Monday, September 6, 2010

Obama Reminds Us Again that the Era of Big Government Never Ended

The President is announcing what appears to be a simply bad proposal to Congress. Here is in Obama to Announce Transportation Infrastructure Plan:

President Barack Obama today will propose a six-year plan to rehabilitate the nation’s transportation infrastructure with an initial $50 billion to help spur an economy that’s lost jobs for three straight months. . .

Two months before congressional midterm elections, Obama will call for the formation of an “infrastructure bank” and request money to rebuild 150,000 miles (241,400 kilometers) of roads, construct and maintain 4,000 miles of rail, and overhaul 150 miles of runways, the statement said.

The first reaction I have is that this proposal is "off", perhaps "out-of-touch", as was used to describe Bush 41. Didn't ARRA (the winter 2009"stimulus" bill) address this topic?Of course it did; per the article:

The economic stimulus package approved last year allocated $38.6 billion for the Transportation Department and so far $18.5 billion has been paid out, according to a government website that tracks the spending.

So there's substantial unspent ARRA money left with which to "stimulate" the economy. Why wasn't enough allocated in ARRA to do an adequate job? Also, President Bush (43) had quite a row with Congress in his second term a few years back over Congress's desire to stimulate its re-election with a very large transportation bill, and he successfully fought for a smaller bill. (This was before Mr. Bush decided that the way to save capitalism was to abandon its principles.)

The Obama proposal has the look of uncreative but destructive behavior from an administration that was touting a Recovery Summer too recently to allow even the most cynical pols assume that people will have forgotten it by the first Tuesday in November.

Let's examine the first two points in the proposal in more detail.

1. Roads. 150,000 miles of them. That's a lot of roads. It is in fact more miles of roads, by far, than exist in the Interstate Highway System. Wikipedia points out that:

As of 2006, the system has a total length of 46,876 miles (75,440 km),[1] making it both the largest highway system in the world and the largest public works project in history. The Interstate Highway System is a subsystem of the National Highway System.

While Interstate Highways usually receive substantial federal funding (90% federal and 10% state) and comply with federal standards, they are owned, built, and operated by the states or toll authorities.
(emphasis added)

So the money goes to the states and eventually all politics is local, so this is pork.
Why does the announcement cover so many more miles than the total of Federally-financed (90%) roads? Perhaps because the IHS is part of the much larger National Highway System, which is described thusly by Wikipedia:

The National Highway System (NHS) of the United States comprises approximately 160,000 miles (256,000 kilometers) of roadway, including the Interstate Highway System and other roads, which are important to the nation's economy, defense, and mobility. The NHS was developed by the United States Department of Transportation in cooperation with the states, local officials, and metropolitan planning organizations. Its main purpose is to coordinate federal funding; most of the roads (including the Interstates) are maintained by the states.

So it would appear that Mr. Obama wants the world, and Americans, to pay up rebuild the National Highway System. I don't get around much anymore, but I wonder if our roads are in such poor repair that this suddenly is such a priority that a normal Congressional review of budgetary priorities is inappropriate. Is there a Pearl Harbor- or 9/11-type event that has just occurred with the roads?


Let's move on to the second point:

2. Railroads. Is the Federal government going to own 4000 new miles of track? If so, is it because Amtrak is such a great financial success? Here are some facts from the Ass'n of American Railroads:

Between 2006 and 2007, the "miles of track operated less trackage rights" dropped about 1% to about 160,000 miles.

So the free market, during a boom, was removing track from its network. Why does Barack Obama want to add so much track when freight traffic is still not near its 2007 peak?

Might the answer have something to do with the following statistic from the same source?

Average 2006 wages: $68,1141.
Average 2006 total compensation: $94,607.

My answer to my question is probably YES, given that this proposal is being unveiled on Labor Day.

Re the third point, airport runways, I have no comment.

The country is, it appears to me, treading water till the appearance of a new New Thing such as the information technology and communications revolution that appeared so exciting a decade ago.

What the country needs is for Washington, including the Fed, to realize that we are now in a situation where the right answer for D. C. is: don't just do something, stand there!

Or, when you're in a hole, stop digging.

Instead, the Democrats are proving that they are fundamentally no different from the Republicans. Together they comprise an ancien regime in a nation founded on libertarian, small government principles.

Per the administration wish list proposed today, the Feds want to increase their control over the real economy and will, as did Scarlett O'Hara, think tomorrow about how to pay for gaining that control.

Unfortunately, we know how that thought ends. During the period when Ross Perot's movement actually had influence, the people were stating clearly that they wanted a government that was in some sort of harmony with society. That's the basic point of belief in a balanced budget. One can be for small or large government and share a belief that honest accounting is the right way to go. I believe that the public continues to understand that the piper gets paid eventually. From a financial standpoint, the easiest solution for Washington is to promote the idea and fear of "deflation" while inflating away.

Despite the alleged need for yet more "stimulus", oil prices are holding almost 4 times greater than the industry assumed price of $20/barrel that prevailed as recently as 5 years ago; copper is holding around $3.50/pound; silver is for now holding near its post-1980 record around $20/ounce; and gold is holding around $1250/ounce.

Some deflation.

As James Montier makes clear in a very nice, brief and interesting blog post, to be fundamentally satisfied with today's 10-year Treasury yield suggests that one is assuming a 70% probability that the U. S. "goes Japanese". To be bullish on the 10-year would therefore suggest a greater than 70% chance of such an event. He suggests that a more "normal" 10-year yield is about 4.4%.

Whether the President's proposal for Transportation Dep't. spending goes anywhere in Congress, and whether he will fight hard for it should it have legislative difficulties, is yet unknown.

What I believe is clear is that the public increasingly has realized that the era of big government never ended, though it did initially hide in the last decade behind a public-private partnership with Big Finance, and that the basic accounting problem of ever-growing Federal deficits (in the setting of near-bankruptcy of more than one state) cannot be wished away and should not be resolved by more and more Federal Reserve monetization of the debt.

In this context, the ups and downs of the voting machine known as the stock market are almost irrelevant. I continue to believe that gold and Treasuries are in, or entering into, a sort of contest analogous to the finals of a single-elimination tournament. I suspect that gold will "win", given the nonsense coming from both wings of the Establishment in Washington. Thus I am in a "hold" mode with gold versus a tactical "buy on dips" mode with long Treasuries (meaning buy on price weakness, which is the same is surges up in yield, given that I currently think that the Treasury bubble has farther to run).

That view does not mean that over the course of a season of tournaments, or several seasons, that other competitors will not do well. These competitors include silver and several strong companies, and even perhaps such boring entities as high quality muni bonds.

Copyright (C) Long Lake LLC 2010

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