hasn’t stimulated anything. But this isn’t a one off. Despite what Keynesians say, the idea that government spending can stimulate an economy beyond the very short term is a complete myth.

The chart above shows data for EU and G20 member states from 2011 on budget deficits and economic growth. It shows a clear trend: countries with higher budget deficits are experiencing lower growth.

A snapshot might not be too useful so what about over time?

This graph uses data for the EU and G20 member states on changes in growth and budget deficits from 2010 and 2011. Again, the trend is clear: countries that reduced their budget deficits between 2010 and 2011 could expect to see higher growth.

This is not to say that the act of cutting budget deficits of itself caused higher economic growth; correlation does not equal causation. But it does show that cutting budget deficits is not the route to economic meltdown. And it does show that state ‘stimulus’ spending is not the passport to prosperity some people like to make out.

People like Paul Krugman, who was in town last week to plug his new book which takes 259 pages to convey one bone-headedly simple message: keep spending. Krugman wrote recently that “All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment.”

Nothing of the sort has happened. As we see, countries enacting ‘austerity’ policies are doing slightly better than those which, relatively, aren’t.

Krugman complains that spending cuts aren’t really about controlling runaway government spending at all; this is all simply a cloak behind which conservatives are hiding the moves towards a small state they desire. This is, to say the least, an idiosyncratic view of a British government which is going to oversee an unprecedented peacetime rise in the national debt of 60 percent during its term in office. In truth, in clinging onto the belief that government spending creates sustainable economic growth which is being discredited around the world every single day, it is Krugman who is still pushing his failed, dangerous ideology in the face of all the evidence.   

Krugman is not alone. His British Mini Me, Will Hutton, has taken to the pages of the Observer to blame austerity for the parlous state of the global economy. Hutton says that in Britain “manufacturing suffered its biggest plunge for three years, and this in an economy already suffering its longest depression since the 19th century. American jobs growth is petering out. Unemployment in Europe averages 11%”

But look at Britain with its budget deficit of 8.1 percent of GDP. Look at the US with its budget deficit of 9.7 percent of GDP. Look at Ireland, Greece, Spain and France with their budget deficits of 11.2 percent, 7.3 percent, 6.9 percent and 6 percent of GDP respectively and ask yourself in which mad universe these countries can be said to be applying ‘austerity’.

Contrary to what Krugman, Hutton, and others argue it is not ‘austerity’ which has failed, it has barely been tried. Over the last three years Britain’s budget deficits have been 10.3 percent, 10.2 percent and 8.1 percent. According to the Keynesian theory the British economy should be in fine fettle yet it’s still in the tank. It is Keynesian deficit spending that has failed. 

You would have to be a complete fool impervious to all evidence to cling like Linus with his blanket to the idea that we could get more economic growth if only the government would spend more money. President Obama is not alone in seeing his ‘stimulus’ fail to stimulate but that will be of little comfort if he is calling the removal men in November. 

This article originally appeared at The Commentator

Paul Ryan’s 40 year detox: America can’t rely on China

And now a word from our sponsors…

The reaction of some to the release of the Path to Prosperity budget last week by Representative Paul Ryan, Chairman of the House Budget Committee, was incandescent fury.

A New York Times editorial painted a picture of America under the Ryan budget as

one where the rich pay less in taxes than the unfairly low rates they pay now, while programs for the poor — including Medicaid and food stamps — are slashed and thrown to the whims of individual states. Where older Americans no longer have a guarantee that Medicare will pay for their health needs. Where lack of health insurance is rampant, preschool is unaffordable, and environmental and financial regulation are severely weakened”

The Washington Post exhumed Dickens and Orwell on the way to saying

“Ryan would cut $770 billion over 10 years from Medicaid and other health programs for the poor, compared with President Obama’s budget. He takes an additional $205 billion from Medicare, $1.6 trillion from the Obama health-care legislation”

According to The New Republic the budget

“would take health insurance away from tens of millions of people, while effectively eliminating the federal government except for entitlements and defense spending”

The Huffington Post quoted one Eddie Vale, a spokesman from pressure group Protect Your Care, as saying “A Republican budget to end Medicare is a Republican budget to end Medicare, no matter what you call it”

What’s most striking about all this is what’s missing. Mr Vale and the others quoted haven’t asked themselves the crucial question about Medicare and food stamps and all the rest; will the Chinese be happy to keep paying for it all?

The United States government borrowed $4 billion today. It borrowed $4 billion yesterday and it will borrow $4 billion again tomorrow and so on. Federal government debt, which was rising by about $625 billion a year under George W Bush, is, under President Obama, rising at $1 trillion a year. According to official figures in December Federal government debt passed 100% of GDP.

In National Review Mark Steyn does an excellent job of conveying the full scale of this explosion of debt

“The 2011 budget deficit, for example, is about the size of the entire Russian economy. By 2010, the Obama administration was issuing about a hundred billion dollars of treasury bonds every month — or, to put it another way, Washington is dependent on the bond markets being willing to absorb an increase of U.S. debt equivalent to the GDP of Canada or India — every year”

And what is the Ryan budget, cause of such wailing and gnashing of teeth, proposing to do about this financial catastrophe? Under what the New York Times called “the most extreme budget plan passed by a house of Congress in modern times” Ryan doesn’t actually propose to balance the Federal budget for another 40 years.

So far America has gotten by through buying consumer goods from China and sending dollars in return. The Chinese then effectively loan these dollars back to America by buying Federal government debt, Treasury bonds. The Federal government then spends the receipts from these Treasury bond sales on Medicare and food stamps and all the rest. This is how the Federal government pays its way and it is why China is the world’s largest owner of US government debt with holdings of $1.148 trillion.

Why have the Chinese been so willing for so long to fund the consumption of Americans who’s per capita GDP is nearly six times higher than theirs?

One reason is geostrategic. America will not be able to confront the emergent power of China over Taiwan or anything else if the US government has to borrow the money from the Chinese to do so.

Another is connected to the economy and domestic politics. It has long been an article of faith among China watchers that China’s economy needed growth of 8% a year to guarantee jobs for the millions of young people entering the workforce every year, failure would lead to political unrest. If the Chinese government could only guarantee these jobs in factories producing goods for sale in the US by loaning the US the money to buy them, so be it.

Either way the entire edifice of the United States government is dependent on a line of credit from China and elsewhere. In total one third of US government debt, $5 trillion, is held overseas. With a bit of help from the Quantitative Easing of the Federal Reserve this vast market for Federal government debt has kept bond yields historically low while debt has ballooned. The Federal government is dependent upon the continuation of this line of credit for its own continuation.

But there are signs that the willingness of poor Chinese to keep lending money to rich Americans is coming to an end. Last year the previously insatiable Chinese reduced their holdings of US government debt for the first time since records began in 2001. Not only China is suffering indigestion at the amount of US government debt it is being asked to swallow. Russia and India have drastically reduced their holdings.

The reason is obvious. As a borrower, like America, piles debt upon debt it becomes ever less likely that they will be able to pay it back so you stop lending to them. Indeed, this outcome was, at some stage, inevitable.

But what of the effect on America? Like anything else as the buyers for Treasury bonds disappear their price will fall. In the world of bond financing this means higher bond yields, rising American borrowing costs in other words.

The Federal government’s debt binge will come to an end. It is simply a question, to paraphrase Von Mises, of whether this should happen sooner as the result of a voluntary abandonment of increasing indebtedness, or later amid the catastrophe of default and inflation. Maybe Ryan’s 40 year detox isn’t so bad after all?

This article originally appeared at The Commentator