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First up we have an article by a couple of academic economists who point out that not only did the New Deal not help during the Great Depression, but it probably extended it by 3-5 years beyond when it would have ended if they had just left things alone read it here http://online.wsj.com/article/SB123353276749137485.html.

Then we have another article pointing out that the money in both versions of the stimulus bill (House and Senate) that is supposed to help expand the reach of broadband is so tied up with conditions and counter-incentives that no broadband company would touch the money with a 10 foot pole http://online.wsj.com/article/SB123353476246637693.html

One of my favorite parts of the last article points out that the cost of broadband, in terms of a standard unit is $3 in the US, 13 cents in Japan and 33 cents in France. Why the difference? Because government regulations designed to “help” consumers discourage the completion that drives the price down.

This just goes to show that Ronald Reagan was right Government is not the answer. There are only a couple of things that the Federal Government can do that cannot be done by the individual states better. They can provide for the National Defense (and trust me…after 25 years in that job, they don’t do a great job, they just do it better than the states could) and they can resolve disputes between states…again, not that they do that particularly well they just do it better than the states can themselves.

Obama’s response to the Federal Government’s ability to break bowling balls is to get the Federal Government even more involved. He wants to regulate salaries at banks and on Wall Street. He wants to tell the automobile companies what type of cars they must sell. He wants to force banks to make more loans (in spite of the fact that a) banks making bad loans is what got us here and b) turns out that banks lent more money last year than the year before). And perhaps the most stupid thing of all, when we are in a recession caused by people borrowing money they didn’t have the means to repay, Obama wants the Government to borrow money it doesn’t have the means to repay to encourage banks to lend money to consumers who don’t have the means to repay.

If this weren’t so tragically stupid, it would be hilarious.

There is very little in the world more frustrating than watching people try to solve a problem with a method that you know will not only not work, but which will in fact create an even bigger problem. That is where we are with the “economic stimulus” package now winding through Congress is just such a disaster.

It helps to understand a little macro-economics. (Oddly enough it helps more to understand a little, than to understand a lot…because then you start understanding too much, you think you are smart enough to see an exception to the rules.) There really are three things that have been at work for a while to put us in the position we are in; the Gross National Product (GDP), the Demand level, and the rate of inflation. In a nutshell, the housing bubble (caused by our Democratic friends in Congress) artificially inflated the GDP. In economic terms, the “real” GDP exceeded the “potential” GDP. In real easy terms, the population was spending more money than the output of the country warranted. We were able to do that by running up debt, but more importantly, by borrowing against make-believe value in our homes. 

Now normally, this situation is self correcting. According to economists, when the demand causes the “real” GDP to exceed the “potential” GDP, prices rise to bring things back into alignment. However, the fed has been so scared of inflation, that they haven’t allowed this to happen. So instead, people continued to take money out of their over inflated home values to buy things that were priced lower than they should have been given production levels. Eventually, this Ponzi scheme of housing prices exploded. There is no place for Americans to go to get money they don’t have to pay for items they can’t afford. 

So basically, the growth of the GDP for several years has been overstated. What we have here is a correction. The GDP will come back to reflect the actual money that Americans earn in a year, instead of that amount plus the amount we took out of houses whose value was inflating while the rest of the economy was flat. Using a historic relationship between GDP and unemployment, an unemployment rate of 10% would translate to a total GDP contraction of about 7.5%. 

That is where we are. Now borrowing $1.5 trillion is only going to fix this one way, the government can try to artificially pump up the GDP again by creating supply where there is no demand. The result will be that the GDP will continue to fall, but that inflation will insert itself rendering the money that folks have been able to hold onto less valuable. This is a little condition known as stagflation that hasn’t happened since J Carter was President. The result will not be pretty. 

So what is the solution? Simple, do nothing. The economy will right itself. Once the GDP stabilizes, unemployment will stabilize along with it. The GDP will begin to grow again at a normal pace until the next government or industry induced bubble. The path the Government is taking, unfortunately, is a trip to our own “lost decade” much like the Japanese in the 1990’s

Stay tuned, and keep your fingers crossed.

Was digging around a little this morning and found some facts and figures on government "infrastructure" projects.  After Hurricane Katrina here in Louisiana, we had "Project Blue Roof" to install tarps on houses damaged by the hurricane.  For the average 1500 square foot roof, the government paid the primary contractor $2250 (pretty similar to the cost of a basic three-tab roof, but that is another story).  By the time the money had passed through hands and gotten to the only person who actually had a job installing that tarp he got between $30 and $50.  Extrapolating that math each of those 40,000 jobs Obama spoke of would pay $555 a year.  Or another way of looking at it, he could actually "create" about 900 $25K jobs for 1 year with a billion dollars. 

Now if those same $1 billion are put into the hands of consumers, and assuming that they will spend 90% and save 10% (pretty high savings assumption), the result would be a $10 billion kick in the economy.  Seems like a no-brainer to me.

Short post this morning.  I was reading about Obama's latest public works proposal.  Leaving aside the whole idea of the government "creating" jobs, where does he get his figures?

According to the article this morning, "Obama estimates every $1 billion spent will result in 40,000 jobs."  Now here is my basic math...1 billion divided by 40,000 equals 25,000.  That means if there was no friction...loss of money on the way from the federal government to the workers, $1 billion would pay 40,000 workers $25,000 for one year.  (For the economists in the group, there is the money multiplier, but it is questionable if it applies here, and even if it did, it wouldn't change things much). 

Not sure that a one year job paying $25,000 is exactly what folks have in mind.