I’d like to take a moment to welcome Pennsylvania Gov. Ed Rendell to the Keynesian Skeptics Society:
Pennsylvania Gov. Ed Rendell (D) backed the $787 billion stimulus but said Saturday that he isn’t sure whether it will actually fix the economy.
Rendell, at the National Governors Association meeting in Washington, said Saturday that all governors are committed to making sure that the stimulus is used for measures that can boost their states out of the recession. But he said that most governors will be watching to see what kind of effect it has on the economy.
Rendell said he’s optimistic but that “80 percent are waiting to see if this works.”
“It’s a good first step, but the challenges in infrastructure are enormous and we hope that the administration and the Congress will work with us to meet those challenges,” he said. “We’ve just scratched the surface of the infrastructure needs in this economy in the stimulus bill.”
Asked whether another stimulus will be needed, Rendell said, “I think we should see how this works first.”
It’s not a good first step, it’s really a step back. Keynesianism has been tried and failed.
The federal government has already committed $9.7 trillion to solving this crisis and more money spending is on the table. Where does it the end?
“The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” – Thomas Jefferson
Here is a look at the Dow Jones since January 20th, when Barack Obama assumed the presidency. I’m not saying this is all his fault, but it’s clear that his mortgage bailout plan and the “stimulus” package have been met with skepticism on Wall Street.
In fact, this is the worst January on record for a president in a century:
[F]rom Nov. 4, 2008 through Feb. 12, 2009, the DJI overall fell 18% — a larger drop than during the Sept-Oct plunge. In January, when the Obama plan, promising far greater deficits than the two much smaller “emergency stimulus” plans signed by Pres. George W. Bush in 2008, was unveiled, the market tanked – the worst January performance in 113 years.
More pointedly, key political victories for the Team Obama spending plan have not been viewed as buying opportunities on Wall Street. A string of negative market reactions began with the December 18 announcement of a stimulus bill of $700 billion (Dow down 2.5%), continued with the January 7 announcement that the actual plan would be “on the high side” (-2.7%) and continued with last week’s 61-36 Senate vote supporting the Administration’s fiscal plan. The White House victory and the new bank bail-out plan announced the following day by Treasury Secretary Geithner were met with a 5% wipe-out in the DJI, and a decline in Treasury bond yields, indicating a “flight to quality.”
Markets don’t react well to a president saying things like, “Potentially we’ve got trillion-dollar deficits for years to come.” Investors realize that deficits matter:
If historic U.S. budget deficits are any indication, the economy is already “stimulated.” The predicted 2009 federal deficit stood at 8.3% of GDP before Obama’s package sent it to about 12%. This is a stunning level of debt, double the previous post WWII high when Reagan’s 1983 budget deficit amounted to 6% of GDP.
We do, however, know the accounting trends: our government faces massive new spending increases as Baby Boomers retire and their Social Security and Medicare bills come due. Market investors are wary of new spending, guaranteeing either future tax increases or inflation, as a run-up to the demographically guaranteed spending spiral. The quest for “shovel-ready” projects makes one think, Where’s Senator Ted Stevens when we need him? In any event, this fiscal bridge to nowhere is not spurring markets.
Government deficits are nonetheless being sold as doctor’s orders, an elixir that – while it looks ugly and tastes bitter – will propel us back to economic health. Yet the best forecast currently on the table is the one made by investors risking their own money. They are shorting the “stimulus.”
As the CBO has already predicted and common sense would indicate, whenever you take a dollar out of the economy through spending or borrowing, it is one less dollar that can be invested. Economists call it “crowding out” because it lessen the money available to the private sector for investing and borrowing, which can result in higher interest rates if the deficit is large enough or inflation if the Federal Reserve is printing money to offset economic problems, which they are today, as Steven Entin noted in a presentation on Keynesian economics at the Cato Institute.
Sounds like the 70′s all over again.
I’ve been reading QandO for years and let me tell you, this is a privilege for me. As McQ has already mentioned, I’ve worked with the Libertarian Party of Georgia and Bob Barr‘s presidential campaign in addition to contributing to a couple other blogs and maintaining my own blog.
I look forward to contributing here and advancing the cause of liberty.