Sunday, August 7, 2011

Obama and the Democrats have to ... make government work", Part 2

I don't think a single week goes by without some left-wing journalist/activist/economist making a heart-felt appeal to increase the government spending. And as is customary, one of the reasons given for such an increase is the need to rebuild our infrastructure - roads, bridges, sewers and the like. Even our president is asking for money to "rebuild the infrastructure". According to laprogressive, "He [Obama] says he wants an “infrastructure bank” that would borrow money from private capital markets to pay private contractors to rebuild our nations roads, bridges, airports, and everything else that’s falling apart." One strange thing though - Obama just spent 900 billion dollars on stimulus, which was also sold as a project to fix our bridges and roads - "the biggest government infrastructure investment since the interstate highway system was launched in the 1950s". And the folks on my second most favourite blog, Alexandria, got in the game and demanded more government spending for roads, bridges - well, you know the rest. Of course, building new roads is a major government spending (4 million miles of roads, 600,000 highway bridges, 117,000 miles of rail, 11,000 miles of transit lines, 19,000 airports, 300 ports won't come cheap), and the liberals require tax increases.

Let's look at this issue from a historic perspective. In 2010, the federal government spent 92 billion dollars on transportation, while the total government (federal, state and local) transportation bill was 271 billion dollars. As a matter of perspective, the federal spending in 2010 was 3,456 billion dollars, and the total government spending was 5,799 billion dollars. In other words, out of every dollar that Obama spent in 2010, only 2.7 cents went for transportation. For all levels of the US government, the number was only slightly higher - 4.67 cents on the dollar. In short, the spending on roads, bridges, airports and "everything else that has to do with transportation" is a minor portion of the budget - practically a rounding error. So, every time when a liberal tells you that he needs more of your money to fix the roads - show him this statistics.

Now, while the transportation costs are a minor blip compared to the entire government spending, these are far from being small if you put them in historical perspective. Here is a singular point of reference - the launch of Interstate Highway System during the Eisenhower presidency. During the first 5 years of the project (1956-1960), the federal government built 10,000 miles of highway. It was far from an easy task, according to this government publication:

High standards were adopted for the interstate highway system. Access to all interstates was to be fully controlled. There would be no intersections or traffic signals. All traffic and railroad crossings would be grade separated, requiring the construction of more than 55,000 bridges. Interstates were to be divided and have at least four wide traffic lanes (two in each direction) and adequate shoulders. Curves were to be engineered for safe negotiation at high speed, while grades were to be moderated, eliminating blind hills. Rest areas were to be conveniently spaced. Each interstate was to be designed to handle traffic loads expected 20 years after completion.
I've collected the information on the cost of this project during these 5 years, and the total federal transportation spending from 1956 to 1960 was 110 billion dollars (in 2010 dollars) - which is only slightly above the federal transportation spending for 2010 alone (92 billion dollars). In fact, in 2009, the federal government spend another 107.2 billion dollars for the transportation improvement. If one includes the fact that technology advanced considerably during the last half a century, it remains remarkable that president Obama was able to spend so much money on "roads and bridges", enough money to build 20,000 miles of the interstate highway - and yet deliver so little. For all intents and purposes I could not even find any publication which would tell us how many thousands of miles of highway the federal government built in 2009 or 2010 - and I strongly suspect that the actual number is probably measured in hundreds of miles, if even that.

In order to illustrate the absurdity of the current situation (and to demonstrate how difficult it would be for the Democrats to make the federal government work), let me show a comparison between two projects, 80 years apart.

Empire State Building
The Empire State Building is an architectural marvel, and one of the most striking attractions in New York City. The building itself was constructed during the Great Depression and is a living monument to that era and the city it so proudly illuminates... For 40 years after it was constructed, it held the record for being the largest skyscraper in the world. The building has starred in over 90 movies, and it remains one of New York City's most popular tourist attractions.
 At the time it was built, the Empire State Building was the center of a competition between Walter Chrysler, of the Chrysler Corporation, and John Raskob, creator of General Motors. The competition, appropriately enough, was to see who could build the highest building first... In the year 1929, Mr. Raskob set about this task with a group of very well known investors...
The excavation for the project began on January 22, 1930 and took only one year and 45 days to complete, or 7 million hours. The masonry for the structure was completed on May 1, 1931, significantly ahead of schedule. On that date, President Herbert Hoover pressed a button in Washington, D.C. to officially open the building by turning on the Empire State Building's lights.  
The total cost to construct the skyscraper was $40,948,000, including the cost of the land. The building alone was constructed with a little over $24,000,000.

According to this site, in 2010 dollars, the total cost of the Empire State building is 500,000,000 dollars (in my calculation, it's closer to 590,000,000 dollars, but I digress). So, on one side we have an "architectural marvel",  "one of the most striking attractions in New York City", which is 1,050 feet above ground with 102 floors and 6,500 windows. What have we got on the other side?

Columbia River Interstate Bridge

The Interstate Bridge (also Columbia River Interstate Bridge, I-5 Bridge, Portland-Vancouver Interstate Bridge, Vancouver-Portland Bridge) is a pair of nearly identical steel vertical-lift, through-truss bridges that carry Interstate 5 traffic over the Columbia River between Vancouver, Washington, and Portland, Oregon, in the United States...

The bridge is frequently a bottleneck which impacts both traffic on the freeway, as well as on the river. The Oregon and Washington state departments of transportation are jointly studying how to replace the bridge. Initially, the estimated cost for a replacement bridge was around $2 billion, but that number has climbed steadily to around $4.2 billion.
On one side, this bridge is no "Empire State Building", not even close. The Oregon architects also don't need to buy the land in Manhattan to build a architectural marvel. And yet, note that the estimated cost of replacement is nearly 8 times the cost of the Empire State Building. But that's not all - there is more.... According to the official site:
1. How much have we spent on the project [rebuilding the Columbia River Interstate Bridge], what do we get from it, and where did the money come from?

Since 2005 the project has spent a total of $127 million. It has been funded about equally by Washington and Oregon, with additional contributions from the federal government. The current phase of the project is wrapping up this year. Since 2005, the funds have been spent on engineering, project management, transit planning, public involvement and communications (required by the federal NEPA process), and environmental studies, including preparation of a Draft and Final Environmental Impact Statement (EIS). The majority of the money spent to date in all project areas supports the current project design, including the bridge type.
After spending 6 years deliberating on how to replace the Interstate Bridge (3 times longer than it took to build the Empire State Building - from a concept drawn on napkin to the actual building open for customers) and spending 127 million dollars (more than 20% of the total cost of the Empire State Building project), the governments of Oregon and Washington still could not decide on what they wanted to build. According to another official site,
The Columbia River Crossing project team is currently refining designs for each of the project’s components based on public and local partner agency input.
In case you are wondering, the governors of both states, Oregon and Washington are hard-core liberals.
So tell me, dear leader, what are the chances that Barack Obama and the Democrats will answer Joan Walsh's plea to make the government work? Don't answer all at once, comrades...

"Obama and the Democrats have to ... make government work", Part 1

A very recent article in Salon proclaimed that Obama needed to "make the government work" in order to create new jobs. The exact job-creating mechanism proposed by the author Joan Walsh is, as could be expected, is solidly liberal and includes three major paths to prosperity:
1. More government spending
2. More government spending
3. More government spending.

I am not sure if anyone following the current discussion on job creation is surprised by the breath-taking diversity of proposals by Joan. She surely gave a lot of thought to the current economic situation, and worked out a very serious plan to cut unemployment. It clearly demonstrates that liberals are ready to deal with a serious crisis of confidence of the American people towards the bankrupt American government. After all, what is more likely to convince our struggling nation that liberals take federal debt seriously - than spending another gazillion dollars on some community bulding project. "If only Obama spent more on stimulus", whisper some economists - "we would have a perfect economy by now".

Apparently, the idea is that when the government spends another trillion dollars, the economy rebounds due to an increase in the never-defined "demand". Of course, it's rare that anyone of those famed economist explain where that trillion dollars is supposed to come from - apparently it just magically appears in the hands of the government (the Santa Claus school of economics). An economist of the Austrian school though would contend that the government must first withdraw that trillion dollars from the economy before it can spend it - so in the end, there is no net stimulus to the economy - there is only transfer of money from private economy through IRS and into the hands of the government clients. The other two options for the government to get a hold of a trillion dollars are equally troublesome -  government borrowing from private investors (which also means less funds would be available to the private businesses) or money printing (which means the government robs anyone who holds cash).

In short, the argument between the Austrians and the American Santa Claus liberals reminds me of a rather similar discussion between two characters in a famous Russian cartoon.

Feodor: We are broke, we need the money.
Dog Sharik: How about we sell something we don't need?
Feodor: In order to sell something we don't need, we have to buy something we don't need - and we can't afford to buy anything because we don't have the money.

The position of a liberal economist is virtually indistinguishable from what Sharik proposed - but then, Sharik was a very nice friendly character - which is not something you can say about professional liberals. In fact, if you disagree with a liberal journalist/economist/politician on this subject - he is likely to call you a "terrorist", a "jihadist", "Hezballah", "Taliban" - and the only thing that is stopping him from biting you is his cowardice.

Thursday, August 4, 2011

Double dip recession

The most unexpected thing about the Obama recession of 2011 is how many people failed to expect it. The US economy was like a giant locomotive, derailing in a slow-motion movie, and yet, the multiple well-respected experts could not foresee the coming crush. The obvious root cause of the blindness of the liberal economists is, at its core, their profound ignorance of how the economy works. They just do not understand the most basic things about the wealth creation. But before I jump to a more detailed discussion, let me first post a few quotes from my own blog.

The first quote comes from my November 2008 article, right before the elections.

Well, one thing that makes me feel better [about democratic lead in the polls] is that Obama seems to be gaining ground, and may well be our next mumbler and stumbler in Chief, while the libs will continue their control of Congress.

Some political party will pay dearly for all the crazy spending, bankrupt SS, Medicare, Medicaid. Someone will have to make hard decisions on the war with Islamo-fascism. Someone will have to deal with failing Europe, resurgent Russia, belligerent and powerful China, insane global warming scares.

If all of that falls on the narrow shoulders of Obama, Pelosi, Reid - and they fail (and fail they will) - the DNC will have to pay a dear price. Can Obama be better for the GOP and America than Jimmy Carter was? I most surely think so.

So 4 years from now, when unemployment is 10-12%, inflation is 10%, GDP is down, stocks are down, our economic freedom is gone, I can look at liberals and tell them: "You folks were kind of stupid in 2008, weren't you? Now, drop on your knees and beg for forgiveness". Isn't it totally worth it? I say yes...

In short, the chickens are coming home to roost - and the liberals may be the ones organizing the welcome party for them. Libs did not want to reform the Social Security under Bush - heck, they will have to deal with it under Obama. Libs thought we could easily win the war by talking to our enemies - smile, Obama will have 4 years to cool down Iran, Iraq, Afghanistan and the rest by talking to them. Libs did not want to cut welfare spending - they got Obama who will expand it. Taxes are too low for companies? Obama will raise them. You think our economy can sustain the liberal Congress, liberal president and the coming recession? Think again.

Bush is doing his best to avoid the recession under his watch. He is pumping the market with paper, so he could postpone the inevitable. And stupid democrats are playing along. Whoever is elected will have to deal with a crisis of Gargantuan proportions, and Obama is the best guy to screw it up – since I don’t want a republican to do it. In short, good freaking luck to liberals and what the liberals lovingly called "A Magic Nergo".

And yes, don't let me forget - Europe is, not feeling too good. Something to do with sclerotic liberal economy and "youths". It will get worse soon. Don't be surprised - liberal policies are quite advanced in Europe - like the advanced stage of cancer. I believe the Europeans should run for their life...
All in all, I expect Obama presidency to be an utter failure, and I do expect the Republican party to cleanse itself by 2012 and take over Congress and Presidency.

Who can honestly argue that my 2008 predictions were not spot on? Notice that nearly everything I said - did happen - the US economy is in shambles, Europe is disintegrating, American foreign policy is in disarray, and unemployment and inflation are rising yet again. How in the hell could Hyphenated American know all that in 2008?

Here is another quote - from an article I wrote in April 2009, when Obama's economic plans were put into action. Back then, if you don't remember, the stocks were starting to rise, it seemed that Obama was pushing back the unemployment.

I remember the former Russian Prime-Minister, Egor Gaidar explaining back in the 90ies to his leftie liberal opponents (former communist apparatchiks) in the Duma that printing money is bad for the economy. While there is some initial euphoria after the money influx, after 6-9 months the inflation catches up, and all the results of the stimulus are gone, and the people are saddled with even more discombobulated economy, mal-investment and high unemployment. In short, things got worse, not better.

Lets now examine the United State. Bush and his liberal cohorts in Congress and Senate pushed a lot of money in late summer, and fall. You surely remember the stimulus checks, money for the banks, the whole nine yards. Trillions of dollars left the government purse and were injected into the economy. It's April now, and the stocks started an unexplainable rise, while unemployment is going up. If you know economic theory - there is nothing puzzling in this situation. Wait for the inflation to hit the stores pretty soon now. It will become ugly. Will it be worse than 10% inflation? It most likely will - since don't forget that Obama makes Bush look like a fiscal ultra-conservative. It will be a long and sustained inflation. Should we expect price controls? Very plausible from this administration.

The New World Order is here - same as Old Europe.
Again, my predictions mostly came true - except I under-estimated the time constant of the US economy. Back in 1990ies, the lag between the government's massive spending and inflation was about 9 months in Russia, while it appears to be closer to about 2-4 years in the US. I presume this is due to 2 main reasons - US economy is much larger than the Russian economy (and don't forget that some of the newly minted dollars spill over to other countries), and American people are less used to high inflation (which means the people's reaction is slower). But all in all, again, my predictions were quite good - Obama's "stimulus" created a false short-term stimuli to the economy and masked the actual problems. When the money ran out, the recession returned - and I believe it will be worse than the 2008 recession.

So, how did it happen? The money pumping started under president Bush, and it was greatly accelerated during the Obama administration. It can be argued that most of TARP money was actually returned to the government, which means Bush's actions did provide a short term relief to the economy without too many immediate negative effects (in the long run, "too big to fail" policies will lead to even more outrageous policies of the big business - the so-called "moral hazard"). But Obama's stimulus money was completely spent - or mis-spent if you want to be more accurate. It would be very difficult to find any long-term positive effects from any item on the long menu of the 2009 stimulus bill - the fixed-sum handouts to the poor and middle class, the "shovel-ready projects" which did close to nothing to fix the infrastructure. Undeniably, spending 900 billion dollars in two short years did create a false impression that the economy was recovering and did promote the short-term spending spree, but in the end it could not solve the underlying causes of the 2008 recession - and once the money was gone, and reality rose its ugly head, the recession came back with a vengeance. What I also expected was that Obama would surely impose numerous rules and regulations that would seriously damage the US economy - which he proudly did. From CO2 emissions, to union rules (for example, Boeing-busting by the labor department), Obama's jihad against energy producers - coal industry, oil exports from Canada, and illegal moratorium on drilling after BP-Obama disaster. The so-called "Dodd-Frank Bill" was a rather brave attempt to drastically increase the role of the government in financial markets (same government that bankrupted Fannie and Freddie - as well as Medicare and Social Security, and grew the national debt to 100% of the GDP). Last but not least was the bonanza of regulations due to Obamacare - the naked attempt by the liberal elite to take over the national healthcare. I also expected Obama to raise taxes - which he undeniably did through the so-called Obamacare. And of course, the federal spending went completely out of control under the current president. It's sufficient to note that 2011 budget is larger than 2007 budget (last one written by the republicans in Congress and signed by Bush) by a hefty 1.1 trillion dollars.

All in all, even without Obama's busy schedule to destroy the US economy, America was in a bad shape. But the last 2.5 years made the economy fundamentals far worse than they were in 2008 - which is something I expected a Marxist community organizer would easily achieve. Artificial work projects, handouts to the poor and subsidies are inherently a wrong way to promote the wealth creation. Any person who studied the Austrian economic theory understands that these measures will only give a temporary and false feeling of recovery - which will have undeniable negative consequences in the long run. When the government decides to spend a billion dollars on a feel-good project, it does not help the economic recovery - quite the opposite. What it does is it essentially competes for resources with real businesses, and makes the wealth creation more expensive. If you plan to build a store - the labor and the materials becomes more expensive, since the government is now using those. When the government borrows a trillion dollars, the loans to private businesses become more expensive and they cannot expand. In other words, the money for the stimulus have to come from somewhere, and this somewhere is your pocket. How could that really help you? Imagine someone (for clarity, let's call him "Obama") inviting you to a most fabulous party with champagne and caviar, and most exquisite meats. You are having a good time, enjoy yourself to the fullest. And the next day you find out that this "someone" used your credit card to pay for the party. Now comes the tricky question - are you better off financially after this party? Of course, this analogy is only partly accurate - while Obama did put all the expenses on your credit card, he did not invite you to the party - unless you are among his core supporters (union leaders, Soros and the like).

In general, Obama's stimulus had no chance to succeed. But what made it worse - it was coupled with myriads of other steps, each one making it more difficult, more risky, more expensive to run a business in America. In short, Obama's stimulus and Obama's policies made the double-dip recession inevitable - and utterly predictable.

From 2009 to summer 2010 I was rather amazed (and amused) by the thousands of economists who proclaimed that a double-dip recession was extremely unlikely. Where are those economists now? What happened to them? What did not surprise me was the reaction of large and small businesses, most of whom stubbornly refused to invest or spend the "record-breaking" profits from the last few years. Apparently, they too understood that the Obama-recovery was built on the sand, and it would soon end. And now it's ending, and the hard times are ahead of us. Very, very hard times are ahead of us. I predict this - don't forget to write it down. The only people who can get us out of these troubled times are the Tea-Party. No one else has the guts and the brains to do the right things.