Monday, February 23, 2009

S&P hits new low as Nero pours kerosene

Two news items struck me as the S&P index hit an 11-year low today -- yet more proof that our political leadership is not up to the task of addressing the economic crisis.

First, our dear leader called for fiscal restraint and cutting the deficit in half, indicating that he will "continue the failed policies of the last" 20 years and view the national debt as a "burden." Does anybody in Washington understand fiat currency economics? The private sector is starving for net financial wealth (dollars or treasury bonds -- same difference), and the administration is worried about the deficit. Oy!

I think part of the reason people are confused about this is that there has been an unfortunate conflation of government spending (which is generally bad) and government deficits (which generally are not). Government spending is generally bad because it means that significant economic resources are allocated (inevitably inefficiently) by politicians, lobbyists, and bureaucrats. But giving money to people, via either transfer payments or tax cuts is not resource allocation. Money comprises little green pieces of paper or bytes in a computer. Nobody is being forced to build a highway in West Virginia or a bridge in Alaska to get a check.

The stimulus bill is an abomination (an Obamanation?) mainly because instead of directly getting little green pieces of paper into the hands of the private sector it tries to do it indirectly over many years through government spending. Even the non-spending parts of the bill, e.g. expansion of benefits for the unemployed (which encourages people to stay unemployed), or aid to state governments (which encourages the expansion of government at the state level), provide the wrong incentives.

Warren Mosler ( and others have been calling for suspension of the wage tax for 2009. That would be an excellent start. It gets money into the private sector fast and incentivizes work. I have no doubt that if this plan were implemented, the S&P would rally 20% within a week.

The second interesting news item was a report that the execrable Harry Reid was on CNBC talking up investment in alternative energy as priority number one. The world is fast-moving these days, and it seems to have left poor Harry far behind -- about 7.5 months behind. We are awash in oil, despite the sub-$40/barrel price, the supply of domestic natural gas is spiking (google around for Terry Engelder and Marcellus formation), and demand for everything is falling off a cliff. Harry and the rest of his minions remind me of the metaphor about rearranging the deck chairs on the Titanic. Only instead they are installing solar panels on the roof and clean coal technology in the boiler room.

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