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It’s easy to find dumb articles on the economy these days, but this one by Robert H. Frank in the NY Times is quite possibly the dumbest collection of nonsense that I’ve read in quite some time.

Mr. Frank is an economist at Cornell – evidently Cornell has loose requirements on who can claim that title – and he has his facts wrong.

For example, Mr. Frank states:  In 1929, President Herbert Hoover thought that the best response to a collapsing economy was to balance the federal budget. With incomes and tax receipts falling sharply, that meant cutting federal spending. But as almost all economists now recognize, President Hoover was profoundly mistaken.

Everyone has heard some variation of that basic statement over the years. The problem is that it’s simply not true.  That’s a polite way of saying that Mr. Frank is lying.

Hoover did not cut federal spending – Hoover increased federal spending.  Here is a chart of federal spending from 1928 -1940.   (Source data is the GPO here – link opens Excel spreadsheet.)

As anyone can plainly see, federal spending actually increased every single year from 1929 through 1932 – the four years of the Hoover presidency.  Yet Mr. Frank states that Hoover cut spending. The fact is that federal spending increased from $2.9 billion in 1928 (the year before Hoover took office) to $4.6 billion in 1932.

That’s a 63% increase in federal spending in just 4 years!  How can Mr. Frank be that ignorant of history and still write authoritatively about economic history?

And this data also lets a little air out of the myth that FDR’s spending brought us out of the depression.  It’s true that FDR increased spending, but when you actually look at the numbers, he increased spending in his first term from $4.6 billion in 1932 to $8.2 billion in 1936 – a 76% increase.  That’s not dramatically larger than Hoover’s 63% increase.  And during his next 4 years, FDR increased spending from $8.2 billion in 1936 to $9.4 billion in 1940 – a meager 15% increase in 4 years.

I have no doubt that “almost all” Keynesian economists will continue to propagate the lies about the Great Depression, Hoover, and FDR, but you and I know that they’re lying.

With that common fallacy exposed, we now turn back to Mr. Frank.

Mr. Frank states When a downturn throws people out of work, they spend less, causing still others to be thrown out of work, and so on, in a downward spiral. Failure to use short-run deficits to stimulate spending amplifies that spiral, causing further declines in tax receipts and even bigger deficits. That this path makes no sense is a settled issue.

It sounds good, but his statement that this is “a settled issue” is false.  It’s false because of his implicit premise that government deficit spending creates productive employment.  I have no doubt that government spending can employ otherwise idle people, but this is not a net gain for the economy.  The government simply transfers wealth from one segment of society to another – it doesn’t create wealth.  Mr. Frank’s major flaw is in his unstated assumption that the government can allocate resources better than individuals.

Take the current auto bailout as an example.  What would have happened if the government didn’t bail out GM?  GM would have declared bankruptcy.  People who had invested in GM stocks and bonds would be SOL – and that’s the way it should be.  When you invest your money, you (whether you realize it or not) are incorporating risk in choosing where to invest.  You may choose to invest in something risky like a dot com or alternative energy start-up, because you balance the risk of them going bankrupt against the possibility of huge returns.

It’s your money – invest it however you want.  But don’t bitch and moan and beg for a bailout when the money you invested disappears because the company goes broke and leaves you with a sock puppet.

In the case of a GM bankruptcy, valuable assets such as factories and parts would be auctioned off to the highest bidder.  Assets with no value are wiped out and those who invested in them would lose money.  Some would be unable to survive and would themselves go broke.

In other words, the “bad” (non-profitable) assets of GM would disappear.  But the “good” (profitable) assets would be sold to private investors (or companies) who would put them to productive use.  Good companies survive and thrive off of the mistakes of their competitors.  Just imagine how many productive  jobs Honda, Toyota, or Nissan could provide using GM facilities and patents.

Mr. Frank also shows his ignorance when he states Once the downturn ends, there should be no need to incur additional debt. Indeed, there are many ways to pay down debt without requiring painful sacrifices. A $2 tax on each gallon of gasoline, for example, would generate more than $100 billion in additional revenue a year.

Politicians and economists have been saying that they’ll balance the budget and start paying down the debt for as long as I can remember – and I’m 47.  It has not happened in my lifetime.  Not once.

The last time the US reduced the national debt was 1957.  (Source is the US Treasury.) When do you suggest we start making payments on the principal Mr. Frank?

And a $2 per gallon tax on gasoline would be an additional $283 billion in taxes at the current rate of consumption of 141.9 billion gallons per year. (Source is US Energy Information Administration.)

Mr. Frank also says It’s also useful to put the nation’s debt burden into perspective. Over the last eight years, Bush administration deficits raised the national debt by almost $5 trillion. Given the current crisis, it’s easy to imagine a similar increase during the next four years. At recent interest rates, servicing $10 trillion of extra debt costs about $400 billion annually — a big amount, to be sure, but less than 3 percent of the economy’s full-employment output. We’ll still be the richest country on the planet even after paying all that interest.

Bullshit.  That’s like saying you got the highest score of those who failed.  I’m not a fan of Bush – since I consider Bush the worst President in my lifetime, that’s the understatement of the year – so I don’t like it when Obama imitates Bush.  Liberal or Conservative – big government is big government.

The 3% figure Mr. Frank gives is technically accurate – when you take the $400 billion figure he uses – but why does he use that number?  The bottom line is the one that matters.

The national debt is currently over $11 trillion (source US Treasury).  The US GDP for 2008 was $14.2 trillion (source BEA).

Our current national debt is 77% of GDP.  If Obama adds $5 trillion more in the next 4 years (as seems likely) our debt will be over 100% of GDP.  And if Mr. Frank thinks that’s sustainable, I’ve got some great beach-front property to sell him.

I could go on and on about the errors in Mr. Frank’s article – such as his mistaken assumptions about the wealthy – but you can read it yourself.  I’m amazed that the NY Times editors allowed an article this full of errors to be published.

gk

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Check out Dr. Helen’s blog.  Evidently she coined the term “Going Galt” in a post last fall, and it’s picked up a lot of press, including a recent column by Michelle Malkin at Townhall.com entitled “Going Galt”: America’s Wealth Producers vs. Wealth Redistributors.

I have not read a lot of her blog, but the first page was full of common sense posts.  I’ll have to read through her archives sometime to see her thoughts on various topics, but at first glance it looks to be an interesting read with some creative thoughts.

The “Going John Galt” post starts with: Do you ever wonder after dealing with all that is going on with the economy and the upcoming election if it’s getting to be time to “go John Galt.” For those of you who have never read Ayn Rand’s Atlas Shrugged, the basic theme is that John Galt and his allies take actions that include withdrawing their talents, ’stopping the motor of the world’, and leading the ’strikers’ (those who refuse to be exploited) against the ‘looters’ (the exploiters, backed by the government).

Dr. Helen goes on to ask “what are some ways to “go John Galt” (legally, of course)–that is, should productive people cut back on what they need, make less money, and take it easy so that the government is starved for funds, or is there some other way of making a statement?”

I like the premise, but the idea won’t work.  It won’t work because the government doesn’t actually need our taxes anymore because our currency is fiat money.  There’s no backing or any link to a standard, so they will simply print more.  Or borrow more.  So the government will never be “starved for funds”.

“Going Galt” would work only in the original sense that Ayn Rand envisioned – that the producers of the world stop producing, therefore causing the economy to collapse.  If enough do that, the economy would indeed collapse, because regardless of how the majority of people think, there are relatively few people who actively create the wealth of the world.  And it ain’t government.

gk

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It’s a cool rainy day in Knoxville, so I’ve been catching up on my reading.  Yesterday’s Daily Reckoning had a great article titled “How to Save the World” and I want to post a bit of it here with some comments, because it sums up the cause – and the solution – to the economic train wreck we’re all watching.

I like this line: It is not often that we are called upon to advise the world’s government. In fact, we can’t remember a single time. But we can’t resist a lost cause. So, we offer the Daily Reckoning Plan to Save the World, or DRPtStW for short.

Humor like that always make Bill Bonner’s articles a great read.

Just read the Financial Times. This week it has a windy series on the “Future of Capitalism,” inviting readers to imagine how the decaying old creed might be reformed. Alas, for capitalism, it’s out of the frying pan, into the toilet. Larry Summers, Obama’s number one financial advisor, voiced the prevailing view: “This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century. And this is one of those times…there’s a need for extraordinary public action at those times.”

Larry Summers is wrong.  The economy is self stabilizing – if only government would get the hell out of the way and let the stabilization happen.

The gist of his program can be expressed in another wistful absurdity: The consumer economy died because of too much spending; now we will revive it by spending more. “Give me your cunning bankers, your hopeless CEOs, your huddled masses of chiselers, spendthrifts and boondogglers,” says the Obama team, “and we’ll give them other peoples’ money!”

This is Keynesian economic theory in action.  It’s just as wrong now as it was in the 1930’s, but the government feels it has to do “something” even it it doesn’t makes sense.

Note – government spending in times of economic slowdown can help alleviate the suffering, but only the government has money to spend.  We’re $11 trillion in debt. Too much debt caused the problem – does anyone really think borrowing more is going to fix it?

“There’s no place that should be reducing its contribution to global demand right now,” explained Summers. “The world needs more demand.” But it was demand that the world recently had too much of. English speakers took on too much debt to create it…and built too many houses and too many shopping malls to satiate it. And despite the ready cash offered by Bush, Bernanke, and Paulson, demand has sunk, because the real problem is not an absence of spending, but a surfeit of debt. In America, for example, total debt went from 150% of GDP in the ’80s to 350% in 2007. The financial markets panicked when it became clear that debtors didn’t have the cash flow to pay off the debt…and that an entire world economy had been fizzed up to supply products to people who couldn’t afford them. Investors have been discounting debt-soaked assets ever since.

The fix is obvious – reduce the level of debt. About $20 trillion worth of debt, in the United States alone, needs to disappear. Then, consumers can go back to doing what they do best – consuming. But how do you reduce the debt level? Former Treasury Secretary Andrew Mellon had the right idea in 1929: ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…It will purge the rottenness out of the system…Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

It really is that simple.  That’s capitalism.  People who make bad decisions go broke, and people who make good decisions get wealthy.  Government interference only gums up the process and keeps it from working.  Which is about the only thing governments do well.

What’s the cure for a depression? It’s a depression. Let willing buyers and sellers mark debt down to what it is really worth. Mellon’s plan was not followed by the Hoover or Roosevelt administrations. Instead, they introduced elaborate bailouts, stimulus programs, and boondoggles. That is why the depression is known as the Great Depression, rather than the So-so Depression. By the end of the 30s, the US economy was almost exactly the same size it had been at the beginning. Likewise, in Japan, holding off liquidation brought a “lost decade” in the ’90s. Bush followed in Hoover’s footsteps. And now, the Obama administration follows in Roosevelt’s and Miyazawa’s.

Here’s our advice: forget it. Let the depression do its work. Let the bad times roll!

Great article Mr. Bonner.

gk

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Saw this article and had to get a link to it here.  It says – much better than I could – what I’ve been trying to say about President Obama’s spending.

Here’s a snip to give you the flavor of the article.

With all due respect Mr. President, Tim Geithner and Ben Bernanke are offering the same policies as President Bush and Secretary Paulson. Those policies are to bail out banks regardless of cost to taxpayers. Mr. President, it’s hard enough to overlook Geithner’s tax indiscretions. Mr. President, it is harder still. if not impossible, to ignore the fact that neither Geithner nor Bernanke saw this coming. Yet amazingly they are both cock sure of the solution. Even more amazing is the fact that solution changes every day.

With all due respect Mr. President, it is impossible to spend one’s way out of a problem, when the problem is reckless spending.

I haven’t previous read anything from Mike “Mish” Shedlock, but I’ll have to check out more of his site later.  If the rest of it is anything like this post, it would be a great addition to my blogroll.  Good stuff!

gk

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Spending “only” $3.55 trillion is considered to be fiscally responsible?

President Obama inherited a more than $1 trillion deficit from the idiot George Bush, but he’s tacked on more than his fair share already.  The current estimate of the deficit is now up to $1.75 trillion for fiscal year 2009, which started on Oct 1st, 2008.

Here’s a story from the NY Times about the budget.

His administration will attempt to close the large fiscal gap even while starting a major health-care initiative intended to substantially extend coverage; to do so, it foresees increasing taxes on the wealthiest Americans and using revenue from a new program: selling carbon credits to manufacturers as part of a cap-and-trade plan meant to slow climate change.

The forecasts are also founded on optimistic assumptions that the recession will end by next year and quickly produce stronger growth than was seen in the last decade. After the economy shrinks this year, the Obama team assumes that the gross domestic product, adjusted for inflation, will increase by 3.2 percent next year and then 4 percent or more the following three years, a rate nearly twice the average of the Bush years.

I wrote a post a few minutes ago where I talked about people saying that this is the bottom in various markets.  But Obama is basing his presidency on this year being the bottom.  I’m afraid he’s mistaken.

But here’s one bit of good news – Mr. Obama promised to include the full costs of the wars in all his budgets, saying that because of “dishonest accounting” past budgets have “not told the whole truth about how precious tax dollars are spent. Large sums have been left off the books, including the true cost of fighting in Iraq and Afghanistan.”

It’s about time that these costs were included in the budget.  We still have to pay them, but Bush somehow made the cost of these wars disappear. They didn’t actually disappear (look at the debt clock at the top of this page!) but they didn’t appear in his budgets – or the official deficits.

The State Department gets the biggest increase, rising from $36.7 billion this year to $51.7 billion next year, although Mr. Obama will not be able to keep his promise to double foreign aid.

There are literally hundreds of things I could say about the bloated, pork laden, unconstitutional (read it!) budget proposal.  None of it is new, and I complained about the exact same things when Bush proposed the massive budgets.  But I promise to get into a lot of the details when the official budget is released with actual line items that I can talk about.

But if you thought Bush’s budgets were mind boggling, the first one from Obama promises to be even worse.  My bet is that he’ll break Bush’s record $1 trillion plus deficit his first year.

gk

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According to Reuters, an anonymous “administration official” said The deficit this administration inherited was $1.3 trillion or 9.2 percent of GDP. By 2013, the end of the president’s first term, the budget cuts the deficit to $533 billion or 3.0 percent of GDP.

I don’t think Obama will do that – he certainly hasn’t started out that way.  But I hope he’s serious.

The Reuters report goes on to say “Most of the savings will come from winding down the war in Iraq, increased (tax) revenue from those making more than $250,000 a year, and savings from making government work more efficiently and eliminating programs that do not work,” the official said.

Let’s see how many programs he eliminates.  He’s due to announce his budget later this week, and I’ll be watching to see which programs are actually cut and eliminated.  I’ll set the “over/under” at 3 – and I’ll take the under.

gk

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I’m continuing to read the stimulus bill, I’ll add stuff here that I think is stupid.  Stupid as in it doesn’t do a damn thing to stimulate the economy and doesn’t actually help people who are out of work.  Keep in mind that is you simply gave each taxpayer an equal portion of the $787 billion stimulus bill, each person would get $5702.90 to blow to stimulate the economy.

Of course, each taxpayer actually owes $5702.90 simply to pay for their portion of the bill, so if we gave each of them that much money, we’d all be even.  Therein lies the flaw in the stimulus bill.  Governemnt doesn’t create anything – it simply takes money from one group and gives it to another group.  Minus their cut of course.

In other words, they’d actually acheive a higher stimulus rate by simply letting each of us taxpayers keep our own damn money – but then they wouldn’t be seen as “doing something” and they wouldn’t get re-elected.

Back to the bill.  As before, comment in [these brackets] are mine.  An ellipsis (…) means I cut out some text to make it readable, and text in italics is a 100% accurate quote.

Picking up where I left off yesterday on page 17 of the PDF version of the actual bill:

• $2.5 billion to the National Science Foundation for ‘‘Research and Related Activities’’
• $1,474,525,000 to improve, repair and modernize Department of Defense facilities, restore and modernize real property to include barracks, and invest in the energy efficiency of Department of Defense facilities. [WTF does installing CFL's have to do with getting the economy moving?]
• $657,051,000 [to the Navy, for the same crap as the Army got just above.]
• $113,865,000 [Gotta get some CFL's for the Marines too - even though they're on Navy ships...]
• $1,095,959,000 [Crap! we forgot to give money to the Air Force for CFL's!]
• $98,269,000 [Army Reserve needs lights too.]
• $55,083,000 [Don't forget the Navy Reserve!]
• $39,909,000 [Or the Marine Reserve - can you guess what's coming next?]
• $13,187,000 [Yup, gotta give the Air Force Reserve CFL's too.]
• $266,304,000 [Crap, are we done yet?  This is for the Army National Guard "energy efficiencies"]
• $25,848,000 [Guess not - Air National Guard gets new lights too.]
• $75,000,000 [Times 4, each branch gets this for Research, Development, Test and Evaluation. Of what?]
• $400,000,000 to improve, repair and modernize military medical facilities, and invest in the energy efficiency of military medical facilities. [Didn't we just do this above?]
• $25 million for the Corps of Engineers for ‘‘Investigations’’ [Quotes are original.  No I don't know what it means either, but they get $25 million to do it with.]
• $375 million For an additional amount for ‘‘Mississippi River and Tributaries’’
• $2.075 billion For an additional amount for ‘‘Operation and Maintenance’’ [Of what?  Why?  how's this gonna create jobs? They don't say.]
• $100 million For an additional amount for ‘‘Formerly Utilized Sites Remedial Action Program’’ [$100 million to pay for crap we aren't using anymore?]
• $1 billion (say it like Austin Powers) For an additional amount for ‘‘Water and Related Resources’’
• $16.8 billion For an additional amount for ‘‘Energy Efficiency and Renewable Energy’’ [I thought we covered this with the defense department CFL crap above, but it looks like the DOE got their hand in the cookie jar too.]
• $2 billion in grants to manufacturers of advanced battery systems and vehicle batteries [Don't forget, italics are 1005 quoted text, no changes.]
• $4.5 billion for expenses necessary for electricity delivery and energy reliability activities to modernize the electric grid [Aren't expenses for utility companies part of our electric bills?  Who cares?  Here's $4.5 billion to utility companies!]
• $3.4 billion For an additional amount for ‘‘Fossil Energy Research and Development’’ [ WTF?  I thought we we trying to get rid of fossil fuels, here we're giving out billions to do more research on them!]

I swear I’m not making any of this up.  And I’m skipping lots of stuff that either bores me or might – and I mean MIGHT actually makes sense.  Here’s one that just kills me:  $1.6 billion For an additional amount for ‘‘Science’’.  That’s it.  No explanation.  Just “Science”.  And the quotes are original.  It could be going for political science.  No one knows because it isn’t defined in the bill.

Back to the fun….

• $5.127 billion For an additional amount for ‘‘Defense Environmental Cleanup,’’
• $3.25 billion For the purposes of providing funds to assist in financing the construction, acquisition, and replacement of the transmission system of the Bonneville Power Administration [Doesn't the Bonneville Power Administration have paying customers?  Why are we giving them tax dollars?]

I’m hoping everyone reading this realizes what a pain it is to scroll through page after page of deliberate obfuscation in order to find the actual spending appropriations.  I’m talking about crap like this: ‘‘(F) OPEN PROTOCOLS AND STANDARDS.—The Secretary shall require as a condition of receiving funding under this subsection that demonstration projects utilize open protocols and standards (including Internet-based protocols and standards) if available and appropriate.’’.
(4) By amending paragraph (2) of section 1304(c) to read as follows:
‘‘(2) to carry out subsection (b), such sums as may be necessary.’’.
(5) By amending subsection (a) of section 1306 by striking ‘‘reimbursement of one-fifth (20 percent)’’ and inserting ‘‘grants of up to one-half (50 percent)’’.
(6) By striking the last sentence of subsection (b)(9) of section 1306.
(7) By striking ‘‘are eligible for’’ in subsection (c)(1) of section 1306 and inserting ‘‘utilize’’.

That’s a direct quote.  Damn, someone should pay me to read through this.  I don’t know why, cause I’m doing it anyway, but it should be worth something. 

• $8 million for financial assistance, technical assistance, training and outreach programs designed to benefit Native American, Native Hawaiian, and Alaskan Native communities
• $5.55 billion For an additional amount to be deposited in the Federal Buildings Fund
• $300 million For capital expenditures and necessary expenses of acquiring motor vehicles with higher fuel economy, including: hybrid vehicles; electric vehicles; and commercially-available, plug-in hybrid vehicles [Didn't we already have an auto industry bailout?]

That’s it for tonight  I’ve been up too late too many nights in a row.  Gotta get some sleep.  Let me know if you see anything on here that looks like it could possible be stimulating. 

gk

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