Saturday, December 5, 2009

O-Where Man Understands That Government's Economic Power Ultimately Comes from the Barrel of a Gun, but He Doesn't Really "Get" the Free Market

From Credit Writedowns, Barack Obama Gets It:

We’ve got a long- term structural deficit that is primarily being driven by health care costs, and our long-term entitlement programs. All right? So that’s the baseline.

Now, if we can’t grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who’ve got jobs are paying taxes and businesses that are making profits have taxes — are paying taxes. That’s the most important thing we can do.

We understand that in this administration. That’s not always the dialogue that’s going on out there in public and we’re going to have to do a better job of educating the public on that.
The last thing we would want to do in the midst of what is a weak recovery is us to essentially take more money out of the system either by raising taxes or by drastically slashing spending. And frankly, because state and local governments generally don’t have the capacity to engage in deficit spending, some of that obligation falls on the federal government.

Thus said Mr. Obama. (Note that he said this is a weak recovery. Does ECRI agree?) But in the second paragraph, what does he mean by sparking strong economic growth with the goal of lowering deficits other than doing so via deficit spending? So he's giving us the statist version of "Reaganomics" that his party derided as voodoo economics and worse. He's saying that despite all the tax increases in the health care bill that will kick in well before the subsidies, and many other proposed taxes to pay for this and that (always on the "rich" who are primarily just hard-working upper middle class "folks"), somehow he's going to do deficit reduction after massive deficit spending. (Perhaps it's all in the baseline of what this reduction is from. If it's from the current bloated deficit, big deal.) His party moaned over the Bush tax cuts and the supposedly horrible deficits that resulted, though their goal was also counter-cyclical and they were much, much smaller as a % of the budget.

The President's statement is nowhere. It's not here, and it's not there. It's an olio of poll-tested themes (cleverly leaving out that unpopular deficit spending provides the spark in his plan), but the stew is mixing fish and fowl and has no unifying theme other than hope. The Reaganites had a coherent story. This was that tax rates were so high and did not allow for any inflation adjustment to boot, that lowering rates would have no tax cost and would probably lead to "revenue enhancement". Believe it or disbelieve, but it was an argument that took a stand that could be refuted. The above statement by the President does not show that he "gets" anything. This is basically because he is a constitutional lawyer with no private sector experience, his vice president is a lawyer who graduated in the bottom half of his class, and all the President's pre-political background is in deep blue academic locales; and this sort of background is true of most of his advisers past and present, the slumlord felon Antoin Rezko and the creepy pastor Jeremiah Wright notwithstanding. (Plus the Chicago meme . . .)

As with Afghanistan, where he wants to both escalate so he can have the pleasure of de-escalating a mere year later, he wants it both ways on the economy. He wants goverment to spark the economy, but he wants to decrease the deficit. A month ago he wanted to cut the rate of growth of government spending. Is that musing still valid? Will he in fact tell Harry Reid to eliminate the tax increases that kick in ahead of the spending on healthcare "reform" simply to make the 10-year CBO projections look acceptable? Whatever way the wind blows (or is it that you don't need a weatherman to know which way the wind blows)? How can these taxes be consistent with the above quote? They can't, but don't expect a CNN or NYT fact-checker to point that out.

The consistent goal for Barack Obama is larger government. That is the unalterable point of the healthcare bill and why he hasn't bothered to take strong positions one way or another. If healthcare is 17% of the economy and government can move toward full rather than partial control, that's a good year's work. Not to mention vastly increased government power over the financial and homebuilding and home-buying worlds (the Bushbama Continuity and then some more power for good measure).

The same is true of New Deal 2.0 and all the George Soros-linked organizations. Large government has little use for small business. It's just too . . . well . . . small and diffuse to bother with. It's far easier to cut deals with Big Pharma and other Big Thises and Thats than to deal with NFIB's members etc.

Small business in turn fears Barack Obama and is hunkering down more than it otherwise would. He is sparking inertia and loathing among certain sectors that know that they are being targeted for selective tax increases (on the owners if financially successful) and higher employee costs, all the while knowing that money center financial institutions have their orders to keep the money flowing to their overpaid employees and to large companies that are "creditworthy" and that already provide health insurance to their employees because they have gross margins over 90% and so they spend vast sums lobbying and advertising to keep their profits up. So small business knows that this administration doesn't really care about them except as annoying sheep to be sheared.

This is one reason the major stock indices and the Labor Dept.'s establishment survey of employment are misleading. (We will have more on the jobs data and economy tomorrow.)

I have to disagree with the accomplished Ed Harrison on this one. I think that until now every President from Jimmy Carter upwards knew what he believed on the economy and believed in the free market to one degree or another (who knows what Richard Nixon really believed?). This President has transcendent social and international goals and is in my opinion relatively uninterested in the details of this allegedly capitalist economy. Unfortunately, he has outsourced much thinking to the Robert Rubin acolytes such as TG and LS, and to Big Finance, and the result is the trickle-down that the Democrats used to decry. Now their Party just as fat and happy as the Repubs and works just as well with Big Finance to keep Americans just a step or two from pitchforks.

The belief here is that the free-market economy works fine, but Big Government screws it up because it cares about Big Finance, war without end in Eurasia and Eastasia, and other self-perpetuating powers that be. Our system will readily meet the needs and desires of the people within affordable levels, but it needs to be free of "policy-makers" who, as was the case with the semi-socialist Pres candidate George McGovern who became a fiscal conservative once he left Congress and got a real job, have no idea what really makes that giant abstraction known as the American economy tick, or if they know, they don't care because their ideology of big government trumps everything.

What Barack Obama "gets" is government. He likes it. He believes in it. He's bringing us more of it. He wants us to think it's just like a friendly Big Brother whose adherents also fought wars without end in Eurasia and Eastasia. But it's not (nor is it the malevolent Big Brother of 1984). Those of us who have spent a lifetime in the private sector know that government is no better than the people, but it is armed with the power of the gun that except for the underworld is absent from normal private sector dealings, and thus government is often unfair and arbitrary even with good intentions. If Mr. Obama joined George McGovern as a proprietor of a small hotel or became a vascular surgeon trying (in vain) to charge $30,000 per amputation, he might well change his tune.

Don't hold your breath.

This rich country could easily have a system of limited government with a safety net for the truly needy, with maximal individual freedoms; but Washington, D. C. has grown so fat, arrogant and happy spending your money that its Big Media enablers have given us the least experienced, most Big Government-oriented President anyone can remember with the Big Lie that he was some polymath who knew everything about everything . . . just ignore the double TelePrompters, please that kept him from gaffe after gaffe. Forget about a new birth of individual freedom for a while or government by and for the people. Just remember that the current theme is government of the people by the powerful. That's Big Government/corporatism 2009. You may like it, love it, hate it or dislike it, but you will have a hard time denying that this is the case.

Coupling this President and his latest disregard for deficits in favor of "sparking" economic activity along with 'copter Ben and abusive zero interest rates (reflation without prior deflation) and you have the bipartisan governmental reason why ordinary investors of varying political leanings are moving small parts of their savings from fiatscos to Auric Goldfinger's fave.

As EBR has consistently said in its short existence, our financial institutions have been in an extend and pretend mode ever since the biggest ones went under or were rescued and this pretending argues for gold as the most secure form of saving/investment, even though you can't buy milk with it at a grocery store. For better or worse, government has done what it has done and must suckle the baby it became wet nurse to until weaning can be accomplished. Until the milk of governmental kindness to Big Finance dries up, there is no reason for gold to lose its fundamental luster with investors. The very short-term technicals for gold look so bad that it just may be a "bear trap". New gold investors who are not trying to pick the bottom can buy GLD at current prices. GLD has already had a 6% correction; often that's all you get when the bulls are in charge. GTU is a bit more extended than GLD, but if gold has another significant move up from here ahead of it, that difference is irrelevant.

The business cycle may work in favor of Mr. Obama in 2012, and I wish it well. I just wish that the era of big government were really over.

Copyright (C) Long Lake LLC 2009

(Edited version 7:45 AM Dec. 6, 2009)

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