The Screed, Vol. 1

In case you were wondering what the $1,000,000,000,000 is all about.  Followed by My Daily Screed.

From WSJ online …

Wonder Land columnist Daniel Henninger questions the theory behind Barack Obama’s stimulus plan.

Three major events piled into view Tuesday: The Senate, under intense fire from the new president, passed a $838.2 billion stimulus bill. Treasury Secretary Tim Geithner unveiled the Obama administration’s solutions to the credit crisis. And the Dow Jones Industrial Average fell 381.99 points, 4.6%.

Mr. President, would you explain the Keynesian multiplier?

Speaking of the “tired ideas of the past,” how long does it take for the ideas of the here-and-now to start running on empty?… read the rest here

Now, My Daily Screed:Speaking of ‘tired ideas’, I do know what the Keynesian multiplier is.  It assumes that every dollar spent by the Federal Government results in approximately $1.20 in incremental Total Aggregate Demand in the economy.  This is classic ‘demand side’ economics and it was disproven and discredited thirty years ago.  The flaw is that when you increase federal government spending the money has to come from somewhere, and that somewhere is the private sector, whether it’s borrowed or taxed.  So you increase government spending on one hand but reduce private sector spending on the other.  Here’s why it’s a bad thing.  Government spending is notoriously inefficient because it is based on politics (see above) and does not flow to its highest and best use.  The true Keynesian multiplier has been calculated (many times by many people) to be around $.80, or negative 20%.   Private sector spending is much more efficient as it is based on the collective decisions of millions of individuals and businesses acting in their own best interests.  Reductions in marginal tax rates return money to the private sector and have a multiplier of approximately 1.2 times, or a positive 20%.  You could look it up.  And here’s why – when people think their take home pay is permanently increased (not one-time rebates), they’re willing and able to spend and save more, and when people think their take home pay is permanently reduced, they’re willing and able to spend and save less.  See?  It’s not that hard.  Ask yourself how you react to those stimuli. You’re typical.  Multiply that by millions of households and businesses. 

There’s a corollary to this.  If you assume that federal tax receipts are 21% of GDP, which has been a relatively stable number over time, then higher tax rates and government spending result in LOWER federal tax receipts because the economy is smaller than it otherwise would be.  The opposite is also true.  You could look that up as well.  For those of you who question Reagonomics, which is the opposite of Keynesianism, budget deficits are a function of tax receipts AND spending.  They had to spend too much to rebuild the military in the ’80s, but the economy grew like crazy and added a bazillion jobs.  The deficit itself, while expanding, fell as a percentage of GDP, which is a proxy for our ability to service the debt.  The economy had grown almost uninterrupted since then and survived a couple of asset bubbles, until now.  That’s over 25 years.

The adoption of Keynesianism by FDR is the primary reason the Depression lasted as long as it did and was as bad as it was.  But liberals still love Keynesianism because it essentially says government (i.e. liberals, who we keep being told are smarter than everyone else) can ‘manage’ the economy.  It can’t, and it’s the height of arrogance to think that a handful of people in Washington can somehow manage a $13 trillion economy with hundreds of million of participants.  Keynesianism, or call it central planning if you prefer comrade, makes things worse, but they don’t care because it means more power and control for them.  Even if it means this recession will be worse and last longer than it otherwise should, which it will.

At first, I was willing to concede that your elected socialists in Washington were pretty smart, that they knew all of this and were just using this economy as a political opportunity to confiscate as much of the private sector as they can by screaming ‘catastrophe’ and ‘crisis’ every five minutes.  That’s obviously the biggest part of it, but listening to their economic justifications for this spending bill, I’m not so sure.  I now think some of them truly believe this is stimulus.  The chief cheerleader is Obama, who is so far out of his element when it comes to economics it’s almost comical if it weren’t so scary.  He wouldn’t know where to find the private sector, let alone understand it if he had any inclination to do so, which he doesn’t.  Who gets hurt the most?  Well, besides the productive among us who lose their jobs, it’s the people you libs say need the most help, the poor, the charities, the underclass.  It is not a zero sum game.  The result will be twofold:  first, they’ll raise tax rates to ‘pay for the deficit’ which will of course only make things worse and second, all this money they’re printing will lead to higher inflation.  Great.

Tomorrow – Why what they’ve done to the banking system is killing us.

-BigJBo