The Anti-Stimulus Plan


The Obama budget ignores the economic crisis.
By Yuval Levin
Posted: Monday, March 16, 2009


ARTICLE
Weekly Standard -- Volume 014, Issue 25  
Publication Date: March 9, 2009

Last September, during the first presidential debate between Barack Obama and John McCain, moderator Jim Lehrer asked Obama what the growing economic crisis would mean for his policy ambitions: “What are you going to have to give up, in terms of the priorities that you would bring as president of the United States, as a result of having to pay for the financial rescue plan?” Obama’s answer was so evasive that Lehrer asked him if he really meant to say that essentially nothing would change.

Over the past two weeks, we have seen something of a reiteration of that answer in practice. Obama indeed meant that no part of his agenda would be given up to pay for the economic recovery. On the contrary, recovery efforts will be undercut in favor of the new administration’s sweeping liberal ambitions.

The stimulus plan enacted last month came under fire for its many flaws and excesses. But the debate about the plan was a debate about how best to stimulate the economy. Both sides essentially called for throwing money at the public; the Democrats preferred vast new government spending and the Republicans deep if temporary tax cuts. Both sought to use the crisis to advance their preferred political vision, but both sought to do so in ways addressed to some of the real economic problems at hand.

The Democratic plan that was signed into law was an incoherent wasteful mess, but it is likely to stimulate the economy some. It could be (as it often was) sold as something like the New Deal: an ambitious and ideologically laden response to a genuine economic crisis.

But the Obama administration’s proposed 2010 budget, unveiled just a week after the stimulus plan was signed into law, cannot be advanced on such grounds. It is certainly ambitious and certainly ideologically laden, but it is not a response to the economic crisis. Rather, it denies the crisis and complicates the effort to combat it.

The budget offers an audacious array of technocratic initiatives aimed at transforming the relationship between Americans and their government and moving the country in the direction of European social democracy. It sets the stage for a vastly expanded federal role in the health insurance market–as one “option” among many to begin with, but with the help of price controls and the power to set rules of entry guaranteed to soon be the reigning, if not the only, option. It puts the federal government in command of a complex scheme of carbon-emission taxes and credits. It opens the way for a significantly increased federal role in education (including higher education).

These programs are not directed at the economic emergency, but are instead unrelated, enormous policy initiatives. They are not akin to the New Deal but to the Great Society initiatives of the mid-1960s, which were the outcome of a progressive worldview that wanted to change the character and role of government in American life. But the Great Society was not enacted in the midst of an economic crisis. It came in the middle of a lengthy and sustained period of growth and prosperity and was in part understood as a way to make use of the tax revenues flooding federal coffers. The kind of ambitious expansion of government Obama envisions requires similar economic growth.

Watching the market these days, and listening to economists’ predictions (not to mention the president’s own dire speeches before the enactment of the stimulus bill), you might think such growth is exceedingly unlikely in the short term. But the Obama budget simply assumes it will happen: predicting the economy will begin a sustained expansion this year and grow by 3.2 percent in 2010, 4 percent in 2011, and 4.6 percent in 2012.

Yet even as it assumes such a prompt and thorough recovery, the budget plants obstacles in its path. It raises taxes by a trillion dollars on the 2.5 million or so American taxpayers who earn above $200,000 a year (or $250,000 for a couple), and a further $646 billion through a proposed cap-and-trade system that, as administration officials have acknowledged, will be paid by all Americans through higher electricity bills.

The budget will double the national debt held by the public by 2015, and by 2019 the White House predicts that debt will equal 67 percent of the country’s GDP (up from last year’s 41 percent). Such spending ambitions send a signal about future tax and interest rates that can only depress investment.

And, most important, as it lays out its ambitious agenda, the Obama administration is doing little about the source of the economic calamity we confront: the banking and credit crisis. The budget includes a placeholder for further action but no particulars, and those have not been forthcoming from elsewhere so far. Amazingly, six weeks and two vast legislative proposals into his administration, the president has not said what action he will take to address the bad debt that has turned some of our largest banks into dead men walking and continues to debilitate our economy.

This combination of counter-productive action and baffling inaction only unnerves investors and is deeply anti-stimulative. The administration appears to have decided to look past the economic crisis and start spending the windfall of the coming recovery, even if that spending comes at the expense of the recovery itself.

– Yuval Levin is the Hertog fellow at the Ethics and Public Policy Center and senior editor at the New Atlantis magazine.

 

Don’t Waste Your Time If You Can’t Pay The Prime

By Deneen Borelli
February 1, 2008

It was the American Dream on steroids.

Mortgages were offered at low initial interest rates without down payments. Many were helped to purchase homes for the first time. Others bought second homes and investment properties. Still more refinanced existing mortgages, subsidized home improvements and – at times – extravagances.

Then, like all unnatural highs, a bad turn of events created a nightmare for thousands of homeowners and their lenders.

Many homeowners began feeling the squeeze when rising interest rates triggered a dramatic rise in monthly payments on loans with variable rates. Foreclosure has too often been the result.

Liberal activists are using this “foreclosure crisis” to stoke class warfare, demanding government intervention to bail out overburdened homeowners. While it is noble to help those in need, the activists ignore the principle that people should be responsible for their decisions.

For example, Jesse Jackson and his Rainbow PUSH Coalition, the NAACP and the National Training and Information Center (NTIC) seem to be using this crisis to advance their political agenda. Masters of the victimization game, they blame failing mortgage loans on the financial industry, saying lenders took advantage of hapless victims. These groups and others recently marched on Wall Street to proclaim this message, and the NTIC’s Save the American Dream coalition sent letters late last year to the top five U.S. investment banks – Bear Stearns, Morgan Stanley, Lehman Brothers, Merrill Lynch and Goldman Sachs -demanding executives “pledge this year’s bonuses to a national foreclosure prevention fund that will provide immediate relief to homeowners in danger of foreclosure.”

Pitting lenders against borrowers is only part of the liberals’ strategy. Not surprisingly, next came the call for federal intervention. Every crisis in the liberal world naturally necessitates a new government program.

The Center for American Progress, headed by former Clinton Administration chief of staff John Podesta, proposed that the government establish yet another agency, to be called the Family Foreclosure Rescue Corporation, that would purchase existing non-performing mortgages (at a discount!) with taxpayer money, offer mortgage holders corporate bonds and issue new fixed-rate mortgages to borrowers in jeopardy.

They need not lobby too hard as some lawmakers are already fervently promoting their agenda. One piece of proposed legislation seeks to grant bankruptcy judges authority to revise specific terms for troubled mortgages. Also under consideration is the “Federal Home Administration Modernization Act,” which would allow the FHA to acquire subprime mortgages and offer fixed rates of approximately six percent.

Missing from all this discourse, however, is talk of the consequences of such government action.

Allowing judges to rewrite mortgage contracts would add significant risk to lenders and would discourage new loans to those with lower incomes. Already suffering their own significant financial losses, banks would be especially leery of granting new, potentially risky loans if the terms could be altered by a third party. The mortgage industry is already tightening its lending standards by increasing fees and surcharges and demanding higher credit scores and down payments.

Foreclosure is never a desired outcome, but the mortgage crisis was not just about lenders taking advantage of borrowers. They fed off each other. Many people bought more than they could afford. While the American Dream was previously achieved through hard work and saving, interest-only loans and adjustable-rate mortgages allowed people to end run it.

Lenders suffer too. Citigroup, for example, posted its worst quarterly losses ever – losing almost $10 billion, laying off 4,200 employees and shorting investor dividends. At-risk borrowers, on the other hand, may get a taxpayer bailout. After setting this precedent, when will the government be asked to cover bad car loans?

Government aid should never remove the burden on citizens to exercise good judgment.

Personal responsibility is the key to fulfilling one’s wants, needs and independence. An understanding of the risks and rewards of contracts is the best way to avoid the temptation of overextending personal financial obligations.

Frederic Bastiat, the noted political theorist, wrote in “The Law”: “Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property.” Handing over this fundamental responsibility to the federal government would take us another step closer to statism.

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Deneen Borelli is a fellow of the National Advisory Council the Project 21 black leadership network. Comments may be sent to DBorelli@ nationalcenter.org.

 

The Goal Is Freedom

Where Free-Market Economists Go Wrong

February 1, 2008

by Sheldon Richman

Sheldon Richman is the editor of The Freeman and “In brief,” and a contributor to The Concise Encyclopedia of Economics. TGIF appears Fridays. Comments welcome.

As the stimulus juggernaut steams through Congress, advocates of freedom would profit by studying the case closely. Try not to get depressed by the spectacle. Politics, alas, trumps economics. There’s nothing new in that, but we ought to learn some lessons and adjust our strategy accordingly.

Newspaper accounts make clear that the President and people who run Congress hurriedly got together on the stimulus package because they were afraid to appear as though they were doing nothing in the face of a recession. They were particularly worried about seeming to put party above the public good.

As the Wall Street Journal put it, “The speed with which Washington hashed out the plan was driven mostly by the drumbeat of bad economic news. Behind the scenes, it was greased by other powerful motivations. Congressional Democrats needed to demonstrate they were capable of results after a year of gridlock. Republican lawmakers, up for re-election, wanted to show sensitivity to voters’ economic woes. And the White House didn’t want ‘recession’ added to its legacy.”

Political interest was universally aligned against good sense. The politicians could get away with this because most of the public is economically illiterate.

Such is how we get economic policy. Bismarck was right: “If you like laws and sausages, you should never watch either one being made.”

As free-market economists point out, government cannot affirmatively stimulate what we misleadingly call “the economy.” (It is people and property engaged in transactions.) All government can do is move money around. To make some people able to spend more it must make other people spend less. Politicians imply that they know who ought to have more and who ought to have less, but beside the obvious injustice of the matter, they can’t know.

Some politicians have now forgotten their own declarations that this is an economic stimulus and treat it openly as a wealth-transfer measure. Why else would they insist that unemployment benefits be extended, food stamps increased, and home-heating subsidies pumped up? These things are irrelevant to the flagging auto or housing industries, so what does such income redistribution have to do with stimulus — unless we’re talking about a political stimulus?

Economists Fall Short

I said the government can’t affirmatively stimulate the “economy,” but it can encourage productive activity. How? By not discouraging it. Here is where some free-market economists have fallen short in shaping the public debate. Too much of what they say is along these lines: “The economy is fundamentally healthy. Recessions are a necessary correction of errors. So just let the economy work through its current problems. The government need do nothing.”

That message should make advocates of individual liberty squirm because it implies that the market today is essentially as free as it needs to be. I often see this implication in economists’ statements. It may be unintended, but it’s there. For example, a few months ago the news media were proclaiming that gasoline prices were at historic highs. In fact, when adjusted for inflation they were not. But the economists pointing this out sounded a little too defensive, as though they were the defending the free market’s honor against market critics. What should we say if next week gasoline does hit a historic high and the anti-market folks blame the free market? I know what I’d say: What free market?

The same defensiveness can be seen whenever a left-statist charges that the gap between rich and nonrich has widened or income mobility has ceased. Whatever the truth of these charges, libertarians shouldn’t react as though the free market is being assaulted. The critics may think it’s the free market they’re attacking. But — need I say this? — we have no free market.

Similarly, if economic activity is slowing down, it can’t be the free market’s fault — because we don’t have one!

What we have is corporatism, an interventionist system shot through with government-granted privileges mostly for the well-connected (yes, who tend to be rich). This system is maintained in a variety of ways: through taxes, subsidies, cartelizing regulations, “intellectual property” protections, trade restrictions, government-bank collusion, the military-industrial complex, land close-offs, restrictions on workers, and more. As a result, people can get rich at the expense of the government’s victims. Even some who have prospered apparently by market means have actually done so through government intervention. Wealth can be transferred in many ways besides welfare and Medicaid, some of them quite subtle.

Overlooked Facts

Free-market economists know this, but they often seem to forget it, such as when they indiscriminately defend firms (such as oil and pharmaceutical companies) in today’s corporatist economy. These economists convey the message that since in a free market people get rich and companies get big only by serving consumers, anyone who is rich today and any company that is big must have gotten that way by serving consumers. The flaw in the argument should be obvious.

Kevin Carson, as I’ve noted before, has a name for the philosophy of those who have “trouble remembering, from one moment to the next, whether they’re defending actually existing capitalism or free market principles”: vulgar libertarianism. (Incidentally, the strain of libertarianism that is acutely sensitive to this point is called “left-libertarianism,” an allusion to the fact that early liberals, such as Frederic Bastiat, placed themselves on the left  — rather than among the apologists for the old regime and landed aristocracy on the right — and were champions of the oppressed common people against the privileged.)

Given the corporatist nature of the economy, it is a mistake — as well as strategically foolish — to say the government should do nothing when a recession might be coming on. There’s much it should do — or rather undo. Freedom’s advocates must spell this out in detail, revealing how government policy harms the mass of people who have no political connections. In contrast, when an economist who proclaims his support for the free market says everything is fine and the economy will fix itself, he brands himself a defender of the statist quo and turns his back on the state’s victims.

The freedom philosophy is a radical idea that looks ahead, not back to some mythical golden era or a Panglossian present. Every time we pass up an opportunity to make this point, we alienate potential allies who are concerned about those who are having a tough time of things. Yes, living standards have improved for decades and being poor in the United States is not what it used to be. That only shows that even a marketplace hampered by government privilege can produce astounding wealth. But to be satisfied with that is to be willing to trade freedom and justice for a mess of pottage.

F.A. Hayek never spoke more wisely than when he said, “What we lack is a liberal Utopia, a programme which seems neither a mere defence of things as they are nor a diluted kind of socialism, but a truly liberal radicalism which does not spare the susceptibilities of the mighty (including the trade unions), which is not too severely practical and which does not confine itself to what appears today as politically possible.”

 

Are Consumers Driving Us into Recession?

By Llewellyn H. Rockwell, Jr.

With recession looming or already here, the time has arrived for finding scapegoats. Expect a long list of these. Here is the target of the day: tightfisted consumers. A decline in personal consumption, writes the New York Times, “would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.”

This recalls Bush’s advice after 9-11, when he assumed the mantle of the nation’s personal financial planner. He told everyone to go out and spend money so the economy could avoid recession. Even then, there was confusion about whether he was right or wrong. Some sensible voices pointed out that economic expansion is based not on spending but on capital expansion rooted in savings. That is to say, the only path to future prosperity is delaying current consumption in favor of future investment.

One only needs to think of the household budget here to see the point. If you are planning for the future for your family, what is the wisest course? Does one go into debt as much as possible, buy the largest house and the biggest car, throw lavish parties, hand out all existing liquid funds to friends and strangers? Based on the view that consumption is the way to avoid economic problems, this would indeed be the right course.

But this also defies everything we know about family finance. The path to a secure prosperity is delaying consumption. One should spend as little as possible and save as much as possible for the future, and let that money be used in the service of investments that yield a solid rate of return. Those who have chosen a different path now see the folly: they are being burned in the soft housing market, for example.

The lesson is also true for the nation at large, because the logic doesn’t magically change when moving from the family budget to the national stage. Just because something involves “macroeconomics” doesn’t mean that we should throw out all good sense. But that is precisely what people have done with regard to the economy, since J.M. Keynes somehow convinced the world that up is down and left is right.

In a recession or a crisis, the right approach for individuals is to save. So too for the national economy. A looming recession will prompt a pullback in consumer spending as a rational response to the perception of economic troubles. This action does not cause the economy to fall into recession any more than more spending can save it from recession. The downturn is a fact that cannot be avoided. We don’t blame umbrellas for floods, and, in the same way, we shouldn’t blame tightfisted consumers for recessions.

There is no question that this is what is happening. American Express reports that the rate of spending by its cardholders fell 4% in December. Surveys of consumer satisfaction with the economy report a 15-year low. Retailers report that December was a “blood bath” (NYT’s words) for them, with sales growing at the slowest rate in seven years. Market watchers are mostly concerned that high-income buyers are bailing out.

Again, it is critical to keep cause and effect in mind. The pullback on spending is not going to cause a recession. If we think about the long term, this is not a dangerous trend but a hopeful one. The more people pull back and save, the more the foundation is laid for a recovery after the current correction takes its course.

To see that requires that we take a long view. Government, however, seems constitutionally incapable of seeing the long term, much less doing the right thing to prepare for it. Making matters worse, this is that dreaded event called an election year. Prettying things up to make the economy palatable to voters is priority number one.

What does this mean? More monetary expansion. More government spending. We can fully expect the Bush administration to resort to its old program of sending checks out to every American family with the proviso that the money has to be spent, not saved.

$15 ” Just because something involves ‘macroeconomics’ doesn’t mean that we should throw out all good sense.”

No doubt that many people would be thrilled by this. But look beneath the surface. Government has no money to spend on anything that it doesn’t extract from the pockets of you and me and the whole American public. This is easy enough to see concerning taxes. It is not so easy to see when the government runs up debt that is guaranteed by the printing presses.

The monetary issue can be understood by analogy to orange juice. The more water you add, the less substance it has. If you keep adding, eventually you come to the point when you can no longer tell that it was ever orange. This is the same with money. If you print enough — literally or electronically through the credit markets — it will continue to lose value. If money grew on trees, it would be about as valuable as autumn leaves.

So long as we have a central bank, government will be tempted to take the easy path of easy money. There do not need to be any secret phone calls from the White House to the Fed. The culture of policymaking itself is capable of broadcasting the right signals to all important players.

In any case, it is a myth that the Fed makes policy independent of political pressure. It is subject to the screams and hollers for looser credit in the same way that bureaucracies are responsive to demands for more regulation.

Yes, government can increase consumption, but by doing so it does nothing to care for the long term. The long-term health of a nation is not different from that of a household budget. Tough times require cutbacks and a beefing up of savings.

So let’s not demonize the consuming public for doing what it should be doing. It’s a good rule of thumb that when the government tells you to spend money, you should close your wallet.

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Llewellyn H. Rockwell, Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of Speaking of Liberty. See his Mises.org archive. Send him mail. Comment on the blog.