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

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

America needs a president who prioritises growth over redistribution

“1 million, 2 million…er…”

I’m not a Mitt Romney supporter. He’s certainly less objectionable than other Republican contenders like Rick Santorum or Newt Gingrich but it’s hard to get enthusiastic about a guy when, as the joke goes, he’s managed to be on both sides of every big issue in recent years.

Indeed, if I was asked to name the most impressive thing about Romney his luxuriant hair would be close to the top of the list. But the last week or so I’ve felt a little sorry for him. Yes, I’m feeling a little sorry for one of the richest 0.006 percent of Americans.

In the run up to the South Carolina primary a desperate Gingrich brought up the tax status of front runner Romney. Immediately the pressure was on for Romney to release his tax records. When he did the press screamed “Wealthy Romney reveals 14 percent taxes” What better example of greed?

Except it wasn’t actually true. Ever since billionaire investor Warren Buffett claimed that his tax rate was lower than that of his secretary there has been much debate about the ‘effective tax rate’ faced by the rich. But this ‘effective’ tax rate is made up of apples and oranges. As such it is a meaningless concept.

Romney, like Buffett, pays the top rate of income tax on his salary income, 35 percent. But, like Buffett, Romney derives much of his total income from capital gains, the profits made by investments, which are taxed at 15 percent.

The two types of income, wages for labour (yes, working for Bain Capital classes as labour for tax purposes) and income from investments, are very different. When you labour you are guaranteed your salary come what may. Even if your employer goes bust you are a preferential creditor; any wages owing to you will be paid out of whatever is raised by asset sales before other creditors see a penny.

Investment income is different; as the small print says, investments can go down as well as up. The risk of not receiving a return or income from your investment is much greater than for labour. It follows that if any investment is to be undertaken at all the reward must be high. Not only that, but the investment income that Romney pays 15 percent tax on comes from the profits of companies which have already paid 35 percent in Corporation Tax.

This is why income from labour and income from investment are taxed differently; they are different things. To lump them together and call it an ‘effective’ tax rate is useless.

But there is a deeper point here. From the dawn of man there have only been two ways to increase your wealth. One approach is to supply a good or service which someone else is willing to trade you for, and with both parties benefiting from the transaction everyone’s wealth increases. This is wealth as a positive sum game.

The other is simply to take the wealth generated by someone else; one only gets better off as another gets worse off. This is wealth as a zero sum game.

The obsession with Romney paying ‘only’ $6.2 million in taxes last year (more than 97 percent of Americans) shows that the second approach is gaining popularity. To some extent this is the predictable outcome of economic stagnation. When wealth is growing you don’t worry so much that guy next door is richer than you because you will be richer tomorrow anyway. But when your wealth is shrinking or stagnating, the difference between you and the guy next door becomes a yawning chasm.

Historically the belief, which grows in times of economic hardship, that wealth is a zero sum game and can only be obtained by taking it off somebody else, has led to disaster. In the last century the Germans, Soviets, and Ugandans, to name just a few, all came to think that the Jews, the Kulaks or the Asians had wealth that rightly belong to them and that they would become rich if only they could get their hands on it.

Comparing rich Americans like Romney to those persecuted groups will sound a little shrill, even distasteful to many. But if we become obsessed with who gets what sized slice of our shrinking wealth cake we might forget to just go and bake a bigger one. What America and other countries need is not destructive zero sum envy but growth. And they need real growth, not the unsustainable debt based fantasy of recent years.

There are many who will tell you that further growth is impossible, that the planet is ‘maxed out’. They have been making this prediction since at least Thomas Malthus wrote his Essay on Population in 1798. These people consistently underestimate the one truly inexhaustible resource at humanity’s disposal; its ingenuity.

President Obama said recently that “This is the defining issue of our time” He is right but he is on the wrong side of it. His recent State of the Union speech was heavy on plans to divide wealth up, but lighter on ideas of where this wealth might come from in the first place. And wealth has to be generated before it can be redistributed.

We must hope that the politics of growth wins out over the politics of envy. With his background in community organising and politics, roles all about the spending of money generated by others, it is not surprising that Barack Obama prioritises redistribution. With his career turning round failing businesses Mitt Romney, however imperfectly, leans towards growth.

America needs a president who prioritises growth over redistribution so that the social balm of increasing wealth can work its magic; so that, as an earlier eloquent Democrat put it, a rising tide can lift all boats.

This article originally appeared at The Commentator

Conservative, liberal, and all the rest

Out of the mouths of Vulcans

One of the great things about sites like Facebook is that every now and then a half forgotten name from the past pops into your head, you rattle it into the search box and up they pop. It can be fascinating and enjoyable to see what someones journey through life has been since it diverged from yours.

So I was happy to see an old friend of mine from university called Gordon on there, someone I’d not seen in ten years. He seemed to have a wife and kids, stuff we’d talked about back when it was in the distant future.

He and his girlfriend Tess were American exchange students at Swansea University. Me and Gordon got on incredibly well. We hung around together, travelled to Ireland together and he came to stay at my parents.

Gordon was a pretty political guy. I suppose he was fairly left wing by American standards which is to say not very by British standards. It was from him, a gun owner and recreational shooter, and not Charlton Heston, that I first heard the phrase “From my cold, dead hand” But he supported the rights of any group you care to name; gays, African-Americans, Native Americans, ‘diversity’ was his watchword.

So when I sent him an email saying hi and asking how he was I was dismayed to get this reply

“Things are good! Thanks. I read some of your writings and, well, have a nice life. I hope the whole conservative thing works out for you”

When he’d finished typing he blocked me. Apparently Gordon’s support for diversity stops short of people’s politics. That is a diversity too far.

I think that’s sad. Beyond having the memory of a nice guy and friend tainted he isn’t even right; like Margaret Thatcher’s idol Freidrich von Hayek, I am not a conservative. I’m a liberal.

I don’t mean that in the sense that it is used in America where it has become a term for what, in Europe, we would call social democrats. I mean it in the original, enlightenment sense, of being a believer in the sovereignty of the individual.

This is why I am not a conservative. There are still very many areas where the scope for free people to pursue their welfare and that of others, to map out their own paths and define their own destinies is hobbled. I do not want to conserve this.

So much for semantics. The real sadness here is a lost friendship. And for what? Because he didn’t like my politics? Many don’t. I don’t like theirs.

But there is more to each of us than that. Human beings are deep, complex, fascinating creatures. There is more to each of us than our politics, our social class, our nationality, religion, race or sports team. As the Vulcans had it, ‘Infinite Diversity in Infinite Combinations’

So there are few more depressing trends in the world today than that of sticking labels on each other. ‘conservative’ or ‘liberal’, ‘rich’ or ‘poor’, ‘Christian’ or ‘Muslim’, all of these may be partly true for some of us but are never wholly true for any of us. We are all more complex than that with more identities. To boil us down to this label or that label strips us of the rich variety of our humanity. It is debasing and dehumanising.

In large part this accounts for the increasingly divisive and bitter tone that public debate is conducted in. I’m guilty of it myself from time to time.

So in losing, or not regaining, a friendship with Gordon, I have not lost some leftie Democrat. I have lost a guy who came to see me in the plays I was in, who I introduced to Newcastle Brown Ale and who I spent long hours with discussing the novel I wonder if he wrote. I lost a guy I liked just because my politics were different from his.

As for my friend Tess, well, she’s better off with her new guy. He’s a lovely chap, a dyed in the wool Democrat, but we get on because there is more to us than our political views. We are all human beings. Which ever box you tick on election day, that remains our inalienable common ground.

No more Solyndras: time for the sun to go down on public spending

$535 million

Whenever I watch Dragon’s Den (Shark Tank to readers in the United States) and I see some entrepreneur waking away with £50,000 in his pocket I try and come up with my own ‘Dragon’s Den idea’.

I wonder how far I’d get if I turned up and said “I want $535 million and I’ll go bust in two years”? I might not get too far with Duncan Bannatyne, but if I was pitching to Steven Chu, Barack Obama’s Energy Secretary, I might be in with a shot.

That, briefly put, is the story behind Solyndra, a California based solar energy technology company which filed for Chapter 11 bankruptcy in August.

There are rumours that something murky went on in the approval of the loan. Perhaps, perhaps not.

But there is certainly a question mark to be raised over the willingness bordering on mania of western governments to throw taxpayers money at any business prospectus with the word ‘green’ in it.

Apparently terrified of global warming, our political leaders also harbour the hope that burying Sussex under wind turbines or covering Nevada with solar panels will boost the economy, a variation on Keynes’ old bottles full of banknotes.

But this is to miss the central lesson of Solyndra; governments aren’t much good at spending money.

In his 1980 classic, ‘Free to Choose’, Milton Friedman set out the four categories that all spending must fall into. Category I, you can spend your money on yourself; Category II, you can spend your money on someone else; Category III, you can spend someone else’s money on yourself; Category IV, you can spend someone else’s money on someone else.

Friedman gave a trip to a supermarket as an example of Category I spending, saying that “You clearly have a strong incentive both to economize and to get as much value as you can for each dollar you do spend”

Category II spending was exampled by buying presents for Christmas or birthdays. “You have the same incentive to economize as in Category I”, Friedman wrote, “but not the same incentive to get full value for money, at least as judged by the tastes of the recipient”

Friedman described Category III spending as being like lunching on an expense account. “You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth”

Category IV spending, Friedman wrote, is like paying for someone else’s lunch out of an expense account and “You have little incentive either to economize or to try to get your guest the lunch that he will value most highly”

Yet it is into this last category that all government spending falls. As D R Myddelton wrote in ‘They Meant Well’, a look at some similar examples of government profligacy in Britain, “Making a profit is the raison d’être of commercial enterprise, and company directors must account to shareholders for their success or failure in doing so. Government quasi-commercial projects may aim to make a profit, but if they fail, taxpayers have to pick up the tab”

Governments are not incentivised to get value for taxpayers’ money because they have no skin in the game. Hence debacles like Solyndra.

The obvious reply, especially given events of the last few years, is that the private sector is no better at spending its money. The multi-billion losses racked up by the likes of Merrill Lynch, JP Morgan, Citigroup, Morgan Stanley, Lloyds, Royal Bank of Scotland etc would make most governments blush.

But here’s the thing, they weren’t risking their money. When these banks saw their investments go sour they were bailed out with taxpayers cash. They were risking your money. And what’s worse, given the close relationship between Wall Street and Washington, the City and Westminster, they knew it.

None of this is capitalism despite what some might say. Capitalism is a profit and loss system with loss just as important as profit in allocating capital. Eliminate losses and you eliminate capitalism.

As has been proven from the Tanganyika ground nut fiasco to the Solyndra mess, government should leave capitalism to the capitalists.

But capitalists and government should also leave taxpayers money in taxpayers’ pockets. It is not the job of government to throw the public’s money at failing businesses or ‘green’ investment pipedreams. That is not capitalism, it is corporatism. And as the Dragons might say, I’m out.

This article originally appeared at The Commentator

Religious Keynesianism and Obama’s blind faith

Birds of a feather…

In the film ‘2010’ Milson tells the astronaut Heywood Floyd “Whenever a President is going to get us into serious trouble they always use Lincoln”.

During his much trailed speech on jobs in front of a joint session of Congress last week President Obama took no chances throwing in Kennedy along with Abe. But given the content of the speech he might have been better invoking Nixon; if two wrongs don’t make a right, try a third.

Obama’s proposed American Jobs Act contains nothing he hasn’t tried already. Since his election Obama has added nearly $5 trillion to the Federal debt, helped by his last stimulus package of $787 billion back in 2009. In that time unemployment has risen by two percent. Under the proposed Act Obama will spend another $447 billion, seemingly working on the belief that doing half of what didn’t work the first time will work the second time.

Paul Krugman, one of the leading Keynesian cheerleaders for the President’s failed policies, accuses opponents of having ‘drunk the Kool Aid’ of free market philosophy. This is a reference to the followers of cult leader Jim Jones who killed his gullible followers by making them drink poisoned Kool Aid.

But in arguing, as they do, that the reason we are in this mess is because the stimulus wasn’t big enough and that all we need to do is commit our economic souls more fully to Keynes, it is the Keynesians who remind one of those religious types who, after a disaster, see it as punishment for being insufficiently pure of faith. Joan Robinson once referred to ‘bastard Keynesianism’. This is religious Keynesianism.

Also, the particulars of the package are hideously badly designed. Obama promised to “offer ideas to reform a corporate tax code that stands as a monument to special interest influence in Washington” but he also proposed, as Peter Ferrara wrote in the American Spectator, a raft of new loopholes including “a new tax credit of $4,000 for hiring the long-term unemployed…a tax credit for hiring veterans who have been unemployed for more than six months, and another tax credit for hiring the unemployed with service connected disabilities”

With the failure of the last stimulus package and the dog eared nature of the new one the belief that Obama’s  Jobs Act will do any good at all is a case of hope (and ‘Change’) triumphing over experience.

But beyond this the US can’t afford it. At one point during his speech Obama said “Building a world-class transportation system is part of what made us an economic superpower. And now we’re going to sit back and watch China build newer airports and faster railroads?”

Well yes actually, you are. The Chinese are building those airports and railways because they can afford to, the United States can’t. In fact, watching Obama speak and make billion dollar spending commitment after billion dollar spending commitment you found yourself thinking ‘I hope the Chinese are happy to pay for all this’

And they may be reaching the end of their willingness to work, save, and lend those savings to Americans to spend on things that most Chinese can’t afford. This week a senior official of the Chinese central bank spoke of Beijing’s wish to “liquidate” its holdings of US Treasury bonds. As the biggest buyer of US debt the prospect of this market drying up presents the Treasury with the nightmare scenario for a heavily indebted economy like America’s of rocketing bond yields. Think Athens on the Hudson.

They are no more impressed with Obama’s plans in Buffalo than they are in Beijing. A Bloomberg poll this week found that while sixty-two percent of Americans disapprove of Obama’s handling of the economy just thirty-three percent approve.  Bloomberg also found that “only thirty-six percent of respondents approve of his efforts to create jobs, thirty percent approve of how he’s tackled the budget deficit and thirty-nine percent approve of his handling of health care”. Americans doubt whether the Jobs Act will do anything for 9.1 percent unemployment by a margin of fifty-one percent to forty percent with fifty-six percent of independents sceptical. Overall, at 45 percent, Obama’s approval rating is the lowest of his presidency.

These weren’t the only bad figures for Obama to emerge this week. Inflation and jobless claims were up, manufacturing was down and poverty hit its highest rate for eighteen years.

This isn’t all Obama’s fault, most western countries face a painful process of deleveraging, but few are following his lead of merrily piling debt on top of debt in the hope that more debt will solve a debt crisis.

Obama has hit the road with his plan like some commission hungry vacuum salesman. He has, as ever, been met with adoring crowds, though these may be smaller than before, Bloomberg also found that those who supported him in 2008 have soured. As then the crowds have been chanting inanely but the fact that Obama’s message always seems to be capable of being summed up in between one and three words, be it ‘Hope’, ‘Change’, ‘Yes We Can’ or, now, ‘Pass This Bill’, suggests that it isn’t much of a message.

But it never was. On the campaign trail candidate Obama said “I’m not talking about a budget deficit. I’m not talking about a trade deficit…I’m talking about a moral deficit. I’m talking about an empathy deficit.” So of four deficits mentioned only two actually exist and he focused on the two that don’t.

It is an article of faith that Republican candidate Michele Bachmann is an idiot. She might be. But can you imagine how idiotic she would be considered if she went on Fox News and said “If you elect me I will spend $5 trillion dollars and increase unemployment by two percent”?

Yet that is exactly what President Obama has done. ‘Stupid is as stupid does’ as a wise man once said.

This article originally appeared at The Commentator

Econogeddon!

There goes the kids trust fund

“It’s only when the tide goes out that you learn who’s been swimming naked”. So said Warren Buffet of recessions. The credit crunch revealed that much of the western world had been skinny dipping in debt for years.

Initially they protected their modesty with stimulus but the limits of that have now been reached. The disastrous performance of stock markets around the world in recent days shows that the western economies are now splashing naked between the European Scylla and the American Charybdis.

The fresh chaos in Europe has been triggered by the failure of a second bailout of Greece. The bailout was as much about protecting Italy and Spain from a crippling rise in their borrowing costs as about buying time for Greece to get its house in order. But it didn’t. Yields on Italian and Spanish bonds have rocketed to 6.02% and 6.14% respectively, their highest since the euro was launched.

Forget about too big to fail. These two dominos are too big to rescue.

The leaders of the eurozone are providing none of the certainty that markets thrive on. It is clear that, if the euro is to work, then the fiscal authority must match the monetary area. At present the monetary area, the eurozone, contains 17 different fiscal areas.

There are two ways out of this; one, monetary authority can devolve downward, the break up of the euro or the exit of some members. Two, the fiscal authority could evolve upward with the creation of a body with the powers to tax and spend throughout the eurozone.

Which of these will happen is unclear. The politicians, wedded as they are to the idea of ‘ever closer union’, are pathetically reluctant to see the monetary devolution of anyone leaving the euro. On the other hand, voters in core EU countries are none too keen to assume the liability for the debts of the PIIGS which fiscal evolution would entail.

The EU leaders preferred, third, option, a return to the pre crisis status quo, doesn’t exist. Yet as long as politicians insist this phantom third option is there and try to keep it alive with one more bailout sticking plaster after another, the more uncertainty there is in markets about which of the two actual options will eventually be chosen.

The United States has just emerged from the political theatre of the debt ceiling negotiations. But there is uncertainty because it’s not clear that the play is over.

Much was made of the dire consequences of not raising the debt ceiling but few pondered the consequences of raising it. The US, already $14 trillion dollars in debt, is going to add another $2.4 trillion to that.

The deal struck in Congress early this week needed some firm commitments to tackling vast Federal entitlement programs. The bill commits to $2.1 trillion of spending cuts over the next ten years but leaves the exact make up of $1.5 trillion of these to a bipartisan Congressional committee. Who knows what they will produce or when they will produce it?

Again we have a lack of the certainty in which markets thrive. President Obama acknowledged this, saying that it was “pretty likely that the uncertainty surrounding the raising of the debt ceiling for businesses and consumers has been unsettling”.

It was when markets started to have doubts over the exact content of Italy’s budget package that Italian bond yields rose. Likewise, when markets looked at the Congressional budget deal they spooked.

But this isn’t the only factor behind the worst days on Wall Street since the depths of the credit crunch in 2008. As the budget non deal emerged from Congress, figures were released which showed the US economy in trouble. According to the Department of Commerce in June consumer spending fell for the first time in two years by 0.2%; incomes recorded the slowest rate of growth for nine months, just 0.1%; job creation fell to a nine month low, just 18,000; and unemployment hit a high for the year, 9.2%.

When Barack Obama was elected president it was 7.3%.

In two and a half years President Obama has added more than $4 trillion to the Federal debt. It took his free spending predecessor eight years to add £4.9 trillion. For this vast expenditure he has bought an unemployment rate 2% higher than when he took office. His vast stimulus has failed miserably. The US is saddled with spiraling debt, a stalled economy, and leaders with no clear idea how to deal with it.

Stock markets are essentially where people bet on the future of the economy. This week investors have reached the conclusion, in large numbers, that the economic future is bleak and they are cashing in their chips. This has nothing to do with the old Keynesian bogeyman of “animal spirits” and everything to do with the dire state of western economies and their vacillating leaders.

The truly frightening thing is that the panic is rational.

This article originally appeared at The Commentator

What’s a guy to blog about?

Ed Miliband channels the The Temptations’ Melvin Franklin

Its been a few days now since my last post. That’s not because nothing has happened, quite a lot has and is, its just that I feel like Ive written about it all before. That’s not because of any great predictive powers on my part. Its just that the political and economic policymakers I write about most seem stuck in the same ruts.

Take the euro. A little over a week ago the European Union agreed to a second bailout of Greece on the questionable logic that if a cure has failed the best thing to do is try it again. Markets rallied and the crisis seemed to have passed.

Except it hadn’t. As Ive written again and again and again and again the euro is a project with fundamental economic flaws, a fact which no amount of wishful political thinking or borrowed cash will change. To prove the point the last few days have seen rising yields on Spanish and Italian bonds and fresh crisis, the very outcome we were told the most recent bailout would avert.

Opposite the Scylla of the eurozone crisis we had the Charybdis of the near default of the United States. President Obama has been blamed by the right for the ballooning spending but, as Ive said before, the Bush administration kicked off the current orgy of debt. This, as I have also written previously, shows up how empty all the rhetoric about ‘change’ was. The only ‘change’ is that Obama borrows more than Bush did.

What do we see domestically? The economy continues to be sluggish but given the extent of deleveraging going on this is only to be expected. Indeed, I have previously expected it to lead back into double dip towards the end of this year. There isn’t much George Osborne could do to avoid this and despite what Ed Balls says he would only make it worse. On the bright(er) side, the economy wont pick up properly until this happens.

So we come to the one area where perhaps there is room for me to, not only say something new, but do it in between mouthfuls of humble pie; the renaissance of Ed Miliband as leader of the Labour party. I’ve mocked Miliband though I’m hardly the only one, and he does make it so easy when he turns up at marches comparing himself to Martin Luther King or giving the funniest interview of all time. Indeed, Ed’s comedy antics saw him getting an ‘excellent’ rating from just 22% of Labour members while 53% thought he had been “Poor or Very Poor”.

Then came ‘Hackgate’ and all was changed, changed utterly. Labour supporters hailed “The emergence of Ed Miliband Mark II” or crowed that “his courage in putting his neck on the line to take on News International has vindicated the trust that I and a majority of Labour’s Electoral College put in him last September”

But a week, a famously long time in politics, is an eternity in the Labour party. Today saw reports that Miliband wants to weaken the power the trade unions have over Labour party policy. A sensible enough idea (though those are no more fashionable in the Labour party now than they ever were) but one that sees those won over so recently warning darkly that “Ed is playing a dangerous game” All is changed, changed utterly. Again.

But, again, there isn’t much for me to write about here as I’ve already said that “Ed Miliband was an incompetent party leader before ‘Hackgate’ and ‘Hackgate’ hasn’t changed that. After its done Ed Miliband will still be an incompetent party leader”

This isn’t to say I told you so or to claim the power of second sight but simply to reflect on how our leaders insist on repeating their obvious mistakes. Whenever they do something daft you find they did exactly the same thing fairly recently and that it was just as daft then whether it be bailing out busted Mediterranean countries, running another trillion dollar deficit, or changing your mind about Ed Miliband.

Marx said that history repeats itself “the first time as tragedy, the second time as farce” He was doubly wrong. You don’t have to wait for something dumb to become shrouded in the fog of history for someone to repeat it and it can be worse than farce; it can be a dull Sunday afternoon repeat of Poirot. Personally I think The Temptations had it more right than Marx

Air pollution, revolution, gun control,
Sound of soul
Shootin’ rockets to the moon
Kids growin’ up too soon
Politicians say more taxes will
Solve everything
And the band played on
So round ‘n’ round ‘n’ round we go
Where the world’s headed, nobody knows
Just a Ball of Confusion
Oh yea, that’s what the wold is today

S**t my economist says #5

When is a debt limit not a debt limit?

The United States has a government debt limit of $14.3 trillion. This limit is there for the very good reason that rocketing debt causes economic crises.

So it is rather strange to hear President Obama warn that an economic crisis will ensue if the Republicans in Congress do no allow him to keep borrowing and adding to the national debt. It’s especially strange given that the rating agencies are now starting to worry about the ballooning of American government debt, previously regarded as the safest investment in town.

Either way, there seems very little point in a spending limit that doesn’t limit spending.