Saving the Will of the People

As we witness a historic spending blowout on Capitol Hill a couple of questions we should ask are:

1) Is the gov't correct in assuming recessionary deficit spending is the optimal course?

When asked what we should do during these tough times, the results are in:

• 300,000,000 micro-economists of average intelligence answer: SAVE
• Handful of brilliant gov't economists answer: SPEND
  

Who is right? Given that recessionary deficit spending has never conclusively worked, I would favor the 300M on this one. Europe's ECB chief agrees.

2) Does the gov't have a right to engage in recessionary deficit spending?

Should not the government represent the will of the people? When the people have so clearly indicated that now is the time to save, does the gov't have a right to defy our collective will and force us to spend?

To put this in perspective, just imagine if we held an election and the results were in:

The People want: DEMOCRATS

But someone, let's say the military or other power stepped in and said, "No, that's the opposite of what you need during this crisis and instead appointed: REPUBLICANS

Wouldn't that be cause for revolution?

The Kindergarten Political Test

Having a hard time deciding where you lie on the political spectrum? Try the kindergarten test below and see which one you like best:

1) Fascist Kindergarten: You show up on Day 1 and all the kids wearing pink are stripped of their belongings and marched off to indefinite detention. You pick up a nice set of "Hello Kitty" earrings and some juice filled fruit snacks. You're nervous about what to wear tomorrow.

2) Socialist Kindergarten: In order to promote an equality of outcomes, the teacher confiscates half of the assignments and test scores of high achieving students and redistributes them to under performers. High achievers are labeled as "privileged" and "pretentious", childish forms of the mature vice "greed", and learn the joys of "sharing". Mysteriously, there have been fewer and fewer high test scores to redistribute and the teacher confiscates more and more in order to stay above her mandated minimum C- average. To avoid ruin, assignments and test scores must be forfeited by children at the end of the school year and are then redistributed among the next year's newcomers.

The free trade of lunch items with children from other classes is strictly prohibited to avoid competition with the school vending machine, where food costs 3X the market price and carries only zero trans fat and organic foodstuffs

3) Capitalist Kindergarten: If you brought a lunch to school, you get to eat it. You can consensually trade a lunch item with any other child from any other class. If you skipped out on Xbox for an hour last night to finish your homework assignment, you get to keep the grade you receive. All of your grades and assignments accumulate and stay with you as you progress from grade to grade. Children are taught to share items and help tutor each other. Some do and some don't. Children are encouraged to read well, behave themselves, and work hard. Some do and some don't. The class has a B- average.

4) Tyrannical Kindergarten: You show up hoping that you're on the bully's good side today. You aren't, and get ridiculed, spit on, and have to sit on the floor all day while one of the bully's cronies rests his feet on your chair.

5) Anarchic Kindergarten: You walk in the door and start screaming like everyone else. The teacher vacillates between a cowering wretch and a vicious, lash-delivering banshee.

Why Armageddon? (Part I)

We're seeing the beginning of a huge and unprecedented power grab by the Federal Gov't. You may think this is good or bad depending on which side of the aisle you sit on. A lot of us think this is bad...perhaps really bad and I'll explain why in the following series:

Armageddon Part I:
Why is the U.S. so prosperous? Just imagine for a moment that all international borders were wiped out, where do you think most people would emigrate too? If you read an international newspaper or have traveled abroad then you likely answered correctly...the U.S.A. Why is that? Why not Argentina or Brussels, Russia or South Africa? It's because of the rule of law.

See, in America people don't govern per se, the law governs. We take it for granted, but throughout human history this is the exception not the rule. In Venezuela, Hugo Chavez sits on the throne. In America, the Law sits on the throne...not any one man or woman, sultan or pharaoh.

As long as the law is fair, consistent, minimalist, and enforced, people go about their affairs providing for their families, taking risks and investing in themselves and their future. Take your standard baseball game. The players, coaches, fans and umpires all have an understanding that the rules don't change mid-game. Once the law becomes variable, one-sided, invasive and selectively enforced, society breaks down. Just imagine a baseball game (Braves vs. Red Socks) where the owner of the Red Socks puts on the umpire's mask and starts calling the game. How long will the Braves play? How long will fans and coaches hang in there? Let's say that Kawakami steps up to bat and hears a whisper from the ump, "He he, two strikes and you're out kid." It wouldn't take long to ruin the great sport of baseball, or any other sport for that matter. So why not our economy?

The Democrats are putting themselves in a position where they not only write the rules, but will also decide which teams win and lose. Cap and trade on energy, government-run health care...even deciding which charity you want to donate to will be dictated by the government. The game just became a lot less fun.

His Excellency Barack Obama

It's difficult to find a suitable title for a President that has already accomplished so much and whose future success is so inevitable. This is not the first time that our country has struggled with presidential titles. A similar debate arose when George Washington was first elected. What do we call him? Any word from the Constitution? Nope. Drat. Well, "His Majesty" seems too highfalutin, ditto with "Your Highness", but then is the title "Mr. President" really suitable for the man who slogged through years of war with lackluster support from a fledgling Congress and risked his life, wealth and well being for the preservation of a nation and ideal?

And along a similar vein, what title is suitable for a Harvard Law grad who tackled head on the scourge of disorganized communities, entered politics by running unopposed for the Democratic Primary after disqualifying his four opponents (including his former sponsor) on technicalities, serving part of a term in the U.S. Senate, being arguably the best self-promoter since Dennis Rodman, and the first African-American President?

We are not in a position to disqualify ANY possible titles and all recommendations are welcome. I think that "His Excellency" is a good baseline and we can work our way up from there.

Fiscal Stimulus - Good or Bad Medicine?

I'd like to pose one question to these Keynesians...where's your data? We talk a lot about the Great Depression and whether public spending helped or hurt. Often times Keynesians will cite the argument that "things might have been much worse if the gov't hadn't intervened with fiscal stimulus." Well, gov'ts across the world have had bailouts of all sorts. Japan has a debt over 170% of GDP (while the U.S. is around 80%) due to a couple of decades of targeted "stimulus". Many European countries (including Italy, Greece and Belgium) have tried to spend their way to prosperity, but are only left with lower productivity growth and huge debts to service.

The reply from leading lights like Lawrence Summers is that fiscal stimulus should work in theory, it's just never been implemented correctly...ever. To be effective, fiscal stimulus must be "Targeted, Timely, Temporary" or TTT. Any successful examples in the past? Well, no. Think of that, not one. Sure, plenty of models saying it should work if done "correctly", but not one shining star in the vast night sky.

Have there been examples of effective treatments aside from deficit spending? Sure, the U.S. has been through many recessions and managed to power out of them without the aforementioned TTT deficit spending.

Let's pretend for a moment that you are a pharmaceutical company seeking FDA approval. You've conducted a clinical trial on your new blockbuster pain pill. Of the thirty patients that took your pill this was the outcome:

Patients - Side Effects
4 - No Effect
12 - Severe abdominal cramps
10 - Chronic fatigue
3 - Fainting within minutes of ingestion
1 - Death

Here's a hypothetical conversation with the FDA panel:

FDA: "This drug looks lousy and dangerous, why are you even here?"

Scientist: "Well, we have researchers and leading microbiologists that are convinced this medicine will work under the right conditions."

FDA: "Huh? What about the faintings?"

Scientist: "We have good evidence to suppose that those three patients were going to faint anyway. Our data indicates that our medication made the fainting spells less severe."

FDA: "OK. What about the chronic fatigue?"

Scientist: "We've confirmed that these patients swallowed the pill a little too slowly and it reacted with their saliva. We think an intravenous introduction to the body will work better."

FDA: "Wow, your drug is toxic when in contact with SALIVA???!!!"

Scientist: "Only when swallowed slowly Sir, our data indicates that some training and a brisk swallow are required."

FDA: "What about the death?"

Scientist: "It was undoubtedly painless, the way we'd all like to go."

FDA: "Intriguing. Any reduction in pain for people that were conscious?

Scientist: "Not yet. Keep in mind, however, that these results do not reflect on OUR drug. We can prove in each case that maximum pain relief could have been achieved with zero side effects under the appropriate conditions. This drug will be a magical remedy for millions. If you approve it for the general market, we promise it will only be administered under ideal conditions..."

FDA: (Insert your own reaction here...)

Some Things Never Change

For a moment let's forget that Pres. Obama's Dept of Economic Security just issued a code Orange for the day. Let's pretend that Eastern Europe is not crumbling and on the brink of collapse. Let us ponder the two constants that have seen us through the boom times and the bad. They are:

1) If housing is going up, it's good time to buy. If housing is going down, it's a good time to buy. Moral: Nice to know that it's always a good time to buy a house. (contented sigh...)

2) If tax revenues are going up, the Federal Gov't spends more. If tax revenues are going down, the Federal Gov't spends more. The better things are, the faster the increase in spending. As the economy heads toward utter ruin, the expeditures of the gov't approach infinity. Moral: Even during these corrective times, it's nice to know that someone, somewhere doesn't have to worry about a budget. (wistful sigh looking out window...)

Code Orangish Reddish

Today the Department of Economic Security released an "Orangish Reddish" rating. The rationale was that either people are stupid and that means trouble for the economy, or people are stupid and that means Keynesian economics actually work and we won't self-destruct today. For those of you who are new to Keynesian economics, the principle in question is whether a gov't can increase deficit spending during a downturn to help the economy. There is a supposed to be a "multiplier" effect so that if the gov't spends $1, then the economy reacts by increasing demand and output by $1.5 or more.

The problem is that either Keynesian economics are wrong headed, or people are nincompoops. Allow me to explain. You own a factory and supply duct tape to the gov't and part of the new stimulus is buying a roll of duct tape for every family in the U.S. As the gov't knows, duct tape solves real problems. Anyhow, you have two choices:

1) Get really excited about the demand, hire twice the number of workers offering them generous benefits packages and short work weeks, train your new hires for future management positions, blow the extra profit on a huge new duct rolling machine that will pay itself off in 20 years, spend the salary on flat screens and pedicures...

OR

2) Hire only temporary menial contracting labor, push full time staff to the limit, make the old equipment get by just as long as product is shipped out the door, take the extra profit and squirrel it away because you don't know when you'll see that kind of money again, and you warn workers to save their paychecks because this may be the factories last big order.

Now, for the Keynesian multiplier to work, people have to take option number 1) above. This assumes that economic participants are fools and don't know the difference between a vaporware order from the gov't and raw demand from a competitive market.

Let us all pray that the Keynesian multiplier does not work. If it does, we've got much bigger problems than a credit crunch...