Another Telling Skirmish

We aren't going to get the Clausewitzean decisive battle until the fall of 2012. But if Sunday's tentative debt-ceiling deal holds we just saw another telling skirmish on the march to 2012. The new Republican House made a difference. Again. You can tell that because Paul Krugman is outraged.

Well, he would be anyway because the President is forced into at least token spending cuts in return for an increase in the debt ceiling. So the president can't do a big spending stimulus to tide him over the election.

Of course what the economy needs is repeal of ObamaCare to take the weight of uncertainty off the backs of business, repeal of Dodd-Frank to re-energize the credit system, and income tax rate cuts to end the capital strike. But it won't get that until the Republican president is inaugurated in 2013 and the Republican Senate is seated.

Well, maybe, as the economy continues to splutter into next spring, the president will get religion and propose some tax rate cuts. God only knows what Paul Krugman will think of that.

But the fact is that, going forward, the issues favor the Republicans.

This is confusing to Democrats who think that they are the party of the little people. Here is pollster Stan Greenberg feeling confused.

I see clearly that voters feel ever more estranged from government — and that they associate Democrats with government...

Oddly, many voters prefer the policies of Democrats to the policies of Republicans. They just don’t trust the Democrats to carry out those promises.

Yes. Of course voters like the idea of free services. They just don't like paying for them, and they really don't like paying for them when the economy is in the tank.

The fact is that the Democrats have blown it. They really believed their Keynesian economic fantasy. They really thought you could blow through a big recession on a debt wing and a spending prayer. Now they have crashed into the ground and they are dazed, and really don't know what has happened to them.

But we know what went wrong. We know what the problem is.

When you have a big easy-money boom the boom ends in a crash. Then the bad debt has to be liquidated and the credit system repaired before growth can resume. Unfortunately, there is still plenty of bad housing debt around, and plenty of unsold homes. Until we turn the corner on that, the economy will continue to languish.

Sorry Dems, but you created the mess with your stupid "affordable housing" policies and you deserve to pay the piper for it.

In my view the chances are 60-40 that the Dems will suffer a punishment similar to the experience of the Republicans in the Great Depression. But don't worry, Dems. Republicans won't be able to invoke the name of Obama to frighten the voters, as Democrats did with President Hoover, for the next 50 years. Dems have a good cheering section in the media and the academy, so I expect they will be able to rehabilitate President Obama within 20 years, tops.

Why "Central Planning Lite" Failed

Beyond the sound and fury of the debt-ceiling debate is a signification that means something. It is "The Failure of Central Planning Lite," as Robert Tracinski puts it.

It is the failure of the faith that the Fed and the Treasury could manage the business cycle and avoid big swings with properly timed economic interventions.

This system can be thought of as Central Planning Lite. By the time Communism collapsed in 1989, it was no longer plausible to claim that full-blown socialism or full-blown central planning were the wave of the future. But our political and intellectual leaders were not quite willing to give up on the dream, so they insisted that we could have a watered down Third Way between capitalism and communism.

No we can't. The Crash of 2008 and the pathetic recovery of 2009-11 give the lie to that conceit. But what is the real problem? What went wrong?

The problem is that the Fed and the Treasury actually have an impossible task. Their job is to mitigate the distortions that politics inserts into the economy.

Politicians are politicians. Their trade is winning elections, and they win elections by promising benefits and subsidies and cheap credit to their supporters. These actions distort the economy in various ways, and so the politicians need economists to tell them how to get out of a jam when all the bases are loaded and the count is 0 and 2. Keynesian economics is a way of trying to game the economic system in a downturn to minimize the damage to the beneficiaries of government largesse. It is, therefore, not a way of structuring the economic system to make it safe, but a way to game the system in the hopes of minimizing the consequences of government interventions. The trouble is that it doesn't work very well.

Ludwig von Mises writes that a recession is the period of adjustment for the liquidation of the malinvestments of the previous boom. Keynesian economics wants to slide out of the recession with bridge loans and printed money--but without actually fixing the problem, the malinvestments encouraged by the cheap credit in the previous boom.

So the experts end up advising the government how to cheat, rather than setting up the parameters for a fair and just economic system.

You can call this the Treason of the Clerics, or the Co-optation of the Experts. Either way it is a big problem. Ever since Wilhelm von Humboldt set up the first research university in the early 19th century, governments have looked to academic experts to support and advise them. The result is that our academic friends have ended up in the pockets of the politicians, using their expertise to advise the politicians on how to maximize their power. Whether it is physicists helping build H-bombs, sociologists helping organize the welfare state, economists helping government game the credit system, or climate scientists inventing hockey sticks, the problem is clear. The professors have entered into a pact with the devil. In return for grants and funding and fame they have danced to the politicians' tune. They have helped build the big government state and helped to damage the health of civil society, the space between government and the individual.

We do not know whether the ordinary people are ready to tell the government to stop gaming the economic system, although the Tea Party gives us cause for hope. But the time is long past for honorable experts to stop feeding the beast, from Central Planning Lite to the whole corrupt bargain of the modern authoritarian welfare state.

After all, the first responsibility of an expert is to do no harm.

Obama Doesn't Need This Fight

Why is President Obama getting himself caught in the briar patch over the debt ceiling? The debt ceiling firefight seems to be consuming official Washington at a time when the president should be thinking about nothing except how to get the economy on track for next year. The president and his people seem to think that they win by getting the right poll tested sound-bites out there about a "balanced plan," "millionaires and billionaires," and "shared sacrifice."

What are they thinking? A look at the Rasmussen Presidential Poll shows the problem. Ever since the debt-ceiling fight started the president has been losing ground in the Strongly Disapprove column, while getting a very modest boost in the Strongly Approve column. That's no way to win an election.

Maybe the president and his people are crazy like a fox because they know they have to keep their base in the trenches fighting the Wascally Wepublicans. Otherwise they might get antsy and back a primary opponent against the president. More likely, if you ask me, is that they really don't have a plan to fix things before the election. They are just bulling forward hoping against hope they can get over the finish line before the track turns to mush. They are doing what they know, which is floating pretty words out to the voters.

But let's not make the mistake of calling this game of debt chicken an example of dysfunctional politics in Washington. Think of it instead as preparation of the battlefield for the 2012 election. The American people are going to be presented with a momentous choice. Do they go the Democratic Way of more spending, more regulation, more subsidies, more entitlements? Or do they make a Turn? To lower spending, reformed entitlements, lower tax rates, fewer subsidies, and less regulation?

The debt ceiling fight may be merely symbolic, for nobody is going to change anything before the election. But it shows, for anyone that is interested, that the Democrats are inflexible on their demand for continued spending. And the Republicans are inflexible on demanding spending cuts and no more taxes. Win or lose this round, both sides need to show their base that they are out there kicking and fighting for their side.

It's all pretty simple. People want to know that the politicians are on their side and that they care about people like me.

But President Obama doesn't need this mess. He needs to fix the economy, pronto. Or it's El Foldo in November 2012.

The Meaning of the Debt Crisis

The complexities of money and credit in the economy often serve to obscure the simplicities of the market economy. It is built on trust. When you hire someone to do a job for you, then you trust that they can and will do a good job. When you lend money to someone then you trust that they are good for the interest payments and the return of principal.

In the real world, of course, things get messy. People are optimistic. They offer themselves for jobs they are not quite qualified for; they borrow money on more of a hope that their business plan will work out than a real knowledge of the difficulties and the problems ahead.

Then there is government. Historically, government has entered the credit system to borrow money to finance its wars. If the wars turned out well then the bond holders got their money back. If the war was a disaster then the credit system crashed and bond-holders were lucky to get anything back. Anyway, governments default on their debt all the time.

But the Anglosphere was different. It managed to pay its debts more or less, from 1700 to 1930. That was, no doubt, because politics was dominated by the merchant class and the merchant class wanted a functioning credit system.

The century of the welfare state, starting in 1900, was different. Now politics revolved around the bribing of the employee class by the political class. Credit conditions were a secondary question. The only thing that mattered for the political class was winning the next election. The only thing that mattered for the employee class was getting and keeping their benefits.

Our present crisis is the end game of the century of the welfare state. The manipulation of the credit system to buy votes, in outright government debt, Federal Reserve open market operations to print money, and subsidies for debt in a host of vehicles like Fannie Mae and Freddie Mac have debauched the currency and brought the government debt up to about 100 percent of GDP.

President Obama is therefore in a bit of a bind. Sooner or later he must cut spending and/or raise taxes, but not before the 2012 election when he hopes to be reelected. Thus, for him, the long-term health of the economy is nothing. The propping up of the economy through the election is everything.

Republicans, goaded by the Tea Party movement, think that we might as well start baling out the ship of state right now by cutting spending. It's easy for them; Republicans don't buy votes with spending. Instead they buy votes by offering tax cuts.

Many people are shocked and appalled by the undignified spectacle of the debt-ceiling debate. But what we are seeing is the opening battle in the struggle for the future. Will the big authoritarian welfare state continue with its centralized, politicized programs of pensions, health care, education, and welfare, or will we cut these failed programs down to size? The Republicans, representing the middle class with jobs in the private sector, don't see too much of the benefit of big government. Democrats, as an over-under coalition of government administrators and experts on the one hand and program beneficiaries on the other are fighting to maintain their sinecures and their benefits. The fight is getting nasty and it will get worse. Of course it will. We are fighting over money.

In the end, of course, the American people will get what they want, whatever it is. In the meanwhile, government will break just about every promise it ever made.

Win Two Elections

The best way to understand the debt-ceiling crisis, in my view, is a battle at the end of the long strategic advance of the authoritarian welfare state.

But, as Michael Barone points out, Republicans lack the strength to win a decisive battle at this point. That's because, as he writes, the Constitution made it that way. You have to win two elections in a row to flip the government to your side:

The lesson is that you have to win at least two elections in a row to make the kind of policy changes that the Obama Democrats made in 2009 and 2010 and that House Republicans want to make now.

Right now the president and the Democrats are insisting behind the scenes that there will be no spending cuts without revenue increases. That is what comes up time and again as negotiations break down. Democrats want to cement in as much of the huge increase in spending as possible. They know they have to do it by minimizing spending cuts and maximizing tax increases.

In my view, of course, they are whistling Dixie. We are going to see a massive realignment over the next few elections and a huge repudiation of the Democratic approach to politics. If Democrats had any sense they would be preparing the battlefield and making strategic retreats on the most egregious of their corruptocratic programs and subsidies.

That's what they should do. But people usually don't. They keep doing what they are good at even after the game is up.

Napoleon is a good example. His great skill was manoeuvering his army between the widely separated armies of his coalition enemies. Time and again he managed to defeat one opposing army with his whole force while the other opposing army failed to get to the battlefield in time to make a difference. The reason the Battle of Waterloo was a close run thing was that the Prussians almost didn't make it to the battlefield in time.

Napoleon's problem was that, eventually, he wasted an entire army in Russia, and then the next year suffered a huge defeat at the Battle of Leipzig. His army never recovered from those two blows.

Democrats are still good at manoeuvering over the political battlefield and winning the war of words. But the game is up. Spending cuts will be necessary: big spending cuts. The Democrats just don't want to face up to them before 2012 because they understand that if they cut spending on their spending constituencies before the election they are dead meat.

It comes down to the Fram oil filter man's proposal. Do we want to pay him now, or pay him later? With benefits cut and sinecures reduced, all those loyal Democrats will be betrayed in the end anyway. It's a shame, but that's what happens when you put your trust in princes.

Obama Boxed In

There is always a presumption in presidential politics in favor of the president. He has his bully pulpit, his status as head of state. What the president wants, when the chips are down, he usually gets.

But is President Obama's position on the debt-ceiling talks as strong as it seems and as the mainstream media wants us to think? I suggest that the president's position is in fact strategically very weak.

Oh yes, the president can win any tactical fight. He can use the mainstream media to make the Republican opposition look extreme and partisan. The question is: would he want to if he wants to win reelection?

The president's basic problem, as I developed in "Where Obamanomics Went Wrong," is that he chose the wrong economic policy back in 2009. Now he is starting the reap the whirlwind, with a weak recovery, a danger of inflation, and still no bottom in the housing market. And he's scared the wits out of the business sector, as gambling king-pin Steve Wynn admits.

I'm telling you that the business community in this country is frightened to death of the weird political philosophy of the President of the United States. And until he's gone, everybody's going to be sitting on their thumbs.

They talked this way in the late 1930s. Business has gone on strike, they said.

I can understand Obama's tactics. From his point of view, he wants to get as much liberal stuff on the wall before they ring down the curtain on this "liberal hour." The problem is, of course, this. What if this isn't just another "liberal hour" but the "Liberal Last Act," after which America turns a corner, demands real change and gets a Republican who does a real number on entitlements, and never lets a liberal in the Oval Office again?

The president is gambling that he can keep most of his agenda, win reelection, and avoid a complete blowout in the 2014 second mid-term. It's easy for him: win or lose, he'll still be America's First Black President, with all the perks and privileges of a former president. For the American people, his gamble could result in a generation of hard times.

Tea Party Grows Up

The big question about the Tea Party has always been: is it for real? It's all very well to have rallies and infuriate liberals, but can the Tea Party move the needle?

For two years liberals have been busily telling us that, in addition to being a bunch of rich racists, it was all a storm in a teacup, an astroturf outfit, engineered by the billionaire Koch brothers.

Then came the 2010 election and clear victories for Tea Party inspired candidates adding up to a once-in-a-generation flip of 63 seats in the House of Representatives.

So now the question has shifted. This year the Tea Party turned out fewer people at rallies. Does this mean that the Tea Party is peaking? Not according to its activists.

In the Washington Post Amy Gardner reports that the Tea Party is shifting its priorities "to focus more on policy."

The strategy appears to be working, both on the presidential campaign trail, where most Republican candidates are eagerly embracing tea party priorities, and in Washington, where loyalists are setting the terms of the debate over taxes and spending.

Ned Ryun in the American Spectator agrees. And then there is the fact that people don't really know what the Tea Party stands for, and are uncertain about associating with it. Yes. Liberal slurs on the Tea Party actually do work! Jason Hoyt of the Florida Alliance has experienced the effect.

Jason related that he speaks at many non-Tea Party events, and will ask the audience to raise their hands if they consider themselves part of the Tea Party. In one women’s Republican group, only three or four raised their hands. Then Jason asked one of them what her definition of “being a part of the Tea Party” was. She stated the core principles of the Tea Party movement (limited government, fiscal responsibility, and free enterprise) perfectly. Jason then asked, “Based on that definition, who here believes they are part of the Tea Party?” Everyone present raised her hand.

Yes, but what about the future? Here is Ken Emanuelson of the Dallas Tea Party:

I'm confident that the Tea Party's best days are still ahead, whether it calls itself the Tea Party, or something else. If you want to see a true revolution, just wait until the center-right grassroots finally succeed in making common cause with the center-left and minority grassroots against the public/private crony corporatist establishment. If and when that happens, game over. I think the proper term is, "sea change."

Yes. The thing about the United States is that it is peopled by people that up-sticked from wherever they are to change their lives. There is no reason to suppose that the can-do attitude has completely disappeared from the American experience.

Tactics, Smashtics

You can allow our Democratic friends this. They really know how to do short-term political tactics, using the bully pulpit and the mainstream media to control the political narrative. Now it looks like the president will humiliate the Republicans in the debt-ceiling debate, as the president and the Democrats refuse a debt-ceiling deal with serious spending cuts. Because who could be cruel enough to deny seniors their Social Security Benefits, even for one day?

What the president and the Democrats don't seem to be thinking about is what comes next. It's understandable that they are utterly opposed to any spending cuts before the end of FY2012. But would the president really want to win the election if he knew what is coming after the election?

Sooner or later, after the massive deficits and quantitative easing, the United States government has got to get back to a balanced budget and has got to cut spending. And that means cutting spending on Democratic voters, because there is no other spending. Otherwise we are heading for a sovereign debt default and that is going to hit Democratic voters with a sledge-hammer.

The usual scenario for Keynesian economics is that, after the easy money and the big deficits, the economy is triumphantly back on track and can handle higher taxes and hard money. But what happens if the stimulus fails to bite? Then you are faced either with serious inflation as the easy money really starts to take down the value of money, or a nasty recession as the government gets to the end of its credit and has to tighten its belt. If it then decides to raise taxes as well, then of course, growth will sputter, revenues will decline, and the fiscal situation will worsen.

The big risk for the Obamis is that the economic recovery may not last until the election in November 2012. However the Democrats succeed in blaming eevil House Republicans for starving grannie, the fact is that the average independent voter will be judging the president on the economy. For the average Joe and Jane, the economy is not good, and it's not likely to get better.

Let's close with a military metaphor. In the long retreat of 1943-45 the German Army was still the tactical match of its opponents. The trouble was that it was overwhelmed strategically. And so after every tactical victory it still had to retreat. The same is true of the great Democratic Ascendancy. The trouble with socialism is that it eventually runs out of other peoples' money. And then the people that voted for it are worse of than before. We are seeing this in recent reports of economic Armageddon in the black community.

What does it matter if you can win a tactical victory on the debt ceiling and put off spending cuts? You still haven't solved the sovereign debt problem.

Can't Guarantee SoSoc Payments Mr. President?

Now I'm confused. Back in the maelstrom of 2008 I remember talking to a young Democrat about pensions. Much better rely on the government, he said, than on Wall Street. And at that point in history, he had a point.

But now comes President Obama during a teeny-weeny battle over the debt ceiling, the sort of minor spat we have every two or three years. All of a sudden the president is doing the FICA shuffle. Here is the president reneging on Social Security in an interview with CBS chappie Scott Pelley:

Pelley: Can you guarantee, as president, those checks will go out on August the third?

Mr. Obama: I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it.

Wait a minute Mr. President. I thought that Social Security Benefits were protected by a Trust Fund. I thought the Trust Fund was secured inside a Lock Box. So how come all of a sudden on a day in July you up and say, well, who knows if there will be any money to pay those Social Security Benefits? You know, the Social Security Benefits sequestered away in a Trust Fund, hidden away in a Lock Box. I just don't get it.

In fact, I would even go so far as to recall, in deepest sorrow, President Truman's words at the end of World War II. Truman said, after the surrender of Germany:

This is a solemn but a glorious hour. I only wish that Franklin D. Roosevelt had lived to witness this day.

Thank goodness the sainted Roosevelt did not live to witness the day that President Obama threatened America's senior citizens with the suspension of their Social Security Benefits. Here is what President Roosevelt said about Social Security:

We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.

The idea was, I understand, that by making believe that the FICA taxes were earmarked for Social Security people would believe that the government had set up a real insurance program instead of a pay-as-you-go Ponzi scheme. But now at least we know, thanks to President Obama, that it is all a mirage, always has been, always will be.

So now I'm inclined to call up my friend and ask him whether he is still so confident about the safety of his future Social Security Benefits. The thing about relying on Wall Street--meaning for the average person Fidelity or Vanguard or some greedy banker--is that if they run off with my money I can get them put in jail. But I can't do that with your average "damn politician." He'll just fly off on his Boeing 747 into the sunset and look down his nose at me.

He might even laugh at me.

Democratic Death Wish?

I think I see what President Obama is trying to do on the debt ceiling crisis. He is trying to get the House Republicans to agree to a tax increase and thereby split the Republican Party. Maybe. It's worth a try, anyway.

But maybe he should be looking at the big picture. A debt deal that increases taxes now and promises smoke-and-mirror spending cuts tomorrow will continue the present economic malaise of low growth and high unemployment. Will that get the president reelected in 2012?

The chaps at the American Enterprise Institute took a look at recent efforts to fix government budgets. In "A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked", Andrew G. Biggs, Kevin A. Hassett, and Matt Jensen found that successful budget deals featured mostly spending cuts. Here is Arthur Brooks's report on their findings:

On average, failed attempts to close budget gaps relied 53 percent on tax increases and 47 percent on spending cuts. Successful consolidations averaged 85 percent spending cuts and 15 percent tax increases. Some of the most successful financial comebacks—like Finland’s in the late 1990s—involved more than 100 percent spending cuts, so that taxes could be lowered. The spending cuts by the successful countries centered on entitlements and government personnel.

It really isn't that hard. Government spending is a weight on a nation's economy. If you want to get the economy moving then you have to reduce government spending. Everything else is smoke and mirrors.

I wonder if the president isn't missing the forest for the trees. It's possible he could get the Republicans to bollix themselves up and agree to a tax increase. And maybe that would get the president reelected in 2012. Or maybe not.

But the fact is that we are coming up to a crisis point where the American people are going to have to decide what kind of country they want the US to be. I just feel that the best way for liberals to keep their high-tax, high-spending state is to avoid budget crises. The liberal line works best if we are just considering one issue at a time, so that we can focus on the emotional appeal of the usual victims suffering from a lack of health care or housing or counseling. If we have a big crisis then people are going to be ready for a big deal and they are going to be more receptive to deep cuts in wasteful spending.

Just saying.

Debt Ceiling Chicken

Count me stupid, but it seems to me a no-brainer that whatever deal comes out of the debt-ceiling talks it can't include a tax increase.

Why? Because it's pretty obvious to me that, after the gigantic spending increases and tax increases of the Obama administration, the only thing left is spending cuts. The run up of the national debt in the last couple of years is putting the nation in sovereign debt default territory, and that is something that will press especially hard on Democratic spending constituencies (from spending cuts) and government employee pension funds (from dollar devaluation and debt restructuring). To protect their supporters the Democrats must come up with a deal.

Radio-host Rush Limbaugh understands this instinctively when he says that there is no pressure on Republicans to come up with a deal. It is President Obama that has a problem. The economy is floundering on his watch. The national debt is climbing into the stratosphere on his watch. And the health of all those Democratic spending programs depends on the health of the tax-paying economy.

Don't forget that a majority of Americans are against any lifting of the debt ceiling. Gallup's May 13 poll found Americans 47% to 19% against any increase in the debt. (Yes, I know. They would certainly prefer an increase in the the debt to giving up their government benefits).

I suppose that the president and the Democrats believe that they can win the PR battle over a debt default just like President Clinton won the battle over the government shutdown in 1995. To which I say: Maybe. There's a big difference between now and then, and the #1 difference is that Bill Clinton was a political genius and President Obama is not.

But the political gamesmanship, of course, is merely a sideshow. The bigger reality is that the Keynesian prescription for getting out of a recession has failed. It has failed because it misunderstands the problem. A recession is not a temporary period of indigestion that can be cured by a couple of pills of stimulus. A recession is the result of the failure of investments made in the previous boom. In the immediate case, a huge boom in housing has collapsed. For growth to resume we must repair the credit system (i.e., the underwater borrowers) by liquidation of the malinvestments of the previous boom so that all loans are once again above water and paying interest.

Right now the economy is still in the process of liquidation. There are still millions of people with underwater and/or non performing loans. The capitalist system depends on a functioning credit system, and that means that more or less every loan is collateralized by assets that are worth more than the principal loan amount, and that the debtor is currently paying interest on the loan and is expected to continue to do so.

President Obama's big mistake was to take his eye off the ball. He should have focused like a laser on getting the bad loans off the books and/or properly valued so that bank balance sheets and individual consumer balance sheets were restored to health. But he didn't, and now he is reaping the whirlwind.

And it will get worse before it gets better.

Obama Whistling Dixie

Even the Los Angeles Times recognizes that President Obama is in political trouble for relection in 2012. Doyle McManus retails the line from the Obama campaign, and then critiques it. Here's the Obama line:

1. He can improve his standing with independent voters by compromising with Republicans
2. He has moved towards the middle
3. Next year's electorate should include more minorities.
4. Obama's a good campaigner with the same team as 2008.

The problems with the Obami scenario are obvious.

1. Indpendents just aren't going to vote 52 percent for Obama like in 2008.
2. Move to the center? Tell that to Boeing and Delta.
3. More minorities? First, the minority turnout is bound to be less. Second, Hispanics will almost certainly deliver a lot less to the Democrats; they are workers, they want a good economy.
4. Same team? Let's face it. The vital team members were the MSM that refused to tell us who Obama was and where he had been. Much as they want to, the MSM just isn't going to be able to deliver in 2012 like in 2008.

Back in the 1960s the media used to blather on endlessly about "credibility" and how President Johnson had lost it over Vietnam. They meant, I suppose, that LBJ had "lied" over Vietnam, or told liberals things they didn't want to hear on Vietnam. But "credibility" means simply that the American people had stopped listening to Lyndon Johnson. That's the problem facing President Obama. Chances are that in 2012 the American people just aren't going to be willing to listen to a word that President Obama and his crack campaign team tell them. As far as they are concerned, the economy is in a recession, and things don't look to be getting much better. It's hard to see that things could get to appear much better by November 2012. Investors Business Daily has the bullet points:

• Jobs: -2 million; Unemployment up 1.5 percent.
• Most long-term unemployed ever.
• US dollar down 12 percent.
• Americans on food stamps up 37 percent.
• Misery Index up 62 percent.
• National Debt up 40 percent.

Candidate Bill Clinton famously ran on the slogan "worst economy in the last 50 years" in the early stage of recovery from a mild recession. But the 2012 Republican nominee doesn't need such fancy footwork. All he or she has to say is "Obama made it worse."

2012: The Liberal Annus Horribilis

Like I always say, the ageing liberal dynasty could have learned a lesson or two on economic policy from Ronald Reagan in the 1980s. The corrupt liberal dynasty could have learned a thing or two from Newt Gingrich's 1994 win and subsequent efforts to balance the budget. The fortunate liberal sons of the 2000s could have paid attention to the travails of the Bush administration. But they didn't. Great imperial dynasties never do see the end coming.

But next year, 2012, will see the liberals experience their annus horribilis. If you have a liberal friend, have mercy on them and don't rub it in.

Why is it possible to predict, a year out, how bad things will be for liberals next year? It just takes a little knowledge of economics and a lot of common sense.

The whole liberal program of tax, spend, and elect relied on the fact that you could always raise taxes on the rich, or promise new spending to the poor and/or the well-connected. Because the US had a staggering wealth that could be mortgaged with a fresh issue of government bonds.

But after a big financial crash the old game can't go on. As we have seen, the US National Debt has zoomed up to the 100 percent of GDP mark. That is when government debt gets to be a problem. You can tell liberals know they are in trouble because all of a sudden they don't want to pass budget resolutions or appropriations bills. Last year, the Democratic Congress failed to pass budget resolutions and failed to pass most of the appropriations bills. But they still lost 63 seats in the House.

Just today we learned that President Obama has agreed to a "big" deal on the debt ceiling. That means he wants a deal that will get him past November 2012. Of course he does. And no doubt in the last few weeks his staff have been working up a deal with as much in the way of phony spending cuts and as much in the way of real tax increases as they can.

But it really doesn't matter. The die is already cast for 2012 and it almost certainly means slow growth, high unemployment and rising inflation.

And then, after 2012, we have to get the economy back on track. That means swingeing spending cuts, because all government spending is waste. It means tax rate cuts, swapping special interest subsidies for lower overall tax rates. It means hard money, getting back to zero inflation. And it means repealing all the crazed hyper-regulation of the last two years. Oh, and it means reforming health care so that average people spend more of their own money on routine health care, economizing on health care just as they do on groceries and everything else they buy.

At the end of it all, we'll have a leaner, better, more hopeful America. But in the next couple of years we are going to see liberals trying every trick in the liberal play-book to put off the inevitable: the race card, the class card, the sob story, the civility card, the mean-spirited card. Don't forget the "it's for the children" card!

But I think that the game is up. Jonah Goldberg reports that young people are using the insult "that's racist!" as a joke. The Senate's class warfare resolution that the rich should pay more is already a joke to the chaps at Wizbang.

That President Obama and his staff are already playing race and class cards is an indication that they are going for a "base" election, and they are giving up on getting the independent vote. You mean the independents that elected the president back in 2008? And just how are Democrats going to get improved turnout from a base that turned out in record numbers in 2008?

As I say: next year is going to be an annus horribilis for liberals.

Liberal La-la Land

There's a big New York article by Frank Rich on "Obama's Original Sin." Obama oughta have dealt out a "reckoning from the moneyed interests who brought the economy down" in 2008, he writes.

Good idea. But why wasn't there a mention of Fannie Mae or Freddie Mac in the article? Just a tear-jerker about a retired policeman that got a foreclosure notice on his debt-free home.

Now that the New York Times's own financial reporter Gretchen Morgenson has a book out on the Times imprint, Times Books, and that book, Reckless Endangerment, fingers the Community Reinvestment Act, Fannie Mae, and Fannie Mae CEO James A. Johnson as the culprits for the meltdown, you'd have thought that Timesman Frank Rich would at least make a nod towards the CRA/Fannie explanation. But he doesn't, and I trawled through the comments looking in vain for a commenter that got it. OK, there was one commenter that referenced George Will's review of Reckless Endangerment.

Look, I understand that the liberal line is that the meltdown was caused by greedy bankers and slack regulation, but even liberals need to know the time of day. As Noam Chomsky wrote about the Wall Street Journal: the news side is solid because the rich need to know the truth about the economy for they need to manage their riches. But it doesn't matter to them that the opinion side is deluded right-wing craziness.

Liberals need to know the truth about their favorite government programs, especially when they are going badly wrong.

Then there's Medicare. According to Michael F. Cannon:

The three most salient characteristics of Medicare and Medicaid fraud are: It’s brazen, it’s ubiquitous, and it’s other people’s money, so nobody cares.

A conservative estimate of Medicare fraud is that it is 10 percent of spending. Maybe it's worse; maybe it's 20-30 percent.

The point is, of course, with Medicare and with the financial meltdown, that the problem is not the fraudsters. The problem is the government. Medicare was set up as a fee-for-service operation, so medical providers have an interest in gaming the system to maximize the number of reimbursable procedures. The government's affordable housing programs forced lenders to lend to borrowers without proper income and credit. So of course we ended up with toxic debt swilling around all over the world.

You can fool some of the people all of the time, said Abraham Lincoln, and it certainly seems that liberals are completely fooled about the financial meltdown and about Medicare.

But at some point, the people that understand what is going down are going to have to stand up and be counted. It was government that set up the financial meltdown and nearly broke the economy. It is government that is breaking Medicare, and forcing the end of Medicare as we know it. Until we get to that point, where the American people understand this and insist on it, we are still heading downriver for the waterfall.

Liberals Tiptoe Around "Reckless Endangerment"

For three years liberals have insisted that the financial meltdown of 2008 was the fault of Republican de-regulation of finance and greedy bankers. The New York Times has not been any more shy in the propagation of this narrative than the Democrats' financial point man, Phil Angelides, chairman of the Financial Crisis Inquiry Commission set up by law in October 2009.

But now comes Reckless Endangerment by Gretchen Morgenson and Joshua Rosner. Morgenson is a financial editor for The New York Times. You'd think from the subtitle "How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon" that Morgenson and Rosner continue the official Democratic line, but it is clear from the reviews that they don't. What emerges from the book, surprise, surprise, is the Republican line, that the problem was the convergence of federal housing regulation in the form of the Community Reinvestment Act and the government-sponsored cheap money from the two mortgage giants, Fannie Mae and Freddie Mac. Morgenson and Rosner even go so far as to finger former Fannie Mae CEO James A. Johnson as the #1 culprit. Johnson was the campaign manager for Vice-president Mondale's 2004 presidential campaign, so he knew a lot about finance.

When George Will pointed all this out in the Washington Post the commenters went ballistic.

But The New York Times has now published two reviews of the book by its "assistant business and financial editor" and published by its own imprint. Both reviews, by Robert A. Reich in the Sunday Book Review, and business journalism professor Pam Luecke, acknowledge the central role of Fannie Mae and James A. Johnson in the debacle, and then scurry for the exits.

Even Michael Barone, reviewing the federal role in subsidizing property ownership over two centuries, doesn't make the obvious judgement, that government interference in the financial system has been a disaster for ordinary Americans. Let's follow his argument, anyway.

First, the government subsidized ownership of farms.

Government sold land cheaply and on credit, and under the Homestead Act gave it away free to those who worked it for a few years.

Yes, but President Andrew Jackson's efforts in that department led to the Specie Circular and a ten year deflationary depression in the 1830s and 1840s. After the Civil War, of course the US experienced a financial war between and the Free Silver movement and the deflationary effort to resume gold payments at the pre-war price of $20.75 an ounce. In other words, the efforts of the government to subsidize farm ownership led to eye-watering booms and crashes and untold misery.

When people moved to the cities and bought homes, government stepped in there too.

Government stepped in to subsidize that property, too, in the form of low- or no-interest mortgages and tax deductions for interest payments.

This all worked pretty well for many years, according to Barone.

Then, as with farm programs, government went too far. Fannie Mae and Freddie Mac, with support from administrations of both parties, financed loans to uncreditworthy borrowers on the theory that, hey, you didn't really need a down payment or steady income to be able to afford a house.

In fact, we have had a 50 year inflationary boom in housing which has pushed housing above the level it would have reached absent the subsidies, and that has, all along, put an immense burden on the young and the poor trying to buy a first home. Housing subsidies tend to give windfall profits to people that already own homes.

Now, of course, the whole sordid game has blown up, and who are the people hardest hit? Why women and minorities, of course. They got to buy houses that they couldn't afford and now they are kicked out of their dream homes and back into rentals. Canny speculators (people with money) are already out there picking up bargains. And people that bought homes 20 years ago are doing fine. Sure, their homes aren't worth millions any more, but they still represent a decent return on investment.

The lesson here, and it is a big one, is that government is clueless when it comes to economic management. If it subsidizes farms, then farm prices get caught in a tornado that sends prices soaring one moment and crashing to the ground the next. In housing, the government's meddling has caused untold misery and unemployment for millions.

There are two kinds of government finance in the world. There is Dutch finance, invented by the Dutch in the 17th century, that keeps the financial system pretty well in the hands of the bankers, with the government benefiting by getting low interest rates on its funded debt. Then there is French finance, invented by Scotsman John Law, where the government tries to manipulate the financial system to maximize its seignorage from cheap money and subsidies. Dutch finance (copied by First Treasury Secretary Alexander Hamilton) leads to prosperity and economic growth. French finance leads to inflation, misery, and collapse.

Which would you choose?

Obama vs. Reagan

Back in 1981 an extremist conservative was inaugurated President of the United States in the middle of a teeth-rattling recession and immediately executed on a program of spending cuts, income tax rate cuts, deregulation, strong defense, and continuing the Volcker policy of hard money.

In 2009 an extremist liberal was inaugurated President of the United States in the middle of a teeth-rattling financial crisis and immediately executed on a program of increased spending, tight regulation, and easy money.

We know now that President Reagan's policies were followed by an astonishing boom that continued more or less for the next 20 years. We do not know what the economy will look like 20 years after President Obama's 2009 policy mix, but things are not looking good.

Columnist David Limbaugh experiments today with a column imagining President Obama admitting that he got everything wrong.

I'm going to ask my party to join with Republicans in focusing on the national debt instead of ginning up envy, jealousy and animosity among people who earn different amounts of money... It may involve some cuts in benefits, but if we don't do this now, eventually everyone will lose his benefits, because Medicare, Medicaid and Social Security are headed for insolvency -- and much sooner than we thought.

Limbaugh's imaginary president continues: "Endless government spending, I now see, will not stimulate economic growth... I'm also going to get real about discretionary spending cuts because trillion-dollar deficits are hardly sustainable." Forget defense spending cuts. "I can now see... that my [ObamaCare] will in fact increase costs... I'll also have to temporarily back off my demand for high-speed rail... [and] my various quixotic renewable energy ruses... My party was instrumental in pushing affordable housing on everyone, which was the biggest culprit in our financial meltdown. I was in the Senate for much of this time, and I went along with Barney Frank and others in obstructing remedial action proposed by President Bush."

Put like that, you can see why the president's Wednesday news conference was such a bust. There he was, mouthing empty but presumably focus-group tested political insults at the Republicans, demonstrating to all the world that he is fresh out of ideas.

The best thing for the nation is a blowout election next year that will cure the Democratic Party for a generation of its tax and spend and subsidize and divide big government politics.

After that blowout, my fellow Americans, by all means put the Democrats back in power. For now, you have the opportunity to teach them a powerful lesson.

But only if you really want to.