Letter From America (About A Country Being Crushed)

Obama’s Wreckovery

Obama knowingly lied about “shovel-ready” projects — and the press covered up.

By Michelle Malkin

February 14, 2014 12:00 AM 

National Review Online

February 17, 2009, President Obama promised the sun and the moon and the stars. That was the day, five years ago, when he signed the $800 billion American Recovery and Reinvestment Act. President Modesty called it “the most sweeping economic-recovery package in our history.” He promised “unprecedented transparency and accountability.” He claimed the spending would lift “2 million Americans from poverty.” Ready for the reality

The actual cost of the $800 billion pork-laden stimulus has ballooned to nearly $2 trillion.
At the time of the law’s signing, the unemployment rate hovered near 8 percent. Obama’s egghead economists projected that the jobless rate would never rise above 8 percent and would plunge to 5 percent by December 2013. The actual jobless rate in January 2014 was 6.6 percent, with an abysmal labor-force-participation rate of 63 percent (a teeny uptick from December, but still at a four-decade low).

Five years after the Recovery Act, 10.2 million people are out of work. The number of able-bodied Americans who have simply given up looking for work or are “not in the labor force [but] who currently want a job” has exploded. By some estimates, a record 90 million–plus people are hopelessly sitting on the sidelines.

The unemployment rate for black Americans is 12.1 percent — nearly double the national rate. The Obama campaign excoriated President George W. Bush when it exceeded 10 percent on his watch. The jobless rate for black teens is now a whopping record 38 percent. Some 50 million Americans remain below the poverty level. And 47 million are now on food stamps, a third more than when Obama first took office in the halcyon days of Hope and Change.

After $150 billion in stimulus and other spending on green-energy boondoggles, what does the White House have to show for it? According to the Green Corruption Files blog, 32 Obama-backed environmental firms have gone bankrupt as of February 2014. These include crony-clogged Solyndra, at a cost to taxpayers of $535 million; Beacon Power, $240 million; Abound Solar, $400 million–plus; Fisker Auto, $529 million; A123, $250 million; ECOtality, $100 million; and Ener1, $118.5 million. In addition, 22 other Obama green-energy projects are now in dire financial trouble.

Unprecedented transparency? Section 1513 of the Recovery Act required the White House to submit a progress report every three months. Last year, blogger Doug Powers noted: “Under their own guidelines, the administration should have released 14 of these reports by now, but they’ve only submitted eight of them for public review.” Whatever.

Before signing the Recovery Act, Obama promised an avalanche of “shovel-ready” jobs to build vital infrastructure. Instead, stimulus money went to wasteful makework and nonwork, including: bridges to nowhere, a California project to photograph ants, a University of North Carolina computerized dance program, a privately owned martini bar and Brazilian steakhouse in Missouri, a bogus New Hampshire beauty school, and renovations to Vice President Joe Biden’s favorite Amtrak train station in Delaware.
Somehow, stimulus “Sheriff” Biden overlooked the hundreds of millions in stimulus money steered to General Services Administration junkets in Las Vegas and Hawaii, ghost congressional districts, dead people, and those ubiquitous stimulus-propaganda road signs stamped with the shovel-ready logo.

In 2012, Ohio State University economics professor Bill Dupor reported that more than three-quarters of the jobs created or saved by the stimulus were government jobs. Dupor and a colleague also concluded that the massive wealth-redistribution scheme “destroyed/forestalled roughly 1 million private sector jobs” by siphoning tax dollars “to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment.”

In 2011, at a rare meeting of his Jobs and Competitiveness Council, Obama turned his “shovel-ready” vow into a punchline: “Shovel-ready was not as, uh, shovel-ready as we expected,” he cracked with a sheepish grin. The dog-and-pony Jobs Council, led by GE’s Jeffrey Immelt, giggled and cackled at Obama’s snark.
More forgotten insult to grievous injury: the telling moment when New York Times columnist David Brooks giggled on Jim Lehrer’s PBS show that Obama had told him off the record in 2009 that the shovel-ready promise was a crock, but that he sat on the truth until the Times’ Peter Baker reported the admission more than a year later, in October 2010. The transcript:

Jim Lehrer: Off the record? So, then you can’t talk about it. [Laughter.]
David Brooks: Yes, because Peter Baker is a better [reporter] than I am, because I couldn’t get him to go on the record with that thing. (Laughter.)
Jim Lehrer: He said this to you a year ago?
David Brooks: It was obvious. I mean, you are trying to build a stimulus package. And when they were trying to build it, believe me, they would have loved to have filled it with infrastructure jobs. But the projects just didn’t exist.

While the lapdogs of the Fourth Estate snicker along with the White House about their lies and cover-up, the Wreckovery Act wreckage continues to pile up. And now the White House wants more money to burn for Porkulus Redux.

Retiring senator Tom Coburn (R., Okla.) was right when he warned five years ago that the “morally reprehensible” stimulus represented “the worst act of generational theft in our nation’s history.” It’s no joke.

It’s a $2 trillion travesty built on criminal government malpractice. Take that and shovel it.

— Michelle Malkin is the author of Culture of Corruption: Obama and his Team of Tax Cheats, Crooks and Cronies (Regnery, 2010). Her e-mail address is malkinblog@gmail.com.© 2014 Creators.com

 

Letter From Argentina (About The Fate of Another Socialist Economy)

Analysis: Argentina policies adrift as inflation spiral looms

Brad Haynes
Yahoo News 

BUENOS AIRES (Reuters) – In the midst of Argentina’s biggest currency devaluation in a decade, with the peso’s plunge rattling financial markets worldwide, President Cristina Fernandez’s first public address in weeks was silent on the matter.  She didn’t say a word about the currency, but instead took to national television last week to announce the latest government measure – a new form of high school scholarship.

While the president has avoided mention of currency policy, the increasingly unpredictable messages from her ministers have amplified the risks weighing on the peso.  An announcement last week suggesting long-awaited relief from currency controls for ordinary Argentines in practice meant a trickle of U.S. dollars for an affluent minority.  Officials also promised to cut the tax rate on spending dollars overseas, but revoked the measure just two days later.

Critics say the government’s erratic decision-making is the biggest risk looming over the volatile peso, as the policies that triggered the currency crunch have only become more contradictory as the crisis unfolds.  The stakes aren’t what they were in 2002, when a record sovereign default shook the global economy, as Argentina has since been ostracized from global credit markets. Still, the sense of a government without its bearings is familiar to some.

“Every day it’s a different argument,” said former central bank president Aldo Pignanelli in a radio interview, pointing the finger at brash 42-year-old Economy Minister Axel Kicillof.  “In 2002 we got things right and wrong, but we faced the storm. I see what this kid is doing and it gets me furious, because we’re losing precious time to take coherent measures.”  Even the dynamics of the peso’s 15 percent drop last week are shrouded in uncertainty. At the start of the historic slide, on Wednesday, there was no government intervention, but by Thursday the central bank was intervening heavily to hold the line, as it has this week. Officials blamed a “speculative attack” in the tightly controlled interbank market.

With the right mix of policies, the devaluation could have helped boost exports and brought relief for Argentina’s dwindling foreign reserves. But the chaotic approach has meant the central bank is burning more quickly through reserves and there is even more pressure on perilously high inflation. 

As veterans of previous crises, Argentines have assumed a familiar defensive crouch, hoarding any dollars they have and spending pesos like they are going out of style.  “Right now all you can do is buy. Today. Not tomorrow,” said Walter Yofre, 41, an accountant on a bustling retail boulevard in Buenos Aires. “I just got a memory chip for 268 pesos. This morning the store was charging 245!”

Trade on a major grains exchange has dried up as farmers stockpile their soybeans rather than taking pesos.   Goods are backing up at the border as officials try to slow the impact of more expensive imports.
And ordinary supply chains are frozen with uncertainty in a country where the dollar is a reference for everything from real estate to raw materials.  “You pick up the phone and 90 percent of your suppliers will tell you they’re out of stock,” said Gaston Luccisano, who runs a kitchen goods store in the middle-class neighborhood of Caballito. “The guy could be staring at a stack of plates but he won’t sell until he knows what it will cost to restock.”

Many economists say officials are obsessing over symptoms while aggravating the illness with an improvised approach.  Economy Minister Kicillof, a former professor of Marxist, spent this week chasing down what he calls speculative price gouging by major corporations.  In daily meetings with business leaders, he and top officials have warned cement makers to avoid “unpatriotic” pricing and forced retailers to roll back new price tags.

Devaluations can help exporters and eventually slow the drain on Argentina’s foreign reserves, which fell over 30 percent in the past year to below $29 billion. But shock and uncertainty over the measure has also fuelled the rush for dollars.  Reserves have fallen more than $2.3 billion so far this month as the central bank fights to defend the new exchange rate – more than ten times what was lost in all of December.  “There is no doubt: this crisis has been entirely self-inflicted by confused policies,” said Eric Ritondale, senior economist for Econviews in Buenos Aires.

Making matters worse, the spike in import costs and a stampede of shoppers trying to lock in prices for durable goods is now feeding Argentina’s inflationary demons.  Consumer prices have risen about 4 percent in four weeks, according to economic consultancy Elypsis, who put the annual inflation rate near 30 percent. Private economists reported inflation of about 25 percent last year – more than double the price increases recognized in the government’s official index.

To interrupt the inflationary feedback loop, the government would need a coordinated program to cut back deficit spending, stop the money presses at the central bank and keep wage hikes under control, economists say.  The central bank has taken some tentative first steps since the devaluation, hiking a key interest rate this week and signalling tighter monetary policy.

The best case scenario, according to Ritondale of Econviews, would be interest rate hikes triggering a sharp economic slowdown. The economy could shrink 3 or 4 percent this year, he said, cooling inflation and restoring enough of a trade surplus to replenish foreign reserves.  That would be an orderly adjustment compared to the crisis set off in 2001, when a string of presidents resigned amid riots and looting as the unemployment rate climbed to more than 20 percent.

There is little or no risk a similar financial collapse, as Argentina’s exclusion from international credit markets since then has left the country with few foreign debts.  Most Argentines are also numbed by years of an overheating economy, discussing the latest prices like the weather. “So, have you bought anything?” is a common conversation starter.  But the potential for social conflict is real.

The test may come in March, when labor talks will have powerful unions out in force, threatening strikes and protests to keep wages rising with consumer prices. Labor disruptions are as regular as the seasons in Argentina, but broader economic frustration this year could make things volatile.  The pressure would be difficult for an avid inflation hawk – and the president is anything but. At a political rally after a stinging primary defeat in last year’s midterm elections, Fernandez showed her colors.  “Do you know what it means when they say we should govern according to inflation targets?” she shouted to flag-waving supporters. “I will translate it for you. It means they want to cap your wages.”

If the government’s fight against inflation has been inconsistent, currency measures have been downright contradictory.  Two years ago, officials attacked the “dollarization” of the economy, discouraging the listing of apartments and cars in anything but pesos. Last year they reversed course, printing central bank paper indexed to the dollar and facilitating dollar-denominated commerce despite the scarcity of greenbacks.  In May, Fernandez dismissed critics suggesting the possibility of a devaluation: “They are going to have to wait for another government.”  Yet last week her government oversaw the peso’s biggest daily drop since 2002.

The recent loosening of currency controls was equally unexpected.  Last week, officials announced access to dollars for private savings for the first time in two years, creating even more demand for scarce foreign reserves. Until then Argentines could only turn to far more expensive dollars on the black market.  But by Monday it became clear the new currency market would be tightly controlled, with just one in four Argentines meeting salary requirements and only a fifth of their wages eligible.

Officials also promised last Friday that the tax rate on Argentines’ overseas credit cards bills would fall in line with the new market for dollar savings.  That is, until Kicillof scrapped the idea two days later.

While some have read the waffling as signs of moderation, others see a government without a plan.  “They have been reacting more than anticipating,” said Daniel Marx, Argentina’s finance secretary from 1999 to 2001 and the head of consultancy Quantum Finanzas. “Their strategies haven’t worked as planned, so they’ve had to correct course. The question is whether they are clear on their goal.”

(Reporting by Brad Haynes; Editing by Kieran Murray and Meredith Mazzilli)

Avoiding the Inevitable

Not a Pretty Sight

Only a fool tries to avoid the truly inevitable.  A wise man will face up sharply.  In our days we are governed by men who are fools.  They are trying desperately to avoid the inevitable.  Their one excuse is that the voters want them to.  They know full well that if they faced up to the real economic situation facing New Zealand and the rest of the developed world there would be riots in the streets and they would be voted out at the first opportunity.

Their approach, therefore, has been to practise the equivalent of palliative care.  Maintain huge deficit spending increases, trim back at the edges, sell a few assets so we can temporarily pay off a bit of debt, make the patient feel as comfortable as possible, and wait.  Hope for a recovery that will allow us to trade our way out of the recession, thereby avoiding a genuine depression.  Kick the toxic can down the road for our children and grandchildren to deal with.

The Governor of the Reserve Bank, Dr Alan Bollard sounded almost plaintive yesterday as he lamented the parlous state of affairs.

New Zealand’s debt and asset price boom is acting as a big drag on the economy, and house prices still look “overvalued and expensive”, according to Reserve Bank governor Alan Bollard. And New Zealand may be dealing with the aftermath of the large increase in private debt for “quite some time” yet, he says.

The Minister of Finance, Bill English recently warned that New Zealand may well limp along for another fifteen years, telling us that things were really bad “out there”.  This is inevitably what happens when debts are excessive and palliative care is the policy.  Palliation locks in a long, lingering recession.  Blame a generation of voters and politicians brought up on a diet of demand rights and redistribution.  It prevents both governments taking and voters allowing the requisite painful medicine.

“It looks as if the accumulated debt is acting as quite a sustained drag in New Zealand and other advanced economies,” Bollard said in a speech in Auckland yesterday, pointing to a still “tepid recovery”. Per capita GDP was still 3 per cent below its peak reached almost five years ago.

Five years on from the start of the global financial crisis “the picture is far from clear”. The persistently tepid recoveries across advanced economies, including New Zealand, remained a surprise, he said. The run-up in debt and the disappointed expectations of borrowers who paid high prices for assets were “clearly playing some role in low rate of growth of productivity and GDP”, he said. Two years ago the Reserve Bank had expected the official cash rate to be back up to 5.75 per cent by now, but it remains at just 2.5 per cent, and some believe it may need to be cut because of global risks.

The problem is the cleft stick upon which Bollard is hoist.  One fork is excessive debt which makes recovery slow and tepid and painful.  The other fork is the Reserve Bank’s policy of very low interest rates (to try to stimulate economic growth).  The risk is this: it will not take much for housing-besotted New Zealanders to decide the way ahead is to lever up even more to use appreciating real estate to pay off their debt hangover.  The adage is: you have to spend money to make it.”  Take on more debt to pay existing debts down.  The conduit will most likely be a debt fuelled, demand driven housing market bubble.

When New Zealand made its Reserve Bank independent in the 1980’s its sole concentrated focus was to drive inflation out of the economy.  The RB reasoned at the time that inflation expectations were more critical than actual inflation.  Until people stopped buying, selling, and borrowing with an expectation of forthcoming inflation, the economy would remain overheated with persistent inflationary pressures.

In New Zealand there is an almost universal expectation that residential house prices always rise.  They may stay level for a time, but they will bound ahead.  The palliation policy has reinforced that expectation, not crushed it.  Palliation is feeding future inflation expectations; residential housing will be the bubble of popular choice–as it always has been.  Bollard, again:

But crucially in New Zealand house prices had not come down “very much or for very long”, unlike in the United States, Spain or Ireland. The median household wealth in the US fell about 40 per cent in the three years to 2010, mostly from falling house prices. House prices in the US had not risen as much as they did in New Zealand.  Bollard said that “our sense is that real house prices are still somewhat overvalued: They are certainly well above historical levels and look expensive by international standards, relative to incomes or rents.”

With a huge debt hangover and a tepid productive economy it is only a matter of time before Kiwis start to reason, “Let’s buy and sell a few houses to reduce our debt and get ahead.”  All that cheap money has to go somewhere, and it ain’t going into the productive sector.  Auckland house prices are already starting to ratchet up.  Early signs of fever can be seen. Housing inflation expectations have not abated.

That’s the problem with trying to avoid the inevitable.  Better to force de-leveraging now by putting up interest rates–before it’s too late.  Sure it will mean lots of economic pain and suffering for three to four years.  But that’s a place that neither voters, nor politicians, nor the Governor of the Reserve Bank want to go.  Palliative care it will be–plus a long, lingering recession in the productive sector, coupled with a residential housing boom and a fresh debt-fuelled bubble.  Not a pretty sight.

But New Zealanders still prefer this course of action.  Things will need to get a whole lot worse before we are prepared to face up to the depression we have to have.  It’s not an easy pill to swallow for those who believe that the government’s fundamental responsibility is to expropriate people’s property to take care of “Me”.

The Law of Diminishing Returns

Why the Recession Lingers

There is no doubt that economic historians will puzzle over the 2008 global financial crisis for decades to come.  There has been no quick fix.  The long, lingering recession some had predicted has come to pass.  Because of its unexpected nature, there is little consensus or clarity about what to do. The old nostrums are not working any more.

Not that this is surprising.  There is in economics a law of diminishing marginal returns.
  Things that work wonderfully well at the beginning of an enterprise become less and less effective as time passes.  A key reason is that all economic and regulatory agents and actors and humans adjust.  The first glass of wine tastes complex, subtle and fabulous.  The tenth makes no sensory impact at all.  The system has adjusted and all of life has become deja vu.

Under certain conditions low interest rates and loose monetary policy can stimulate economic demand, borrowing and consumption.  They can also promote rapid expansion of production and supply as firms borrow money to expand.  But at other times it can have little or no effect.  This is one of those times.  But governments have few options.  Printing money is easy.  Running a fiscal deficit and increasing national indebtedness is easily done.  But what do governments do when all this does is increase debt and has little or no effect upon economic production and economic growth?

One solution to the conundrum is for governments to eat themselves.  Governments can get so big, so intrusive, and have such a sclerotic effect upon an economy that the economy is effectively drunk and comatose.  The West is that that point.  Economists in France complain that the government (and the EU) is so intrusive that business cannot adapt, increase efficiency, or compete successfully.  No government policy except that of cannibalising itself will have an effect.  But rulers want to rule; governments want to govern.  The last thing they want is to attack themselves. 

Nevertheless we need an emergence of anti-government governments.

Here is a condign analysis of the situation in the US–well beyond the competencies of President Obama, the Democratic Party and most of the Republican Party to understand–such are their ideological blinkers–yet so simple and common sensical.

One More Time: Consumption Spending HAS Already Recovered
by Robert Higgs

Commentators and pundits, some of whom ought to know better, continue to harp on the idea that the recession persists because consumers are not spending. Every Keynesian seems to believe that because consumers are in a dreadful funk, only government stimulus spending can rescue the moribund economy, given (to them, at least) that investors will not spend more because the Fed, having already driven interest rates to extraordinarily low levels, cannot use conventional policies to drive them any lower and thereby elicit more investment spending.

People, please look at the data. They are conveniently available to one and all at the website maintained by the Commerce Department’s Bureau of Economic Analysis, the outfit that generates the national income and product accounts for the United States.

According to these data, real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010. Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak.

Real government expenditure for consumption and investment (this concept does not include the government’s transfer spending, such as unemployment insurance benefits and social security benefits) is also running higher than its pre-recession level. In the second quarter of 2011, it was running more than 2 percent higher (recall that this is “real,” or inflation-adjusted spending; nominal spending has grown substantially more).

The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak. This figure fails to show how bad the investment situation really is, however, because the bulk of the investment spending now taking place is for what the accountants call the “capital consumption allowance,” the amount estimated as necessary to compensate for the wear and tear and obsolescence of the existing capital stock.
 
The key variable is net private domestic fixed investment—the investment that builds the productive private capital stock. Quarterly data through this year are not currently available at the BEA website, but the annual data show that an index of its real amount peaked in 2006, fell substantially in each of the following three years, and recovered only slightly in 2010, when the index showed net private domestic fixed investment was running about 78 percent below its level in 2005 and 2006. Here is the true reason for the recession’s persistence.

Private investors, despite the full recovery of real consumer spending and the increase of real government spending for final goods and services, remain apprehensive about the future of new investments, especially new long-term investments. I have argued repeatedly during the past three years that an important reason for this apprehension and the consequent reluctance to make new capital commitments is regime uncertainty—in this case, a widespread, serious fear that the government’s major policies in areas such as taxation, Obamacare, financial reform, environmental regulation, and other areas will have the effect of depriving investors of control over their capital or diminishing their ability to appropriate the income that the capital generates. President Obama’s harping on the desirability of making “the rich” pay their “fair share” (that is, more) of the government’s ever-rising costs only exacerbates regime uncertainty. Business leaders have spoken again and again of how the present political environment is discouraging risk-taking and entrepreneurship.

In any event, it should be crystal clear that the problem is not the failure of consumer spending to recover. Let us please have more respect for the facts than to continue singing that old, thoroughly worn-out tune.

>It Ain’t Over Till It’s Over

>Rough Waters Ahead

The lingering characteristic of the current recession has many perplexed.  We believe there is yet more to come.  But why?  Vague suspicion?  Gut feeling?  Constitutional lugubriousness?  The essay which follows by Paul A. Rahe offers a reasoned explanation of why the current recession is a long way from over.  It has yet to go through Stage II, which will be a combination of rising global interest rates and government (central, state, and local) cutbacks resulting in a rapid shrinking of the public sector.

He draws a distinction between a “normal” recession, which is driven by an ordinary business cycle and a fiscal recession which he reckons we are in now.  A fiscal recession is caused by gross indebtedness.  The last fiscal recession was the Great Depression.

New Zealand will not be immune from this.  Whilst we did not enter recession with particularly bad government finances, the current government has lacked the political will to cut government spending responsibly.  As a consequence our fiscal deficit is expanding by the minute.  The private sector, however, entered the recession with unparalleled levels of indebtedness. But, and here is the killer for NZ, both crown and private indebtedness is funded by offshore borrowing.  Rising global interest rates will hit and hurt. 

As sovereign governments and states either approach or actually default, credit ratings will drop like stones.  Rating agencies will play “catch up”. New Zealand’s credit rating will go down with them.  Our currency would then drop, our country risk profile would rise substantially, and interest rates would rise sharply.  Then, and only then will the government start to cut its spending, rather than merely restrain its spending increases. Highly indebted individuals and corporates, who may have been hanging on by the skin of their teeth, will drop away into bankruptcy or insolvency.

The bright lining is that our export-led recovery will really gather some legs, with a lower exchange rate. But in the short term everyone would be prudent to keep reducing debt as fast as they can.  It’s something the government has not yet faced.  It will.  It will have no choice.  And if you depend for your income on government paychecks and spending, expect a very tough ride. 

Economic Storm Clouds on the Horizon

by Paul A. Rahe

The experts charged with determining when recessions begin and end tell us that the latest of these unpleasant events ended a while ago. Technically, they are no doubt right. But that does not mean that the economic crisis we have been facing is over. I suspect that we have thus far only seen its first act. The drama to come may be far, far worse. To see why, one must recognize that economic downturns come in two different forms.

The economists who study recessions tend to think about them in turns of the business cycle – and rightly so, for in most cases it is the business cycle that produces the downturn. In the course of such a cycle, boom builds upon boom and bust upon bust. It is a bit like a game of crack the whip. Downturns occasioned by the business cycle are caused by overproduction. When businesses have more stock than they can sell, they stop producing and lay off workers.

The workers laid off and no longer getting paychecks cut back on their consumption, and this in turn reduces the demand for goods and services and causes other businesses, which find their products and services no longer as much in demand, to curtail their efforts and lay off another set of workers. And so the recession grows, building on itself, until some businesses find that they have underproduced or underprovided for the services in demand. Then, the same process takes place in reverse with stepped-up production and a stepped-up provision of services requiring stepped-up employment, which occasions more consumption requiring another round of stepped-up production and provision of services and a further increase in employment and so forth – until production and provision once more overshoot demand. In the absence of perfect knowledge, human beings living in commercial societies are fated to suffer from an oscillation of this sort – between boom and bust.

When Barack Obama became President, his economic advisors appear to have been on automatic pilot and to have taken it for granted that this was the sort of recession that they were up against. And so they opted for a remedy that – if applied in the proper fashion, at the proper time, and  in the proper amount – might serve to hasten an economy’s recovery from a recession occasioned by the business cycle. That is, they sought to prime the pump – to increase consumption by artificial means, to borrow money from the future, put it in the pockets of certain citizens, and hope that they would spend it right away and thereby put others back to work.

Such was, at least, their pretense. In practice, of course, the so-called “stimulus bill” was a targeted measure – a massive pay-off designed to reward the public-sector employees and unionized workers involved in infrastructure construction who make up core constituencies within the Democratic Party and to do so at the expense of those whose taxes the Democrats intended in the future to raise. Obama’s advisors did not worry much about the manner in which the “stimulus” was to be applied, its timing, and amount, however. For they took it for granted that the expenditures would do no immediate damage to anyone and that the economy would bounce back quickly in any case, as it always does when the downturn is caused solely (or at least primarily) by the business cycle.

But, of course, this did not happen. The economy did not bounce back. On 10 January 2009, Christina Romer – Chairman of President Obama’s Council of Economic Advisors – predicted that, if the so-called “stimulus bill” were passed, it would save 3.5 million jobs, that unemployment would stay below 8%, and that joblessness would quickly decline from that level. In the twenty-three months that have passed since Romer made this prediction, we have lost something like 3.5 million jobs, unemployment has climbed to about 10%, and it has not appreciably declined from that level. The chart posted below, which first appeared on Business Insider and on Calculated Risk, illustrates nicely the difference between the ordinary course of a recession and the course taken by our most recent downturn.

The only defect of this chart is that it fails to capture the full level of distress. To the 15.1 million Americans seeking employment (the basis for putting it at 9.8%), one has to add, as Irving Stelzer recently pointed out, the 2.1 million who have given up looking for work and the 9 million who have been kept on but only part-time. What the chart does show, however, is that we are not experiencing an ordinary downturn.

There is, as it happens, another type of recession not rooted so firmly in the business cycle, which you might call it a fiscal recession. The last one we experienced in the United States began in 1929, and it was a doozy. Fiscal recessions are a function of the level of indebtedness. The one in 1929 was preceded by an extended period in which the Federal Reserve Board, supported by the Secretary of the Treasury, followed an easy-money policy. Interest was low; money was lent to all and sundry on easy terms; home-buyers and consumers took out loans they could not manage; and investors with borrowed money took great risks in attempts to make a quick buck. Bubbles appeared; and when the stock market finally crashed and the unemployment rate went up, the number of bankruptcies was legion. Those able to manage their debts concentrated on paying them down; and, for a good long time thereafter, Americans were very, very reluctant to take on debt.

This is not the whole story, to be sure. After the crash in 1929, the Federal Reserve Board kept interest rates high; Herbert Hoover and the Republican Congress increased taxes and tariffs; and Franklin Delano Roosevelt and the Democrats compounded thereafter the damage that their predecessors had done by sustaining their policies and by raising taxes further. In all other respects, however, the current downturn is more like the Great Depression than it is like any recession subsequent to World War II.

One other qualification deserves mention. No recession is ever purely fiscal, and even in recessions produced by the business cycle, those who have taken on excessive debt or who have lent foolishly go bankrupt. I have been speaking in terms of ideal types. What one needs to focus on right now, however, is the fact that policies which might help to turn around an economy suffering a downturn rooted primarily in the business cycle will backfire if that downturn is chiefly caused by an excess of indebtedness – which is precisely what is happening right now.

Between them, Alan Greenspan and his successor Ben Bernanke – with the support of two Presidents from different parties and a series of Secretaries of the Treasury appointed by both Presidents – ran an easy-money policy for something like two decades. In the process, home-owners, consumers, investors, states, and municipalities ran up massive debts that they had little hope of paying off.  Under George W. Bush, the federal government did so, on a lesser scale, as well; and then, under Barack Obama, the federal government did so on a scale unprecedented in peacetime.

We have now been left holding the bag. Something like 2.1 million houses are in foreclosure. States like Illinois, New York, and California are insolvent. And the powers that be have colluded in delaying the day of reckoning. The banks have not yet fully recognized their losses; the real estate market has not cleared; and nothing has been done to balance the budgets of some of our largest and most important states. In the meantime, Barack Obama and his party have lead the federal government into what economists call a fiscal trap.

In the next couple of years, the banks will have to face the music, and those houses will be dumped on the market – which will drive housing values down further and encourage those who find that they owe more than their houses are worth to join the millions who have stopped paying their mortgages and, in effect, abandon ship.

In the next couple of years, as Walter Dean Burnham has recently argued, Illinois, New York, and California are going to have to declare bankruptcy, give their bondholders a haircut, cut salaries and benefits, and let go a great many public-sector workers.

Moreover, in the near future, as Lawrence Lindsey has recently pointed out, interests rates are going to rise, and the federal government is going to find the cost of servicing its debt harder and harder to sustain.

These are separate matters,  but the odds are good that the second housing crash, the recognition of state insolvency, and the fiscal crisis of the federal government will coincide. To date, everything that the Obama administration has done has served only to delay the arrival of our day of reckoning and deepen the fiscal crisis on the horizon. If the unemployment rate is not coming down, it is because employers see through the charade and are intent on not getting caught short when the entire structure comes tumbling down.

The next few years are going to be grim, and those in charge do not inspire confidence. Would you entrust your welfare to Jerry Brown, Andrew Cuomo, Pat Quinn, and Barack Obama? We have to hope, however, that these men wake up, swallow their preconceptions, and without delay move decisively in the direction of balancing the budgets of California, New York, Illinois, and the United States.

I myself very much doubt that they will do so. Unless these men – our President above all – demonstrate qualities that they have never before evidenced, we are in for a truly terrible ride. There is only one silver lining; and welcome though it might be in ordinary circumstances, it is hardly worth the cost. Politically, this means that Barack Obama is likely to be remembered for having done to the Democratic Party what Herbert Hoover did to the Republicans.

>Irrational Exuberance

>Housing Bubbles and Cool Calculations

We are all aware that kiwis have willingly deluded themselves into thinking that residential housing is a yellow brick road to wealth. Actually, for a long, long time they have been quite right. But it is unsustainable. It is pyrrhic prosperity. Smart folk will be very aware of this and will be planning accordingly.

Now, in these matters timing is always critical. As Keynes once observed, “the market can stay irrational far longer than you can stay solvent”. In other words, an investment market or asset may be way, way out of synch with fair value, but a return to reasonable prices may take years, decades, even generations. If you get exposed by betting the family farm or the household silver on the “market” pirouetting nimbly from irrationality to rationality–without considering that it may take decades to happen–you are speculating. Don’t complain if the markets fail to perform within your required time frame.

Residential housing investment is a case in point. Let’s be clear on what a rational market in residential housing would “look like”. In case you missed it, a residential house is, well, a house, a building. And buildings depreciate over time, as does all plant and equipment. Houses eventually need maintenance and repairs. They wear out. They have to be replaced. This means that a ten year old house should be worth less than on the day it was first built. In general terms the land on which the house is built could be expected to appreciate in value over time because there is a finite and limited supply of land. There is only so much of it in NZ. Moreover, land never wears out (unless you are living in an area subject to coastal erosion).

So, a rational housing market should see the land on which the house is built increase in value over time, due to limited supply, while the house built upon the land decrease in value over time. But this is not the experience of New Zealanders in general. They have an expectation that whatever one pays for a house today, it will be worth more in three to five years time. This is a cultural axiom beyond dispute. It is a financial nostrum which only a fool would deny. Consequently, New Zealanders believe that housing is “safe” in financial terms. They are prepared to take considerable financial risks to own it. Even if they have to mortgage up their lives, in the end it will pay off as their house rises in value over time.

But it remains a fools paradise. Inflation–caused by a general increase in the supply of money–obscures the real fall in value of houses over time. A ten percent rise in market value of a house might actually be a five percent decline in real value by the time inflation is taken into account. Inflation is annoying in that it sends the wrong price signals that obscure real value.

But a far more significant factor distorting the housing market in this country, making it an irrational bubble, is the artificial limits upon the supply of housing. It is this which has worked more than any other factor to create a distorted, protected, housing market. The supply of houses has been artificially restrained not by a shortage of timber or other construction materials, but by local and central government restrictions upon house building. The Resource Management Act and local government town plans have restrained the supply of houses, reducing their supply, thereby jacking up prices of existing houses. This in turn has led to the nostrum that houses always rise in value. In the living memory of most people they have.

So, when you bet the family silver on a house you are probably going to be OK. Unless you are the one caught when the bubble bursts. But what would cause the bubble to burst?

A real depression. A really serious economic depression, lasting ten or so years, goes through phases. The first is the rapid contraction due to firms laying off staff and going bankrupt. Unemployment rises, spending falls, and credit contracts. The fall of demand and the turning off of the money-spigots means that prices fall, cash is king, bargains can be found. This is the first phase.

The second phase is the contraction of central and local government. Tax revenues drop sharply; limits upon government borrowing are reached; and government spending cuts begin.

It is at this point that local municipal governments start to wake up and smell the sewage. First up they realise that they have swathes of land which they had bought up in the halcyon days for one grand project or another. It is lying vacant; there is no revenue for the council being generated. Secondly, as indigent people are forced out of their houses, they “inherit” a bunch of houses due to non-payment of local government rates.

It gradually dawns on local bodies that a growing housing stock is a good thing. Querulous greenie voices fade to whimpers. Local bodies become pro-development and a building boom commences. But, every new residential house completed, lowers the value of the existing housing stock. Depreciation–a rational economic force–kicks in. A more sane and stable housing market develops–but one which sees the artificial wealth which people believed they held in ever appreciating residential property ebbs away. This is the third phase of a really serious depression.

Everyone is poorer. The fourth phase is when it dawns on the entire populace that the only way wealth can be created and sustained is to produce marketable goods and services at a profit. In other words, we have to work and earn our way out of economic recession. Then–and only then–a sustainable recovery begins.

In New Zealand, folks can makes lots of money from housing. If you are one of them, just keep reminding yourself that you have been fortunate and that it will not last. Warn your children.

Here’s a good rule of thumb. Assume that the life of your current house is fifty years. Then it will be bulldozed and a new one constructed on the site. Look at your original QV statement and subtract the unimproved land value. The residual is the house value. If the house is ten years old, consider it depreciated by 20 percent. In other words the economic value of the house is worth one fifth less than its original sale price, if it is ten years old.

Such calculations will serve to keep you economically rational when you consider the residential housing market.

>Green Jobs

>Foolishness is Bound Up in the Heart of Government

The Law of Unintended Consequences warns us that when governments exceed their God-given sphere of competence the unintended consequences of their actions mean that we are worse off than if nothing was done. The actual outcome is usually the direct opposite of what was intended.

Another way of expressing the law is, beware politicians with a grand vision. Grand visions usually turn out to be grandiose, causing a great deal of unintended harm, pain, and suffering.

The current economic malady has produced a number of grand visions. We have had a few in New Zealand. One example is the “feel good” policy of the government funding home insulation. We are told that this is a win,win,win. Well, that’s it then. Who could possibly object?

The protagonists argue thusly: the government needs to spend money to keep the economy from sliding into depression. So, funding home insulation gets a tick. It will fund jobs that would not otherwise exist. Secondly, people will end up with warmer, better insulated homes. This will reduce sickness and disease–thereby lowering public health costs. Tick. In the long run it will reduce government spending. Tick. Thirdly, heating costs will be lower, thereby reducing our “carbon footprint”, lowering demands for energy, and reducing our national pollution. Tick.

It has to be good. There simply aren’t any downsides. As we said, it is win, win, win. We have shattered the Law of Unintended Consequences!

Well, not quite. Firstly, the government will have spent money it does not have–thus increasing our national debt burden. That is a bad outcome. Secondly, the jobs will be unsustainable. They will exist only by virtue of government subsidy–thus no real long term national wealth based on sustainable production. Meanwhile, there is an opportunity cost. Those home insulators could have been employed in jobs producing goods and services that would be sustainable and productive.

Thirdly, home insulation is likely a crock. Modern methods of home insulation seal up houses so that air is kept within a house. Over time, it entraps moisture in the house, leading to mould and dampness–ideal conditions for respiratory diseases and maladies like colds and flu. Moreover, the more damp a house is, the more energy it takes to heat it, and keep it warm. Thus, the outcome of home insulation is more likely to be greater energy costs and a less healthy population.

Snap. The Law of Unintended Consequences will bite with a vengeance. The actual outcome will be the exact contra-polar opposite of the intent. We expect that within fifteen years we will be hearing how stupid we all were back in the noughties, when home insulation was the official flavour of the decade.

Another example of unintended consequences has recently come to light. Spain has been touted as having a progressive and advanced policy on creating “green jobs” through state subsidisation of “clean energy” projects (wind farms and the like). Now, however, the truth has started to emerge. A study has been undertaken by Dr Gabriel Calzada, an economics professor at Juan Carlos University which has shown that in Spain for every four jobs created through state subsidised green energy projects, nine jobs were lost.

State subsidising of green jobs results in rising unemployment! Now, of course, President Obama has cited Spain as the country he wants to imitate in his green jobs initiative (part of the huge public spending to stimulate the economy.)

“Think of what’s happening in countries like Spain, Germany and Japan, where they’re making real investments in renewable energy,” said Obama while lobbying Congress, in January to pass the American Recovery and Reinvestment Act. “They’re surging ahead of us, poised to take the lead in these new industries.”

“Their governments have harnessed their people’s hard work and ingenuity with bold investments — investments that are paying off in good, high-wage jobs — jobs they won’t lose to other countries,” said Obama. “There is no reason we can’t do the same thing right here in America. … In the process, we’ll put nearly half a million people to work building wind turbines and solar panels; constructing fuel-efficient cars and buildings; and developing the new energy technologies that will lead to new jobs, more savings, and a cleaner, safer planet in the bargain.”

Yup. Win, win, win. The guy’s a genius. Well, actually, no. Obama’s great green energy spending initiative will make energy in the United States more expensive, less efficient and productive, and it will destroy permanent jobs. Moreover, the Spanish study concluded that only one in ten jobs created in the “green energy subsidy” rort actually turned into a permanent job. So even the jobs that were created have largely proved to be impermanent.

But who can gainsay a politician with a grand vision, who chants “yes, we can”. Well, no-one. Expect the Law of Unintended Consequences to bite deep and painfully.

>Systemic Failure

>The Root of the Problem

Patrick J Buchanan has written a pointed piece on the greatest debt crisis of this century (so far). His reference to John Adams on the necessary moral foundations of government if the Constitution is to survive is telling.

Systemic Failure

By Patrick J. Buchanan

As the U.S. financial crisis broadens and deepens, wiping out the wealth and savings of tens of millions, destroying hopes and dreams, it is hard not to see in all of this history’s verdict upon this generation.

We have been weighed in the balance and found wanting.

For how did this befall us, save through decisions that brushed aside lessons that history and experience had taught our fathers?

It all began with the corruption called sub-prime mortgages.

The motivation was not wicked. Democrats wanted to raise home ownership among African-Americans from 50 percent to the 75 percent of white folks. Rove Republicans wanted to do the same for Hispanics.

Banks were morally pressured by politicians into making home loans to folks who could not remotely qualify under standards set by decades of experience with mortgage defaults.

Made by the millions, these loans were sold in vast quantities to Fannie Mae and Freddie Mac. There they were packaged, converted into mortgage-backed securities and sold to the big banks. The banks put scores of billions of dollars worth on their books and sold the rest to foreign banks anxious to acquire Triple-A securities, backed by real estate in America’s ever-booming housing market.

Computer whizzes devised exotic instruments — derivatives, which could soar in value, making instant multimillionaires, but also plummet, based on rises and dips in the underlying value of the paper.

Came now young geniuses at AIG to insure the banks against catastrophic losses, should the U.S. housing market crash. As the risk was minuscule, premiums were tiny. Payouts, however, should it come to that, were beyond AIG’s capacity.

In AIG’s Financial Products division, based in Connecticut and London, brainiacs were creating other exotic instruments, such as credit default swaps to guarantee against losses and insure profits. To keep these wunderkinds at AIG, they were promised million-dollar retention bonuses.

Who kept the game going?

The Federal Reserve, by keeping interest rates low and money gushing into the economy, created the bubble that saw housing prices rise annually at 10, 15 and 20 percent.

As the economy grew, however, the Fed began to tighten, to raise interest rates. Mortgage terms became tougher. Housing prices stabilized. Homeowners with sub-prime mortgages now found they had to start paying down principal. People losing jobs began to walk away from their houses.

Belatedly, folks awoke to the reality that housing prices could go south as well as north, and all that paper spread all over the world was overvalued, and a good bit of it might be worthless.

And, so, the crash came and the panic ensued.

Who is to blame for the disaster that has befallen us?

Their name is legion.

There are the politicians who bullied banks into making loans the banks knew were bad to begin with and would never have made without threats or the promise of political favors.

There is that den of thieves at Fannie and Freddie who massaged the politicians with campaign contributions and walked away from the wreckage with tens of millions in salaries and bonuses.

There are the idiot bankers who bought up securities backed by sub-prime mortgages and were too indolent to inspect the rotten paper on their books. There are the ratings agencies, like Moody’s and Standard & Poor’s, who gazed at the paper and declared it to be Grade A prime.

In short, this generation of political and financial elites has proven itself unfit to govern a great nation. What we have is a system failure that is rooted in a societal failure. Behind our disaster lie the greed, stupidity and incompetence of the leadership of a generation.

Does Dr. Obama have the cure for the sickness that ails the republic?

He is going to borrow and spend trillions more to bring back the good old days, though it was the good old days that brought us to the edge of the abyss into which we have fallen. Then he is going to spend new trillions to give us benefits we do not now have, though the national debt is surging to 100 percent of the Gross National Product, and may reach there by 2011.

Is Obama willing to speak hard truths?

Is he willing to say that home ownership is for those with sound credit and solid jobs? Is he willing to say that credit, whether for auto loans, or student loans, or consumer purchases, should be restricted to those who have shown the maturity to manage debt — and no others need apply?

“Avarice, ambition,” warned John Adams, “would break the strongest cords of our Constitution as a whale goes through a net. Our Constitution is made only for a moral and religious people. It is wholly inadequate to the government of any other.”

In this deepening crisis, what is being tested is not simply the resilience of capitalism, but the character of a people.

>Slow Learners

>The Liberal Ideologues Cannot Help Themselves

The Proverb says, “A hundred blows on the back of a fool makes no impression; but a word to the wise is sufficient.”

We and many others have written on how welfare-rights-entitlement ideologies were at root substantially responsible for the banking crisis in the US (and, due to financial disintermediation and securitisation subsequently, a global problem.) The morally bankrupt idea that the poor had an entitlement right to own their own homes led to Congress led policies which forced banks to lower lending standards and grant mortgages to people who had little or no hope of servicing them.

This has resulted in a large number of mortgages being defaulted upon, which has brought great strain to US and international banks. So the US government, marshalling its ability to spend, has loaned billions and billions of dollars to banks to shore up their balance sheets, compensating them for all their mortgage assets which have gone sour. If banks don’t have sufficient capital, they cannot continue to lend. Even creditworthy and sound lending opportunities then cannot find capital, leading to a rapid contraction in business in almost every place. So far, so good.

But now, we are told, the welfare-entitlement-rights folk in Congress and the Obama administration have decided to have another crack at forcing banks to engage and continue in bad lending. The basic rationale is the same as that which promulgated the crisis in the first place. It is the belief and assertion that people–especially poor people–are entitled to own a home. Therefore, Congress has decided it is going to tell banks how to do business, if they accepted Federal money. They must keep lending to insolvent, bankrupt, poor people who cannot service the loans which they should never have been given in the first place.

We have heard plenty about executive bonuses, salaries, fat-cat spending etc. etc. Congress has railed against such misuses of government money. So, according to the Herald Tribune, Congress has put rules in place to prohibit such excesses. But it has also began to instruct banks not to foreclose upon and evict people in default of their mortgage commitments.

U.S. financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must lower dividends, cancel employee training and morale-boosting exercises, and withdraw job offers to foreign citizens.

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the administration of President Barack Obama and lawmakers are attaching more and more strings to rescue funds. Some experts say the conditions are necessary to prevent Wall Street executives from paying lavish bonuses and buying corporate jets, but others say the conditions go beyond protecting taxpayers and border on social engineering.

Thus, banks are now being forced, once again, to engage and maintain bad credit lending. The result: weak banks are being forced to continue bad lending practices which will have the effect of making them weaker still, leading to more and more bank defaults (or more bank bailouts)over time.

A growing chorus of industry experts is warning that asking weak banks to carry out the government’s economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could require weak banks to engage in lending practices that will lose them even more money, and that the government inevitably will become more heavily involved in dictating how banks do their business.

In other words, government policy is now forcing banks to increase their risks, not reduce them. Risky lending. We thought that Congress and the Obama administration believed that banks excessive risk taking was the cause of the problem. Now they are requiring federally assisted banks to become even more reckless. But, hold on, it’s OK, because the poor are having their entitlement rights served. And that has been the cause of the problem all along.

It the fool will not learn, no matter how many adversities are visited upon his hapless head. Rights based ideologues and zealots are fools. They will continue to follow policies that bring devastation and destruction right through the community because they are blinded by their idolatry and ideology. Welcome to Athens!

But it is not all bad. The smart, stronger banks have woken up. They have decided to give the Federal money back.

Some bankers say the conditions have become so onerous that they want to give the bailout money back. The list includes small banks like TCF Financial of Wayzata, Minnesota, and Iberiabank of Lafayette, Louisiana, as well as giants like Goldman Sachs, Wells Fargo and U.S. Bank in San Francisco. They say they plan to return the money as quickly as possible, or as soon as regulators set up a process to accept the repayments.

Wells Fargo has been a very successful bank over a long time. Their decision is significant. These are the institutions which are fundamentally sound and are likely to go from strength to strength in the current environment. What is likely to happen is the bank sector in the US will be split into two: those banks which are sound and which have decided to have nothing to do with the Federal government’s blood money; and those which have accepted it and are are becoming weaker by the day as the government forces them to engage in more and more risky commercial behaviour.

The policies of the Congress and Obama administration will probably be judged by history to have been the biggest single cause of the destruction of the banking system in the first decade of this century. But that’s what fools do. An ironic development is likely to be that banks which accept federal bailouts will be branded as weak, near insolvent, and to be avoided like the plague. So much for a federal bailout: it will turn out to be a Judas kiss. We recall the sage words of Ronald Reagan: the most terrifying words in the English language are, “I am from the Federal Government and I’m here to help you.”

We leave the closing word to one smart banker.

C.R. Cloutier, the president of MidSouth Bank of Lafayette, Louisiana, and a survivor of the savings and loan debacle, said that his institution accepted $20 million from the rescue fund because he and his board believed it was patriotic and would help them offer loans during a recession. But faced with what he says is an unwarranted stigma of participating in the program, as well as the new restrictions that are imposed on banks taking the money, he is now considering whether to return the money, as other institutions have sought to do.

“Two things you learn in the banking business,” Cloutier said. “The first is concentration is bad. We now have 64 percent of deposits in eight institutions. The second rule is your first loss is your best loss. Get it over with. Don’t pump water in a dead fish.”

Indeed. Now there is a wise man for whom a mere word is sufficient.

>Mid-Week Miscellany

>They Are Drinking Our Beer Over There

First up this week is the appearance over the weekend of an article on John Key in the Wall Street Journal. Now the prestige and breadth of readership of the Journal is pretty much peerless so this is quite significant.

For those of our readers who have not yet seen the article, we reproduce it in full below.

There are a couple of things which stand out. Firstly, Key’s candour in acknowledging the limitations of government. One of the most disgraceful things to become evident recently has been the way politicians, journos, and the chattering classes have all expressed outrage that the government is “not doing more.” They mean by this: spending more money in a spectacular way.

There has been a chorus of calls to cancel tax cuts. Why? So the government can have more money to spend on the crisis. What has been on display in recent weeks has been the shameless devotion to the mantra “the government is our god”. People have wanted their god to deliver them, to be doing something, to save us.

How refreshing and realistic it is to have the Prime Minister keeping the limitations of government firmly in his mind. In our view he needs to repeat this publicly and often.

Secondly, it is salutary to have the Prime Minister worrying about the burdens of debt.

When we were being pulled back from the brink of economic devastation by the Douglas reforms in the 1980’s, New Zealand used to get positive international press regularly. It is possible that we will see that again as New Zealand works its way through the recession and comes out the other side. Certainly at the moment New Zealand is marching to be beat of a very different drummer than the rest of the developed world. We believe in time it will be evident that it was a much better drummer to boot.

You Can’t Spend Your Way Out of the Crisis

New Zealand’s prime minister wants to give his country a competitive advantage instead.

By MARY KISSEL

Wellington, New Zealand

These days, you have to travel far to find a national leader who is talking about market-based approaches to the global recession. All the way to the other side of the world.

“We don’t tell New Zealanders we can stop the global recession, because we can’t,” says Prime Minister John Key, leaning forward in his armchair at his office in the Beehive, the executive wing of New Zealand’s parliament. “What we do tell them is we can use this time to transform the economy to make us stronger so that when the world starts growing again we can be running faster than other countries we compete with.”

That idea — growing a nation out of recession by improving productivity — puts Mr. Key and his conservative National Party at odds with Washington, Tokyo and Canberra. Those capitals are rolling out billions of dollars in stimulus packages — with taxpayers’ money — to try to prop up growth. That’s “risky,” Mr. Key says. “You’ve saddled future generations with an enormous amount of debt that then they have to repay,” he explains. “There is actually a limit to what governments can do.”

The 47-year-old Mr. Key, a pragmatist by nature, knows a thing or two about how the public sector works. The youngest of three children, he was raised in state-owned housing in Christchurch, on New Zealand’s South Island, after the death of his father. His mother worked at blue-collar jobs to keep the family afloat. Mr. Key earned a bachelor’s degree in commerce from the University of Canterbury, took a job the next day at a local accountancy firm, and married his high-school sweetheart. After seeing a TV advertisement about a foreign-exchange trader, he started canvassing banks for a job. That kicked off a career as a foreign-exchange trader, with postings in Singapore, London and Sydney — most recently at Merrill Lynch. “Bank of America,” he says, with not a little mirth, “it’s probably soon to be owned by Barack Ob-ah-ma!” — emphasis on the “ah” in Kiwi-speak. His press secretary rolls her eyes.

Mr. Key’s coalition government, which includes parties to the right and left of the Nationals, has moved fast to implement a program of tax cuts, regulatory reform and government retooling. He won’t label it supply-side economics and smiles when I ask if he’s a Milton Friedman or Friedrich Hayek acolyte. “I’m not deeply ideologically driven,” he says. “I believe in good center right politics.”

Mr. Key is returning the country to a formula for prosperity that’s worked in the past. As in Britain, the U.S. and Australia in the 1980s, New Zealand’s government implemented a wide-ranging program of economic liberalization, including deep reductions in tariffs and subsidies, and privatization of state-run industries. The plan, nicknamed “Rogernomics” after then-Finance Minister (now Sir) Roger Douglas, was akin to Reaganomics, and the island nation grew smartly.

But while the U.S. and Australia broadly continued their economic liberalization programs under both right- and left-wing governments, New Zealand didn’t — until now. Over the past nine years, Helen Clark’s left-wing Labour government rode the global economic expansion and used the revenue surge to expand government welfare programs, renationalize industries, and embrace causes like global warming. As a result, the economy stagnated while Australia took off.

“We have been on a slippery slope,” Mr. Key says, pointing to the country’s slide to the bottom half of the Organization for Economic Cooperation and Development’s per-capita GDP rankings. “So we need to lift those per-capita wages, and the only way to really do that is through productivity growth driving efficiency in the country.” He talks at length about how to attract and retain talented workers. What does he think about populist arguments about the end of capitalism? “Nonsense!”

Mr. Key’s program focuses first on personal income tax cuts, which — given that the new top rate, as of April 1, will be 38% — are still high, especially when compared to Hong Kong and Singapore. “We just think it’s good tax policy to lower and flatten your tax curve,” he says. “People will move in labor markets and they look at their after-tax incomes.”

Cutting the corporate tax rate — which is now 30% — isn’t as crucial just now as keeping liquidity flowing, Mr. Key argues. “A lot of [companies] won’t pay tax if they don’t make money,” he reasons. “So they might be slightly less focused on corporate tax in the immediate future. Longer-term, they will be.” Why? Corporate money is “mobile.” “If you really are out of whack with the prevailing corporate tax rates, and there’s been a global shift toward countries lowering their corporate tax rate, then you’re not likely to attract capital, or you’re likely to lose capital.” Mr. Key and his coalition partner, the ACT Party — Mr. Douglas’s party — want to eventually align personal, trust and company tax rates at 30%.

For now, the prime minister is focusing on chipping away entrenched regulations that drive away foreign capital — a contrast to the U.S. and Australia, which are reregulating their markets in the wake of the financial crisis. “Good regulatory reform can be an important catalyst toward driving economic growth and coming out of the recession faster,” Mr. Key says. His government is revising legislation meant to protect New Zealand’s pristine environment from private-sector development but misused by greens to stymie all stripes of business plans.

Big government is also coming under the gun. Mr. Key launched a “line-by-line review” of every government department, and committed the government to cap new spending in its May budget. “If we want to fund new initiatives, we by definition have to stop [funding] some of the things we don’t think were working. . . . We’re just getting better value for money.”

The Key government also is wary of climate change orthodoxy. “Half of all of our emissions come from agriculture,” he says, meaning cows “burping and farting.” “We don’t have an answer to that. . . . So at the moment, we either become more expensive or we cut production. And neither of those options are terribly attractive.” Mr. Key is reviewing the economic impact of the previous government’s cap-and-trade plan. “New Zealand needs to balance its environmental responsibilities with its economic opportunities, because the risk is that if you don’t do that — and you want to lead the world — then you might end up getting unintended consequences.”

Much of Mr. Key’s reform agenda hinges on his belief that he has to prepare his country to compete in the global economy. “The world, whether we like it or not, will become more and more borderless,” he says. That means Wellington is planted firmly behind free trade. “The sooner Doha is completed,” Mr. Key says, referring to stalled global trade talks, “the better from our point of view.”

Mr. Key chuckles when I ask him about the “Buy American” provision tucked into the Obama administration’s stimulus package. The previous government’s “Buy New Zealand” campaign got a “lukewarm” reception, he recalls. “There are so many component parts manufactured in different parts of the world, you’re chasing your tail the whole time about where something’s actually made.”

New Zealand last year inked a free-trade agreement with China, recently signed a deal with the 10-member Association of Southeast Asian Nations, and announced the start of negotiations with India and South Korea last month. Korea “obviously” wants an FTA with the U.S., he says.

Does New Zealand’s model hold lessons for the Obama administration? Mr. Key says that might be “presumptive.” But he does outline a few general lessons: “Your citizens are entitled to expect you to be realistic . . . to be specific about what it is you’re going to do, what you can or can’t do. And finally, I think, to be confident that you can get through it. Now there’s plenty of doom and gloom merchants out there. But the single biggest risk is that everyone believes them and stops doing anything. I can’t see how that helps us.” What did he learn in his former trade? “It taught me not to panic.”

Going forward, he worries about, among other things, the U.S. dollar’s path. Like most other trading nations, the bulk of New Zealand’s exports is denominated in dollars, and the country’s private sector borrows heavily from offshore markets. Says Mr. Key: “For anyone trying to manage currency risk, and indeed often interest-rate risk, you know, it’s not generally the absolute level, it’s more the volatility that becomes the determining factor.” A strong and stable dollar policy out of the Obama administration would be helpful.

But ultimately, Mr. Key says his biggest fear is rising inflation on the back of rising money supplies. “Economic theory will tell you that inflation is going to rise — and that inflation will be exported around the world. . . . In the short term, I’m not criticizing U.S. policy: I think inflation is probably the thing that’s going to be necessary to get them out of the current issue. [Federal Reserve Chairman Ben] Bernanke sort of signaled that. But longer term, inflation is cancerous to your economy.”

So would Mr. Key, the onetime foreign-exchange trader, buy or sell the U.S. dollar? As we move toward the door, the press secretary steps in: That’s one call that’s off the record.
Ms. Kissel is editorial page editor of The Wall Street Journal Asia.

Mainstream Media Are Beginning to Ask Questions

Just how cold has been the northern winter? An article in the Boston Globe tells us.

The United States has shivered through an unusually severe winter, with snow falling in such unlikely destinations as New Orleans, Las Vegas, Alabama, and Georgia. On Dec. 25, every Canadian province woke up to a white Christmas, something that hadn’t happened in 37 years. Earlier this year, Europe was gripped by such a killing cold wave that trains were shut down in the French Riviera and chimpanzees in the Rome Zoo had to be plied with hot tea. Last week, satellite data showed three of the Great Lakes – Erie, Superior, and Huron – almost completely frozen over. In Washington, D.C., what was supposed to be a massive rally against global warming was upstaged by the heaviest snowfall of the season, which paralyzed the capital.

Meanwhile, the National Snow and Ice Data Center has acknowledged that due to a satellite sensor malfunction, it had been underestimating the extent of Arctic sea ice by 193,000 square miles – an area the size of Spain. In a new study, University of Wisconsin researchers Kyle Swanson and Anastasios Tsonis conclude that global warming could be going into a decades-long remission. The current global cooling “is nothing like anything we’ve seen since 1950,” Swanson told Discovery News. Yes, global cooling: 2008 was the coolest year of the past decade – global temperatures have not exceeded the record high measured in 1998, notwithstanding the carbon-dioxide that human beings continue to pump into the atmosphere.

None of this proves conclusively that a period of planetary cooling is irrevocably underway, or that anthropogenic carbon dioxide emissions are not the main driver of global temperatures, or that concerns about a hotter world are overblown. Individual weather episodes, it always bears repeating, are not the same as broad climate trends.

But considering how much attention would have been lavished on a comparable run of hot weather or on a warming trend that was plainly accelerating, shouldn’t the recent cold phenomena and the absence of any global warming during the past 10 years be getting a little more notice? Isn’t it possible that the most apocalyptic voices of global-warming alarmism might not be the only ones worth listening to?

We wonder how long it will be before similar questions find their way into the MSM in New Zealand.

>The S-Files

>The Passing of Spin and Spiteful Partisanship

Contra Celsum has decided to present John Key, Prime Minister of New Zealand with an S-Award.

Citation

The Government has opened a first front to combat the economic downturn in New Zealand. John Key recently announced a cluster of changes aimed at helping smaller businesses with cash flow, by reducing or removing some of the more onerous and draconian provisions of the tax system.

Critics have slammed the changes as a pathetic whimper, when a big bang is required. But for our money, Key has got it exactly right.

1. “Micro” is where the real action is. Removing some of the senseless and unnecessary dead weight of bureaucracy from business and freeing up cash flow may not seem like much to those wedded to the grand, the symbolic, and the titanesque, but it is precisely what needs to be done. While it may be acceptable for big-box retailers to shout “Big Is Good” we believe it is completely unacceptable for governments to adopt a similar posture. Such grandiloquence, we suspect, has more to assuage their own demands for the historic and the need to manufacture their own moments of destiny.

Key shows that he understands that it is private capital and private labour that generates sustainable, long-term economic wealth and economic growth. Government can help by getting out of the way as much as possible.

2. Key has stated clearly what he believes the true role of government is in these times. He has also made clear what it is not. This is a salutary change. He has artgued that it is not the role of the government to become the economic engine of the country. One shudders to think where former Prime Minister Clark and her coterie would have led us by now. (Drastic slash and burn measures, huge increases in government spending, empty symbolic actions like nationalising key industries, higher taxes, and so forth. And, oh, we forgot–parading like mutton dressed as lamb around the world stage.)

Read carefully the following account of Key’s remarks in the New Zealand Herald and you will get a sense of just how commonsensical and realistic he appears to be in tackling this challenge.

Speaking after outlining a $480 million relief package for small business, John Key said the role of the Government was not to become the economic engine of the country “but to do all it could to keep the engine humming, tuned and free to go up a gear”.

And its actions to stave off the crisis should not undermine the economy in the future.

“This is a very fine balancing act between doing more, ensuring confidence is out there, but also making sure we don’t blow up the Crown,” he said.

“There is a limit here to what can happen. There has got to be a balance so we don’t get downgraded as a country or at least don’t precipitate a downgrade.

“A short-term sugar fix today could lead to a diet of debt later.”

3. Key is not wasting his time and energy blaming the previous government for the problems–although there is plenty that could be sheeted home fairly and properly. However tempting, he has avoided the trap. (One groans to recall how the previous government, even after being in government nine years, routinely blamed the former National government for every continuing problem, or answered criticisms by claiming, “Yes, but we are better than they were.” What a relief to be freed from such public and dispiriting peurility.)

4. If Key continues in the “removing impediments to the economy” vein, and focuses upon the details, the micro-economic realities, the positive impact will be far greater and extensive than all who are wedded to statist solutions could possibly conceive. It is at the micro-level that true wealth creation takes place. To remove impediments at the micro-level is like removing leg irons from a marathon runner–and not just “a” marathon runner, but hundreds of thousands of them. Every one of them is likely to perform better as a result.

5. Finally, we wish to acknowledge that Key has a Douglas-esque mantle about him. Sure, different personality, different style. But he conveys a clear conviction and sense about what needs to be done and where we need to go to address the fundamental problems. There is a realism that inspires confidence. He does not waste time trying to gild the lily. But neither does he sensationalise.

He reminds us a great deal of Roger Douglas at his best–albeit without the “shock and awe components” although to be fair to Douglas, the Muldoonist garotte that was choking the life out of New Zealand required radical action. Douglas delivered–warts and all. We are intrigued to see that political commentator, John Armstrong sees the influence of Douglas upon Key in this most recent announcement and that it is not a bad thing.

Been there, done that. Sir Roger Douglas had some sage advice for John Key prior to the Prime Minister unveiling his Government’s $480 million small and medium business “relief package” yesterday.

Whatever critics might say about Labour’s most radical and most polarising finance minister, there is no dispute Sir Roger was a dab hand at selling his policies to voters during difficult economic times in the 1980s.

He suggested the Government – likely facing deep and prolonged recession – follow his example and take the public into its confidence. It should explain exactly what was happening to the economy, what it was doing about that and be honest about the downsides, as well as the upsides, of policies tackling the crisis.

Otherwise, the public would start thinking there was a vacuum.

Key has called the government’s approach to the economic challenges as a “rolling maul”, which for those of you who do not understand the game of rugby, refers to a team of rugby forwards keeping in tight formation, holding the ball up off the ground, and rumbling forward in different shapes and directions, depending upon what the opposition are trying to do. Keeping in tight formation yet responding and adapting as things unfold and eventuate is the essence.

John Key, Prime Minister of New Zealand: S-Award, Class I for actions in the course of public duty that have been Smart, Sound, and Salutary.

>Let’s See What You are Made Of

>Update on the Spectre of a Trade War

In an interview with Fox News, President Obama has come out and expressed disapproval of the “Buy America” clause in the House version of the stimulus bill, which would require that all iron and steel used in federally funded construction be sourced completely from the US. We blogged recently on how this risks re-igniting a trade war which would surely send the world into a deep depression.

As we expected there has been a strong reaction from United States’ trading partners. For example, The Times reports:

The European Union warned the US yesterday against plunging the world into depression by adopting a planned “Buy American” policy, intensifying fears of a trade war.

The EU threatened to retaliate if the US Congress went ahead with sweeping measures in its $800 billion (£554 billion) stimulus plan to restrict spending to American goods and services.

Gordon Brown was caught in the crossfire as John Bruton, the EU Ambassador to Washington, said that “history has shown us” where the closing of markets leads — a clear reference to the Depression of the 1930s, triggered by US protectionist laws.

Last night Mr Obama gave a strong signal that he would remove the most provocative passages from the Bill.

“I agree that we can’t send a protectionist message,” he said in an interview with Fox TV. “I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.”

However, it is not at all clear what might be done. The Bill belongs to the Congress in the end: Obama’s hands are tied. Presidential power is power to persuade, not command. He cannot control what goes into the Bill or what is taken out of it. And there is strong Democratic support for protectionism, it would seem. According to the Sydney Morning Herald today, the Senate Democrats have extended the “Buy America” rule to include all goods and services funded by the federal government as a result of this Bill.

This is unbelievable, but presumably true. We are looking at the beginnings of a genuine trade war–somewhat akin to a rogue state mobilising its armed forced prior to an invasion. The options available to Obama are limited, as the Sydney Morning Herald notes:

Mr Obama has no power to knock out the individual provisions; he can only veto the entire bill. His alternatives are to ensure the clause is either removed, he is given a waiver clause, or it is somehow made consistent with existing trade law.

We doubt very much that if Buy America were to remain in the final bill Obama would veto it. He has invested far too much political capital in getting a stimulus bill passed, and we know that he has demonstrated strong protectionist instincts in the past. If it remains in the bill and is signed by Obama, we would expect massive and swift trade retaliation, plus a host of legal challenges under existing treaties and cases before the World Trade Organization. The genie would be out of the bottle.

There may be a significant risk that New Zealand would be caught in the cross fire and effectively shut out of our export markets. If that were to happen we should run a poll on how long the dole queues in New Zealand would stretch. On the other hand, maybe we would weather the storm better than most. In a trade sense, New Zealand is quite non-aligned. It is friends with all, and enemies of none. Moreover, it produces foodstuffs which would likely continue to be in high global demand and escape the worst of protectionist measures–particularly in the Middle East and Asia. Depressions lead people to focus upon the basics–and there is nothing more basic than food.

On the other hand New Zealand has some significant structural and “secular” problems that make it vulnerable and weak. We labour under the burden of generations of socialist welfare and entitlement policies, so that over half our households depend upon government payments to live–and that is after having gone through nine years of economic growth and prosperity. A significant and growing number of people are unemployable, will never work, and will take from others all of their lives. Our notoriously low savings rate coupled with our propensity to high debt and consumer spending means that we are as dependant upon overseas lenders as a drug addict on the next fix. The Athenian dogma of human rights and entitlements is a poisonous brew that kills in the end.

In the event of a severe downturn, the entitlement-millstone would get bigger and heavier; government finances would deteriorate rapidly, and an international credit downgrade would be almost inevitable. That would push the cost of borrowing up for everyone, including the government. And so the vicious cycle would turn.

If a world-wide depression were to eventuate, it would likely not be a pretty sight. Let’s hope “Buy America” gets skewered.