The Obama "Stimulus" (Deficit Spending) Plan--Posner

I suspect that we have entered a depression. There is no widely agreed definition of the word, but I would define it as a steep reduction in output that causes or threatens to cause deflation and creates widespread public anxiety and a sense of crisis. Suppose some shock to the economy, such as the bursting of the housing and credit bubbles, causes people to reduce their demand for goods and services. Before the shock, demand and supply were both X; now demand is X - Y. How do producers respond? If all prices, including the price of labor (i.e., wages), are completely flexible, producers (and suppliers of inputs to them, including suppliers of labor--i.e., workers) will reduce their prices, and this will induce consumers to increase their buying. Consumers will have less income because those who are employed will have lower wages, but since prices are lower they will buy enough to prevent a substantial reduction in output. Unfortunately, not all prices are flexible; wages especially are not. This is not primarily because of union or other employment contracts. Few private-sector employers in the United States are unionized and as a result few workers (other than federal judges!) have a guaranteed wage. The reasons that employers generally prefer to lay off workers than to reduce wages when demand drops are first that by picking the least productive workers to lay off an employer can increase the productivity of its work force; second that workers may respond to a reduction in their wages by working less hard, and, conversely, may work harder if they think that by doing so they are reducing the likelihood of their being laid off; and third that when all workers in a plant or office have their wages cut, all are unhappy, whereas with lay offs the unhappy workers are off the premises and so do not incite unhappiness among the ones who remain. When, to bring output down from X to X - Y in my example, producers and other sellers begin laying off workers, demand is likely to sink even further because the workers who have been laid off suffer a loss of income and the ones who are not laid off fear that they may be next and so try to save more of their income rather than spending it. As demand falls, sellers will lay off more workers, putting still more pressure on demand, but in addition they will reduce prices still further in an effort to avoid losing all their customers. As prices spiral downward, consumers may start hoarding their money in the expectation that prices will keep falling. In addition, they will be reluctant to borrow (and borrowing increases economic activity by giving people more money to spend) because with prices falling they will be paying back their loans in more expensive dollars, that is, dollars that have greater purchasing power. When the same number of dollars buys more goods, we have deflation--money is worth more--as distinct from inflation, where money is worth less because more money is chasing the same number of goods and services. One way to try to prevent a deflationary spiral is for the Federal Reserve Board to increase the supply of money, so that dollars don't buy more goods than they used to. The Fed does this by buying federal securities from banks; the cash the banks receive from the sale is available to them to lend, and what they lend ends up in people's bank accounts and so increases the number of dollars available to be spent. Fearing deflation, the Fed has done this--without success. The banks, because they are close to being insolvent, are fearful of making risky loans, and loans in a recession or depression are risky. So they have put more and more of their money into federal securities, thus bidding down the interest rate virtually to zero. Zero-interest short-term federal securities are the equivalent of cash. If banks want to hold cash or its equivalent rather than lend it, the Fed's buying cash-equivalent securities for cash does nothing to increase the money supply. So the Board is now buying other debt, and from other financial firms as well as banks--debt that has a positive interest rate, so that if the Board buys the debt for cash, the seller is likely to lend out the cash so that it does not lose the interest income that it was receiving on the debt it sold to the Fed. But as yet this program has not had much success either. This is the background to the stimulus program proposed by soon-to-be President Obama. To return to my example, if monetary policy is not going to equate demand to supply--is not going to close the gap between a demand of X - Y and a supply of X--then maybe government spending can do the trick. The government can buy Y worth of goods and services, thus replacing private with public demand, or it can reduce taxes by Y, so that people have more money to spend, or it can do some of both, as in fact Obama proposes to do. At this writing, roughly 40 percent of his proposed multi-hundred-billion deficit-spending package (that is, spending financed by borrowing rather than by taxing) is earmarked for tax reductions. The rest is split between public-works programs, such as road construction, and transfer payments in such forms as additional unemployment benefits, mort-gage relief, and health insurance for people who don't have any. There are three basic questions to ask about the program. The first is whether it is necessary, the second whether it has the right structure, and the third whether it is the right size. I will discuss just the first two questions. Ben Bernanke, the chairman of the Federal Reserve Board and the leading economic student of the Great Depression of the 1930s, is a conservative economist. Conservatives don't like huge deficit-spending programs, or at least the public-works and transfer-payment components of them, which increase government involvement in and control over the economy. Bernanke supports the program, after having failed to avert a depression by means of monetary policy alone. Almost the entire economics profession converted--virtually overnight--from being Milton Friedman monetarists (Friedman believed that only bad monetary policy could turn a recession into a depression) to being John Maynard Keynes deficit spenders. I'll assume they're right, and move on to the question of structure. I do not think the tax cuts are a good idea. Most of the increase in after-tax income is likely to be saved, rather than spent on buying goods and services. One of the reasons why the recession has turned into a depression is that Americans have meager savings, most of them in overpriced houses and overpriced stocks, and so they are sensibly reallocating income from consumption to saving. And there is much evidence that even in normal times, people spend less out of temporary income spurts than they do when they receive what they think will be a permanent increase in in-come. There is no such thing as a permanent tax cut, because the Congress that enacts a tax cut cannot bind subsequent Congresses (there is a new one every two years) not to rescind it. I also think the transfer payments are a bad idea. The goal of a Keynesian deficit-spending program is to restore demand to X, not to increase it. If instead of demand rising as a consequence of the program from X - Y to X, it rises from X - Y to X + Z, there will be inflation because demand will exceed supply. Programs to transfer wealth are very difficult to abolish, because interest groups form about them. The problem is somewhat less serious with public-works programs, especially road-building and other infrastructure projects, and especially those infrastructure projects that were planned or begun by states or municipalities and interrupted or deferred because of the fall in tax revenues resulting from the depression. The federal government can finance these projects until the depression is over, and then the states can continue them with its own tax money. There is a legitimate concern that many of the projects undertaken by the federal government will yield costs in excess of benefits. But the concern is exaggerated, because it ignores the benefits that such projects confer on fighting the depression as distinct from simply improving the nation's transportation system or reducing carbon emissions or buying military equipment to replace what has been lost in the Iraqi and Afghan wars. To the extent that the projects by increasing demand reduce unemployment, and reduce fear of unemployment by those who are not laid off (yet), they not only increase people's spendable income (unemployment benefits are lower than the wages they replace) but by reducing job insecurity reduce the fraction of wages that people save rather than spend. The saving rate has soared in recent months and is one of the major factors in reducing consumption and pushing us to the edge of a deflation. In addition, public-works spending has a multiplier effect. The government's expenditure on buying goods and services (a road, a bridge, or whatever) increases output directly, but it also does so indirectly because the company that builds the project with government funds pays its employees and suppliers, and they in turn spend part of the money they receive, further stimulating output. Properly structured, a Keynesian program can help to check a downward economic spiral. With monetary policy apparently inadequate to avert a downward spiral big enough to trigger deflation, there may be no good alternative to such a program.

Comments

[Kristina Brooker]

Here's information about sex. Oh the defensive partner should
contract for penetration

After marriage, live together first, after a certain age, move out of
home, get a job first, don't hurt job (I am a metrician?)
love (parents?), trust (as expected?), go out (their opinion?),
casual, random (information?).

Do what you want.
I say twenty due to mature conversation.

Their are two differences between children and adults, money and sex. If
you choose money first and sex after, both are better vs. less.

Cool used to be determined by TV now it's computer access. As with other
classing heirerity easy to couple implies easy to work with. Currently
tv cool is like sex for friends, sex is cool, not intimidating things
to say.

Since sex effects working with basically sex effects health and
intelligence. The question are you smart is a stupid question, people
have different skills, a better question is are you confident, until
you find confidence you don't know if having sex is hurting your job.
Remarkably the most important feature about you is memory:
responsibility, placement, cooperation, trust demand MEMORY.

Something you might not realize until after is:
Are you avant guarde or derrier, your memory is TV's success.

How sex negatively effects health is called muscle removal (bounce),
your sex muscles become more difficult to contract. If your allowed
not to have sex for 4 years that problems has improved as much as
it's going to.

If the police are controlled by drug dealers it doesn't matter that
the phrase to indicate unhealthy sex is "This is illegal sex".

[Kristina Brooker]

Relativity: could be interpretated as agreeing their is a
communication between what you are thinking and what is going
on around you. You'll be thinking about something, observe
a "severe statistic" and interpret options about what to expect.

(humm if signs from God are relativity and I can say the preceeding
statement why don't we call me God as well. I also used to refer to
myself as God so as to handle opportunity and responsibility
carefully and respectful of my perspective.)

I figured the more I was obsessed to do "something else" the more
religious (neutral) I was being to other people's perspective.

[Kristina Brooker]

"Nobody ever had control of America before I took control of her."

"I was the last great economist, preceding a programmed distribution."

"In the end economics didn't imply finding one religion, it required
finding one currency."

-I'm leader of the canadian attempt of communism as a religion.

-I'm also leader of my young ambitions to green the OIL.

-This reaction here (easy to beat) is usually why I drink.

Ms. Brooker (99386493)

"I am the Interest Rate."

"I choose the Credit Crisis."

"I put the oil price to $147 because I was sleeping for a year. If I
continued to sleep I could have the price of oil at $200."

"SEVEN years celibate, BALD and mother is THOMAS."

[Joseph Mises]

You're wrong. This Friedmanite approach to lowering interest rates as a means of jumpstarting the economy is utterly fallacious. You're directly advocating inflation. Why not call it by its name.

[Jack]

Interesting chart on "bang" for various government bucks.

http://www.ourfuture.org/files/images/Economic-benefits-of-stimul.jpg

[Alex]

Agreed with Joseph Mises. Friedman advocated a consistent, predictable, simple rule based increase in money supply from year to year.

[John Papola]

I'm sorry but this public works Keynesian stimulus has all the sense of the mythical perpetual motion machine. The idea that our government can limitlessly spend money it doesn't have on make-work projects of questionable productivity "until the depression passes" is ludicrous.

They have to get the money from somewhere, for starters, and there's plenty of peril just in dealing with that.

Then, there's the fundamental problem of what caused the depression: mal-investment. The depression didn't just happen like some act of nature that will eventually pass just as naturally.

A series of government and federal reserve policy blunders, magnified by snake-oil quantitative finance and risk management gimmicks like CDS's causes a series of massive bubbles (housing, commodities, related equities, etc). These bubbles drew in enormous over-investment well beyond what real demand would have warranted.

Now, the bubble has burst and the liquidation or foreclosure of these bad investments is underway. It's painful. But it's healthy. It's a lesson for everyone. Housing isn't a productive investment (duh). People need to move on, let this sucker bottom out, deflation being an inherent part of that, and get back to producing goods and services that people are willing to buy with their real money (not cheap, fake credit).

The idea that the government can or should somehow try to prevent this liquidation from happening (like propping up the housing market) is preposterous. 18 million vacant homes means prices MUST fall.

One last thing: there may be macro-problems (or macro views on problems) but there are no macro solutions. Public works won't "multiply" shit. Sorry. It'll help certain specific politically connected corporations and contractors and their employees. I've seen no convincing evidence of a "multiplier", where $1 is government spending magically becomes more than $1 in consumer demand.

Obama should withdraw and shut down our world military empire and use the savings to eliminate the income tax permanently. THAT would be stimulus I can believe in.

[Jack]

Alex....... I suppose the closest we can come to asking Milton would be to ask Gspn what he thinks Milton's response to there being a missing $10-$25 trillion from the economy. Yawn? and carry on as usual?

John? Are you denying the multiplier effect in sort of a "flat earth" manner? That multipliers don't exist?

http://www.absoluteastronomy.com/topics/Multiplier_(economics)

......... Anyway, I think we're about to learn a lot about DE-multipliers!

[neilehat]

John, Public works projects don't work? Tell that to my Grandfather who was a supervisor on WPA Road Projects in Ohio After I.H. closed its doors for the duration. At least he managed to keep his house and put food on the table for his kids and shoes on their feet. And Ohio got some decent roads instead of the muddy lanes that they were before. In fact, I.H. reopened just to supply construction equipment.

As for shutting down the "World Military Empire", are you willing to share your bed with O'Sammy and his buddies? If they allow you too live that long.

Get Real!

[Jack]

John: I'm not a big fan of overspending on the military and particularly not in the area of regional pork ladled out by Congress, still, a recent pie chart shows US mil-spending at 20% of the total budget, perhaps there is a case to be made that it consumes another 5% indirectly .... so getting rid of the whole thing would save only about enough to begin to retire the DEBT built up by various "supply sider" experiments. Sorry, no break for the taxpayer. Worse to come!

[Jack]

John: I'm not a big fan of overspending on the military and particularly not in the area of regional pork ladled out by Congress, still, a recent pie chart shows US mil-spending at 20% of the total budget, perhaps there is a case to be made that it consumes another 5% indirectly .... so getting rid of the whole thing would save only about enough to begin to retire the DEBT built up by various "supply sider" experiments. Sorry, no break for the taxpayer. Worse to come!

http://www.care.org/graphics/getinvolved/advocacy/budget_piechart.gif

[Debunkr]

"The Fed does this by buying federal securities from banks; the cash the banks receive from the sale is available to them to lend, and what they lend ends up in people's bank accounts and so increases the number of dollars available to be spent."

This is because the number of good credits (in terms of consumers) is falling and the good credits are probably levered as high as they can go with real estate. This is the problem with TARP or any other monetary stimulus -- we don't have a shortage of money. We are tightening lending standards to a rational schema and therefore the economy will incur a permanent reduction of spending from the loose credit policies from before. Once the credit standards are reinforced (or re-enforced?), it will take a long time for the good credits to gain enough headroom to accept more leverage and make investments. Certain kinds of government spending can help avoid this. Example: accelerated spending of targeted advanced technology types. This will provide growth capital to technology companies who will definitely deploy the capital in the form of hiring and services spending which will create many more good credits from their employees.

[Bill Bost]

I am a business lawyer and I am seeing some clients decide that they must move forward with capital expenditures and production, even in the face of dire economic consequences and predictions.

The analysis seems to be that if they scale back too far for too long, they certainly will lose; if they produce at normal levels, then at least they have a chance to survive, although the time that they can survive using this strategy if unsuccessful is less than if curb their efforts.

It is like a trapped animal who must leave the safety of a cave in the face of great danger; if he stays in the cave he starves, but if he ventures out he has a chance to survive even through great hardship.

At some point everyone is going to reach a point that they must do something because doing nothing is no longer an option. Do you agree? Doe this have a name in economics? When might it occur? How long does one wait until he decides to take desperate measures?

[Ken]

Directed to Judge Posner:
I thoroughly enjoyed your interview on the RadioEconomics podcast from 10/2/08.
Question: Could you explain the long-term risk/damage/benefits from the Govt printing our way out of this recession/depression by creating alot of inflation through massive fiscal spending? It seems to me (a lay person with a non-economist background) that the pros far outweigh the cons, which makes me think I must not properly understand the downside. Seems like high sustained inflation (followed by a Volker-type induced correction) would benefit those with high debt/worth ratio (avg American citizen) and harm those owed the debt (mostly foreign?). Plus, would stimulate spending.
Thanks in advance. Ken

[John Papola]

@Jack
Here's the issue I have with this notion of "multipliers", which is a Keynesian construct, not some law of nature. The government spends borrowed/stolen/printed money on a project and those dollars flow through to contractors income which then gets spent on consumer goods (or put in the bank). So the money changes hands multiple times, shrinking as each transaction is taxed, and that's considered a "multiplier". Great.

But how do you wean that chain of consumption off it's life support of government funds? When that "stimulus" funding ends, so does the consumption it drives.

The theory, then, seems to treat this stimulus as a kind of life support "until the economy recovers" as if the economy is some force of nature. But it's not a force of nature, and the stimulus is ultimately a coercive diversion of resources by the state. I'm terrified of the restrictions on business that are coming alongside this government "stimulus" such as new climate change regulations. Where the state ascends, the private/productive sector recedes.

Companies have (or had) the burden of sustainability in their investments, which is why they tend not to build bridges to nowhere or Alternative Energy Museums in towns with 200 people. The burden of staying profitable is key justifying real investment versus phony mal-investment.

The dollars aren't really multiplying in the sense of creating real wealth that can grow to replace the root source, as the failure of the great depression's make-work projects seem to support.

Or am I totally off base? I'm just trying to get a handle on what's happening to our nation and my son's future. It's not looking great, for where we sit right now.

I'll assume the "flat earth" comment is just an ad hominem dig and ignore it.

As for the military budget, I don't trust the official numbers. Hasn't all of Iraq and Afghanistan been kept "off the books" as an "emergency expenditure"? These people are crooks and liars. Again, maybe I'm wrong, but I've seen estimates that our total annual military expenditure is nearly 1trillion. That's the place to start saving.

@Neil,
I'm sure your grandfather is a great, hardworking family man. God bless him and his life of work. But a personal ancedote about someone benefiting while being on the taxpayer's dole doesn't prove anything. There's plenty of people on taxpayer-funded government "aid" including our entire farming industry.That doesn't make it reasonable or right. It's all welfare.

As for wanting to lay down with Osama, I'm not sure what you're implying. Osama is a product of CIA training and funding. Our world police posture hasn't made us safer. Sorry. Nevermind that it's all unconstitutional. Remember, our founders resisted entering the fray between France and England immediately after our independence, an independence that France helped us achieve. This interventionism is unamerican neocon garbage.

[John Papola]

...did I mention that our government is bankrupt? That's a crucial point in this stimulus debate. The only reason The State can act in ways that a normal company can't is because of The State has a unique monopoly in the use of force, which it uses to rob the productive of their labor with taxation.

[John Papola]

Great take on the great, fake magical multiplier:

http://www.mises.org/story/2869

Thanks for that link, Jack. I found this one from the bottom of yours.

[steve]

Interesting article, clearly written, with good points. As a new viewer, I am surprised that for what seems to be a fairly calm reasonable blog, the number of clearly deranged comments is pretty high. This does not seem to be the place where such folks would hang out, but you never know. Perhaps there is an economic explanation for this? Did the author(s) manage to offend organized some lunatic fringe? Just bad Karma?

[neilehat]

John, If you don't like the anecdote about the value of the Ohio Road Projects, how about the Hoover Dam or the Mississippi River Flood Control Projects, or the Trans-Continental Railroad or the Interstate Highway Projects or most recently the NAFTA Superhighway. Or etc., etc., etc. Too reject Federal and State funded Projects that benefit the Public at large because it's perceived as "Welfarism"; is nothing more than more Libertarian clap-trap that got us into this mess in the first place.

Now, how does the National Security and maintaining National Sovereignty become "Neo-Con Garbage"? Except in the fantasies of one out of touch. As for the Founding Fathers and their actions, the World has changed dramatically. Are we to be dragged down by the millstone of precedential actions by those who were doing the pragmatic thing at the time. If I remember correctly, later on they went after the Barbary Pirates alone and single handed cleared the Mediterrain. The only other one who did that was Pompey Magnus.

Oh, BTW, you had better bone up on the U.S. Constitution.

[Jack]

Bill sez: "At some point everyone is going to reach a point that they must do something because doing nothing is no longer an option."

......... I think you know the answer to that is "business". In a time of expansion the juxtaposition of fear and greed is on the upside of how fast to expand, on the downside it's the much tougher one of trying to maintain enough of the smaller market share to stay in business. Mergers to gain efficiency come to mind, but how to value either the acquirer or the acquired? Tough one!

[Jack]

John: Yeah, I dig give you a bit of a rib-poke as I thought, think, you're coming from the ideology that gave rise to HW calling it "voodoo" at least until he too became a participant and practitioner. Apologies.

@Jack
Here's the issue I have with this notion of "multipliers", which is a Keynesian construct, not some law of nature. The government spends borrowed/stolen/printed money on a project and those dollars flow through to contractors income which then gets spent on consumer goods (or put in the bank). So the money changes hands multiple times, shrinking as each transaction is taxed, and that's considered a "multiplier". Great.

JJJJJJJJJ Agreed. Virtually ALL economic constructs come from theory and observation, with much residing on the ragged edge of mass and individual pyschology. As for the above, if the multiplier WERE to only shrink due to the government getting some of its investment back through taxation our task of spurring would be far easier than it is in a "globalized" economy. I live in Alaska where our multiplier is half what it is in the US, as a "new" dollar takes a pretty direct path back to the L-48 that supplies most of our food, merchandise, heavy equipment etc. Likewise the leakage and lower multiplier of the US as a whole is due to our massive trade deficits including our horrible habit of exporting so many petro bucks.

But how do you wean that chain of consumption off it's life support of government funds? When that "stimulus" funding ends, so does the consumption it drives.

JJJJJJJJJ GOOD Question!! And one we're all concerned about. We've run substantial deficits in all but five? years since 1980 with much larger ones since 2000 and still our economy staggered along with declining wages and little job growth even before The Meltdown. I'd suggest some fundamental changes.

Among them are the matter of ever increasing wage inequality; I'll go up against about anyone who thinks that we can grow a healthy economy while median wages remain flat for 25 years. Nope; we ARE demand limited and it can not fly on the one small wing of increasing wealth at the top.

The theory, then, seems to treat this stimulus as a kind of life support "until the economy recovers" as if the economy is some force of nature.

JJJJJJJJ Well, I've a bit more hope than that of a "make work" situation. As you see, we've somehow neglected some couple trillion of delayed infrastructure maintenance and likely more in needed upgrades that would pay us all dividends in the future. It is NOT a foregone conclusion that anything undertaken by government for the general welfare of our nation is a "loser".

Too, I'm enthused about incentives to spur a New Energy future. Perhaps, as an Alaskan, I more jaded than most, but we (with FBI help) have jailed half a dozen legislatures and found a Senator of 40 years in office guilty of taking too many gifts from an oil service company that did the dirty work for oilcos in Alaska. Trust that NONE of these crooks were trying to "slip in" a CAFE standard or ANY means of slowing US consumption and waste of our precious oil supplies.

But it's not a force of nature, and the stimulus is ultimately a coercive diversion of resources by the state.

JJJJJJJJJ This IS a tug of war isn't it? One that clearly brings up the question of what role democracy plays in our nation as compared to what is sold as "the market" though it clearly includes those "coercive diversions" that can and are purchased from Congress on a regular basis. But! slow as it is, the pendulum finally swings in a democracy and it's clearly time to look at "the rules" regarding the commonwealth, energy for the future, and health care. I'd have LIKED to take these one at a time over the years... but..................... here we are.

I'm terrified of the restrictions on business that are coming alongside this government "stimulus" such as new climate change regulations.

JJJJJJJJJ Well there is still debate as to man-caused warming, but! fortunately much of the response to warming is alone the same path as dealing with Peak Oil, or if you don't like that one either, the VERY real problem of exporting our lifeblood to purchase ever more costly oil to waste. Review the chapters on "externalities?"

Where the state ascends, the private/productive sector recedes.

JJJJJJJJ Uh-oh. Are we assuming the private sector is "productive" while the public sector is not productive? Well, what the $50 teacher produces as compared to what the $10 million buck insurance CEO or DC lobbying firm produces is surely a topic for another day; but! most of the changes being discussed, infrastructure upgrades, New Energy, and health care will primarily employ private sector companies.

JJJJJJ As for being broke, shush! don't tell anyone! and most of us have begun a biz or bought a car or home while flat broke; it's the American way!

JJJJ And lastly if you want to wring reeking gobs of age-old fat out of the military I'll certainly help if I can however in this environment we're going to hear about "reset" and "adapting to the new enemy's tactics" along with "being prepared" etc though I hope there will be less overt fearmongering than in the past eight years. Oh.... the British press has done away with "war on terror" for it seeming to align forces not formerly aligned.

[Jack]

John, there are some sites on the web that try to give an understanding of the economic principles in which we've the most confidence, others are pumping ideology. The Mises site is involved in the latter and the story is full of errors.

http://www.mises.org/story/2869

[John Papola]

@neilehat

I'm being an ideologue. Certainly. Proudly, in fact. That said, I'm in a process of learning (always will be) and am open to all ideas. But you are not representing state action particularly well by leaning on anecdote.

You can point to the hoover dam, or the TVA or NASA or many other taxpayer-funded government projects and say "Look! It Works!". Sure. It worked for those specific beneficiaries of the public dole. Not "us". But what you are ignoring is the grave of opportunity costs. The government must TAKE from some to fund these projects for others. This idea that "we" all benefit from this is a meaningless, romantic collectivism with no real foundation.

Private individuals in free enterprise have produced equally amazing projects without the need to take funding by the coercive force of taxation, inflation or public debt. And given the reality that none of these depression-era make-work projects lifted the country out of the depression, I don't see where the empirical evidence is for this public works keynesian multiplier. Please prove me wrong. I like to learn.

The true track record of state action has been to bolster corporate incumbents and big business, who hate free market competition as much as any marxist ideologue.

As for the national security, what the hell do I know, really. Maybe our global police force of 700 bases in 130 countries is holding the whole world together. But I doubt it. Call me a skeptic. What I do see, especially in the middle east, is a trainwreck of convoluted "alliances" that have all too often put our government in league with brutal dictators and made our government, by association, the enemy of millions of oppressed people. The overthrow of Mossadegh comes to mind.

As for this line:
"Too reject Federal and State funded Projects that benefit the Public at large because it's perceived as "Welfarism"; is nothing more than more Libertarian clap-trap that got us into this mess in the first place."

That's just plain nonsense. Sorry. Bush has been the farthest thing from a libertarian possible. He expanded the state in every respect, from regulations (sarbanes/oxley) to entitlement spending (medicare D/nochild) to the military. I'll study the constitution if you promise to get some schooling on the structure of our centrally planned banking system and the enormous regulatory mess that socially engineered our current crisis. This is not a "free market" crisis. Not by a long shot.

[John Papola]

@Jack,
I agree that the deficit spending and loose monetary policy have created fake wealth at the cost of enormous debt burdens on our currency and our nation's future. We can certainly agree there.

But I think where you and I start to have a hard time is in basic language and, indeed, philosophy behind the language. I do not conflate the government with "us". The government is an organization of individuals with the same human nature and incentives driving their bureaucracy as any other organization. The difference is that the government derives its power and funding from coercive force and need not justify it's "investments" with sustainability or profit, like a private organization must do.

This idea of collective psychology and collective choice is just baloney. Each of us choose for ourselves. Elections with 5% margins don't mean that "we" chose anything. And even if the margin was 80%, that will still just equate to mob rule. We are, as Franklin said, a Republic... if we can keep it. I fear we've lost it.

So "we" didn't neglect infrastructure. The government did. Go check out the roads in Disney World. They're doing just fine. The BQE here in NYC on the otherhand? Forgetaboutit. And why do we even have so many damn roads in the first place? People complain about suburb sprawl and the death of "downtown", but it was these very government projects that have given us the car culture that created these "problems".

Let's take a look at the "New Energy Future" for a minute. So far, government mandates and massive "investment" has gone into hands-down the WORST fossil fuel alternative imaginable: ethanol. Truly, it is the worst. Hundreds of billions of dollars have been taken from the taxpayer and given to a tiny handful of people in crucial election states to fund what is universally acknowledged to be an immoral product. As a double-whammy, the subsequent boom has driven food prices sky high and punished the poorest and hungriest people around the world. Many countries have been destabilized by these phony and immoral food price spikes.

And even after a major public backlash, nothing has changed and nothing is being proposed to change this horrifying policy of using food and arable land for fuel.

THAT's state "investment".

When government agents, whose principal incentive is re-election, have discretion to spend other people's money, this is the result. Corruption. No company could have enabled this kind of policy absent the monopoly of force that Uncle Sam provides. And what of the enormous investment resources that have poured into biofuels INSTEAD of going to genuinely productive alternatives? Behold the opportunity cost. That is MALinvestment. Not a multiplier.

There's no reason to believe that the government will "invest" in the best technologies and every reason to believe that they won't. What they will do, is get gamed, and collude and steal away opportunity, just as Ethanol has drained research and capital away from other pursuits.

"This IS a tug of war isn't it? One that clearly brings up the question of what role democracy plays in our nation as compared to what is sold as "the market" though it clearly includes those "coercive diversions" that can and are purchased from Congress on a regular basis. But! slow as it is, the pendulum finally swings in a democracy and it's clearly time to look at "the rules" regarding the commonwealth, energy for the future, and health care. "

As you can see with our immoral farm subsidies, our monopoly-maintaining FCC, our destructive monetary policy and countless other forces of state agency... democracy isn't working. The pendulum is swinging in a range of about 3 degrees between the supposed "left" and "right". Why? Because the incentives for state agents keep the incumbents in power. "Campaign Finance Reform" simply erects higher barriers for new comers. Massive regulations like the new CPSIA of 2008 destroy small competitors, leaving the big guys to grow.

Democracy works when the state is doing the simple things that a balance of power can truly check. We're so far beyond that now.

"Well, what the $50 teacher produces as compared to what the $10 million buck insurance CEO or DC lobbying firm produces is surely a topic for another day"

Ask the kids in Newark how that $50 in taxpayer-funded salary is working for them. Even with $18k/student, that system is failing. It's only a few miles away from me and let me tell you... they're suffering. No competition + no accountability = failure.

DC lobbying happens because the state has the power to effect these companies. Ask Microsoft, who prior to the anti-trust suit had virtually no lobbying presence, what happens when your competitors choose to compete with Uncle Sam's club. They learned the price of doing business without collusive lobbying.

As for the insurance CEO... don't even get me started. Insurance as a concept has gone completely beyond all reason, and yes, is part of today's meltdown.

As for mises "pumping ideology", I don't consider that an insult or a useful criticism. If there's errors, dig into them. Again, Ideology drove our independence. Ideology underpins the very idea that "all men are created equally" when simple observation demonstrates that we are not. Ideology is what we need. Not "pragmatism" that leads us into ridiculous wars and ever expanded failed programs supported by tax-consuming interest groups.

If you knew me, you'd know that I'm a generous, empathetic person and a caring parent. Not some freak, supply-side cartoon character. But this idea that each of us can live at the expense of all of us is wrong. Bastiat understood that. Philosophy and ideology give us that gift on understanding.

god bless. Love the debate. Always learning.

[Michael Lewitt]

I believe that the government is going to have to become a direct lender in order to stimulate the economy. Using the banks as lending intermediaries has not worked (i.e. the first half of TARP) because the banks need government money to offset their own losses, which are still increasing. Accordingly, government money infused into banks isn't making it into the "real" economy. In addition to Keynesian spending, we need the government to be a direct lender as well.