In thrall to a long-dead experiment

By Patrick McIlheran

Milwaukee Journal Sentinel

We are all Keynesians now, Richard Nixon is said to have said. Too true, says Hunter Lewis, who's got a new book on how the famous British economist is still messing with your life.

And he is. We are all followers of John Maynard Keynes in the sense that lab rats, learning a maze by electric shocks, are disciples of some psychologist's theory. We no more benefit from this than do the rats.

Keynes, who died in 1946, is fashionable again. Politicians pray for his blessing on their stimulus plans, since Keynes preached that the way out of a slump was for government to spend lots of money. It should borrow vastly, said Keynes, and spend it on anything. He's the guy who first suggested paying some to dig ditches and others to refill them.

Nor just in slumps, said Keynes: Governments should print money, loads of it, to drive interest rates toward zero. This would cause a permanent boom, if only we also tax away money hoarded uselessly by rich people.

Sound familiar? Of course, says Lewis, who explains the doctrine precisely in "Where Keynes Went Wrong." Washington's embrace of Keynes went uninterrupted through Clinton to Bush to Obama. Fannie Mae's loose loans, the Fed's giveaway rates, bailouts, the porkulus: all Keynes, no matter the party.

How has that worked? "There's just no evidence" that this ever cured a recession, Lewis told me. Keynes "wasn't particular interested in evidence."

History suggests he should have been. Keynes was embraced by Franklin Roosevelt in the Depression; this stalled the mid-1930s recovery. Keynes' ideas in the 1970s led to stagflation. Japan stimulated crazily in the 1990s, giving itself the Lost Decades. The cure for the 2001 slump set up the 2008 crash.

Whereas recessions without stimulus - America in 1921, Southeast Asia in the 1990s - were sharp but swiftly over.

When governments pump stimulating rivers of money, they manipulate prices, the economy's gauges. By juking interest rates, the price of money, you're messing with the most critical gauge. The ensuing unreality leads to inflation, dot-com bubbles or foreclosed subdivisions. Stimulus is like curing a hangover with Thunderbird.

Lewis feels Keynesianism, an intellectual bubble, is nearing a pop, if only because Washington is running out of willing lenders. About time, he says. It has punished thrift and encouraged profligacy. It has led government to turn swaths of the economy into federal protectorates. "That's the single thing that worries me most," he said, the way bonds between government and business make the two indistinguishable. It sickens democracy.

Keynes wasn't a clear writer, says Lewis. He was self-contradictory: The solution to bad debt is more debt, for instance. The more you spend, the more you have. Deficits are a kind of savings. Lewis becomes grimly hilarious when he compiles the Keynesian paradoxes now being spouted. You realize our leaders aren't making sense.

Keynesians argue that it does make sense, only you rabble aren't equipped to comprehend. Keynes believed the economy couldn't be left up to rabble, who were ruled by "animal spirits." It had to be run by the wise - by people like him.

"He said, 'If things go too far in the wrong direction, I'll just step in and fix it,' " said Lewis. "Then he died."

We since have learned that governments are ruled by spirits as animal as anyone's, only with bigger paws. No one is so short-term as politicians, thinking of re-election and seduced by an urge to be in charge. This is why Keynesianism has triumphed among them, said Lewis: "It's a rationalization for policies that they'd like to pursue anyway."

So we all live in a $24 trillion experiment in whether, this time, stimulus will work. Two questions from one of the rats:

First, if the government rigs reality by messing with the value of money, how can we expect any other part of the economy to not be distorted and dishonest?

Second, if we abandon simple, comprehensible rules and rely on constant tinkering by wise leaders, what happens when we instead get leaders who, having done no work but rabble-rousing among Chicago's poor, have not the least clue about running an economy?

Revered, Keynes has no answer.

Patrick McIlheran is a Journal Sentinel editorial columnist. E-mail pmcilheran@journalsentinel.com

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Record US deficit stokes concern

By Martin Crutsinger Washington

What is $1.42 trillion (R10.4 trillion)? It is more than the US's total national debt for its first 200 years and more than $4 700 for every American man, woman and child.

It is also the 2009 US federal budget deficit, three times more than any other deficit before. Some economists warn that unless the government start to cut spending or raise taxes, it could sow the seeds of another economic crisis.

Treasury figures released on Friday showed that the government spent $46.6 billion more than it received in September, a month that normally records a surplus. That boosted the shortfall for the full fiscal year that ended last month to $1.42 trillion. The previous year's deficit was $459 billion.

As a percentage of US economic output, it's the biggest deficit since World War II.

Forecasts of more red ink mean the federal government is heading toward spending 15 percent of its money by 2019 just to pay interest on the debt, up from 5 percent this year.

President Barack Obama has pledged to reduce the deficit once the great recession ends and the unemployment rate starts falling, but economists worry that the government lacks the will to make the hard political choices to get control of the imbalances.

Friday's report showed that the government paid $190bn in interest over the last 12 months on Treasury securities sold to finance the federal debt. Experts say this tab could quadruple in a decade as the size of the government's total debt rises to $17.1 trillion by 2019.

Without significant budget cuts, that would crowd out government spending in such areas as transport, law enforcement and education.

Already, interest on the debt is the third-largest category of government spending, after the government's entitlement programmes and the military.

As the biggest borrower in the world, the government has been the prime beneficiary of record low interest rates. The new budget report showed that interest payments fell by $62bn this year even as the debt was soaring.

The Congressional Budget Office projects that the debt held by investors both in the US and abroad will increase by $9.1 trillion over the next decade, pushing the total to $17.1 trillion under Obama's spending plans.

The $1.42 trillion deficit for 2009 - which was less than the $1.75 trillion projection that Obama made February - includes the cost of the government's financial sector bailout and the economic stimulus programme. Income taxes also dwindled as a result of the recession. Coupled with the impact of the tax cuts under former president George W Bush earlier in the decade, tax revenues fell 16.6 percent.

"We should be desperately worried about deficits of this size," says Mark Zandi, the chief economist at Moody's Economy.com. "The economic pain will be felt much sooner than people think, in the form of much higher interest rates and much higher rates of inflation." This could result in stagflation - a mix of inflation and economic stagnation.

The administration has pledged to include a deficit-reduction plan in its 2011 budget, which will go to Congress in February.

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Newest National Debt Statistics Posted September 2009

Here are the newest National Debt statistics courtesy of www.Treasurydirect.gov (U.S. Treasury Department) effective Sept. 11, 2009.

Debt Held by the Public
$7,488,352,210,282.27

Intragovernmental Holdings
$4,306,343,094,699.45

Total Debt (9/11/09)
$11,794,695,304,981.72

Interest payments
August 2009
$27,374,808,039.95

Fiscal Year 2009
$367,837,472,521.29

Gifts to reduce the public debt
July 2009
$65,591.69

Fiscal Year 2009
$3,008,736.87

Increase in the past year (since 9/11/08)
$2,112,578,308,687.88

Increase since President Obama's inauguration (234 days ago)
$1,165,813,819,471.49

Daily rate of increase
$4,982,110,339.62/day Sphere: Related Content

Area residents travel to D.C. to protest increasing national debt

The Herald Mail
Hagerstown, Md.

September 12, 2009

HAGERSTOWN — More than 400 people from four states traveled Saturday from Hagerstown to Washington, D.C., joining thousands of others for the March on Washington, a rally protesting big government, both in spending and control.

“It was truly amazing,” said Nancy Allen of Hagerstown.

Allen said she never felt the need to take part in a political demonstration before in her life.

“It is the control the government is trying to exercise over the people, To me, it is very threatening,” Allen said. “I do see this as a (peaceful) revolution. I really do.”
Allen said she left the demonstration “with a great sense of optimism.”

Neil Parrott, organizer of the Hagerstown TEA (Taxed Enough Already) Party, said a caravan of eight buses stopped to pick up people in LaVale, Md., Chambersburg, Pa., Martinsburg, W.Va., Winchester, Va., and Frederick, Md., as well as Hagerstown

Before the buses departed Saturday morning from Hagerstown, a press conference was held featuring U.S. Rep. Roscoe Bartlett, R-Md. Parrott also spoke to the group.

“Today, we will tell elected officials, we will tell the nation and we will tell the world that we care about our freedoms and we care about our nation,” Parrott said in prepared remarks.

“We want our elected officials to listen and to turn their destructive fiscal policies around,” Parrott said. “We want them to quit increasing the national debt and devaluing the dollar. We want to be heard and we want action.”

While acknowledging past deficits and growth of the national debt in previous administrations, Parrott said the rate of the increase in spending in the last two years has been much more alarming to him.

“Our debt has just increased tenfold,” Parrott said Saturday afternoon after the rally.

Harold Carbaugh of Clear Spring said he never had experienced anything like Saturday’s rally.
“I’m on cloud nine,” Carbaugh said after the rally, where he met people from Florida, Louisiana, Texas, Mississippi and other states.

Carbaugh said he began asking people where they were from after realizing the demonstration wasn’t simply by people from the Washington area.

“Basically, what our founding fathers gave us is being eroded,” Carbaugh said of his concerns. “Our Constitution is being stripped out from under us one piece at a time.”

Carbaugh, a dairy farmer, said it was time for good men and women to do something or risk losing what the founding fathers established.

Anne Gray of Frederick, Md., said House Speaker Nancy Pelosi’s criticism of people attending the town hall meetings on health care as being “un-American” inspired her to join the protest.
“It was the biggest summer reunion picnic you ever had,” Gray said of the event’s atmosphere. “I definitely want to become more involved.”

The march was the third event Parrott has participated in since April 15, when TEA Party events were held across the nation.

Earlier this summer, Parrott expressed interest in running for Subdistrict 2B seat in the Maryland General Assembly. The seat currently is held by Republican Christopher B. Shank, who is considering running for the Maryland State Senate seat held by Republican Donald F. Munson. Sphere: Related Content

China alarmed by US money printing

The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

By Ambrose Evans-Pritchard, in Cernobbio, Italy
UK Telegraph

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to
buy whenever there is a price dip, putting a floor under any correction.

Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."

Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.

China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".

Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.

"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."

Yet the consequences are not symmetric.

"He who goes borrowing, goes sorrowing," said Mr Cheng.

It was a quote from US founding father Benjamin Franklin. Sphere: Related Content

Newest National Debt Statistics Posted August 2009

Here are the newest National Debt statistics courtesy of www.TreasuryDirect.gov

As of Aug. 24, 2009

Debt Held by Public
$7,385,932,492,348.44

Intragovernmental Holdings
$4,333,128,433,517.42

Total Debt:
$11,719,060,925,865.86

Interest payments:
July 2009
$19,812,486,187.83

FY 2009
$340,462,664,481.34

Gifts to reduce the public debt:

June 2009
$33,690.42

FY 2009
$2,943,145.18

Increase from previous month:
$113,539,846,023.73

Increase from previous year:
$2,100,326,268,141.77


How much has the National Debt increased in the 216 days of the Obama Administration?
$1,092,183,876,952.78

[$5,056,406,837.74/per day increase] Sphere: Related Content

Washington Times: A Failed Single Term?

By Jeffrey T. Kuhner
Saturday, August 15, 2009

President Obama is on the way to joining an exclusive club. It is the club of failed one-term presidents.

During the presidential campaign, Mr. Obama sold himself as a pragmatic moderate. In fact, he is the very opposite. He is an internationalist socialist whose policies will lead to ruin at home and defeat abroad. They will also doom his re-election efforts. He is flirting with political disaster.

Despite his many flaws, former President Bill Clinton established the model for successful Democratic administrations. Mr. Clinton governed as a liberal centrist. He realized that veering too far to the left early in his presidency was detrimental: His support of Hillarycare and gays in the military resulted in the 1994 Republican takeover of Congress. Mr. Clinton changed course by embracing free trade, welfare reform and balanced budgets -- combining fiscal responsibility and social liberalism. This formula prevented the Republican Party from recapturing the White House in 1996.

Mr. Obama is the anti-Clinton. He is a leftist ideologue who has surrounded himself with radical and inept advisers. Mr. Clinton had political counselor Dick Morris and Treasury Secretary Robert E. Rubin. Mr. Obama has David Axelrod and Timothy F. Geithner.

As a result, Mr. Obama's presidency is starting to look like the worst in 100 years. His $787 billion fiscal stimulus has failed to restore economic recovery. Unemployment remains high. Growth is anemic.

His massive spending is projected to yield record budget deficits of $1.8 trillion this year and $1.3 trillion next year. Over the next decade, according to the Obama administration's own estimates, the debt will explode by more than $10 trillion. These soaring deficits threaten to cripple our long-term prosperity and economic security. No country has sustained this kind of massive borrowing and spending without becoming a second-class nation. America is going the way of Argentina.

Mr. Obama's government-run health care plan is too expensive: It will saddle taxpayers with more than $1 trillion in costs. If enacted, it will do what socialized medicine has always done: ration care, extend waiting lines to visit a doctor and deny lifesaving, costly treatment to those deemed the weakest and most unproductive members of society -- the elderly. It is why so many seniors rightly oppose Obamacare.

National health care will force Mr. Obama to break his tax pledge. His signature campaign promise was not to raise taxes on families making less than $250,000 a year. However, Mr. Obama has boxed himself in, vowing that any health-insurance overhaul must be paid for without adding to the deficit. Hence, his administration is exploring soak-the-rich schemes such as higher income and capital gains taxes and a "wealth surtax." The problem remains that even these policies can't generate nearly enough revenue to fund Mr. Obama's ambitious expansion of the welfare-entitlement state.

This leaves him with only one option -- raising taxes on the middle and working classes. Already, key administration officials are considering a 10-percent national sales tax, also known as a value-added tax (VAT). In other words, a European-style health care system inevitably leads to European-level taxation -- and, consequently, European-style high unemployment and low growth rates.

Mr. Obama's energy policies will also undermine the economy. If passed, his cap-and-trade initiative will impose huge indirect taxes on businesses. It will punish manufacturing, oil-producing and coal states. Its goal is to increase the costs of gas and electricity, thereby discouraging their use.

Consumers will be paying more not only at the pump but also on everything from food to heating and electric bills. Mr. Obama's green socialism threatens to erode our standard of living, trigger skyrocketing inflation and stunt job creation.

Yet, the biggest danger is in foreign policy. Mr. Obama is pouring another 21,000 U.S. troops into Afghanistan. American forces are bogged down in a protracted guerilla campaign. The Taliban are resurgent. They have reclaimed their stronghold around the southern city of Kandahar. Insurgents are waging bold and deadly attacks even in the northern and western parts of the country -- formerly stable areas. The fighting is spreading, U.S. casualties are soaring, and public support for the war is ebbing.

The problem in Afghanistan is that terrorists are able to blend in with the native population. American soldiers find it increasingly difficult to distinguish civilians from combatants. The administration does not have a coherent counterinsurgency strategy. Hence, the Taliban are winning, and Washington is clueless on how to change the grim results on the ground.

Mr. Obama is frequently portrayed as the heir to Franklin D. Roosevelt. The more apt analogy, however, is Lyndon Baines Johnson. Just like Mr. Obama, President Johnson believed he could have guns and butter. He sought to implement the Great Society while escalating America's military involvement in Southeast Asia. Unable to choose, Mr. Johnson lost both: His domestic agenda and prosecution of the Vietnam War proved to be disastrous. His reckless ambition reduced his administration to political rubble, costing him any chance for re-election in 1968. This is why he (smartly) decided not to run again.

Social democracy and interventionist nation-building do not work. They destroyed the Johnson presidency and are on the verge of destroying Mr. Obama's as well.

Jeffrey T. Kuhner is a columnist at The Washington Times and president of the Edmund Burke Institute, a Washington-based think tank. Sphere: Related Content

Newest National Debt Statistics posted July 2009

Here are the newest National Debt Statistics for July 2009 as reported at www.treasurydirect.gov

As of July 23, 2009

Publicly held debt:
$7,264,963,795,966.75

Intragovernmental holdings:
$4,340,557,283,875.38

Total Debt:
$11,605,521,079,842.13

June 2009 Interest payment
$106,612,310,280.24

Fiscal Year 2009 Interest
$320,650,178,293.51

Gifts to reduce the public debt
May 2009: $51,546.51
FY 2009: $2,909,454.76

Increase in the debt since President Obama's Inauguration:
$978,644,030,929.05

Rate of increase each day in the 184 days of the Obama Administration:
$5,318,717,559.40 Sphere: Related Content