Economics, Cycles & Politics

As I listened to this past Friday's dismal job growth numbers and persistent high unemployment, coupled with the prior Friday's dismal GDP growth numbers, it occurred to me that, due to the misleading mythology allowed to grow up around FDR's presidency, the US now seems destined to borrow and spend its way to ruin thanks to empirically discredited Keynesian economic policies.

Let's go back to basic macroeconomics. Before Keynes.

Economies move in cycles. If there were no presumption on the part of governments to attempt to repeal the laws of economic cycles, then we'd see what was prevalent in pre-1930s America and elsewhere. Expansions eventually slow as Samuelson's accelerator-multiplier  (see also here) theory kicks in,

"Stunningly simple, it seems to square, for me, at least, with human behavior. As many great economic insights do. Such as fellow Nobel Laureate Milton Friedman's concept of income as a steady, long-term expected value.



Samuelson noted that when growth slows from a higher rate, to a lower one, the mere slackening of growth is transmitted back through what we now would call the supply chain, as a series of demand reductions.


Instead of 10% more materials each year to make my products, this year, I need only 5% more.


My supplier will see a decrease in expected sales. Growth will be half of what it was, and, thus, sales fall below expectations.


While real output is still higher, the gradual cutback in production from expectations results in a contraction, as workers work to produce less. The cycle continues, and the multiplier effect, which, in forward gear, causes economic expansion, is responsible for its contraction when run in reverse.


Seen in this light, recessions which are attributable to simple changes in economic outlook can't really be affected very effectively by one-time fiscal monetary transfers."


Contraction follows expansion, then recession, followed by recovery and, subsequently, expansion.

Before America had the world's reserve currency, was the free world's economic hegemonist, and could basically print or borrow dollars at will, that's how most economies behaved.

Yes, you will now hear Keynesians decry over-savings, or the paradox of thrift, as ex-PIMCO managing director Paul McCulley did in a Bloomberg television interview on Friday afternoon. He now looks like some wild-haired ape-man, with an even more virulent streak of Keynesianism, now that he has no responsibility to PIMCO to appear the least bit economically sane.

But those arguments only appeared as Keynes wrote the General Theory and mistakenly believed that pump-priming, deficit spending, call it what you will, could actually and benevolently affect long term economic conditions positively.

We know now, decades later, that Keynes' theory was simply a sop to human desire for immediate gratification, while ignoring the very real longer-term consequences of debt, higher taxes, and reduced personal economic freedoms.

The linked post from last week, discussing the true nature of WWII as a time of immense savings and lowered consumption, setting the stage of the US economy's rapid growth in the 1950s, puts the lie to McCulley's contention regarding the so-called paradox of thrift.

The reality is that savings are collected and invested, eventually forming capital and underpinning healthy economic growth in the private sector, when natural economic forces are allowed to operate.

I believe that, much like the current mistaken belief by many that cutting social welfare programs like Social Security, Medicare, or Medicaid, constitutes a broken societal promise, the real question is whether the cure is worse than the disease.

Those social programs will never operate in a sustained fashion, designed, as they all were, with fatal flaws.

So, too, does Keynesian theory on government stimulus exist in a sort of fantasy world of arithmetic, rather than human, behavior. The reality is that the forced spending doesn't create lasting employment or economically-viable industries, but it leaves very real debt and a need for future spending reductions or increased taxes.

What was wrong with simply allowing natural economic cycles to operate in the first place, if the policies which economists have been able to develop as a method of repealing the laws of economic cycles bring side-effects which have ultimately proven worse than the original condition of naturally-occurring phases in economic cycles?

If the US federal government didn't have the monetary power of the world's reserve curency, combined with politicians of both parties who, once elected President, Senator, Representative or Fed Chairman, work furiously to retain those positions, do you really think we'd seriously be spending trillions of borrowed money to try to remove recessions and contractions from our economic cycles?

This folly has been primarly a politically-generated error. The health of the American economy doesn't require Keynesian stimulus spending- only the political careers of federal elected officials.

Another Old Federal Spending Myth Blown Away

This past weekend edition of the Wall Street Journal featured an excellent editorial by Prof. Richard Rumelt entitled World War II Stimulus and the Postwar Boom. Rumelt is a professor of business at the UCLA Anderson School of Management.

Much as Amity Schlaes book, The Forgotten Man, corrected many of the economic myths which had grown up around FDR's failed Great Depression programs, Rumelt's piece highlight the real source of US economic growth during and following WWII- forced consumer savings, not government spending.

Rumelt begins his piece by observing,




"Despite two years of fiscal and monetary stimulus, the U.S. economy is sagging. This has renewed the argument over the usefulness of more stimulus, and many of its proponents make an analogy to World War II.


Last month, former Obama adviser Larry Summers put the case this way: "But for Hitler and the military buildup he caused, FDR would have left office in early 1941 a failure, with American unemployment above 15 percent and with the recovery promise of the New Deal shattered." And in 2008, Princeton's Paul Krugman referred to "the enormous public works project known as World War II."


This is received wisdom to many economists and historians, but it skates around key facts of the World War II economy. Chief among them: Government policy didn't stimulate personal consumption, as Keynesian policy makers aim to do today, but rather enforced thrift.


During World War II, there was no investment in civilian infrastructure and the government placed severe restrictions on consumption. That meant significant portions of the massive government spending went toward saving and private debt repayment. Thrift restored personal balance sheets, ultimately setting the stage for the postwar boom."

Those are the themes of Rumelt's editorial. Here are some of the supporting data he cites regarding his theses,


"In 1939, before the U.S. entered the war, about 15% of the work force was unemployed. The war eliminated unemployment by moving 11% of workers into the military, where they were indentured at low pay with little ability to purchase consumer goods. Another 5% were directly employed by the government as military support personnel.


As the military swelled, the civilian work force declined to 53.9 million in 1945 from 55.2 million in 1939. A shrinking civilian work force and surging government demand created wage inflation of about 5% per year. Higher wages, plus about 20% more hours worked, generated a 65% increase in real (inflation adjusted) national disposable income between 1939 and 1945. But, remarkably, total consumer spending did not rise to match these higher incomes. During the 1941-45 war years, over 22% of disposable income was saved.

This high saving rate was driven by fiat. Thanks to wartime rationing, Americans were only allowed to purchase small amounts of sugar, butter, meat, gasoline, tires, shoes, bicycles, processed foods and other goods. Plus, there was virtually no production of new cars, radios, home appliances or housing. In fact, when inflation and increased working hours are taken into account, consumption per hour worked actually declined for the bulk of civilians during the war. Civilian living standards stayed at Depression-era levels.


Americans' wartime savings over 1941-45 were $142 billion, about $1.3 trillion in 2005 dollars. These funds went to pay down consumer credit, buy War Bonds, and bulk up savings accounts. During the war, outstanding consumer credit fell to $5.7 billion from $7.2 billion, a 44% reduction in constant dollars.


Despite higher incomes, household mortgage debt rose only slightly during the war, falling by 17% in real terms. As a consequence, the overhanging debt that had plagued households since the start of the Great Depression was dramatically reduced and household balance sheets markedly improved.


When hostilities ended in 1945, many expected that an expanded civilian work force, plus reduced federal deficits, would bring back the depression of the 1930s. There was indeed a brief recession in 1946, but as production was rededicated to consumers and rationing was lifted, people rushed to replace rusted-out automobiles and broken-down refrigerators. The returning soldiers got jobs, moved to newly constructed housing in the suburbs, and the postwar boom was on. And it was greatly accelerated by households' renewed capacity to take on debt.


Consider the ratio of household debt to disposable income over the decades from 1919 to 2010. Data (from the Federal Reserve Flow of Funds, the Bureau of Economic Analysis and other historical records) show that the debt ratio started a sharp upswing in 1920-22 with the 1920s housing boom and the introduction of consumer financing by auto makers and producers of home appliances, rising to 41% in 1929 from 16% in 1919.


As the economy dipped into recession in 1930, household incomes fell and people made dramatic reductions in spending for consumer goods in order to hold onto their cars and homes. Falling incomes forced the debt/income ratio to a peak of 61% in 1932. By 1940, the ratio had slowly worked its way down to 40%, about where it had been in 1929. Then, with the advent of the war and rationing, the ratio plummeted to 20% by 1944-45, a level not seen since 1924.


Today, households carry a much greater relative debt burden than they did in 1929, largely due to a 25-year mortgage binge. Between 1980 and 2007, disposable income grew at 5.9% per year while household indebtedness grew at 8.7% per year—a clearly unsustainable situation. As in 1939, this hangover of debt blocks new rounds of consumption and dulls the impact of fiscal and monetary stimuli."

Stunning figures, are they not? I'm in my fifties, so I recall my late father's stories about "life during wartime." The gasoline rationing, lack of tires. Buying black market aviation gasoline which burned out the cylinders in his used car. The stories of meat, butter, sugar and egg rations. It occurs to me that my own children know nearly nothing of those privations for almost half a decade in the early 1040s.

Rumelt then turns to Summers' folly, explaining what emulating WWII's approach to economics would actually mean in today's environment,


"If one wanted to replay the economics of World War II (without the war), it would mean high consumption taxes aimed at the middle class, and putting 30 million Americans to work at minimum wage or less. No serious politician could put forward such a plan.


The difficult truth is there is no easy cure for the present hangover. Myopic policies allowed credit to be pushed over its natural limit. Credit expansion shifts consumption from the future to the present, but the future has now arrived. Policies aimed at reigniting the credit-driven consumption boom of the last 25 years won't work.


Instead of looking for a pre-election year pop, it would be wiser to focus on transitioning from credit-driven economic growth to growth that is, once again, driven by new productive investments. The key policy aims should be removing the tangle of tax, policy, regulatory and human-capital impediments to domestic private investment."


Which brings to mind, for me, this post from last Friday. Imagine! Actually encouraging people to save for purchases, rather than simply borrow for immediate gratification.

On that latter point, as if summoned by my writing this post on Monday afternoon, as I finish this, I hear Paul Krugman on Bloomberg television haranguing for, of course, more federal borrowing, higher taxes, and more spending in the face of economic softness.

Like Summers, Krugman apparently was absent from economics school the day they taught the theory of economic cycles. You know, how economies naturally move through recession, recovery, expansion, slowing, then recession again.

Trying to slice off the unwanted slow and recessionary phases, in order to have only expansions, just isn't feasible. No matter how much money government prints or borrows.

Instead, as Rumelt notes, what actually leads to robust expansion in a mature economy is capital formation based upon savings, not endless borrowing and government budget deficits.

Fourth of July & America's Porkiest Generation

Last week I wrote this post discussing, on the occasion of economics Nobel Laureate Michael Spence's excellent Wall Street Journal editorial, why the US may be carrying a significant percentage of unemployed for years to come, thanks to global trade, strong foreign competition, and the end of of a fortuitous 30 year post-WWII era of economic dominance.

Today, being July Fourth, is a traditional celebration of American Independence and, coincidentally, though perhaps less so than Memorial Day or November 11th, a day that honors American service personnel. The link, of course, is that freedom, independence and liberty have cost American lives since 1776 to purchase and maintain.

Liberal network icon Tom Brokaw bestowed the moniker "The Greatest Generation" on those Americans who came of age to fight WWII.

I think the time has come to consider and acknowledge that generation's total impact on America, and rename it The Porkiest Generation.

Some of that generation were young Democratic Congressmen, like LBJ, who helped FDR enact the Social Security Act in 1935. That was the first true misstep down the road of social pork.

After winning WWII, the Porkiest Generation came home to, after some uncertain steps by the federal government to absorb those millions, fairly smooth economic and job growth for thirty years. Along the way, many of the Porkiest became the entitled blue-collar middle class who ran the steel mills, auto plants, manned the dockyards and drove the trucks and trains that supported America's post-war economic expansion. They demanded, and were given, promises of lavish health care and pensions as defined benefits plans.

When these mostly-unionized employees wanted more, the unions struck until a profoundly dumb American management class, being, as I contended in that prior, linked post, luckier than smart, simply promised more future defined benefits to bring the workers back into the factories.

Between the 1930s commencement of the folly of Social Security as a defined benefit scheme, and the use of that template by private unions for the next forty years, the idiocy of defined benefits amidst war and economic havoc in the rest of the world became the rule in America.

I should add, here, as a footnote, that defined benefit schemes were given a boost by the federal government's wartime wage and price controls. In order to entice skilled workers to change companies, so-called "fringe benefits," now simply defined benefits, were promised. As non-cash compensation, they didn't trigger federal wage control violations, while, as future benefits, they didn't affect current profitability. Being rather new concepts, accounting principles weren't yet well-established to correctly reflect the costs of such expensive promises.

By the late 1960s, the Porkiest Generation, then firmly in control of Congress, tripled-down on intellectual economic stupidity by enacting two more general-pool, defined benefit programs, Medicare and Medicaid. And, for good measure, every so often, they larded up Social Security's benefits, too, so that children of deceased Americans began to have their college education funded by this social safety net.

What astounds and confounds me is that, for forty years, from 1935-75, apparently no economist of standing bothered to note that it was a mistake promise defined benefits, over time, from the proceeds of a national economy subject to the vagaries of recessions, depressions, monetary crises, global competition and occasional wars. After 1945, the same economists should have warned Congress not to use a temporary period of US economic hegemony as the baseline from which to forecast the availability of lavish wealth for decades hence, from which to pay ever-growing defined benefits of health insurance, care, and retirement pensions.

How is it that out of some 200MM+ citizens, nobody was smart enough to point out that promising defined benefits to be funded by varying levels of economic activity and production, i.e., GDP, was folly from the get-go? That the best that could be offered was contemporaneous, annual contributions to individual accounts for health care and old-age pensions?

As I wrote in the first post on this blog, union leaders are to fault for accepting promises of future benefit payments from industry, rather than current cash contributions to individual worker accounts.

But, I digress.

My point for today's patriotic post is to highlight how the generation that deserved credit for fighting and dying to win WWII promptly rewarded itself, through unionism and Democratic control of Congress, by promising itself defined levels of health care and old-age pensions which were never going to be affordable. The mistaken belief that a brief period of unrivaled American economic supremacy would endure and fund such lavish promises should have been challenged and crushed before it could become cemented into the American workers' expectations.

Can it really be that nobody was smart and courageous enough throughout the 1930s-1970s to point out this folly? That no society in history had ever managed the trick of working for about 30-40 years, then being paid near-working wages in retirement for another 20-30 years? That the mechanics of actuarial math and compounding wouldn't sustain those promises without economic assumptions never before seen in global economics?

When you think about it, most of the intent of dedicated health care and old-age pension benefits have more to do with societally-enforced saving for these needs, and necessarily less to do with societal funding of them.

If all Social Security had ever been was a law to mandate workers and employers to dedicate defined percentages of the formers' wages to individual, single-use accounts, it's not clear that federal assistance would have ever been necessary.

After all, using federal funds to augment such accounts is simply a wealth-transfer from those making higher incomes to those making lower incomes. But if actuarially-determined amounts were deducted from compensation, federal funding never would have been required. Besides, society pays, either way. It's just that when the government is involved, it is taking from some to give to others, rather than have those others behave responsibly and live within their means.

But, thanks to the Porkiest Generation, we are now, eighty years on, saddled with their originally self-imposed promises of defined benefits, the crushing burdens of which on the next generation, and subsequent ones, they now complain can't be changed.

What a Ponzi scheme, eh? You get control of unions and Congress, you pass laws to promise wildly unrealistic and unaffordable benefits to be paid by subsequent generations, then retire and complain when the next generation realizes what the Porkiest had done.

In my opinion, enacting foolish and economically impossible legislation and promises is no defense to simply stripping them away- now- totally- and reverting to defined contribution schemes.

Just because one generation managed to gain control of the levers of labor and legislative power to promise itself unaffordable and unsustainable financial benefits is no reason not to reverse those outlandish promises now.

Happy Fourth! Let's declare Independence from the economic enslavement of our nation by the Porkiest Generation!

Alan Meltzer On Alan Blinder's Keynesian Position

In yesterday's post I discussed Princeton economics professor Alan Blinder's poorly-reasoned editorial warning of a shortfall of government spending.

It turns out that Blinder's piece was just a part of a larger current exchange in several venues between liberal Democratic Keynesians and their adversaries who espouse more modern economic theories.

On Tom Keene's noontime Bloomberg program he described the Krugman/Blinder Keynesian position versus that of Alan Meltzer and other more modern economic thinkers, then had an on-air talk with Meltzer.


Meltzer noted that Krugman and, by inference, Blinder, espoused a rather old, primitive Keynesian brand of economic theory which ignores the last few decades of rational expectations work.


Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.

These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.

Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research.

Between Reynolds' empirical work undercutting traditional Keynesian stimulus programs, and the Nobel-prize winning work of Lucas and Prescott on rational expectations, it's difficult to understand why any thinking person would take Blinder's and Krugman's ideas seriously.

While I didn't read about Lucas' work while in college or graduate school or, for that matter, years after that, I noticed something which the linked site attributes to him, i.e., that modern Keynesians tend to build econometric models which are bereft of explicit theoretical bases or explanations, as well as being susceptible to only fitting periods on which they were calibrated, rather than being generically effective at prediction of consumer or investor behaviors.

Alan Blinder's Latest Attempt To Revive Keynesian Economics

I know Princeton economics professor and former Fed member Alan Blinder is a liberal Keynesian economist. But in yesterday's Wall Street Journal editorial, he displayed an ability to play fast and loose with contexts, as well as so narrowly define terms and situations as to make his points irrelevant.


He began by writing,


"Right now, I'm worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes's teaching, government spending destroys jobs.



No, that's not a typo. House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.


Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"? "

Blinder is engaging in incredibly literal interpretation of a statement that isn't meant to convey what he chooses to draw from it.

To begin with, empirically, Alan Reynolds has done research, about which he wrote in a Journal editorial, which has effectively dismissed the contention that government intervention in recessions helps economies. I mention this because later in his editorial, Blinder appeals to empirical evidence, or the lack of it.

Regarding 'job killing government spending,' it's not meant to be a direct and simple logical proposition as implied by Blinder's semantics. Rather, in the current context, with pre-existing uncertainty regarding government extra-legal intervention in business sectors (health care, autos, finance, insurance), aggressive regulatory actions (energy, autos, finance, health care), combined with record government debt and deficits, further deficits or higher taxes to finance more spending is seen as driving businesses to refrain from domestic expansion and/or new hiring. Additionally, the increasing deficits are expected to lead to higher rates on government borrowing demanded by investors, which will raise the deficit, which will eventually require, combined with the other economy-retarding government policies, higher taxes.

These are nuances points, but Blinder's not interested in the reality of nuances as he continues,


"The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?


One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That's a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue. But tax-financed spending is not what's at issue today. The current debate is about deficit spending: raising spending without raising taxes."

Blinder is wrong on both points. It's precisely government's ill-advised spending that is at issue. Such as bailing out GM, rather than letting it be reorganized through conventional bankruptcy. Plus, such government spending inevitably invites cronyism, e.g., Jeff Immelt's GE and its curious ties with the current administration and benefits from all manner of environmentally-related government-procured favors.

Further, "tax-financed spending" is indeed part of what's at issue today. In order to avoid further borrowing, the current administration is using the debt limit crisis to try to force higher tax rates and new taxes.

Blinder continues to write,


"For example, the large fiscal stimulus enacted in 2009 was not "paid for." Yet it has been claimed that it created essentially no jobs. Really? With spending under the Recovery Act exceeding $600 billion (and tax cuts exceeding $200 billion), that would be quite a trick. How in the world could all that spending, accompanied by tax cuts, fail to raise employment? In fact, according to Congressional Budget Office estimates, the stimulus's effect on employment in 2010 was at least 1.3 million net new jobs, and perhaps as many as 3.3 million."

Well, as Blinder would know if he read the business press of the past few years, most of that so-called stimulus was used to fund transfer payments to state and local governments. It didn't create jobs, but it may have maintained some. Blinder evades the question of whether simply leaving the governments to resolve their own longer term fiscal situations wouldn't be better for the nation in the first place.

Oh, those pesky details that fall outside of economics.

Then Blinder turns to the fabled "crowding out" effect,


"A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending, that pushes interest rates up, which dissuades some businesses from investing. Thus falling private investment destroys jobs just as rising government spending is creating them.


There are times when this "crowding-out" argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don't rise, you don't get crowding out."

I don't believe it's quite that simple just now. Rather than crowd out private investment via higher rates, perversely, private lending is stalled because everyone knows current rates don't cover risk. Especially when we just suffered through a residential housing-initiated financial crisis triggered by the Fed's low-rate policies.

Did you really forget that already, Alan?

Plus, the crowding out now occurring is businesses expecting higher taxes at some point to pay for all the deficit spending. That's implicitly crowding out domestic investment as businesses wait for the uncertain other government fiscal shoes to drop in the form of new taxes or higher tax rates.

Blinder then offers this,


"In sum, you may view any particular public-spending program as wasteful, inefficient, leading to "big government" or objectionable on some other grounds. But if it's not financed with higher taxes, and if it doesn't drive up interest rates, it's hard to see how it can destroy jobs."

He simply ignores the transmission effect I noted in my earlier comments, i.e., deficit spending means higher future taxes, in part due to the US government's debt becoming objectionably large to global investors. How Blinder can ignore this is a mystery to me, unless it's because he is an economist, not a financier.

Blinder then appeals to his liberal colleague Paul Krugman's argument,


"Let's try one final argument that is making the rounds today. Large deficits, it is claimed, are creating huge uncertainties (e.g., over what will eventually be done to reduce them) and those uncertainties are depressing business investment. The corollary is a variant of what my Princeton colleague Paul Krugman calls the Confidence Fairy: If you cut spending sharply, confidence will soar, spurring employment and investment.


As a matter of pure logic, that could be true. But is there evidence? Yes, clear evidence—that points in the opposite direction. Business investment in equipment and software has been booming, not sagging. Specifically, while real gross domestic product grew a paltry 2.3% over the last four quarters, business spending on equipment and software skyrocketed 14.7%. No doubt, there is lots of uncertainty. But investment is soaring anyway."

I suppose this is where economists show their ignorance of actual business operations. Business spending by US corporations doesn't mean that spending occurs in the US, or employs more workers in the US. Much of the growth of the S&P500 corporations recently has been overseas, not in the US. Blinder and Krugman fail to distinguish between domestic and foreign investment, spending and hiring by US multi-nationals.

Finally, Blinder closes with,


"Despite all this evidence and logic, some people still claim that fiscal stimulus won't create jobs. Spending cuts, they insist, are the route to higher employment. And ideas have consequences. One possibly frightening consequence is that our limping economy might have one of its two crutches—fiscal policy—kicked out from under it in an orgy of premature expenditure cutting. Given the current jobs emergency, that would be tragic.


Yet it is undeniable that we have a tremendous long-run deficit problem to deal with—and the sooner, the better. So it appears we're caught in a dilemma: We need both more spending (or lower taxes) to create jobs and less spending (or higher taxes) to tame the deficit monster. Can we square the circle?


Actually, yes. Suppose we enacted a modest fiscal stimulus program specifically designed for maximum job creation. My personal favorite is a tax credit for firms that add to their payrolls, but there are other options. And suppose we combined that with a serious plan for reducing future deficits—and enacted the whole package now. Then we could, in a sense, have our cake and eat it, too."

I disagree with Blinder's contention that "we need ..... more spending." Blinder seems unwilling, Keynesian that he is, to simply accept the conclusions of Reynolds' empirical work on the ineffectiveness of government fiscal expansionary policies, and let the US economy endure the natural cycles that private savings, spending and investment will cause.

Many observers, myself included, feel that government spending is the wrong response to the current economic situation. Better to trim government borrowing, by cutting spending, thus improving prospects for Treasury debt offerings and avoiding higher tax rates and new taxes, to leave more money in the private sector. That money will either be spent, or invested, according to private sector appetites, leading, either way, to economic growth.

Why can't we just do that? Allow the private sector to spend and invest its own money as it chooses, rather than force it to either disgorge its money to the government via taxes, or force it to take on liabilities as our government continues to borrow- and spend- on the private sector's account?

John Cochrane On Inflation, Treasuries & US Spending

John Cochrane of the University of Chicago's Booth School wrote an editorial in Thursday's Wall Street Journal explaining why the US federal budget for 2025, seemingly so far off in the future, matters today.

Cochrane periodically pens editorials in the Journal, and they are always well-written and -reasoned. This one was no exception.

Early on, he associated current returns on a 30-year Treasury of 4.5% with a real 2% return, implying a long term inflation rate lower than 2.5%. With that rather risky bet as a background, he noted that such a belief of low inflation means,

"you have to bet they will solve the 2025 deficit. If you decide that the government will just keep kicking the deficit can down the road, sell your 30-year Treasuries. Sell fast, before everyone else does- because if we all try to sell, we just drive down the price and long-term interest rates rise."

Cochrane went on to chide the government for making the same mistake that Bear Stearns and Lehman did in 2008, i.e., fund excessively short-term for alleged reasons of lower cost, ignoring the risks of funding drying up when refinancing is undertaken. He warns,

"It is cheap precisely because it is dangerous."

So true, because the lender's view of short-term finance is that you aren't liable for the longer-term default. You only have to bet that the borrower, in this case the US, will manage to remain solvent for another few quarters or a year.

I won't go into Cochrane's comments on budget cuts, tax rates, etc., because they are more political in nature, and this is my business blog. However, he closes with these passages,

"The challenge is whether we will accept a vaguely rational tax system and a set of entitlements that protect the vulnerable without bankrupting the Treasury. It's not rocket science.

But we don't have much time. The bond market won't wait. The budget and debt problems will be much harder to solve if long-term interest rates spike, the dollar falls further, and inflation breaks out."

That last line caught my attention after I reread the piece following my reading of the weekend Journal's lead interview with Smithfield Foods CEO C. Larry Pope. Here are some of the passages from that piece,

"Mr. Pope is the chief executive officer of Smithfield Foods Inc., the world's largest pork processor and hog producer by volume. He doesn't mince words when it comes to rapidly rising food prices. The 56-year-old accountant by training has been in the business for more than three decades, and he warns that the higher costs may be here to stay.



It's also a business under enormous strain. Some "60 to 70% of the cost of raising a hog is tied up in the grains," Mr. Pope explains. "The major ingredient is corn, and the secondary ingredient is soybean meal." Over the last several years, "the cost of corn has gone from a base of $2.40 a bushel to today at $7.40 a bushel, nearly triple what it was just a few years ago." Which means every product that uses corn has risen, too—including everything from "cereal to soft drinks" and more.



Inflation: An overview of the prices consumers really pay .What triggered the upswing? In part: ethanol. President George W. Bush "came forward with—what do you call?—the edict that we were going to mandate 36 billion gallons of alternative fuels" by 2022, of which corn-based ethanol is "a substantial part." Companies that blend ethanol into fuel get a $5 billion annual tax credit, and there's a tariff to keep foreign producers out of the U.S. market. Now 40% of the corn crop is "directed to ethanol, which equals the amount that's going into livestock food," Mr. Pope calculates.


The rapidly depreciating dollar is also sparking inflation, although Mr. Pope says that's a "hard" topic for him to discuss, trying to be diplomatic. But he doesn't deny that money is cheap. Investment bankers are throwing cash at the firm—a turnaround from 2008, when money was scarce—even though Mr. Pope doesn't need it right now.


Now food price inflation is popping up across the country. A pound of sliced bacon costs $4.54 today versus $3.59 two years ago and $3.16 a decade ago, according to the Bureau of Labor Statistics. Ground beef is $2.72, up from $2.27 in 2009 and $1.74 in 2001. And it's not just Smithfield's products: "You eat eggs, you drink milk, you get a loaf of bread, and you get a pound of meat," he drawls. "Those are the four staples of what Americans eat in their diet. All of those are based on grains."
"Maybe to someone in the upper incomes it doesn't matter what the price of a pound of bacon is, or what the price of a ham, or the price of a pound of pork chops is," he says. "But for many of the customers we sell to, it really does matter." Workers can share cars when the price of oil rises, he quips, but "you can't share your food."


Mr. Pope also worries about the impact on farmers, who are leveraging up operations to afford the ever-rising price of land and fertilizer that has resulted from the increased corn demand. "There are record prices for livestock but farmers are exiting the business!" he exclaims. "Why? Farmers know they won't make money."

Weather is a factor, too. "We've had the luxury for the last three years of extremely good corn crops, with high yields and good growing conditions. We are just one bad weather event away from potentially $10 corn, which once again is another 50% increase in the input cost to our live production."


Food price inflation isn't a problem confined to America's shores. "This ethanol policy has impacted the world price of corn," Mr. Pope says. The Mexican, Canadian and European industries have "shrunk dramatically. . . . We have an unsustainable meat protein production industry," he says. "We're built on a platform of costs, on a policy that doesn't make any sense!"



Nor does the science. The ethanol industry would supply only 4% of the nation's annual energy needs even if it used 100% of the corn crop. The Environmental Protection Agency has found ethanol production has a neutral to negative impact on the environment. "The subsidy has been out there since the 1970s," Mr. Pope says. "If they can't make themselves into a viable economic model in 40 years, haven't we demonstrated that this is an industry that shouldn't exist?"


So what's the solution? First, Mr. Pope says, get rid of the ethanol subsidies and the tariff. "I am in competition with the government and the oil industry," he says. "It's not fair." Smithfield's economists estimate corn prices would fall by a dollar a bushel if ethanol blending wasn't subsidized. "Even the announcement that it is going away would see the price of corn go down, which would translate very quickly into reduced meat prices in the meat case," he says. Imagine what would happen if the mandate and tariff were eliminated, too.


He also advocates lifting regulatory and tax burdens on business. "I fundamentally don't understand the logic of corporate income taxes," he tells me. "If I have a 35% tax, all I do is take that 35% tax and I transfer it into the price of bacon and the price of pork chops."


Mr. Pope says the "losers" here "are the consumer, who's going to have to pay more for the product, and the livestock farmer who's going to have to buy high-priced grain that he can't afford because he's stretching his own lines of credit. The hog farmer . . . is in jeopardy of simply going out of business 'cause he doesn't have the cash liquidity to even pay for the corn to pay for the input to raise the hog. It's a dynamic that we can't sustain."



Coming on the heels of Bernanke's much-lauded first Fed press conference, Pope's remarks and Cochrane's editorial are quite sobering. Pope is quite explicit in painting the US ethanol policy as damaging to food prices with virtually no impact on oil importation, while ruinously effecting the price of corn as a global food supply mainstay. Then there's weather, which so few of us pay attention to for farming. Pope offers a rather cold-eyed assessment that we're almost certain to experience weather that could more than double current corn prices!

 I wrote about that Bernanke's remarks,

"Yes, Bernanke did attempt to claim that commodity prices have surged due to developing nation demand, as Cramer predicted. Not that it was such a hard call to make.



The trouble is, it's not just oil. I don't think US food demand is down as much as its oil consumption is from a few years ago. But we have broad grocery store inflation approximating 10%.


Bernanke's hopes for moderated inflation while Americans pay more for food and gasoline just aren't believable. Further, technically, inflation is a monetary phenomenon, and Helicopter Ben has been monetizing Treasury debt and presiding over a weakening dollar."


So there you have it. A rather candid triangle of Bernanke spinning the Fed's ultra-cheap dollar policy as having absolutely nothing to do with imported inflation, Cochrane warning that even a whiff of inflation makes today's 30-year Treasury yields razor thin, and Larry Pope, a pragmatic pork processor CEO forseeing years of high food price inflation.

Who do you believe? The government employee, the financial academic and/or the CEO? No more than two can be right. If either Cochrane or Pope are right, Bernanke can't be.

Bad Economics On CNBC

It never fails to astonish and amuse me when Keynesians claim that cutting federal spending will send the US economy into a nosedive. Specifically, now, with our economic recovery still fragile, is not the time to contemplate serious federal budget cuts.

No, if anything, taxes must be raised in order to allow more spending without unduly increasing the deficit.

What nonsense.

But this is what you heard from Byron Wien on CNBC Wednesday morning. Wien was, at Morgan Stanley, a perennial investment bear. Almost as gloomy as the legendary Salomon Brothers chief economist, Henry Kaufman.

After hearing Wien spout this widely-heard nonsense, I checked his biography to see where his PhD in economics was from. Apparently, he doesn't have one. I found him credited only with a BA and MBA from Harvard.

Later in the morning, CNBC gave North Dakota Democratic Senator Kent Conrad its platform to repeat Wien's concerns. Conrad, too, has no advanced economics degree that I could find among his bios.

As I've written in prior posts, it seems that many pundits and, certainly, free-spending members of Congress, cannot acknowledge that economies have naturally-occurring cycles. That money not appropriated by or borrowed in the name of taxpayers, to be spent by Congress, will still exist on private balance sheets.

Government spending doesn't create long term employment, nor, per se, businesses. The same money, in private hands, does.

I understand why Conrad can't comprehend this, being a conventional tax-and-spend liberal Senator. But Wien, with his long tenure at Morgan Stanley, should know better. Much better.

If anything, recent economic research has shown a clear dampening effect on private consumption when federal spending is seen as increasing taxes via interest on debt.

The notion that federal spending can't be replaced by private sector spending, or that, if the money is saved by the private sector, rather than spent, it is a mistake, is just bad economics.

But it seems that many of the carefully-screened pundits you'll see on CNBC don't know this, and, basically, could care less.

Paul Ryan Teaches Economics To The "Senior Economics Reporter" On CNBC This Morning

Now that he's Chairman of the House Budget Committee, Wisconsin Republican Paul Ryan has been appearing on CNBC's morning program, SquawkBox, more frequently.

If you haven't seen, heard or read Ryan, he's a remarkably intelligent and economically savvy elected official.

This morning saw a priceless moment wherein Ryan befuddled the economically-challenged, CNBC so-called "senior economic reporter" Steve Liesman.

Ryan was responding to questions regarding monetary policy and the Fed. He had contended in a remark that the nation's fiscal and monetary policies are heading for conflict. Liesman, hoping for an easy chance to make Ryan look bad, jumped in to ask for elaboration.

By way of background, Ryan offhandedly referred to a piece he and heavyweight monetary policy economist John B. Taylor had co-authored in Investors Business Daily recently. Taylor is, of course, the author of the influential Taylor Rule, explained below by Taylor,

"Let me start with the example of the Taylor rule. It says that the short term interest rate equals one-and-a-half times the inflation rate plus one-half times the real GDP utilization rate plus one. So, in 1989, for example, when the federal funds rate was about 10 percent in the United States you could say that the 10% was equal to 1.5 times the inflation rate of 5% (or 7.5) plus .5 times the GDP gap of about 3% (or 1.5, which takes you to 9) plus 1, which gives you 10. Now this is a very specific rule, and it can be written down mathematically as shown in Figure 1, which also shows the way the rule was written when first presented in 1992. Of course, I did not name it the Taylor rule. Others did that later. Originally the rule was meant to be normative: a recommendation of what the Fed should do. It was derived from monetary theory, or more precisely from optimization exercises using new dynamic stochastic monetary models with rational expectations and price rigidities. Like most rules or laws in economics it is not as precise as most physical laws, though that does not mean it is less useful. It was certainly not meant to be used mechanically, though it now appears that monetary policy might operate even better if it stayed closer to the rule."
 
Ryan is an explicit Friedmanite on most economics issues. Especially, if you listen closely to his comments, monetary policy.


The priceless moment came when Liesman demanded that Ryan cite, on the spot, the rule he preferred the Fed follow for monetary policy.

Ryan slowly, carefully explained that he is a member of Congress, not a professional economist. Therefore, he said, he could not and should not specify the rule, but he knew he preferred that the Fed use one.

All the while, the camera showed Liesman's pudgy face in a frown, with a sort of dull-witted mask of slow comprehension. He began to slowly realize that Ryan is far, far more intelligent than he, Liesman, is, both economically as well as in terms of the media dynamics going on at the moment.

You can't possibly script this sort of thing. Ryan just seems to mesmerize Liesman and leave him dumbfounded. Emphasis on the dumb part.

Immediately on the heels of that exchange, Rick Santelli chimed in to chide Liesman for being harder on Ryan than he's ever been on Bernanke. Whereupon the so-called senior economic reporter retorted/admitted that he'd never actually interviewed the Fed Chairman.

Priceless, unscripted business and economic comedy this morning.

Demographic Stress Tests

For some time now, I've been convinced that US government employee unions and various social wealth transfer schemes, e.g., Social Security, Medicare and Medicaid, will have to accept significant reductions in promised benefits due to unchecked growth in said benefits due to unrealistic contract terms and poorly-designed programs.

On the weekend after Thanksgiving, Nicholas Eberstadt of the American Enterprise Institute and Hans Groth, senior director for Healthcare Policy & Market Access for Pfizer Europe, wrote Time for 'Demographic Stress Tests,' an editorial in the Wall Street Journal which describes some of the potential consequences if my expectations are not realized.

The editorial paints a dark picture, beginning,



"Financial crises can erupt suddenly and unexpectedly. Demographic pressures, by contrast, gather slowly and predictably—but over just a generation they can transform the economic and social landscape irreversibly.

Such a transformation is already underway in the developed world. Twenty years from now, Western economies will be characterized by stagnating populations, shrinking work forces, steadily increasing pension-age populations, and ballooning social spending commitments. These demographic changes will mean major increases in public debt burdens and slower economic growth, as savings are diverted from investments and innovation that enhance productivity."


For example, they write,

"The U.S., meanwhile, can expect to see continuing population and manpower growth between now and 2030, thanks to relatively high birth rates and a robust inflow of immigrants (roughly half of them legal). America will remain the most youthful Western society, although its 65-plus population will be about 19% of the total, up from 13% today.



Nevertheless, entitlement liabilities—especially the unfunded liabilities in the health-care system—are on course to skyrocket in the decades ahead. The country's recently enacted health reform will make the burden heavier.


At present, the ratio of gross U.S. public debt to GDP is nearing 100%, and the country is running annual deficits of around 10% of GDP. The Congressional Budget Office projects gross public debt to be 200% of GDP by 2020, and the BIS sees it hitting 300% of GDP by 2030. By the BIS estimates, restoring the U.S. public debt burden to 2007 levels would require budget surpluses of 2.4% of GDP for the next 20 years.


Maintaining economic growth in the face of these demographic trends will require rethinking current approaches to work and retirement, pension and health-care policies, and government budget discipline."

Music to my ears, most assuredly. I've become certain that, for the US to avoid fiscal calamity on a society-wide scale, the 1930s- and 1960s-era social safety net programs, all sharing design flaws, must soon be seen as a temporary taking leave of economic senses by a country careening between deep despair and post-war elation. They will have to be halted, dismantled, or severely capped, to be replaced by more restrained, individually-based, defined-contribution, rather than defined-benefit approaches.

Eberstadt and Groth provide similar statistics for other countries, including Germany and Japan, which, together with the US, the authors note comprise "half of the West's output and nearly 30% of the world's GDP."

All three are projected to experience public debt/GDP ratios of over 200% in just twenty years. Japan's would hit 600%. These are stunning numbers, when you are used to the US running no more than about 50% on this ratio in past decades.

The authors suggest, in conclusion,

"Thanks to the recent financial crisis, we're now familiar with the concept of the "financial stress test" used to evaluate the soundness of banks and allied institutions. A "demographic stress test" for Western economies is now in order, so that voters and their elected representatives can cope with aging populations and declining work forces.



Such an exercise would assess how manpower availability, labor force participation rates, aging and budgetary commitments would, over the next 30 years, affect key measures of national economic well-being like growth and productivity, fiscal balances, and government debt. It would also indicate the extent to which adverse "baseline" costs and consequences could be mitigated or offset by changes in lifestyle, personal behavior and public policy. These could include, for example, later retirement thanks to healthy aging, increased attention to preventive health care, enhanced personal savings, and adjustments to health and pension schemes.


Every Western country will have to determine how to pursue a future that is grayer but healthier and more affluent. The sooner we pay serious attention to the demographic challenge, the likelier we will be to meet it successfully."


Even these pundits avoid what ought to be obvious to objective observers of these predictions. Most large Western country pension, social safety net and health care schemes will have to be radically redesigned and reduced in scope and cost. There's just no way, after several decades and generations in which expectations have been so heavily affected by citizens' knowledge of social benefits replacing their own savings, that younger, working citizens can or will sustain these obligations.

Who in their right mind expects people to work from 21-70, then live for another 15-20 years at similar standards without having saved substantial amounts of their prime years' compensation? Especially when you add in the demographics of shrinking young Western populations- except for the US- which make the burdens so much more heavy?

Reading a non-partisan, cold-eyed piece like Eberstadt's and Groth's really opens your eyes to the magnitude, across most of the West, of the size of the shortfall and drag on economic activity that old, ill-conceived social spending obligations for pensions and health care will have in a comparatively short time.

More than in past years, we are now, for many countries, on the cusp of moving irrevocably into financially dangerous territory if we continue to allow badly-designed, unsustainable social programs to remain in place.

David Stockman On CNBC's Noon Program Today

David Faber's noontime CNBC program featured as its main guest former Reagan budget director David Stockman.

It's not hard to see why Faber's management wanted Stockman on today. I'm old enough to recall that the the one-time Reagan administration member went over the hill on his boss' tax cuts, publicly calling them misguided, and much worse.

He hasn't changed his tune in twenty-some years. Throughout the interview, Stockman swore that 'you can't cut your way to growth,' decried a Republican House as unable to grapple with the 'real issues,' and dismissed the electorate's concern over recent spending and legislation as 'yesterday's problems.'

Must be nice to be able to be so smug about problems yet to be solved. Stockman didn't present any empirical evidence for his personal views on taxes and spending.

Trouble is, Stockman was largely discredited by the economic boom brought about by Reagan's tax cuts and slowing of spending growth. That latter phenomenon wasn't an absolute 'spending cut,' but it was a substantial reduction in the rate of growth of spending on various entitlements and discretionary budget items.

I find it noteworthy that Faber didn't invite, instead of Stockman, now out of government for nearly three decades, someone like Mitch Daniels, a much more recent OMB director, and current governor of Indiana. Daniels wasn't even invited for a sort of pro-con debate with Stockman.

It goes to show how desperate CNBC was to find a figure with the correct, though aged, credentials, to mount his soapbox and spout the network's familiar politically liberal line.

California's Unsustainable Pension Burden

To get some idea of what sort of stealth government deficits are looming, it's worth reading California governor Arnold Schwarzenegger's August 27th Wall Street Journal editorial.

Arnold presented a bar chart showing California's past and projected annual retirement costs for public employees rising from roughly $5B in 2007, to $10B in 2013, and more than 20B by 2018.

Reading the list of actions by the state's government favoring public pension gives you a headache.

Meanwhile, the governor presents another graphic showing private sector job losses in the state totally 1.2MM since 2008, while public sector jobs have only barely budged, losing perhaps 10K.

It's difficult to understand how US equity markets can be expected to soar while lurking public sector deficits and excessive spending provide an offsetting drain on economic resources.

If California, once the prized growth engine of the US economy, has fallen into this unsustainable situation, how many other states are in similar straits? Where will the resources come from to provide for these unpaid public sector pension promises?

Federalizing them won't cure anything. It will only encourage more unaffordable pension promises.

It's articles like Arnold's which makes me sceptical that recent equity market rises are also sustainable for more than a few weeks at a time.

Disingenuous Economic Reporting In The WSJ

Before I took a brief sabbatical from writing this blog earlier this month, I had saved a Wall Street Journal front page article on which to comment. The column, from July 27, was entitled Next Step on Economy Hinges on Debate Over Stimulus.

I found the piece entirely disingenuous in that it gave significantly more weight to the pro-stimulus argument, despite absolutely no credible economic research or other evidence that such actions have ever worked in a large, modern economy.

Consider this quote from the article,

"But today, neither side can say with certainty whether the latest stimulus worked, because nobody knows what would have happened in its absence."

Never mind that we know from Amity Schlaes,' and others research, that the gigantic 1930s FDR-led stimulus programs failed. Or that the current programs have failed to meet the few objectives voiced for them.

Some people will continue to apologize for and excuse any and all manner of stimulus spending.

A more recent Journal piece by Alan Meltzer, as well as a statement attributed in the July column by Carmen Reinhart, both focus on modern consumers behaving differently, by expecting higher future taxes, when government deficit spending rises. This was never even imagined by Keynes and his minions.

Another misleading aspect of the article is that it fails to note that, when the US embarked on its failed stimulus programs of the 1930s, the national debt was far smaller, on several measures, than it currently is. And the nation hadn't run an almost constant annual budget deficit, along with legislating ever-greater future social spending promises, for nearly 80 years!

Thus, now, global investors are much better informed about the continual propensity of the US to spend money it doesn't have. Sooner or later, even high T-bill rates won't adjust for the risks of the US simply failing to generate sufficient tax revenues to pay debt interest.

The WSJ is a serious national daily business newspaper. If it can't manage to publish realistic, credible lead stories on its front page, who are we to trust to tell consumers and investors the truth about the recent macroeconomic mistakes of the US federal government?

Recessions & Deficits: Then & Now

This morning's Wall Street Journal provided a sobering comparison of the US government's approach to the last two major recessions.

Under Ronald Reagan, the deficits following the Carter-era recessions were:

1982 4%
1983 6%
1984 5%
1985 5%
1986 5%
1987 3%

In contrast, the recent, current and projected deficits for this administration, from OMB sources, are:

2009 10%
2010 10%
2011 9%
2010 6%

Of course, the recent projections for future years are, if history is a reasonable guide, lowball estimates. Thus, the rough average of the current administration's deficits are/will be easily twice that of the Reagan years.

The Journal editorial notes,

"The 1981-82 recession was comparable in severity to the one Mr. Obama inherited and reached similar heights of unemployment. The deficits that resulted from that recession were the source of huge political consternation, with Democrats, the press corps and even some senior Reagan aides insisting that only a huge tax increase could save the country from ruin."

Remember David Stockman's infamous trip to the woodshed?

But Reagan didn't raise taxes, he lowered them. The resulting economic boom, derided by those parties which the editorial described as consternated, fueled US growth and government revenues for the following 15 years.

Now, however, we have much higher tax rates, being increased at the margin and by whole new taxes, accompanied by the largest amounts of federal spending ever seen outside of WWI and WWII.

As the Journal editorial concludes, it's a revealing comparison from the experimental lab of prior and current OMB-sourced deficit scorecards.

More Reflections on This Morning's CNBC Travesty

I wrote earlier today about an appalling hour of liberal excess on CNBC this morning.

Congressman Paul Ryan was assailed by two CNBC co-anchors and a Democratic House member from Illinois, all, I suppose, part of an attempt to either portray Ryan as detached, cold-hearted and naive, or change his mind. Neither occurred.

But as I replayed some of the exchanges in my mind later this morning, while swimming, another revelation came to me.

Having been educated in both classical and Keynesian economics, I am aware that, even in the latter system, investment decisions are allegedly a function of supply and demand for capital interacting in the form of interest rates.

Since even Keynes believed that no single person knew the correct amount of investment for an economy, he, too, relied on interest rates, set in a free market, to attract sufficient capital for available projects. Less investment would leave some desirable projects unfunded, while more investment would waste capital on projects which wouldn't return sufficient profits to justify their risk.

What isn't invested by consumers, i.e., saved, is spent.

Thus, in an economy in which, hypothetically, there was no government spending, consumers would invest what they don't spend, and spend what they don't invest.

Funny, then, isn't it, how the two CNBC co-anchors and the Illinois Democrat kept harping that the government had to provide the 'necessary spending' in the economy?

If even Keynes believed that markets had to allocate savings among investments, then it follows that he, conversely, believed that consumers, individually, decided on spending levels. Cumulatively, that provided a total spending level.

How is it that our modern day economic savants, who happen to moonlight as CNBC co-anchors, plus the Democratic Congress, believe they can do what even their economic patron saint, Keynes, never contended, i.e., that government knows what is the 'right' level of aggregate economic spending?

Here's another insight from my morning swim.

Ryan contended that consumers and investors are scared by so much heavy-handed government intervention in various economic sectors, so they refrain from investing. Savings, in the form of bank deposits or mutual funds, may be invested by professionals in Treasuries, since risk assets are now, well, so risky, due to the potential for government intervention affecting investment results.

But it may go further than that. Perhaps consumers are very aware of Congress' decade-long love affair with Fannie and Freddie, and their direction of those GSEs to back bad mortgages to less well-off borrowers who couldn't actually afford the homes they bought. Maybe those consumers have concluded that, with Congress willing to behave so recklessly with taxpayer dollars, taking actions which led to a financial sector crisis that amplified the effects of an already-occurring economic slowdown, it's wiser to just sit tight and try to save and avoid losing more money, either directly or through wasted tax dollars.

Then there's the leverage issue. Congress, in the wake of the financial crisis it brought about through lax supervision of Fannie and Freddie, when it wasn't forcing them into buying questionable mortgages, decried excessive leverage in the financial sector.

Now, though, the federal government is borrowing, printing money and spending it at rates far in excess of what the private sector was doing before that crisis.

If private leverage was a bad thing, why is government leverage a good thing? Further, why is it better for government to choose how much to spend, which is really all that government can do with money, rather than let people make their own spending choices?

It makes no sense.

Rather than allow for savers, investors and entrepreneurs to find the right level of investment and, as a result, spending, for the economy, we have a federal government determined to choose investment and spending levels all on its own, employing terrifying levels of leverage in the process.

I have read Keynes' original work, and I seriously doubt even he would approve of the current US federal government fiscal policies.

CNBC's Explicit Liberal Bias On Display with Congressman Paul Ryan (R-WI)

I am watching Congressman Paul Ryan (R-WI) appear on CNBC this morning's Squawkbox program as a guest host to discuss federal deficits, spending and tax policy.

In his opening few minutes, an exchange occurred which was simply priceless, displaying Carl Whathisname's and Becky Quick's undeniable, purely-liberal biases. I wish I could link to a video clip, because I can't recall the give and take verbatim.

However, I can give a pretty good sense of the comments.

Carl and Becky professed amazement that Ryan thought the US government should trim spending. Carl said, on several occasions, words to the effect,

'But if government didn't spend that money, then you have a spending shortfall.'

Quick contended,

'Surely even you don't believe that government shouldn't have enacted some sort of stimulus spending, do you?'

To which Ryan replied that, yes, he thought a stimulus was needed, in the form of tax cuts. Letting people spend their own money.

He then turned to Carl and refuted his points, noting that government borrowing and spending crowded out people using their own money to invest or spend.

The look on Carl's face was as if he'd been slapped, he was so dumbfounded.

This went on for a few rounds, with Quick and Carl desperately trying to get Ryan to admit that government had to spend lots of money to shore up the economy, no matter what. For co-anchors of a business program on a business cable network, they displayed unusual ignorance of basic economics, not to mention empirical work which has routinely been published in the pages of the Wall Street Journal by noted economists.

The two things which most greatly troubled and shocked me were Carl's inability to fathom that, if government didn't tax and borrow your own money, that money does not just hide in a mattress, and that federal discretionary spending, according to Ryan, doubled last year.

When Ryan said that, both Quick and Carl jumped on the economic weakness, assailing Ryan for perhaps saying no spending was needed.

That's when Quick tried to entrap Ryan by insisting he was for some sort of stimulus, thinking, of course, with her one-track mind, that this would necessarily mean spending.

Ryan then landed a Sunday punch, pointing out that only 4% of the $700B stimulus bill was for Keynesian infrastructure, with most of the rest going for social spending. The program's co-anchors then said, nearly in unison, that this was, of course, necessary to keep teachers, firemen and policemen employed.

Ryan countered, immediately, that this was simply delaying states' having to reckon with their own fiscal problems, and, thus, a red herring. Either way, Ryan noted, it was excessive spending. For good measure, Ryan noted that everyone supports Keynesian automatic stabilizers, such as COBRA, job training benefits and such. But the uncertainty stemming from government takeover of key industrial sectors had sent capital scurrying to the sidelines, inhibiting economic recovery.

Even now, as I'm finishing this post, the programmers recruited a liberal Democrat Congresswoman from Illinois, Rep. Schakowsky, to repeat the same contentions as the co-anchors. She is evidently ignorant of this recent piece by Art Laffer in the Journal, claiming that giving unemployment insurance creates demand that would not have otherwise existed. She also just assumes that federal spending is necessary because you can't rely on people to spend their own money in useful economic ways.

There have been few instances of such blatant liberal and socialistic economic bias on CNBC as this morning's hour-long assault on Paul Ryan and his prudent fiscal concepts.