Spending to a de­pres­sion?

The Washington Times Weekly - - Commentary -

In the panic fol­low­ing the in­sol­ven­cies of Fan­nie Mae, Fred­die Mac and Lehman Broth­ers in Septem­ber 2008, the Amer­i­can tax­payer was stam­peded into bail­ing out Wall Street by ac­qui­esc­ing to Wash­ing­ton’s $700 bil­lion Trou­bled As­set Re­lief Pro­gram (TARP) in or­der to pre­vent the col­lapse of our fi­nan­cial sys­tem. Amer­i­can In­ter­na­tional Group Inc. was at the cen­ter of the storm with its $1.5 tril­lion book of credit de­fault swaps (CDS).

In­ex­pli­ca­bly, af­ter pas­sage, TARP was di­rected at banks rather than trou­bled as­sets — al­most like a bait-and-switch plan. Now, a lit­tle more than a year later, TARP in­spec­tor Neil M. Barof­sky re­ports that AIG’s port­fo­lio did not, af­ter all, pose sys­temic risk. So if the bailout was mis­rep­re­sented, it seems ap­pro­pri­ate to ques­tion ex­tend­ing TARP and to re­con­sider all suc­ces­sive debt-fi­nanced stim­u­lus spending since un­em­ploy­ment, fore­clo­sures and bank fail­ures have risen.

An ac­com­moda­tive mon­e­tary pol­icy may be nec­es­sary to re­vive eco­nomic ac­tiv­ity, but — even with the fed­eral funds rate at zero — it is nei­ther suf­fi­cient nor without risk of dis­tor­tions such as inflation. Clearly, help is needed from ef­fec­tive trade, fis­cal and reg­u­la­tory pol­icy.

Trade pol­icy caused a de­cline in com­merce dur­ing the De­pres­sion be­cause of dra­mat­i­cally higher tar­iffs im­posed by the Smoot-Haw­ley Tar­iff Act. To­day, Wash­ing­ton is at odds with free trade, in­sert­ing a “Buy Amer­i­can” pro­vi­sion in the stim­u­lus bill and pan­der­ing to pro­tec­tion­ist la­bor unions.

The ad­min­is­tra­tion has ig­nored the im­por­tance of trade in other ways, such as fail­ing to act on free-trade pacts al­ready ne­go­ti­ated with South Korea, Colom­bia and Panama; im­pos­ing new tar­iffs on Chi­nese tires and steel prod­ucts; and let­ting our com­peti­tors race ahead in se­cur­ing new free-trade agree­ments.

His­to­ri­ans rec­og­nize that the Hoover ad­min­is­tra­tion’s sharp tax in­creases on per­sonal, cor­po­rate, in­her­i­tance, gift and ex­cise taxes — all in­creased by Franklin D. Roo­sevelt — were a defin­ing fea­ture of the De­pres­sion years. In this re­gard, the Obama pres­i­dency will be the first ad­min­is­tra­tion since the Eisen­hower ad­min­is­tra­tion to raise taxes dur­ing a re­ces­sion.

In fact, Pres­i­dent Obama has one of the most am­bi­tious tax­in­crease agen­das of any pres­i­dent. He pro­poses new taxes on health plans; sur­charges on the wealthy, drug com­pa­nies and de­vice mak­ers, for­eign-source earn­ings, cap­i­tal gains, per­sonal in­come, es­tate, fi­nan­cial trans­ac­tions, car­ried in­ter­est and en­ergy — through a ca­pand-trade regime.

Roo­sevelt cre­ated an al­pha­bet soup of new reg­u­la­tory bodies and un­prece­dented reg­u­la­tions to re­dress busi­ness and in­vest­ment ex­cess fol­low­ing the stock-mar­ket crash of 1929. The New Deal sought to rem­edy dis- par­ity of wealth by em­pow­er­ing la­bor unions and farm­ers and in­tro­duc­ing new reg­u­la­tions to re­form the bank­ing, se­cu­ri­ties and util­ity in­dus­tries.

Wash­ing­ton is sim­i­larly in­tent on mas­sive en­large­ment of gov­ern­ment bu­reau­cra­cies, ex­pan­sion of la­bor unions and reg­u­la­tion of health care, bank­ing and fi­nance as well as the util­ity and en­ergy sec­tors.

New health care leg­is­la­tion that in­creases the role of gov­ern­ment would un­der­mine the role and choice pro­vided by pri­vate in­sur­ance and di­min­ish in­no­va­tion from med­i­cal de­vice mak­ers and drug and biotech com­pa­nies. A new Con­sumer Fi­nan­cial Pro­tec­tion Agency would im­pose new reg­u­la­tion, costs and more lit­i­ga­tion risk on a wide swath of re­tail busi­nesses. Cap-and-trade leg­is­la­tion or reg­u­la­tion by proxy through the En­vi­ron­men­tal Pro­tec­tion Agency would dra­mat­i­cally in­crease en­ergy prices and have broad-based rip­ple ef­fects that would raise pro­ducer and con­sumer prices through­out the econ­omy.

Al­though the shrink­ing of avail­able credit to pri­vate busi­ness - the mother’s milk of re­cov­ery — has pushed the ad­min­is­tra­tion to ratchet up pres­sure on the banks to ex­tend new loans, the anti-busi­ness leg­isla­tive agenda of the White House is at the heart of this con­trac­tion of credit.

In the past 15 months, the fed­eral bud­get deficit soared to $1.42 tril­lion, all of which is fi­nanced with U.S. Trea­sury debt. Suc­ces­sive years of ad­di­tional red ink will like­wise re­quire is­su­ing more gov­ern­ment debt at a time when our largest cred­i­tors — notably China and the mem­bers of the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries — have balked at in­creas­ing their U.S. dol­lar hold­ings. The most likely in­vestors to fill the gap in buy­ing this debt will be do­mes­tic banks, which will crowd out lend­ing to busi­nesses that need cap­i­tal for ex­pan­sion and job cre­ation.

If tempt­ing fate by re­peat­ing mis­taken poli­cies that led to the De­pres­sion is too hard to grasp, what may prove to be the tip­ping point is push­back on rais­ing the fed­eral debt ceil­ing to $14 tril­lion, a 40 per­cent in­crease since gov­ern­ment debt broke through $10 tril­lion when TARP was rolled out 15 short months ago. A fit­ting New Year’s res­o­lu­tion for 2010 would be to end the mad­ness and vote against any­one who fa­vors con­tin­u­ing down failed paths and can­not com­mit to debt re­duc­tion.

Scott S. Pow­ell is manag­ing di­rec­tor of Al­phaQuest LLC and a vis­it­ing fel­low at Stan­ford Uni­ver­sity’s Hoover In­sti­tu­tion. Ron Lau­rent is the manag­ing part­ner and chief in­vest­ment strate­gist of Ver­i­tas Part­ners LLC.

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