I was struck by a particularly interesting stream of nonsense emanating from the mouth of the head of the Democratic Congressional Campaign Committee, Rep. Chris Van Hollen of the extraordinarily poorly governed state of Maryland. If we were to privatize or partially privatize the nation’s public-pension system, he argued, that would be the equivalent of “gambling.” Not investing, but gambling.

“If you privatize Social Security,” he said, “the end result will be that that money is not there. There is not a stable source of retirement money because we’ll be literally gambling it on Wall Street.”

Gambling. Literally?

Representative Van Hollen, as a pampered member of Congress, one day will enjoy a very nice pension funded by taxpayers. But he’s also an alumnus of a powerful Washington lobbyist/law firm, the well-connected son of an ambassador, and, even though he is not particularly well off by the standards of congressional Democrats (his ethics filings show his net worth to be considerably less than the price-tag on John Kerry’s yacht or Charlie Rangel’s sundry real-estate holdings) he’s not going to starve to death. If ever he leaves Congress, he will have a very lucrative career ahead of him. Chances are, he’ll retire a rich man. Is he going to invest all the money he makes in Treasury bonds? Does he invest all of his money in Treasury bonds today?

Presumably not. Most wealthy people invest their retirement savings in a mix of stocks, bonds, and other investments. The smart ones start off investing aggressively when they are young, getting more conservative and more liquid as they get older. That’s how you retire rich. That is not gambling. That is investing.

But many Americans, particularly Americans of modest means, find it difficult to save and invest. One of the reasons that they find it difficult to save and invest is that Uncle Sam skims 12 percent off the top of their paychecks and forces them to “invest” in Social Security — which, for most Americans, is an investment that provides embarrassingly low returns; for many Americans (such as black men, who are relatively short-lived), Social Security is a money-losing proposition.

Americans should keep this in mind: There is risk when investing in stocks and bonds. But there is also risk — real, terrifying risk — when “investing” in Social Security. Social Security’s unfunded liabilities are $108 trillion; if it were a bank or an insurance company selling retirement annuities, it would have been shut down long ago, and its executives probably would have been charged with crimes.

There is no corporation in the world that I am aware of with $108 trillion in net liabilities.

If you invest in a diversified basket of corporate bonds, there exists a possibility that some of them might go bad and default. (Speaking of which, junk bond issues are at an all-time high; what is it going to take to get Ben Bernanke’s attention? A giant flashing neon sign in the sky? A personalized message from God? An unexplainable rash in the shape of Milton Friedman?) Stocks and bonds go bad sometimes; that’s why you don’t put all of your money into one company. But for people of modest means, who will be almost entirely dependent on Social Security, all of their eggs are in a red, white, and blue basket — and they’re about to get scrambled by Congress and the Obama administration. When the time for choosing comes, and Washington has to decide whether to pay its bondholders in Beijing or little old blue-haired ladies in Muleshoe, Texas, waiting for their Social Security checks, who do you think is going to get shorted? The bond markets have the power to end Congress’s ability to borrow money on amenable terms — and that prospect scares the political class more than anything short of manual labor.

Don’t fall for the false-choice argument: There is risk to investing in stocks and bonds, but there is risk — probably greater risk — in counting on Social Security. You own your stocks and bonds, but Social Security can be taken away from you at the whim of Congress — or its value diluted by inflation when we start printing money to pay for all of the spending that Obama & Co. have been up to for the past couple of years.

Americans understand this, I think. Let me ask you to engage in a little thought experiment: Imagine that you are 25 years old. Given a choice between having the value of your future Social Security benefits in-hand today, either in the form of cash or in the form of a soberly diversified investment portfolio, or the promise of a Social Security check in 40 years, which would you choose? Why? Once you answer that question, you will know that Representative Van Hollen is talking through his hat.

– Kevin D. Williamson is deputy managing editor of National Review.

Maybe we’ll try to use ethanol when it’s our turn:

NKorea wants to use ginseng to pay Czech debt

You don’t say:

Democratic U.S. Rep. John Yarmuth lashed out at President Barack Obama’s economic team Thursday, saying they show more concern for Wall Street than average Americans in a blunt election-year assessment from an Obama loyalist frustrated by a tepid economic recovery.

What started out as a bashing of Senate Republican leader Mitch McConnell by union activists, who pressed for more public transportation projects, shifted gears briefly when Yarmuth took aim at Obama’s inner circle of economic aides.

“I’m not real happy with our economic team in the White House,” Yarmuth said. “They think it’s more important that Goldman Sachs make money than that you make money. And that’s where we’ve got to change the attitude of this country.”

Dear Representative Yarmuth: There is a reason that Goldman Sachs acts like it owns the Democratic party. It does:

Goldman Sachs is one firm that’s learned that politics matters: The sinking investment bank received some $12 billion in bailout funds while its competitor, Lehman Brothers, was allowed to go bankrupt. Goldman operators move easily between government and the private sector and have played key roles in both Democratic and Republican administrations. But like the rest of Wall Street, they have tilted heavily Democratic of late. Goldman Sachs was the biggest business donor to Democrats in 2008, according to a Center for Responsive Politics report. Some 73 percent of Goldman Sachs’s millions in 2006–08 donations went to Democrats, but its outlook has been informed by bipartisan pragmatism: The banking bailout came from a Republican administration and was marketed by Goldman Sachs alumnus Hank Paulson, who literally begged, on bended knee, for the money. It was managed by assistant treasury secretary and former Goldman Sachs foot soldier Neel Kashkari and was politically nudged along by Bush’s chief of staff, Josh Bolton, another Goldman veteran.

With Democrats now controlling the elected branches in Washington, Goldman has an even stronger hand: Former chairman Robert Rubin is the dean of the Goldman Sachs Democrats, the group that ran economic policy under the Clinton administration and is doing the same under Obama. Rubin acolytes Larry Summers, Timothy Geithner, and Peter Orszag already are filling key economic-policy positions, and Rubin’s son, Jamie, is raising money on Wall Street for Democrats and acting as a talent scout for the Obama administration. The elder Rubin is sure to have the ear of all the major players. Geithner, hurt in the ruckus over his unpaid taxes, has turned to the bank for a reliable loyalist, hiring former Goldman lobbyist Mark Patterson as his top aide. And Geithner’s replacement at the New York Fed? William C. Dudley, former managing director of Goldman Sachs.

Other major nodes on the Goldman-Democratic nexus include Al Gore’s London-based private-equity firm, Generation Investment Management, which was founded with assistance from former Goldman boss Paulson and includes in its ranks a half dozen prominent Goldman veterans. Former Goldman Sachs Asset Management CEO David Blood is its CEO, earning the firm its nickname, “Blood and Gore.” Goldman Sachs is a significant investor in E+Co, Blue Source, and APX, all firms positioned to profit from the cap-and-trade schemes that are at the heart of Gore’s global-warming crusade.

You get what you pay for.

… with their own money, anyway. Uncle is now handing out $50,000 checks to homeowners threatening to default on their mortgages.

The Treasury Department says it will send $2 billion to 17 states that have unemployment rates higher than the national average for a year. They will use the money for programs to aid unemployed homeowners. Some of those states have already designed such programs.

Another $1 billion will go to a new program being run by the Department of Housing and Urban Development. It will provide homeowners with emergency zero-interest rate loans of up to $50,000 for up to two years.

A check for fifty grand? That’s got to be the biggest welfare payment not made to a farmer that I ever have heard of.

Notice this is another TARP tumor: In spite of the new financial-reform bill’s promise to roll up TARP, we’re still using “saved” TARP funds for spending shenanigans of every stripe.

It’s a great time to buy a house: Mortgages are at record lows — 4.4 percent for a 30-year loan.

It’s a terrible time to buy a house: Real-estate is still overpriced and likely to decline at least 5 percent — or as much as 20 percent if the double dip we’re apparently heading into turns out to be a deep one.

So the question is: How cheap does the money have to be before you decide to pay too much for the asset? That dilemma is the U.S. economy in miniature. Government borrows tons of money to get monkeys high on cocaine and other (economically, un)stimulating projects, but it gets to print all the money it wants and thus to repay the debt in devalued dollars. When the dot-com bubble turned out to be built more on gee-whiz tech enthusiasm than on real profits, we flooded the system with cheap money in the hopes that suckers investors thus armed would be up the price of those devalued assets. They bid up the price of real estate instead — and when that cheap-money bubble went south, what did we do? What are we doing? Flooding the economy with cheap money in the hopes that we can reinflate the real-estate bubble and start the whole thing all over again.

Now, with interest rates at basically zero and the economy probably headed back into recession, what is the Fed going to do? It can’t very well cut interest rates. Instead, it’s buying up Treasury debt. The Fed acquired a bunch of mortgage-backed securities as part of the bailouts. The Fed had planned to return that money to the taxpayers and let those assets disappear from its balance sheet as they were paid off. (Note: Never trust the government to do what it says it is going to do with the money it takes from you.) Instead, the Fed is taking that mortgage-bond money and investing in Treasury bonds — a subprime-for-subprime swap. The government is, in effect, buying its own debt. The Fed has a $2.3 trillion portfolio, and about $200 billion of those mortgage-backed securities will mature each year — more than the budget of the United States Army (2010 budget: $142 billion).

The problem for the economy at large is precisely the same as the problem for the housing market: the underlying assets have lost a lot of value, and you can’t make money cheap enough that paying too much for them makes sense. With our public debt headed toward Greek levels thanks to Obama & Co., and a deeply damaged financial system, we are due for a deep and intense national restructuring. There’s no way around that, and all of the cheap money that Helicopter Ben wants to throw at the problem won’t make it go away.

So now that it is basically out of monetary options, the Fed is going to keep greasing the wheels by buying up more U.S. government debt. The dollar says, Ouch!

The U.S. dollar fell against the yen and pared gains against the euro on Tuesday after the Federal Reserve said it would begin reinvesting proceeds from maturing mortgage bonds into longer-term government debt to support a flagging economy.

The euro rose to $1.3170 EUR= from around $1.3110. It was still down 0.5 percent on the day, but well off its session low.

The dollar extended losses against the yen to 85.31 yen JPY= from about 85.80 yen. It was 0.6 percent lower compared to late Monday.

The Obama stimulus is not working, it’s just eating up a gazillion dollars. Fed pump-priming is not working, it’s just devaluing those gazillion dollars eaten up by the Obama stimulus.

Is there a Plan B, guys?

Secretary of Defense Robert Gates breaks the ice with a plan for some reductions at the Department of Defense.

Question: If DoD can take a scalpel to its budget, which funds an actual, legitimate federal responsibility, where are the secretaries of HUD, HHD, Education, Energy, etc? Those departments should be looking not at scalpels but at meat axes.

Ezra Klein asks a fair question here:

Where does the Laffer curve bend?

Another way of asking the same question: How high can Ezra Klein’s favored politicians raise tax rates?

Short summary of answers: Professional tax economists guess 60-70 percent, lefties guess around 70 percent, conservative talking heads guess 20-40 percent, elected Republicans won’t say. (Not that you asked, but here’s my answer: Economic conditions are in constant flux, and the tax rates interact with too many other factors — market conditions exogenous to tax policy, interest rates, non-tax public policy, complex investment decisions — for the real growth effects of tax policy to be very well understood. Just a guess.)

Here’s a related question in return: As a share of GDP, what level of government spending produces a net economic loss for the country? Another way of asking this is: How much is enough for Ezra Klein? Progressives don’t like to answer that question — the standard evasive line is that they have no a priori preferences about the size of government — but surely there is a way to get at to the purely empirical part of the question.

Any answers?

If you want to see U.S. economic policy in miniature — and see most of what is wrong with it — watch this short interview with Robert Rubin, the Wall Street Democrat and former Goldman Sachs chairman who was treasury secretary under the Clinton administration. Rubin is a very smart man and independent-minded. I would not say that he is the best we could expected from the left side of the political spectrum, but he is in the upper end of the range of my own preference curve for plausible policy expectations. Here is the low end:

It’s a wide spectrum. But there’s a reason everybody in Washington is marching the same way: toward bigger government, higher spending and higher debt. Here’s how Rubin calls it:

I would try over the next six months to put in place a very serious beginning of deficit reduction that would take effect at some specified time in the future. And I would guess something like two years. So it wouldn’t take effect right now, when the economy is still so vulnerable, but if you could do it and it was credible and people believed it and it was real, I think that could do a lot for confidence. The problem is that’s very easy to say and very hard to do.

Some things you’ll notice about that quote. It’s sober, it’s moderate, and it’s well-reasoned. There is much in it that a typical Republican would agree with. And it’s totally 100 percent pure bovine byproduct. Let me translate it into English for you: “Let’s not cut the deficit. Let’s not even plan to cut the deficit. Let’s plan to have a plan to cut the deficit. But not now. Not today — let’s kick that ten-ton can of toxic trouble on down the road a bit longer.” Or, as one S&P structured-finance guy described a deal he was working on: “Let’s just hope we are rich and retired before this house of cards comes crashing down.” Mr. Rubin is already rich and can retire when he wants.

In contrast to the vague platitudes offered above, here’s Rubin a half-minute later:

I would put an estate tax in place right now, immediately, because we have no estate tax right now. There is no supply side effect in having an estate tax. And we should fill that void. Number two, I would increase the tax on the higher brackets, those top two brackets, and bring them back up to the Clinton rate. I believe there’s no supply side effect there. We did it in 1993 people said we were going to destroy the economy, in fact we had the longest expansion . . . in American history. I would leave the middle-class tax cuts intact for a limited period because I do think that the probability is higher that we’re going to have slow and bumpy growth than vigorous growth, and I think that given the vulnerability, the high unemployment rate, one thing and another, I wouldn’t want to have that contractive effect right now.

Boom, boom, boom! Specific policy proposals (estate tax, income-tax hikes on the top two brackets) with a real time horizon (now!) and even real numbers attached (bringing things back to the Clinton-era rates). There’s a prepackaged economic rationale (no supply-side tax effects on the death tax) and a political strategy (God save the holy middle class, their tax subsidies, and their entitlements).

So, Robert Rubin wants to do something about spending, and he’s a mush-mouthed equivocator with his hands in his pockets, eyes downcast, tracing little circles on the carpet with the toe of his wing-tip. Ask him to sell America a tax hike in lieu of spending cuts (no, he did not say in lieu of, but that’s what it comes down to) and he’s got an instant agenda. Ask him to design a tax increase and he’s got numbers and firm proposals. Ask him to reduce spending and he’s waiting for the Deficit Fairy to come in flying a sortie with an auxiliary attachment of fluffy fiscal unicorns to spirit that debt off to the Island of Misfit Finance, which would be crushed under the weight of it.

Chairman of Goldman Sachs, this guy was.

Tax hikes now or fiscal discipline in the misty future: Which of those things do you think will get done?

Who would you trust to get the budget balanced? Robert Rubin?

I’ll bet on Rick Rubin first.

– Kevin D. Williamson is deputy managing editor of National Review.

Remember Katrina? Remember “George Bush doesn’t care about black people“? Remember how the suffering of non-whites was used as prima facie evidence of racism on the part of President Bush personally and the government at large? I’m sure you do.

What does that tell us about Barack Obama and unemployment? Consider today’s ugly employment numbers, as reported by the Washington Post:

The nation’s economic recovery continued to sputter as private-sector employers added just 71,000 jobs in July, according to a report released Friday by the Labor Department.

The small increase in private-sector employment was more than offset by the loss of 143,000 temporary census jobs, and the nation’s unemployment rate remained unchanged at 9.5 percent. Overall, the nation shed 131,000 jobs in July.

… The Labor Department said 8.5 million workers were working part-time even though they would prefer full-time work. Meanwhile, 6.6 million of the nation’s 14.6 million unemployed workers have been jobless for more than six months, continuing a historic high, the government reported.

The report also showed that blacks and Hispanics continue to be the groups hardest hit by the nation’s job crisis. The black unemployment rate was 15.6 percent, the Labor Department said, and among Hispanics, unemployment was 12.1 percent. For whites the unemployment rate was 8.6 percent, and Asians had an 8.2 percent jobless rate.

So, the obvious conclusion is that Barack Obama hates blacks and Hispanics, tolerates white folks, and has a soft spot for Asians, right?

Wrong.

These ethnic bean-counting exercises do have some good uses: The circumscribed economic prospects of black Americans remain a national scandal, one of which we ought to be reminded, frequently. As I reported in my February article, “Keeping Blacks Poor,” (subscription only, alas):

There’s not much other work to be had in the Bronx, where unemployment is currently at about 13.1 percent. Much of the Bronx is young and black or young and Hispanic. Nationally, the unemployment rate among blacks rose to 16.2 percent in the year-end numbers, while the rate for whites fell to 9.0 percent. For black youths, the numbers are startling: 50 percent for 16–19-year-olds, 26 percent for 20–24-year-olds. A study from the Community Service Society of New York puts actual work-force participation among black men 16–65 years of age in New York City at about 50 percent, and the number for young black men nationwide is just 40 percent. Never mind the jobless recovery: For a great many black Americans, it’s been a jobless eternity, in good times and in bad. Why?

The easiest answer, and therefore the most popular one, is ill will. But the truth is, practically every politician in these United States would like to see a narrowing of the gaps that separate blacks from the rest of the country when it comes to economic standing, education, crime, and other areas of concern. Even a rotten old racist like LBJ wanted to do something about it — because it is a problem that imposes real costs on the country. But the fact is, government cannot manage the economy at that level. It can do very little to manage the economy even at the macro level: If all that Keynesian demand-management stuff worked, there’d never be a recession, never be any unemployment, etc. But it doesn’t.

Black unemployment in the United States is not outpacing white employment because Obama, Pelosi, and Reid are racists, or because they are insufficiently concerned about the welfare of black Americans. Federal economic policy is a pretty blunt tool, and it does not produce precisely the outcomes that its authors promise it will. Remember that the next time President Obama tells the nation that, not only are we going to “create” jobs, we’re going to create specific kinds of jobs — “green” ones — in specific industries — like battery development — because those jobs and those industries comport with Democrats’ political priorities. If Barack Obama actually had the ability to translate political desire into economic reality, black unemployment wouldn’t be nearly double white unemployment.

This is daft: Andrew Exum’s alter ego, Abu Muquwama, calls our editorial on the Ground Zero mosque “disgusting.” He writes:

You would think “conservatives” would be pretty clear on matters related to the freedom to practice one’s religion — not to mention private property rights. But when that religion is Islam, what passes for “conservativism” these days apparently takes a vacation.Writing as a Christian, I am firmly within the majority in the United States. As a Protestant Christian, I am also within the majority. And as an Evangelical Protestant Christian, I belong to the largest subset of all Christians in the United States. I treasure the way the 1st Amendment protects my rights to worship. But I also understand that the 1st Amendment — the “first draft” of which was written by one of my ancestors — exists more to protect religious minorities than those of us in the majority. It’s an amendment written with Huguenots and Quakers and Catholics in mind. Where the Bill of Rights really has its value is as a check against the tyranny of the majority. It’s for times like these when the passions of Americans — stoked by the memory of September 11th — cause us to do and say things that spit in the face of the freedoms we claim to cherish.

Nice reading skills, Abu. Not only did our editorial not call for any sort of government action that would violate the First Amendment, it did not call for any sort of government action at all:

We will not appeal to the official powers to use the machinery of government to stop this project. We appeal, instead, to the sense of decency of the American Muslim community, and to its patriotism.

The First Amendment begins: “Congress shall make no law ….” While the awesome power of a National Review editorial never should be underestimated, it is not an act of Congress. (Somebody skipped Civics Day at Penn.)

Also: Nice name-drop with George Mason there, Abu. But as one of my ancestors said, “The free man cannot be long an ignorant man.”

(Now, if you’ll excuse me, I have to go oppress some Huguenots.)

This interesting note from Grant’s Interest Rate Observer (subscription only) is the piece of news that should be disturbing your sleep tonight:

Taxes may be certain — not so, tax rates. The 2011 tax-rate schedules are yet unprinted because Congress hasn’t decided what they are going to say. “Unusually uncertain,” said Ben S. Bernanke, the phrase-making central banker, in characterizing this moment in business and finance during congressional testimony last month. He could say it again.

I think that many conservatives oversell the influence of “uncertainty” in businesses’ decision-making at this moment. That $1 trillion-plus mountain of cash American businesses are sitting on top of starting building up a long time ago, and, given the state of sales, it is more than plausible that very weak demand and a lack of attractive alternative investments are the reasons why cash is king. (You can concede the Keynesians’ case about weak demand, which seems to me pretty obvious, without conceding the policies they propose, i.e., another Iraq-and-Afghanistan-wars-combined-sized pile of stimulus spending.) But there is a lot of uncertainty out there, nonetheless. Uncertainty about future taxes, future employment, future returns to individual investments, and the future of entitlement benefits almost certainly is having an effect on Americans’ spending and saving decisions comparable to the effect of actual lost income. Americans are saving at a relatively high rate; presumably, it is the employed, not the unemployed, who are saving.

Demand is low, uncertainty is high. Is there a way to address those problems without resorting to Robert Reich’s proposal for supersized investments in floating unicorn ranches? There is not an easy or obvious one that comes to mind. But there are economic benefits to be realized from paying down the debt:

1. Less uncertainty: We are the largest national economy in the world, and we are a lot bigger than the No. 2 national economy — welcome to second place, China, tough luck, Japan — about three times bigger, in fact. The the world’s No. 1 and No. 2 national economies are joined at the hip, and the ramifications of that fact are not well understood. A fiscal crisis in China will be a crisis for the United States, and vice versa. Our government’s books are a wreck, and their banks are the stuff of nightmares. Nobody knows how high a debt-to-GDP ratio the United States can withstand before somebody starts calling in the chips — and China has all sorts of weird incentives when it comes to that issue. In short: The radical expansion of the U.S. national debt under the Obama administration is not just creating an enormous risk for the economy of the United States — it is creating enormous risks for the entire world, and those risks are not well understood, because there is little or no precedent for this situation. Weighed against those facts, the case for another $26 billion in political bribery for Democratic special-interest groups is pretty weak.

2. More capital available for productive investments: We spent stimulus money subsidizing beekeepers, turning b.s. into fuel to power magical corn-gas distilleries, and getting monkeys high on cocaine. As much as I would enjoy having a platoon of coke-tweaking baboons to dispatch around town to do my bidding and collect the honey from my organic apiary, these are not exactly pressing national priorities. But that money has to come from somewhere, and the banks, which are still being subsidized with free money from the Fed, are content to park their funds in T-bills and collect the spread — which is pretty attractive when the cost of money is zero and the risk is (allegedly!) negligible. Why take a risk on making a loan to a start-up when you can ride out the storm with free money and a passel of implicit and explicit federal subsidies? People who want to make stuff and provide services need capital to get going, but Uncle is sucking a whole lot of capital out of circulation.

3. Signaling seriousness: I have to imagine that our precarious government-finance situation is dissuading investment from both foreign and domestic sources. A little bit of discipline would go a long way toward re-establishing the United States as the world’s economic gold standard. Right now, if I were an investor with significant concern about political risk, I’d have to be thinking to myself that Canada and Europe are looking like relatively good investments, ceteris paribus (and, yeah, I know, ceteris is rarely paribus).

Those unpublished tax schedules are more symbolic than substantial — but, still, a little predictability would be a welcome thing right now, something that might help our economy feel more like a productive enterprise and less like a roulette wheel.

Thanks to Senators Coburn and McCain for pointing this one out:

BP may have found itself staring down huge financial losses over the past several months, but executives can take solace knowing that a stimulus windfall will help offset them. On September 28, 2009, Hydrogen Energy California, LLC (HECA), owned largely by BP, was awarded $308 million in stimulus funds to “generate more environmentally friendly electricity by capturing carbon dioxide from the burning of fossil fuels.” HECA is a joint venture of BP Alternative Energy North America and Rio Tinto subsidiaries. Stimulus funds “enabled continued development of the HECA project which otherwise would have been cancelled.” Construction is not expected to begin until December 2011, nearly three years after the passage of the Recovery Act, raising serious questions about whether it is anywhere near “shovel-ready.”

Depends on what they’re shoveling, senators.

And remember: This is on top of the $600 million a year or so in subsidies BP collects under a single federal program.

Cynthia Tucker, 100 percent predictable Democratic apologist producing copy for the Atlanta Journal Constitution, approves of David Stockman’s weekend tua culpa on tax cuts. The piece is headlined: A few Republicans remember how to count. She writes:

More and more conservatives, including some who worked on in Republican administrations, are publicly pointing the finger at a combination of spending — under both Democratic and Republican presidents — and tax cuts — under George W. Bush — as the double-whammy that produced an ocean of red ink. . . . The vast majority of Republicans on Capitol Hill, however, continue to hope that Americans are laboring under a delusion that has caused them to forget how to count. Or to forget recent history. If tax cuts caused revenues to increase, how is it that Bush’s tenure turned Clinton’s surplus into a deficit?

Let me help you out with that final question:

Cynthia Tucker has done a very fine job making the case against irresponsibly cutting taxes while leaving spending untouched. Now, repeat after me: “We cut taxes! We cut taxes for 95 percent of working families! We cut taxes for small businesses! We cut taxes for first-time homebuyers! We cut taxes for parents trying to care for their children! We cut taxes for 8 million Americans paying for college!”

Thoughts, Ms. Tucker?

Remember when Barack Obama was talking about eliminating the capital-gains tax for small businesses? Whatever happened to that guy?

Noted Obama endorser Anne Applebaum on spendthrift Republicans:

Of course, parties can change, politicians can see the light, lessons can be learned—and perhaps some Republicans have learned them. But you cannot start from scratch. You cannot forget history. You cannot pretend that the Republican Party has not supported big and wasteful spending programs—energy subsidies, farm subsidies, unnecessary homeland security projects, profligate defense contracts, you name it—for the last decade. Before the Republican Party can have any credibility on any spending issues whatsoever, Republican leaders need to speak frankly about the mistakes of the past.

They also must be extremely specific about which policies and which programs they are planning to cut in the future. What will it be? Social Security or the military budget? Medicare or the TSA? Vague “anti-government” rhetoric just doesn’t cut it anymore: If you want a smaller government, you have to tell us how you will create one.

All excellent points. So, take it from an Obama endorser: Don’t fall for vague rhetoric, don’t ignore big, wasteful spending programs, and remember that, before you can have any credibility, you must speak frankly about the mistakes of the past.

Debt held by the public as a share of GDP:

Pres. Barack Obama is neither dumb nor dumber, but he is tempting fate if his message is: “things could be worse.” Yes, things could be worse — and if we keep on the current track, we stand a pretty good chance of discovering how much worse things could get.

I was not much surprised when the Obama administration more or less shrugged off the new GDP numbers over the weekend — numbers  suggesting our already anemic growth is slowing, perhaps portending the second part of a double-dip recession. But the Obama administration mostly is interested in those GDP numbers to the extent that they have an effect on the number they’re really watching: the unemployment rate.

GDP growth is long-term and complicated. Unemployment is short-term — and, unfortunately, it is gameable. You can do all sorts of things to mess with the unemployment numbers: You can keep a few hundred thousand marginally employed in federal temp jobs, you can shunt great streams of federal taxpayers’ dollars to state and local governments to encourage them to hire and retain workers, or you can keep extending unemployment benefits so that the sting of joblessness is felt a bit less acutely. But once you’ve done all that, you’re pretty much out of options.

Which means that you have to, in the end, deal with reality.

And the reality is this: No amount of Keynesian theorizing or federal demand-management is going to get us out of this mess, get the economy growing, or get unemployment down. In fact, it was precisely that kind of government demand-boosting that got us into this mess to begin with: Hey, let’s increase demand in the market for mortgage-backed securities! What could possibly go wrong? Remember? So instead of throwing away another Iraq-and-Afghanistan-wars-combined-sized pile of money on beekeeper subsidies and cars that run on unicorn juice, you can put that money to much better use by — not spending it.

We have a gaggle of economic problems. Unemployment is one of them. The debt-to-GDP ratio is another: It’s heading toward World War II levels in the near term and Greek levels in the medium term, if we do not change course soon. (Note to President Obama: I’m guessing you were more of a humanities guy back in college. You studied a little Greek drama, I’m sure. Remember the key ingredient in a Greek tragedy? Hubris. Think about that.) There is no magic formula for making the economy grow in order to buck up that GDP vs. debt calculation. But we can work on the other side of the equation: by cutting spending.

A real-estate developer (and Obama supporter) writes that he wishes somebody would sit down with Americans and give us what he calls “the grown-up talk,” which goes, in part:

The economy is likely to be stagnant for some time, unemployment is likely to remain high for the foreseeable future, and near term significant GDP growth will be elusive. The time has come for us as a country to retrench for the future. Retrenching is not fun. It’s hard. But it is necessary. We have to address our real problems and solve them and those problems start and end with entitlement spending. Like it or not, we are going to have to accept things like means based testing, and increasing mandatory retirement ages. Our country cannot afford to be held hostage by the AARP and aging baby boomers . . . . We are going to have to make painful cuts. Our economic well being does not rise and fall on the fate of beekeeping and ethanol subsidies.

There are obvious areas where we can afford to cut and should cut. We have to end our sacred cow mentality toward defense spending. Is is absolutely vital for the security of our country to spend 3 times more on defense than the next country? How much additional risk do we assume if we spend 2.9x more than the next country?

The upshot is that neither tax cuts nor additional stimulus spending is likely to cause the kind of growth hoped for by advocates of each approach. There’s a lot of malinvestment out there, a lot of misallocated capital, and it is simply going to take time, pain, and frustration to work through it. We cannot magic those problems away. But government can — and must — start to get its fiscal house in order, and that begins with getting out-of-control spending on a leash.

If Barack Obama wants to serve a second term, he’s probably got about six months to get religion on spending — and if the Republicans want to do something useful with all those congressional seats they are expecting to pick up in the next two elections (rather than just redirect pork away from green-energy boondoggles and back to black-energy subsidies and the Small Business Administration) then they are going to need a plan. Here’s one. It’s not perfect, but if any Republican has a better agenda — or, for that matter, any credible agenda at all — let’s hear the plan.

– Kevin D. Williamson is deputy managing editor of National Review.

Deficits vs. stimulus, Reich vs. Williamson.

Jonathan Huntley of the Congressional Budget Office’s Macroeconomic Analysis Division has performed a public service, producing a lucid report on the state of the national debt that is as clear and informative an analysis of the subject as one could hope to discover from a government source. He places our debt in its historic context, considers the constraints a growing debt will place on national action, measures the possibility of a critical public fiscal crisis, explores debt-related fiscal crises in three other countries (Ireland, Greece, Argentina), considering the ways in which the U.S. government-debt situation is comparable to them and the ways in which it is different. For an eight-page report, this is a lot of ground to cover. I do recommend reading the whole thing.

Particularly refreshing is the realism of CBO’s “alternative fiscal scenario.” The official version, the false gospel, is the “extended baseline scenario,” the static analysis that simply extends all current policy out into the future, assuming that there are no changes to the laws that affect our taxing and spending. The “alternative fiscal scenario” incorporates the things that are going to happen that nobody really wants to talk about: Doctors’ payments are not going to be cut under Medicare, and the “doc fix” will live on and on in legislative limbo; most of the 2001 and 2003 tax cuts will be retained and the alternative minimum tax will be indexed to inflation; tax revenues will not climb much above or fall much below 19 percent of GDP. Etc. Under that scenario, the national debt, measured as a portion of GDP, will soar. Get a load of this steeply rising dotted line:

That graph looks like your blood sugar level after an hour at the dessert buffet. But, as usual, things that look really bad on paper turn out to be a lot worse in reality. That’s because even the CBO’s realistic scenario does not account for the effects that all of that debt is going to have on economic output. In truth, the debt as a share of GDP probably will be much heavier than even this analysis predicts. The CBO report itself is careful to point that out:

By 2020, debt would equal nearly 90 percent of GDP. After that, the growing imbalance between revenues and noninterest spending, combined with the spiraling cost of interest payments, would swiftly push federal debt to unsustainable levels. Debt held by the public would exceed its historical peak of about 110 percent of GDP by 2025 and would reach about 180 percent of GDP in 2035. Indeed, if those estimates took into account the harmful effects that rising debt would have on economic growth and interest rates, the projected increase in debt would occur even more rapidly. Under the alternative fiscal scenario, the surge in debt relative to the country’s output would pose a clear threat of a fiscal crisis during the next two decades.

In short, the CBO is ringing the church bells, sounding the klaxons of alarm, and basically belting out a whole Götterdämmerung of fiscal angst, in its quiet, wonky way. In other words, pay attention, Congress.

Another useful observation in this report: We really do not have any experience to guide us in this matter. While debt as a share of GDP was similar during and just after World War II, the economic situation of the late 1940s is not really comparable to the economic situation of 2010. And we do not have a good indicator of how much public debt will trigger a fiscal crisis. Ireland, Greece, and Argentina had very different levels of debt before their fiscal crises. And the U.S. economy is always a special case, as the report argues:

The United States may be able to issue more debt (relative to output) than the governments of other countries can, without triggering a crisis, because the United States has often been viewed as a “safe haven” by investors around the world, and the U.S. government’s securities have often been viewed as being among the safest investments in the world. On the other hand, the United States may not be able to issue as much debt as the governments of other countries can because the private saving rate has been lower in the United States than in most developed countries, and a significant share of U.S. debt has been sold to foreign investors.

So, which is it? Unhappily, there is no way to know. Or, there is a way to know: but you don’t want to find out that way. While the Obama administration continues to promise a fundamental transformation of American society, the conservative values of prudence and caution are what’s called for instead.

The CBO report emphasizes that making changes in our spending policies, particularly in our entitlements, will be much less painful if we starting doing so now, rather than when we are in a true crisis. Early action gives people, businesses, and policymakers time to adjust — and that time is a precious commodity rarely appreciated until it is needed. Sober present action can forestall future dangers — if anybody in Washington has the guts to make that happen.

Over on the homepage, my estimable colleague Steve Spruiell details another potential federal foray into the world of commercial lending: Uncle Sam wants to buy into community banks and then bribe them into making loans that comport with the political mandates of whoever happens to win the next couple of elections. How could that possibly go wrong?

Between the remains of TARP, the new “TARP Forever” program that Steve examines, the Fed’s ever-growing portfolio of dodgy securities, ongoing investments in private companies, and the unlimited line of credit to Fannie Mae and Freddie Mac, it’s beginning to look as if our government is dedicated to very little other than finance and war-fighting. It’s like a hedge fund with an army attached to it — the world’s greatest military married to the world’s worst hedge fund. Make that the worst hedge fund in the history of hedge funds, going out of its way to buy the very worst investments in the marketplace at the very highest price.

The big Wall Street–level interventions get all the press, but the government acts as a shadow bank all the way down through the system. Consider the curious case of the Small Business Administration, which was created in 1953 to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns,” but which has evolved into a mini-Fannie, replete with corruption-enabling incompetence.

The SBA, like Fannie and Freddie, is in the business of buying loans. Just as Fannie and Freddie helped to inflate the housing bubble by making sure that mortgage-lenders could write liars’ loans without taking much of the risk upon themselves, the SBA tries to keep credit easy and cheap for small businesses — at least, for certain kinds of politically favored small businesses — by buying loans and offering loan guarantees. They’re not very good at it: A 2006 investigation by the SBA’s inspector general found that 44 of the 45 loans examined in its audit sample contained undetected “lender deficiencies.” In other words, in 97.7 percent of the SBA loans examined, the agency was backing the small-business equivalent of a no-doc mortgage. It was the usual mix of incompetence and petty corruption: The SBA’s lenders were all over the map when it came to the kind of documentation they would accept, and so money was handed out when it should not have been, to people who should not have received it, who used it for things for which it was not authorized.

The SBA calls this using “loan proceeds for an unauthorized purpose.” The SBA puts the price tag of improperly reviewed disbursements at $130.6 million in the audit. Naturally, the thing to do in that situation is to double down. Or triple down: The so-called Small-Business Jobs Bill wending its way through the bowels of Congress would nearly treble the size of loans made available through the SBA Express program, from a maximum of $350,000 to a maximum of $1 million. Here’s a radical thought: A government program that as late as 2006 was messing up its lending documentation in 97.7 percent of the cases it handled should not be handing money out in $1 million increments. The SBA should not be allowed to run a pawn shop, much less hand out money in million-dollar buckets.

The same legislation would also radically expand the SBA’s mischief-making opportunities in other ways. It would define “small” businesses in such a way as to include much larger businesses than are currently eligible for SBA backing: Up to $15 million in net worth and $5 million a year in net income. (And you know how easy it is to camouflage those “net” numbers.)

There are other lending subsidies in the bill as well: Lending fees are waived in many programs and the SBA will continue to guarantee 90 percent of most of the general-business loans it supports — and the maximum size of those loans will be raised from $2 million to $5 million. Special fee subsidies enacted by the stimulus bill — the temporary stimulus bill, remember? — will be extended. Loans made under its “certified development company” program — loans of up to $5.5 million a shot — will be “temporarily” made available for refinancing commercial mortgages. Which is to say, while the rest of the financial system is deleveraging, reducing risk, and getting its credit-rating housing in order, particularly when it comes to real-estate lending, the SBA is sprinting heels-and-elbows in the opposite direction.

Man, I miss the fiscal discipline of the Bush era!

Gulp.

I never expected to write those words. The Bush-era Republicans were out-of-control big spenders, fiending for appropriations, handing out largesse, creating giant new health-care entitlements here, building nations there, all with a devil-may-care attitude about where the money would come from. They were all carrot and no stick, cutting taxes but not doing a thing about spending.

And then:

A mid-year budget review by the Obama administration forecasts the deficit will be $1.47 trillion this year and $1.42 trillion next year as the U.S. struggles to recover from the recession.

This year’s budget shortfall is $84 billion less than President Barack Obama’s budget office projected in February because of lower than projected spending for unemployment and some government programs. Still, the total would be a record and represent 10 percent of gross domestic product.

That is from the Mid-Session Budget review, where the government checks in on the federal books and sees how closely they match up to the actual budget. Pretty close, in this case — unfortunately.

Let me see if I can type this right: $1,470,000,000,000.00 — and that is just the part of the bill that we do not know how to pay. The actual bill for government  spending this year is more than twice that. We are borrowing 41 cents of every dollar we spend. We are spending $36,000 per household.

Okay, here is the ritual denunciation: That is the biggest deficit in the history of the United States of America, in gross dollars. For Pete’s sake.

And here is the reality: That is the biggest deficit in the history of the United States of America since World War II, as a portion of GDP. That deficit is about  10 percent of GDP; the Bush-era deficits were typically about 3 percent of GDP.

Heritage puts it this way:

These future deficits are driven almost exclusively by rising spending. President Obama’s budget would push inflation-adjusted federal spending past $36,000 per household by 2020—$12,000 above the level that prevailed under President Bush. Even President Obama’s enormous and anti-growth $3 trillion tax increase proposal won’t stop this spending spree from pushing the national debt to economically dangerous levels.

The Mid-Session Budget Review also confirms the failure of Obama’s economic agenda. The President concedes that the unemployment rate will remain at nearly 10 percent this year and not revert to pre-recession levels until 2016—and even that is based on the same optimistic Keynesian economic models that claim the stimulus created or saved 3 million jobs. If this is economic policy success, one wonders how failure would look.

I do not like to make predictions (because I am really bad at it, and the world is too complicated) but here is one: Obama will find it much more difficult to get himself re-elected in 2012 if the unemployment rate is 9.7 percent than if it is 7.7 percent. I have said, on several occasions, that the only way I expect a Republican to defeat Obama in 2012 is if unemployment persists at very high levels or if there is another major economic disruption. It must be clear, even to President Obama, that his program is not working. It certainly is clear to those members of his increasingly incoherent economics team who are skedaddling. For a guy who campaigned on hope and change, Barack Obama is proving to be absolutely pig-headed when it comes to sticking to what does not work. Memo to the president: This is no way to run a welfare state.

More words I never expected to type: Meanwhile, in the land of liberty, Canada:

Canada’s federal budget deficit amounted to $4.2 billion during the first two months of the fiscal year, much smaller than in the same period last year when the economy was mired in recession, the finance department reported Friday.

The Finance Department’s fiscal monitor noted the government spent $7.2 billion more than it took in during April and May of 2009 because tax revenues were down and social and economic spending to offset the slump was higher.

“The data is reassuring that the deficit should continue to narrow,” said Mary Webb, an economist with Scotia Capital. “And it continues a trend we saw in the last quarter of fiscal 2009-2010, which is that revenues were coming back reflecting the strength of the Canadian recovery.”

The improvement in the deficit year-over-year was most visible in revenues from personal income taxes and provincial sales and services taxes.

The government says the deficit includes about $1.7 billion in spending under the stimulus package introduced in January 2008.

Whatever you think about socialism, here is an undeniable fact: Canadians are better at it than Americans are. We are managing to inflict the costs of welfare statism on ourselves without even deriving any of the benefits: Heritage now ranks Canada’s economy as more free than that of the United States. Its government spending is only marginally higher than our own, and its government institutions are much cleaner and more effective. It went into the financial crisis with low levels of government debt and a sounder banking system, thanks in no small part to the fact that the Canadian government is not as dominated by narrow financial interests as the U.S. government is. (Question: Why is it that the lefties who rightly appreciated what a rent-seeking nightmare our financial system is do not see that they have just helped to create a substantially similar situation in the health-care industry? Just askin’.)

The upshot? Canada already is packing in its stimulus measures. And tiny little Canada is creating more jobs than is the United States:

Canada has recouped 403,000 jobs, or 97% of those lost in the recession. Employment rose by 93,200 in June – a number five-times greater than economists had expected – following a gain of 24,700 in May and a record-high surge of 108,700 in April.

By comparison, the United States, which has a population 10-times larger than Canada’s, only added 83,000 jobs in June. And if you factor in the loss of 225,000 temporary Census jobs, the United States actually lost 125,000 jobs. Worse, if you include “discouraged workers” who haven’t looked for a job in the past four weeks, the U.S. labor force has shrunk by 974,000 in the past two months alone.

Canada’s unemployment rate slid to 7.9% in June compared to 9.5% in the United States.

… Canada has already begun the process of reigning in its stimulus measures. The Bank of Canada (BOC) yesterday (Tuesday) raised its key interest rate a quarter of a point to 0.75%. That was the second such high in as many months.

If you want to emulate Canada, emulate the parts that work: clean government, balanced budgets, low debt.

– Kevin D. Williamson is deputy managing editor of National Review.