Wednesday, August 11, 2010

The Luck of the Liberals

You've got to hand it to our liberal friends. They've had an amazing run of luck. After mucking up the economy throughout the 1930s they managed to persuade the American people that they saved the economy in those years with their brilliant stimulus spending on the CCC and the WPA and the TVA and Grand Coolee Dam.

Then, for the last half century, it always turned out that a Republican was in the White House during a recession: 1958, 1969, 1974, 1981, 1990, 2001. Those stupid Republicans, we are reminded again and again. How could they keep screwing it up.

You could also think of the Luck of the Liberals. They always manage to be on vacation when there is real work to be done.

Let's think of liberals more as the uncouth Baron Ochs auf Lerchenau in Der Rosenkavalier. He had a remarkably high opinion of himself, even though his name translates as "ox of the lark-meadow." And he had a favorite rollicking waltz, "The Luck of the Lerchenaus." Eventually, the Baron's luck ran out and he was roundly humiliated to the satisfaction of everyone.

But now the liberals are in charge in the worst recession for a while, and it is a recession combined with a banking crisis, a particularly nasty combination. In such a situation, you need to get it right, otherwise things are going to be really nasty--kinda like the unending Great Depression of 1929-39, America's lost decade.

I felt and I wrote, back in early 2009, about my foreboding when the Obama administration did not change course after winning the election and continued with its entitlement and regulation agenda during the aftermath of the Crash of 2008. Not good, I thought. You chaps need to fix the economy first.

But the courtiers were all egging the Obamis on, and on they went. Now, of course, everyone is predicting a double-dip recession and deflation and a lost decade like Japan's in the 1990s, and Democrats are waking up the the prospect of an electoral tsunami in October. (A tsunami? Another proof of global warming, I should think.)

The sensible strategy is to repeal ObamaCare, repeal the Dodd-Frank financial re-regulation bill, enact sharp spending cuts, extend the Bush tax rate cuts, enact corporate income tax rate cuts, and watch the stock market turn on a dime.

But that, I would guess, is politically impossible for the Democrats. If they were to do that it would announce to the voters and the world that everything they stand for is rubbish and always has been.

The problem, I think, was encapsulated in a recent Wall Street Journal article by businessman Michael P. Fleischer about the problem he faces in the Obama economy. He talks about the cost of "Sally," the median employee at his business. She has a high-school education plus some specialized training. He goes on and on for several paragraphs adding up all the taxes and fees he must pay for.

When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally's job each year.

Think of it this way. Government puts a 33 percent jobs tax on every job in America.

Now do you wonder why business is slow to hire new employees in the aftermath of the Great Recession?

I'm reading A History of Central Banking in Great Britain and the United States by John H. Wood right now. Don't laugh, it's a real page-turner. Here's an important take-away. Every time there's a financial panic or crash, it seems that the big question is "confidence." Market players look for a magic bullet to restore "confidence." Another word for "confidence" is "credit" or faith.

In other words, the economy runs on more than the numbers. It runs on confidence and credit and faith and trust. It runs on the faith in the counter-party, that he is good for his commitments.

Governments and financial "plungers" tend to take advantage of other peoples' trust to hoodwink and deceive. But the market economy, at bottom, runs on trust, the trust that things will turn out all right and that the other guy will not try to run away from his commitments.

That's why J.P. Morgan told the Congress this in 1913:

[A] man I do not trust could not get money from me on all the bonds in Christendom.

This statement merely states the obvious. The problem with lending money arises not when things are going well but when things are going badly. What will a man do about the money he owes me when things are going south?

America's businessmen right now are in a quandary. They are making money, because they have ruthlessly pared back their operations to make sure they can turn a profit. But they are looking forward and they just don't have the confidence in the future to take a risk on expansion.

Not with President Obama in the White House and Pelosi and Reid leading Congress.

And so it looks like the Luck of the Liberals is running out, just like the Luck of the Lerchenaus. You just don't want to let the oxen loose in the lark meadow. Not if you want larks in it.

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