You Say The Stimulus Isn't Working?

Despite the orgy of "initiatives" from the Obama administration, the market continues to tank, the economy is in free-fall and our Democrat saviors are reduced to wringing their hands. Timothy Geitner is positively dumb-struck - not only a liability quite a bit more profound than his unpaid payroll taxes, but apparently a natural condition - and President Obama has retreated to upping the ante on almost a daily basis so as to distract people from the essential incoherence of his so-called plans.

Why is anybody surprised by this outcome?

From his election in November, the economy has gotten progressively worse with Obama's every utterance. It will continue on this downward path because Obama's prescription for the disease is more of the disease itself: government spending. Since FDR, Democrats have enacted laws that have increased government spending from 20% of GDP to 60% of GDP (including government mandated private sector over-spending on things like health care and mandatory insurance of any form).

Put as succinctly as possible, the reason businesses aren't investing, banks aren't lending and consumers aren't spending is that government has stolen all the money.

Government spending produces little that an informed consumer would willingly buy, such as a car, home, food, clothing or entertainment. Those are the purchases that drive our economy. Government spending produces next to nothing in the investment and procurement of plant and equipment that is the lifes-blood of the business community, save for Defense and Aerospace. If the government consumes 60% of a $14 trillion dollar economy, that's an extra $5.6 trillion per year (in current dollars) that government takes out of the Private Economy since the days of FDR.

In the face of this competition with Government for the limited pool of dollars, consumers and businesses have sustained their purchases by doing the only thing they could do: borrow. Government has encouraged that in a variety of ways until last year when there was no asset left to leverage, and corporate and personal debt were at an all-time high.

Bottom line, there's no money left for purchases, and there's no money left for investment. If Buyers don't have money to buy things, and businesses don't have their own capital to expand and improve their businesses, then there is no economic activity and the economy dies.

Now Obama and the Democrats propose much, much more government spending, increasing government and public sector spending as a percentage of GDP from 60% to 70%. We are now far past the point of arguing whether Government spending is crowding out consumption and private sector investment. That started happening in the 30s, and the problem got serious in the 60s. It is a tribute to the resilience of our economy and the fabulous wealth we have accumulated since World War II that it has taken this long for Democrats to spend us into oblivion.

Milton Friedman famously stated that he was not nearly as concerned with the size of our current budget deficit as he was the size of the future obligations to spend made by our government. All of Obama's commitments to spend are rightly seen by investors as "down payments" on yet further spending. His solutions are thus the moral equivalent of firemen dousing a house fire with gasoline, knowing full well that there are people inside the house. Obama is either a towering economic Illiterate, or a cynical destroyer of the American way of life.

Not that Republicans get a hall pass for this debacle. First, they let Nixon out-Democrat Democrats in the 70s, when he engaged in an orgy of post LBJ social spending and government regulation that would have embarrassed LBJ, and LBJ was the author of "The Great Society". Next, they let George W. Bush out-Democrat the Democrats in exactly the same way; he saw Clinton's social spending and went all-in, funding gargantuan expansions of Medicare and Education, while benignly presiding over a 50% increase in most every other social program.

Republicans in general stood by and let it happen. This orgy of confiscation and spending goes against everything we stand for, yet our leaders do nothing - or next to nothing. On specific issues, such as the sub-prime mortgage fiasco, when our leaders did raise an objection, it was a diffident "expression of concern", as opposed to the full-throated alarm it should have been.

For one prime example, the record shows that when Repubs raised the Red Flag on the mortgage boondoggle as far back as the mid-90s, Democrats pushed back, and Republicans did - nothing. Why? Too concerned about their place at the table? Too concerned about the bad press they might have to endure? Or is it that they themselves didn't have the courage of their convictions, or the willingness to make a prediction that might not come true within one media cycle?

There's a common misconception that there's a definable cause and effect where economic activity is concerned; both sides maintain that if Button A is pushed - whether it's a new round of government spending or a tax cut - that there will be a particular result. That has never been true since the Depression, because the playing field has constantly changed as the Economy had to absorb ever higher levels of government spending. Our so-called economic "cycles" have been nothing but the economy's reaction to that spending.

Bottom line, both parties have acted like the economic process reacts and responds to the same dynamics that regulate our political process. Nothing could be further from the truth.

And my only consolation - as Obama and the Democrats pump gasoline onto the house fire that is our economy - is that Republicans had it right in theory, never mind that they were too gutless to sacrifice short term political gain to save us.