Scott Spiegel

If deficit spending is the way out of an economic downturn, as leftist economists like Paul Krugman keep telling us, then one way to characterize President Obama’s approach to reviving the ailing economy is “killing it with kindness.”

Another is “tough love”—not the kind where you force hard choices and self-discipline, but the kind where you shoot the poor beast to put it out of its misery.

James Clyburn, House Majority Whip, recently crystallized the Democrats’ position on fiscal responsibility when he announced, “We’re not going to save our way out of this recession.  We’ve got to spend our way out of this recession, and I think most economists know that.”

Here are some fun facts about Obama’s proposed federal budgets over the next decade:

•    The projected deficit for Obama’s 2010 budget is $1.6 trillion, which is 10% larger than the 2009 deficit, which in turn was three times as big as the record 2008 deficit under President Bush.

•    The projected 2010 deficit is 10 times as large as the deficit for Bush’s 2007 budget, the latter of which included funding for the troop surge that won the war in Iraq.  Hoping to match our accomplishment in Iraq, the White House Travel Office has approved a trip for Obama to go to Cambridge, Massachusetts in November to get a Democratic dogcatcher elected in Harvard Square.

•    The projected 2010 deficit will render our national debt 13% bigger on the last day of this year than it is today.  Projected 2010-11 deficits will cause the debt to swell 23% bigger than it is now.  By 2020, the debt will be twice as big as it is today.

•    By 2013 the deficit will recede to $700 billion, a “mere” half of the 2009 deficit, then ratchet up again to $1 trillion by 2020.  Even this will happen only if Congress agrees to drastic spending cuts before 2013, which it has already expressed strong resistance to doing.

•    All of these numbers are conditional on what many private sector economists call overly optimistic expectations held by the current administration regarding growth of the economy.

These sobering statistics raise a number of tough questions about the measures Obama has proposed to bring down the deficit—which, naturally, he will never satisfactorily answer.

For example: in his budget address on Monday, Obama stated, “Because small businesses are critical creators of new jobs and economic growth, the budget eliminates capital gains taxes for investments in small firms and includes measures to increase these firms’ access to the loans they need to meet payroll, expand their operations, and hire new workers.”

Why only small businesses?  Why not medium and large businesses?  Who adds more jobs to the economy—Sal’s Pizzeria, a local franchise of Linens ‘n Things, or Microsoft Corporation?

Obama proposes letting the Bush tax cuts expire for families making over $250,000 a year.  He wants to impose a new tax—sorry, “financial crisis responsibility fee”—on banks and corporations who received TARP money, some of whom were forced by the administration to take it.  Obama wants to strip away tax breaks from oil and gas corporations.

Why would Obama want to choke the engines of growth and job creation by saddling them with tax increases?  If the absence of a $5,000 tax credit would hinder a small business from new hiring, what does he think the addition of hundreds of thousands of dollars in taxes to a corporation would do to their hiring?  Do big corporations hire workers out of the goodness of their hearts, with no concern for the bottom line?

Also, given that many of those families who make over $250,000 are headed by small business owners, how does Obama justify giving them tax credits while simultaneously increasing their taxes?  Is his administration even feigning consistency here?

History shows that cutting individual and corporate tax rates increases long-term tax revenue.  Obama was specifically asked about this proven fact by George Stephanopoulos during a primary debate with Hillary Clinton.  Obama stated outright that even if this pattern were true, he would still favor higher taxes on the wealthy to promote “fair” taxation.

Obama is free to endorse Marxist policies if he desires, but how can he turn around and claim that his proposal to increase taxes for the wealthy is an effective way to reduce long-term deficits?

When you’re handed a hot potato such as the sickly economy—a fate Obama has reminded us of precisely eight million times since he was elected office—the responsible solution is to let it cool down.

Instead, Obama proposes to cremate it.

Critics of Federal Reserve Chairman Ben Bernanke’s performance in his first term blame him for failing to recognize the threat of the looming subprime lending crisis; his supporters laud the aggressive policies he enacted in response to the crisis.

I fault him for both.

Before the crisis, Bernanke helped Fannie Mae and Freddie Mac executives cover up their scheme to hide trillions of dollars in junk mortgages and give themselves enormous bonuses.  In the process, he failed to address the growing housing bubble that precipitated the financial crisis.

His solution was worse.  Having learned the wrong lesson from the Great Depression—that the government prolonged it by not intervening more, rather than intervening too much—Bernanke radically expanded government’s power and “reinvented the Fed,” as Time magazine put it mildly in their recent cover story on Bernanke.

Time glowingly continued: “[H]e conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies… lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash… revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed’s balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation.”

“Conjured up,” “blasted,” “engineered,” “revolutionized,” “breathtaking,” “shopping spree,” “blew up,” “desperate improvisation”—somehow these don’t sound like particularly reassuring terms for investors in the world’s largest financial system.

Bernanke isn’t finished.  The Federal Reserve has been buying up Fannie and Freddie securities to try to keep mortgage rates artificially low and stimulate the housing market.  The program is set to end in March, but Bernanke is toying with the idea of propping up the housing industry indefinitely.  Sound familiar?

The question is whether the Senate will reconfirm Bernanke for another four-year term before his first term expires on January 31.

Dumb arguments for keeping Bernanke abound:

•    The Financial Times of London reports, “Economists warned that a rejection of Mr Bernanke could be seen as a threat to the central bank’s independence.  US Treasury yields were little changed but stocks fell more than 2 per cent” due to uncertainty regarding reconfirmation.

Come on—it’s at least as plausible that stocks plummeted last week because of Obama’s announcement that he was going to impose a new tax on banks to subsidize the Troubled Assets Relief Program (TARP).  (Especially given that the Dow Jones Industrial Average slipped 219 points while Obama was still giving his speech.)

After Bernanke’s prospects improved over the weekend, Obama’s boosters at the Associated Press helpfully divined the trend in the stock market for us: “Amid the news, the Dow Jones industrial average rose 24 points.”  Well, the Dow was down 3 points on Tuesday—I think this means Bernanke’s chances are dimming.  What say ye, Associated Oracle?

•    Mohamed El-Erian, CEO of bond investor Pimco, declared, “A No vote on Bernanke would be viewed by markets as adding yet another uncertainty in an already fluid economic and policy environment.”

Give me a break: Ben Bernanke-Tim Geithner-Larry Summers form the very Axis of Uncertainty.  The Obama administration has demonstrated that it is capable of deciding, in any given week and depending on its poll numbers, to announce any manner of blanket economic policy to try to shore up its popularity.  This is exactly what causes uncertainty in the market: whimsical manipulations from disconnected puppet-masters on high.  Sowing a little uncertainty about whether King Caprice’s minions will remain in office is the surest prescription I know of for assuaging the market.

•    Obama’s team “saved” the economy, so it’s best to keep the same leadership in place.

Obama’s team didn’t save anything—it wasted a trillion dollars and slowed down the real recovery.  Obama claimed that unemployment would reach 8.0% if we didn’t pass his stimulus bill last spring.  We did, and unemployment is at 10.0% and projected to increase.  The last people who should still be in charge of our monetary policy are the people who helped Obama implement his disastrous recovery strategy.

•    Chris Dodd, the Senate banking committee’s chairman, announced that booting Bernanke would hurl our financial system into a “tailspin.”

Chris Dodd certainly knows something about sending the economy into a tailspin.  Given his role in the subprime lending crisis, I say his vote on any financial matter from now until his retirement next January ought to automatically count as a vote for the opposite of whatever side he’s on.

•    Dick Durbin, Senate Majority Whip, pointed out that conditions that led to the financial crisis were in place before Bernanke took office.

Yes, and if Noah had deliberately drilled a hole in the bottom of his ark, I think he could credibly claim that conditions that led to the Great Flood were in place before his time at sea.  But that doesn’t mean he would bear no responsibility for having made things worse.

Paul Krugman, whom I never thought I’d quote (except mockingly), recently wrote, “Before the crisis struck, Mr. Bernanke was very much a conventional, mainstream Fed official, sharing fully in the institution’s complacency.  Worse, after the acute phase of the crisis ended he slipped right back into that mainstream.”  Granted, Krugman is only partly talking about Bernanke’s failure to head off the imminent lending crisis.  He’s also talking about Bernanke’s failure to push for cumbersome bank regulations and inflate the currency, goals Krugman seems to think worthwhile (we are talking about a New York Times columnist, here); but the general characterization still applies.

Krugman continues, “During the run-up to the crisis, as financial abuses proliferated, the Fed did nothing.  In particular, it ignored warnings about subprime lending…  Mr. Bernanke didn’t acknowledge that failure, didn’t explain why it happened, and gave no reason to believe that the Fed would behave differently in the future.”

I’m mystified as to why so many in Congress are reluctant to sack Bernanke for poor performance.  Perhaps it’s because they fear it will remind their constituents that they may apply the same standard to their elected officials.

Thanks to the Obama administration’s new Car Allowance Rebate System (CARS), also known as Cash for Clunkers, American taxpayers are now subsidizing car owners to do what they would have done eventually—scrap their old cars and buy new ones.

CARS is perversely profligate in numerous ways, among them the fact that it forces car dealers to waste time filling out onerous paperwork to get reimbursed by the government and adding legal riders to contracts with car buyers regarding liability for rebates.  Mechanics must squander effort draining each car’s oil, then donning protective suits and carrying out a dangerous procedure involving pouring sodium silicate on the engines to make them “seize up” and cease to function.

This government-mandated engine-cide is a huge problem for auto parts sellers, who earn the bulk of their income reselling engines, motors, and transmissions—all of which must be intentionally damaged and made unsalable to comply with program rules.  Government inspectors will go around making sure engines have been properly decommissioned, a precondition for dealers and car buyers to claim refunds.

More disturbingly, for those who can barely afford to buy a used car, the reduced supply of used engines will lead to increased, often prohibitive costs for used cars, because so many used car engines—having been decommissioned by mechanics—cannot be resold to potential buyers.  That’s looking out for the little guy!

For those concerned about the “environmental impact” of the program, the plan unfortunately won’t help on that front, either.  According to the director of Columbia University’s Center for Climate Change Law, the energy required to produce a new car years earlier more than offsets any fuel savings from driving a used car for a few more years.  Without the program, car buyers would have ended up buying more fuel efficient vehicles anyway, because most vehicles are made to be more efficient nowadays.

The one thing we can’t foresee is what those in high enough tax brackets who will be funding most of this program would have done with their money if they could have kept it—say, devoted it to more profitable, wealth-creating investments of their own choosing?

If all of this isn’t enough to convince you the program is a slam dunk, there’s also the matter of how it’s being administered.  Congress allotted $1 billion and expected the funds to last 100 days—from July 24 to November 1.  They didn’t enact any sensible precautions on the limits of the program—say, no more than 20 clunkers bought by each of the nation’s nearly 20,000 car dealers—until the program’s impact could be measured.  This is, of course, because Congress is not managing its own money, but rather maintaining an infinite balance sheet.

Shockingly, Congress underestimated the cost of its new program and the rate at which people would lap up free money.  Rae Tyson, a Transportation Department spokesman, insisted on July 28, “When we get close, we will start alerting dealers so they don’t get caught with a deal in the pipeline.  We’re not going to leave them hanging. We’re not going to run out of money in a couple days.”

Two days later—surprise!—the Transportation Department announced that the program had run out of money and would be suspended at midnight.  Tyson should have concluded his statement, “When we get close, we will start alerting dealers…  OK, now!”

So the program’s funding lasted six days.  Assuming a steady rate of access by dealers over the intended life of the program, the actual rate of use so far has been 17 times as high as lawmakers anticipated.  Were the program to be funded at its current rate until November 1, it would blow through $17 billion.

Representative David Obey, chairman of the Appropriations Committee, speaking on behalf of lawmakers who want to dump more money into CARS, declared, “Consumers have spoken with their wallets, and are saying they like this program.”

Note to Obey: “speaking with your wallet” usually means that the wallet owner chooses to purchase a product or service with his own money, not that he gobbles up a heavily subsidized goody that he would have bought in a few years on his own.

Saying Cash for Clunkers has been “wildly successful,” as many reporters have decreed, is like saying that a program designed to give out $4,000 checks to anyone who’s willing to cash them has been “wildly successful.”  Cash for Clunkers would have been a colossal failure if it hadn’t run out of money in less than a week.

The sudden revelation that people like free money led to uncertainty over continuance of the program: word got out from the Transportation Department that the program was bankrupt, but Press Secretary Robert Gibbs insisted to reporters on Friday that it would continue through the weekend and beyond.  In other words, the Obama administration, caught in a jam, with no idea whether additional funding would ever be approved or not, simply lied by sowing confusion over how much money was actually left in the program.

John McEleney, chair of the National Automobile Dealers Association, and numerous car dealers across the country have reported on the risk they face that the government will not reimburse dealers for buying clunkers, given the precarious state of program funding.  They have also complained about the confusion regarding rules and continuance of the program, contradictory statements from government, inability to make future business plans, and the havoc all of this has wreaked on their dealerships.  All of which augurs well for the long-term beneficial effects of CARS on the economy—because if there’s anything the market loves, it’s confusion, conflicting information, delay, and chaos!

House Minority Leader John Boehner noted, “There are a lot of questions about how the administration administered this program.  If they can’t handle something as simple as this, how would [they] handle health care?”

The Cash for Clunkers debacle should be viewed as a test run for Congress’ overhaul of the nation’s health care system.

Break out the sodium silicate.

Five months after the stimulus bill was passed, we can now say that we’ve witnessed the following under-stimulating results.

Payrolls are falling more than forecast, with employers having cut 467,000 jobs in June, following a 322,000-job decline in May.  Factory jobs fell by 136,000 after dropping 156,000 in May.

Unemployment is at 9.5%, the highest level in 15 years, and is projected to exceed 10% by the end of 2009.  Some economists expect it to remain at historically high levels for years.

The average workweek is at 33 hours, the lowest in 45 years.

Average weekly earnings are down to $611.

The national debt is $11.5 trillion.  The Congressional Budget Office projects the deficit for 2009 to be almost $2 trillion and for 2010 to be more than $1.4 trillion.

The Treasury is increasing its sale of debt to pay for spending.  Treasury offered $1 trillion in notes and bonds in the first half of 2009 and plans to offer another $1 trillion by the end of 2009.

Colin Powell, of all people, is alarmed that Obama’s spending orgy may be swelling government and the national debt: “I’m concerned at the number of programs that are being presented, the bills associated with these programs and the additional government that will be needed to execute them…  [We have] a huge, huge national debt that, if we don’t pay for [it] in our lifetime, our kids and grandkids and great-grandchildren will have to pay for…”  Now he tells us!

Jared Bernstein, chief economic advisor to Joe Biden, whose office is managing the stimulus, says, “It’s working, it’s demonstrably working.”  According to Bernstein, $200 billion in stimulus money has already been obligated or spent.  Case closed!

Note to Bernstein: In order to demonstrate causality, you have to show that: (1) there was a cause, (2) there was an effect, and (3) the cause influenced the effect.  Defenders of the stimulus bill are still stuck on #1: as of June, only 10% of all stimulus funds had been distributed.  Bernstein’s $200 billion “obligated or spent” figure—eerily reminiscent of the administration’s “jobs saved or created” trope—is untrustworthy, because the administration has already been caught lying about money committed to spending projects.

Given the miserable failure of the stimulus bill, naturally Congressional Democrats want… another stimulus bill!  According to House Majority Leader Steny Hoyer, “We need to be open to… further action.”  Democratic Senator Sheldon Whitehouse said that another stimulus would “probably take place towards the end of the year.”  Second-ranking Senate Democrat Dick Durbin said he would leave any decisions on passing another stimulus bill to “the president’s evaluation”—and we all know how cautious Barack “Fiscal Restraint” Obama will be.  Stan Collender, former Congressional budget analyst, said that another stimulus bill may be possible if the economy gets worse: “Right now it doesn’t seem to be justified…  Come September, it might be.”

The first stimulus package was “a bit too small,” according to Laura Tyson, member of Obama’s Economic Recovery Advisory Board.  Paul Krugman writes in the New York Times, “O.K., Thursday’s jobs report settles it.  We’re going to need a bigger stimulus.”  Biden advisor Bernstein says, “There is no conceivable stimulus package on the face of this earth that would fully offset the deepest recession since the Great Depression.”

Let’s see: the stimulus bill committed a record $787 billion in spending.  Tyson says it should have been “a bit” bigger.  Congressional Democrats and Krugman wanted it much bigger.  Bernstein admits it would have to be infinitely big to work.  Can we give Bernstein the award for inadvertent honesty on this one?

The clincher that the stimulus bill was an abject failure—and that another stimulus bill would be a repeat failure—is the fact that Wall Street has just hit a 10-week low after talk of a second stimulus package recently began.  Amateur analysts suggest that chatter about another stimulus bill is making investors nervous, because—get this—it shows that the economy might not be recovering.  According to Hugh Johnson of Johnson Illington Advisors, “When there’s talk about another stimulus plan, that adds fuel to that fire, it intensifies the concerns about the timing and strength of the recovery.”

Is it possible, just possible, that investors are nervous, not because Congress’ hinting at a second stimulus package implies the economy is not recovering—which I think they can figure out on their own—but because Congress is hinting at a second stimulus package?

If Democrats aren’t persuaded by Republicans’ argument, backed up by ample historical data, that spending vast quantities of wealth not yet created does not stimulate the economy in the long term, could they at least admit their little experiment failed and try the Republican option for a change?