Deflationary Spiral and Government Spending

Obama’s “bold” stimulus package is anything but. He is not venturing into any unchartered terrirtory. He has not come up with any new ideas. He is using a simple variation-on-a-liberal-theme, which involves more and more government spending in order to get out of a crisis. FDR did it, Carter did it, now Obama plans to do it.

 

Throughout this entire politicization of economics, hundreds of solutions have been offered. Coming from the right is mostly the idea that the government should stay out of it. Coming from the left (and McCain and Bush) is the idea that infusing the economy with “capital” is the way to go; nevermind where that “capital” comes from. One thing I have not heard from a prominent politician is a reduction in government spending.

 

We have seen hundreds of thousands of jobs lost, and Obama has warned of “millions” more. Have there been any federal government layoffs? Has there been an effort to curb spending by any government agency? Has there been any sort of inclination for the federal government to set the example and live within their means? The answer to all three of these has been “no.”

 

The United States Postal Service was reportedly considering layoffs in October, but then they denied it in November and announced a raise in rates beginning January 1, 2009 (as if that is going to encourage the use of snail-mail). Government agencies have been spending their budget to the fullest over the past year; some have even been spending more. (If they don’t spend their budget to the fullest, they don’t get the same amount next year.) And now the Obama administration is announcing a “bold” stimulus package that will increase government spending by trillions over the next four years, although he hasn’t exactly given a number.

 

Obama claims that this deflationary spiral will increase the defecit. What is he talking about? If prices go down and the defecit remains the same, it is only an increase in relative defecit. The only way to increase the actual defecit is by spending more money. If you owe $1,000 on your Visa for a computer you bought, you owe $1,000 regardless of the value of the dollar or the computer; it may just be a little harder to pay off. If you continue to use your Visa you will owe more.

 

But Obama’s answer to the economic flu has been to create more and more government jobs (Office of the President-elect; Change.gov; technology czar…), and he hasn’t even been sworn in yet…

Shattered Expectations

Already, Obama and his advisors are trying to tone down the enormous expectations they set during the campaign. They say the economic crisis is so bad that we may not be out of it for (ahem) five years! This looks to me like a not so subtle approach to a reelection campaign.

 

Perhaps now that Obama is getting all the information that the President gets, he has probably realized that there has been way more going on than he previously knew during his 6-month working stint in the Senate. (I don’t claim to know what is going on, but I am positive that neither the American public nor senate have access to all the information.) He has probably realized that this final verdict was not a verdict at all, but rather a complex web of proactions, reactions, and inevitables. This could have been coming for 5, 10, 20, or even 50 years.

 

Another option is that he knew he wouldn’t be able to fix the economy in a short amount of time, but decided to deceive the people into thinking he could. His entire campaign was centered around the word “change,” which connotes an abrupt shift in direction, speed, or mass. If he wanted to be completely honest during his campaign he would have made the slogan, “Slow Change We Can Believe In,” or “Evolution We Can Believe In.” Instead, he played on Americans’ short attention spans, manipulated their emotions, and promised to change the world.

 

I can see his administration’s policy now. He will continue to blame anything bad that happens on his predecessor, insisting that “fixing” things “takes time.” I can also see that the media will believe him and force that belief onto the American people. When will he begin to accept responsibility? He set these enormous expectations, not the media, not the people; they just merely believed him. That he is attempting to shift away from those expectations says that he is either deceitful or unwilling to accept responsibility for his actions. Or both.

 

President Harry S Truman had a sign on his desk: “The Buck Stops Here.” I believe Obama’s sign will read, “Bush Has The Buck; Give Me Yours.”

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Budget Deficit Not a Big Concern

We see how President-elect Obama will try to save the economy in this latest article from Reuters: Spend, spend, spend. This is remeniscent of the New Deal, an era to which he has nostalgically alluded.

Now, perhaps this will actually work; I’m not saying it won’t by any means. But the difference between the deficit which we incurred during the New Deal and this one is that very little of our money in the 1930s was owed to foreign countries.

Going into further debt with these foreign nations, especially when our credit rating is in danger of dropping, is definitely not the wisest of ideas. But we’re just going to see how this one works out… Spending more while one is in debt just doesn’t follow the logic of common sense though.

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Bailing Out the Auto Industry

On the surface, bailing out the Big Three of the auto industry sounds like a win-win scenario. Ford, General Motors, and Chrysler provide approximately 500,000 jobs to Americans and millions more to secondary and tertiary industries such as suppliers, dealerships, and mechanics. If the government does not bail them out, it could stand to lose over $150 billion in revenue. Obama’s proposed bailout package to the auto industry is only $25 billion, or 1/6th of the revenue they stand to lose. So why not bailout the auto industry? Why is President Bush resisting this seemingly mutually beneficial package?

I suppose I should qualify this article by saying I was never in favor of the bailout in the first place. Injecting $700 billion dollars worth of capital into banks is meaningless if it is putting the injector in debt an additional $700 billion dollars. What makes it worse is that the injector, the government, attached strings to its money, placing the businesses they want to succeed firmly under the governmental thumb.

But the bailout, er, rescue package passed, and we must deal with it. Obama’s plan calls for $25 billion of that $700 billion to go toward the auto industry. However, this money was not intended for the auto industry. This money was intended for banks, to encourage banks to lend money by way of buying up their troubled assets. Now the President-elect wants to bypass the original intent of the bill, one he voted for, and pursue some sort of “quick fix” for the auto industry. I fear there is not quick fix for our current economic situation. We can see retrospectively that it was a long time coming, and it will take time to fix it. One thing I haven’t heard politicians emphasize is fiscal responsibility or living within our means, something to which the government should adhere as well. The reason this is not emphasized is because it is not a quick fix, and Americans have grown so accustomed to instantaneous results. Our collective short attention span and disposable-goods society demand nothing less than instant and easily replaced goods and services, even at the expense of quality. Fiscal responsibility may not be a quick fix, but it is a quality fix that does not have a long-term perpetuation of our economic crisis.

Proponents (mostly democrats) for the bill cite the “rippling down” effect the $25 billion will create, helping the suppliers, dealers, mechanics, and ultimately the consumers. These proponents (Obama included) are the same people who decried trickle down economics, saying that its time had passed, that it doesn’t work in a 21st century economy (as if the laws of supply and demand are influenced by arbitrary temporal milestones). Now they insist that helping big business will be good for the consumer! I suppose a tax cut would have been just as effective, only the government wouldn’t go further into debt by imposing it…

Finally, if the Fed allows the automobile industry to participate in government handouts, whom can they prohibit from participating? Lobbyists for financing companies have already formed lines outside the Treasury Department seeking their own little capitally-infused piece of pie. What happens if we open it up to manufacturing and production companies? I presume it would be like a New Years Eve party in Times Square where Dick Clark offers free beer to anyone who shows up. The only difference would be that Dick Clark could not make the beer consumers play by his rules… The precedent is dangerous.

I don’t want the automobile industry to fail. I want them to succeed. It benefits me and my portfolio if they do. But if the government continues its practice of “rescuing” private companies, they will have created a maelstrom of debt from which it will be impossible to escape. Hundreds of thousands, even as many as 5 million may lose their jobs if GM, Ford, and Chrysler go under now; but how many more will lose their jobs five, ten, or twenty years from now if we continue to infuse false capital into a dying business who has been living outside its means?

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Obama to lift Cuban Embargo

President-elect Obama has promised to ease sanctions on Cuban trade if they “take significant steps toward democracy….” As much as I would like to disagree with him, I can’t on this issue. There is no economic reason for a U.S. embargo on Cuba.

The Political Darwinism of the 20th century is by no means over, but it has significantly dwindled to tolerable levels. Truly, we are punishing that country by denying them trade. Their economic situation for the past 40 years has been evidence of that. But dictatorship thrives under turmoil, and by our not assisting their economic prosperity, we have been assisting their despotism.

In 1969, President Nixon began implementing unprecedented measures in order to ease impediments to a bilateral trade agreement with Communist China. In 1980, we began to allow China to export at the same tarriff rates as friendly countries. We currently enjoy the largest mutually beneficial trade agreement with China. Not only has this trade agreement encouraged growth and decreased prices, it has also allowed the people in the People’s Republic of China to see the benefits of a capitalist economy. In 1990, the current Shanghai Stock Exchange opened and has quickly become the fifth largest exchange in the world.

Since these capitalistic trade agreements have been incrementally implemented, the people’s attitude toward communism has also become incrementally more negative. Democratic activists are increasing anually, and the Chinese government is becoming more and more tolerant. This is due partly to the government’s gradual acceptance of the idea, but it is also due to their reliance on international trade. They have come to fear the world’s economic reaction if they overtly supressed all forms of democracy.

This is the way to influence democracy. By strengthening Cuba’s economic base their people will gradually enjoy a better quality of life. Once the people become accustomed to the benefits of capitalism, they will be resistant to go back; and once the leaders of Cuba become dependent on U.S. trade, they will be equally hesitant to return to despotism for fear of economic reprisal. As long as we perpetuate their economic strife by resisting trade, we are perpetuating their dictator’s whim. I’m sorry to say it, but I think Mr. Obama is on to something.

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Obama’s Plan for Bigger Government

Reuters has reported three very distrutbing things in a recent article about the Obama administration’s plan:

1. The Securities and Exhange Commission will “become a more robust agency with increased powers.” We do not need increased government power, especially to an agency that contributed greatly to our current economic situation. President-Elect Obama will appoint a new chairman of the SEC who will presumably be very involved in business’s operations.

The “financial crisis” has opened the door for the federal government in numerous ways. Whenever there is a national crisis, the federal government has the opportunity to step in and seize more power. During the Great Depression FDR implemented huge government increases, some of which were unconstitutional. Congress and the American public did not care because we were in a crisis. During the Civil War, President Lincoln took drastic measures to preserve the Union, even by directly defying the contitution by denying habeus corpus. The most recent topic of debate has been the Patriot Act a a result of 9/11, which some people insist violates a constitutionally implied right to privacy.

The point is that government benefits from crises. It allows them to justify their existence and expand their boundaries. The problem arises when they encroach on the boundaries of others, in this case, businesses. It has been a long time since we have had a truly laissez faire economic system, but the more the government encroaches on a business the more power it has over its operations. According to Reuters, Obama “insisted that the banks taking the [bailout] money accept the rules.” One of these rules is described later as limits on executive pay, or as I like to call it, a maximum wage. Interestingly, the following paragraph to the quote above is Obama’s stated desire for another stimulus package. Can we presume if these stimuli keep coming we must eventually play by the rules in order to benefit?

What I want to know is if the first stimulus package didn’t work, what makes Obama think another one will? He wants to dole out this money so his subjects will feel obliged to him. If Obama throws us a bone he will expect us to do tricks. The average person won’t think of a stimulus package as getting back what was rightfully theirs to begin with (for those who actually pay taxes); they will consider it a gift from the federal government.

2. Reuters reports, “Obama is expected to promote economic growth by encouraging building infrastructure for high-speed Internet use, and has vowed to create a new chief technology czar that may be at the Cabinet level.” A Cabinet level technology czar, Mr. President-Elect? And what will his job be? One can only presume that it will ultimately be to regulate the internet. As the fastest growing technology–-and showing no signs of slowing down–-the internet has been a target for government regulation for years. Thankfully, President Bush has kept his hands out of this cook-eJar during his tenure.

I wrote earlier about Obama’s new website Change.gov. In a somewhat jocoserious manner, I implied that this might lead to a Secretary of Change Cabinet post. Perhaps this is it. If he succeeds in creating this post, regardless of the practical impacts it will have on everyday technology use, billions more in government spending will be created to grow this department and billions more to maintain it. Apparently, Obama’s philosophy on job-creation is to create more government jobs.

Why create more governement jobs? Going back to the first disturbing item, it allows the government to have direct power over indviduals and departments. Perhaps Obama’s ultimate goal is to have every job in the United States be a government job. That would certainly fit in with his socialistic economic philosophies. Departments are created to regulate on a national level. The Secretary of Defense, Secretary of the Treasury, Attorney General, and Secretary of State all influence policies according to their respectively related duties. What could the Secretary of Technology regulate that is not already in place? It could require businesses to have broadband internet capabilities, I suppose, evetually, perhaps leading to everyone setting Change.gov as their home page…

3. Ironically, the only mention of President-Elect Obama’s proposed spending cuts had to do with defense spending. I agree that we have spent more than we needed to over the past years in the defense budget, but that is what happens when wars are fought. The Department of Defense wants lighter, faster, and more lethal soldiers; the Department of Justice wants more humane, more politically correct enemy treatment; the troops want lighter equipment and better living conditions; the media wants more access to information; the families want more armor and more protection; the defense contractors are merely trying to comply at the most profit to them. If Obama wants to cut defense spending, at least one of the above “wants” will be compromised.

This proposed defense spending cut is ironic because of its juxtaposition with the technology czar. There has never been a better catalyst for technology than war. For every war we have had, numerous technological advancements have been made that allowed for an everyday commercial use. The internet is perhaps the greatest example. So, if Obama wants to advance technology by regulation AND cut defense funding, he will have created a technological paradox.

In the end, all of these ideas give President-Elect Obama more power, more oversight of the American people, and more government involvement in our daily lives. Plato said, “Dictatorship naturally arises out of democracy, and the most aggravated form of tyranny and slavery out of the most extreme liberty.” I fear that Plato is correct, but it is the job of a conservative by definition to conserve our present democratic principles and not allow the government to further infringe upon our freedoms.

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