This is worrisome:

According to a new poll, American voters say that reducing unemployment is more important than cutting the federal budget deficit, taking the Democratic side in what is expected to be an ongoing debate in this midterm election year.

By a ratio of better than 2-to-1 — 64% to 30% — the poll respondents said that reducing employment is the priority, according to the Quinnipiac University poll released Thursday. The national unemployment rate is about 9.5%.

The either/or structure of this question includes an unspoken assumption: that these are competing goods, rather than complementary goods. It is as likely that our stimulus efforts are making unemployment worse as it is that they are making it better.

But here’s the thing: The government can cut the deficit — today, right now, this instant, if it should decide to. Government cannot manage employment, or any other economic factor, as well as the American people think. If the effects of economic policy were regular and predictable, then there would never be a recession, and there would be no unemployment. Politicians have really good incentives to support policies that promote economic productivity, high wages, full employment, and great long recessionless expanses of growth. The problem is: They do not know what those policies are. Nobody does: The economy is far too complex, the information embedded in it too vast, for any person or institution to achieve the kind of understanding of its workings that would allow micromanagement (or even very ambitious macromanagement) from Washington. They literally do not know what they are doing.

The federal budget, on the other hand, is relatively easy to get one’s head around, once you get used to seeing figures in the trillions. And we do have good reason to believe, from long experience, that large public deficits and heavy government debt are a drag on the economy. So, stop stimulating and start cutting.

Another thought: Stimulus is an income-substitution game. The argument about extending unemployment benefits, for example, emphasized the need to replace the purchasing power of the unemployed. Most other stimulus arguments have to do with replacing lost income. And that’s fine, so far as it goes, but: Our current economic distress is not principally a question of lost income, but of lost wealth – all that devalued housing and mortgage-related securities. Stimulus spending cannot replace that lost wealth. Many Americans feel poorer, and are acting poorer, because they are poorer, the value of their largest asset, the family home, having decreased substantially. And their investment portfolios aren’t in great shape, either.

As a consequence, we are spending less on lots of things — why should we be spending more on government? It’s one of the least productive things we spend money on, and every dollar we throw away by trying to stimulate the economy with beekeeper subsidies is a dollar that is not available for productive investments of the sort that produce real goods and services, build real wealth, and create real employment.

Today on the BBC’s The World Tonight, I had a very civil discussion with Robert Reich about the economics of a fifth round of stimulus spending, which now seems to be an inevitability. (I’ll link the audio when it is available.) Mr. Reich  took the conventional Keynesian view that our problem is a deficit in aggregate demand, which discourages producers from offering new products and services, from building factories and opening offices, and from hiring people to staff them.

“Government,” Reich said, “has to be the buyer of last resort.” I do not think he made a very convincing case. For a Keynesian, it’s always 1933. But it may very well be 1973, instead: the doorstep of staglation.

A few thoughts:

As F. A. Hayek put it, “The curious task of economics is to demonstrate to men how little they know about what they imagine they can design.” (Those words should be engraved on the Federal Reserve building and the U.S. Treasury.) There are lots of sophisticated economic thinkers in the Obama administration, just as there were in the Bush administration, just as there were in the Clinton administration. Alan Greenspan has forgotten more economics than the average homo sap. will ever dream of. None of them has got the policy right. It is very, very difficult to transmute economic knowledge into fruitful public policy. If Mr. Greenspan could have foreseen the consequences of the Fed’s keeping interest rates so low for so long, surely he would have chosen to do otherwise. If the hundreds of U.S. policymakers who spent decades upon decades stimulating the residential real-estate market had been able to foresee that they were creating a bubble that would end in a crash, dragging the world financial system down with it, they surely would have chosen to act otherwise. But it is impossible to see into the future with any great clarity.

With that in mind: We do not know what will be the consequences of our current descent into unprecedented deficits and mushrooming sovereign debt. Prudence dictates that we proceed with the utmost caution — in fact, that we do not proceed at all farther down the path to deeper national debt.

Mr. Reich pointed to the 1950s, during which time the United States was able to grow so robustly, with the economic benefits so thoroughly dispersed throughout the population, that the debts left over from the FDR era and World War II were of relatively little economic consequence. Here’s the problem with that line of thinking: We are not in the post–World War II economy. The economic circumstances of the postwar era were utterly unique: The majority of the world’s productive manufacturing capacity was in the United States, Europe and Asia having fully militarized their economies only to see their factories and capital blown to bits, their work forces decimated (and, in some cases, worse than decimated). That is not going to happen in 2010, let us pray.

There are some other problems with the orthodox Keynesian account. As Tyler Cowen has asked: If aggregate demand really is so weak, why are profits so strong? Harley Davidson, to take one example, saw its profits quadruple in its last report, and it is a company that is very much dependent upon American buyers. Other firms, from Pepsi to Mattel to Ameritrade, have seen very strong profits of late. Analysts have remarked that, in terms of profits, this is one of the strongest recoveries we’ve seen in a good long while. That does not comport with Mr. Reich’s account.

In any case, profitable businesses are a more sure source of economic growth and jobs than are temporary government-spending measures. I’d rather have a job at the Harley factory than a job that depends upon such ingenious Obama stimulus proposals as the purchase of a polar icebreaking ship ($87 million) or new subsidies for beekeepers and fish-farmers ($150 million). Government is a reliable misallocator of capital, and that stimulus money has to come from somewhere. Where? From the sort of people who might like to start a factory to compete with Harley Davidson, or a toy company to compete with Mattel, and earn some profits of their own.

As my colleague Stephen Spruiell has pointed out, once this latest round of stimulus (in the form of expanded unemployment benefits) has gone out the door, we will have spent more trying to stimulate the economy than we spent on the Iraq war and the Afghanistan war — combined. To what end? Ten percent unemployment? A tottering recovery? The Democrats will argue that things would have been worse without the stimulus, that it would have worked better if it had been larger, etc. That hypothesis has the political advantage of being unfalsifiable. But we can look around the world and see that other countries that have enacted proportionally smaller stimulus programs have fared better than we have. (The Germans, of all people, are wondering what has gotten into us, why we seem to be going all Italian.)

Consumer demand is not the fundamental problem; it is, if anything, a symptom of the deeper problem: a few trillion dollars’ worth of devalued capital in the form of a cratered real-estate market and a similarly knee-capped market for mortgage-backed securities. Stimulus spending is not going to drive housing prices back up to where they were, and that is a good thing: We should not try to reinflate the bubble. Remember that our current problem is, in no small part, the result of earlier attempts to stimulate the economy through artificially low interest rates. Rather than allowing the markets to sort out the banks and the mortgage securities, we’ve propped up weak institutions, given a blank check to the government-sponsored enterprises at the heart of the problem — Fannie Mae and Freddie Mac — and produced an inscrutable financial-reform bill that will do little or nothing to address the fundamental problems behind the recent crisis, and little or nothing to prevent future bailouts, should such measures become politically feasible. The real cause of the credit crisis is the intertwining of politics and finances, and we have only complicated and deepened that relationship.

Which is to say: This is not 1933. A monetary tsunami may (or may not) follow this radical expansion of the money supply and credit. There are no obvious signs of inflation, but there need not be: General-price inflation can happen very rapidly, with little apparent warning. The truth is, nobody knows. And when you don’t know, you proceed with caution. It is not a coincidence that American corporations are adding rapidly to their cash reserves at the same moment that the American government is adding rapidly to its debts. Which course of action seems more prudent?

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

Sen. Mitch McConnell, the Republican majority leader, sounds like a reasonable guy when he says that Republicans aren’t against extended unemployment benefits, but merely want them offset with spending cuts elsewhere in the budget. In some circles, that’s the very definition of moderation: I’ll go along with your program, but you have to find the savings.

Don’t buy it.

Republicans, perhaps because of their party’s evangelical wing, understand what it means to be born again — and they’re out to convince Americans that they are born-again debt crusaders, ready to rumble in the holy struggle for smaller deficits and less-unbalanced budgets. This takes a little bit of chutzpah. Here’s McConnell: “The American people don’t think our problem is that government taxes too little. Our problem is that government taxes too much. And that it spends too much and borrows too much. And until Democrats demonstrate even the slightest ability to restrain the recklessness with which they spend Americans’ hard-earned tax dollars, the job creators and the workers of this country aren’t about to take them seriously on how to lower the debt. The American people shouldn’t be asked to pay the price for Democrats’ recklessness through higher taxes.” Until Democrats demonstrate the slightest ability to restrain their recklessness? Fair enough, but let me refresh Senator McConnell’s memory:

Check out the spending under your guys, Senator McConnell. Notice how it doesn’t go down? This is why nobody trusts Republicans on spending: because Republicans have not earned anybody’s trust.

If you want to see just how befuddled Republicans are when it comes to this issue, look no further than Senator John Cornyn’s performance on Meet the Press opposite David Gregory this weekend. Gregory asks the same question I ask every time I interview a Republican bigwig: “What does distinguish the Republican party of today from the Republican party under President Bush’s rule, with regards to spending.” Cornyn’s answer was, basically, “Uhhhhh — hey, look, something shiny!” But let’s hear from the senator in his own words: “Well, I think what people are looking for, David, are checks and balances. They’ve had single-party government and it’s scaring the living daylights out of them, and it’s keeping job creators on the sidelines rather than investing and creating jobs. That’s why the private sector isn’t creating jobs.” This is politician for, “The dog ate my homework.” Yes, there is some uncertainty about the political environment, and that surely is affecting investing and hiring decisions. You know what else is affecting those decisions? A couple of trillion dollars’ worth of devalued capital in the form of collapsed real-estate values and a crippled banking system that Congress has decided to prop up rather than allow it to be sorted out by the ruthless Darwinian forces of the market.  

But what about those unemployment benefits? The Republicans say they want to extend them but pay for doing so by cutting other spending. Unfortunately, the “other spending” they plan to cut is stimulus funds that have been theoretically appropriated but not spent — i.e., they’re “saving” money by not spending money we might not have been spending, anyway. It’s like a broke guy saying: “Yeah, I was planning on buying a new Ferrari, but then I changed my mind. What should I do with the $250,000 I saved myself?”

Not good enough.

Because I am a public-minded guy, I’m going to help the senators out here. If you cruise over to Mitch McConnel’s website and click on “Issues,” there is an issue that is conspicuously missing: spending. He talks about spending night and day, castigates the Democrats for their spendthrift ways, says he wants spending cuts. But, here’s the Entire Universe of Issues according to Mitch McConnell:

1.    Financial Regulation

2.    Economic Growth

3.    Health Care Reform

4.    War on Terror

5.    Energy

6.    FY 2011 Appropriations Requests

Or, as I like to put it:

1.      New spending on babysitting bankers

2.      New spending on special-interest projects

3.      New spending on oldsters who might vote for Mitch McConnell

4.      New spending on bombing Afghanistan until it turns into Connecticut

5.      New spending on Kentucky coal products

6.      New spending on things Mitch McConnell is keen on

There is no category for “Spending Cuts,” or “Balancing the Budget,” or “Ceasing to Basically Haul the Nation’s Entire Stock of Diminishing Assets Down to the Local Pawn Shop and See If We Can Get Enough for a Forty.” But . . . FY2011 Appropriations Requests. Now, there’s something a politician can get to cackling about.

As you might guess, those appropriations requests are more densely packed with pork than a can of Spam — Kentucky-fried pork, of course. Seems the Paducah Gaseous Diffusion Plant needs $116 million of your money. The Forage Animal Production Unit needs $4 million. The biofuel lobby needs a million dollars to be routed to it through the University of Kentucky. Hopkinsville has a narcotics taskforce with its hand out. Raytheon wants $12 million to put lasers on 20mm Gatling guns in Louisville — which at least sounds kind of awesome, but President Obama thinks they can do it with $6 million instead of $12 million. Somebody wants to buy something called Fern Lake and make a park out of it, but they want you to pay for it — $1.2 million. No, there’s no tab for “Cutting Spending,” but if you add up all the stuff that Senator McConnell lists under FH2011 Appropriations Requests, you come up with just about $600 million. That’s a lot of cash — and that’s just the special-interest stuff he’s advertising on his website, not the big-ticket items. So, let’s do some English-major math here: $600 million in feel-good spending multiplied by 100 U.S. senators equals . . . $60 billion, almost enough to pay for those unemployment benefits Senator McConnell is so keen to fight over — twice.

Now, I think every household in America should have a Raytheon laser Gatling gun on its rooftop, right next to the Democrat-subsidized solar panels. In fact, a Raytheon laser cannon that runs on solar panels sounds like an awesome bipartisan project, and I want one. But we can’t afford it. You want to cut spending, Senator McConnell? Ask an intern to print out that list from your website, and take a deep breath.

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

Tim Fernholz takes issue with me.

This pox-on-both-your-houses nonsense is carefully shielded in “preference.” While it’s true that I prefer eating a pint of Ben and Jerry every day, I know that’s unsustainable. Similarly, Williamson may be right about the relative preferences of the two parties, but if you look at recent history, only the Democrats have shown any inkling of restraint, and, just as important, a willingness to make deals that produce responsible budgets. Democrats occasionally overindulge, but Republican politicians are passed out in the kitchen, surrounded by empty cartons of Chunky Monkey.

Since it’s Friday afternoon: Well, allow me to retort.

Show me that inkling of restraint. I see a lot of Chunky Monkey, with no spinach in sight.

Fernholz’s take is flatly untrue, and it is untrue in a characteristic way, in that it misattributes Congress’s budgetary powers and responsibilities to the president. Congress writes budgets. Congress sets the tax rate. Congress appropriates the money. Nancy Pelosi didn’t like our fighting a war in Iraq, she could have defunded it, if she had the guts. She didn’t: Here’s the proof. Congress runs the show. The last politician to (kinda, sorta) balance the federal budget was Newt Gingrich, if you buy the myth that the budget was balanced during the Clinton era. (I do not. Because it is not true.) It was Gingrich who forced the government shutdown over the deficit. He got killed for it. Politics is like that.

But if you want to talk about other legislative-executive deals, it was George H. W. Bush who put himself on the line and paid a great political price by agreeing to tax increases that he believed to be part of a responsible compromise. Democrats, of course, ran against Bush for agreeing to their budget compromise. He got killed. Politics is like that.

Democrats like to talk about presidents and deficits because they would rather blame Reagan for the deficits of the 1980s than blame the Democratic Congress that actually wrote the budgets. They would rather blame George W. Bush than accept responsibility for the government they currently are running.

But I don’t see how you can call this an example of having Democrats “occasionally overindulge.”

Yeah, blame it on Bush: Democrats control the House, the Senate, and the White House. You want to do something about it, step on up. Don’t worry; I’ll wait. You have until November.

The “pox on both their houses” talk is not at attempt at easy moral equivalence. Republican majorities in Congress have been disgraceful on spending. Democratic majorities in Congress have been disgraceful on spending. I don’t write that to be bipartisan; I write that because it is an inarguable fact. You don’t get $130 trillion in the red by accident.

But Fernholz is hostage to a narrative of Democratic heroism, which makes him say and write dunderheaded things. (Partisanship does that to people.) We were together on a television show not long ago, talking about his alternative-energy fantasies, and Fernholz, confident that we’re going to be able to replace the bulk of our energy infrastructure in an economical and non-disruptive way through a federal jobs program, boasted: “Democrats are the party that put a man on the moon.” That sort of thing embarrasses me; do you really want to be the guy who turns the moon shot into a cheap partisan point? Wouldn’t Republicans blush if Haley Barbour gave a speech and said:  “Hey, pass the Republicans’ capital-gains tax cut — we’re the party that freed the slaves!”

Here’s the deal: You can vote Republican, you can vote Democrat, but you’re a fool if you trust either party to get serious about spending. The evidence is all against it, which is obvious to anybody not blinded by partisanship.

An interesting thing happened on the way to the bond market: As I mentioned earlier, the state of Illinois went to market with $900 million in “Build America Bonds,” which are federally subsidized debt instruments intended to be used for infrastructure projects — building bridges, blacktopping roads, and the like. Which is to say, right in the middle of a fiscal meltdown, Illinois is launching a major construction campaign — basically, it’s a make-work jobs project, a chance to get a piece of all the money that the stimulus bill has left on the table and put it in the hands of politically connected union bosses. Thanks to Barack Obama, Nancy Pelosi, and Harry Reid, you and I will be covering a 35 percent federal tax credit for investors in those bonds. (Most of the investors, that is, but not all — more on that development in a second.)

Illinois, already sitting on top of $5 billion in unpaid bills and an imploding pension system, is borrowing money everywhere it can, having already tapped into the bond markets three times in recent years just to cover its unfunded retirement obligations for state employees. (Illinois state-government pension? You should have a retirement so fat.) So the chance to go even deeper into debt, with a federal subsidy to sweeten the deal, was irresistible.

Strangely, the market went crazy for those Build Americas. Illinois is already paying a premium in the debt markets; its credit was downgraded in June and its finances are just abject. But the yield demanded on those Build Americas came in 15 basis points lower than expected, meaning Illinois will pay a little less interest on that $900 million bond obligation. Why did the markets cut Illinois a break? Did they forget the Land of Lincoln is the land of Obama, Blago, and George Ryan? That it has the worst credit rating of any state in the Union? That it’s currently considered a greater default risk than Iceland and that it’s only one spot behind Iraq in the default-risk ratings? (And only three behind Pakistan!) What gives?

The most obvious explanation is that the yield on the Build Americas is nearly 7 percent, and there’s not much out there paying 7 percent right now. Investors also get a 35 percent federal tax credit on those returns, so the real rate is even higher. [See correction below.] But what about the risk? My own suspicion is that, even though the law explicitly says otherwise, there is some suspicion on the part of investors that the Obama administration would, in a crunch, stand behind those Build Americas — especially from a big state like California or from a politically sensitive state like the president’s home turf of Illinois.

Addison Wiggin has an interesting observation: 29 percent of the bids for those Build Americas came in from overseas, where investors don’t even enjoy the tax subsidy. They’re just looking for a yield and not paying much attention to the risk. Investors are liking governments: Capital inflows into municipal bonds are way up — $2.7 billion this week vs. $676 million last week, with similarly strong increases in the four-week rolling average — and junk-rated municipal bonds are popular, too. Wiggin sees a bubble and reports:

Allstate (perhaps not ironically headquartered in Illinois) has trimmed its muni holdings by 13% over the last three quarters. An insurance giant holding $20 billion in munis is seeing the same subprime-style risks we outlined in the last issue of Apogee Advisory:

• Widespread investor acceptance
• Complicated derivatives
• Intense incentive for banks to make deals
• Boneheaded assumptions of endless return on investment
• Loads of underqualified borrowers
• Stunning amounts of leverage and debt
• Social and political pressure to grow at all costs

The multi-trillion-dollar muni market remains loosely regulated, and despite high-profile mishaps in the subprime market, municipal bonds still carry overstated credit ratings from Wall Street’s finest firms.

The latest stimulus under consideration, Stimulus V, is a state-and-local bailout in disguise. If Illinois, California, and the others keep borrowing like this, they won’t even be able to disguise the coming bailout when the municipal-bond bubble bursts.

I wonder, Where will the money come from?

STIMULUS SPENDING UPDATE: $50,000 in stimulus dollars spent to put on a stage version of Gertrude Stein’s novella Brewsie and Willie. Taking the stimulus to the theater? And nothing for the critics?

UPDATED: Reader Prayin’ for Reagan (nice name)  sends in a correction, which I’m still trying to confirm. In short: There are two kinds of Build America bonds: one in which the 35 percent interest subsidy is paid directly to the bond issuers, and another in which the subsidy is passed on to the bond investors in the form of a tax credit. Either way, the investors receive a higher real yield and the issuers get the benefit of a federal subsidy to offset their risk. I thought Illinois was issuing tax-credit bonds, PfR says I’m wrong. Am checking out now, will update.

UPDATED AGAIN: Prayin’ for Reagan is indeed correct, and I am wrong.

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

A little late to this party, but a couple of people asked me to comment on the Jon Kyl/Mitch McConnell tax-cut business. As Dan mentioned on The Corner, Senator Kyl does seem to be engaging in nefarious starve-the-beastism, while Senator McConnell seems to be endorsing naïve supply-siderism.

Kyl is particularly bothersome here:

“Who does the money belong to?” Kyl asked rhetorically. “The money belongs to the taxpayer, to the people. The money does not belong to the government, and yet that’s what this kind of a rigid paygo rule would assume: that the money belongs to the government, and therefore if you’re going to deny the government some of that revenue through a tax cut, you have to make the government whole, because the government can never lose any money. That would mean that you could never reduce the size of government. Each year, when it gets bigger, it stays at that level or it gets bigger yet, but you can never reduce it.”

You know what? Kyl is right: The money does belong to the taxpayer. You know what else? The money Jon Kyl and his colleagues are spending belongs to the taxpayer, too. Jon Kyl’s been known to pork up a highway bill in 2008 — even as he voted against one of the worst of them in 2005. (And Kyl’s one of the good ones.) If you spend the taxpayer’s money, you have to tax the taxpayer, at some point. You cannot magic that money into existence. As I’ve been arguing — ad nauseam, forgive me — taxes are a secondary issue. The primary issue is spending. As ye spend, so shall ye tax. The rate of spending is the rate of taxation; debt and deficits only push the date of tax collection into the future. You can collect the taxes today or you can collect the taxes tomorrow — but what you spend, you will have to collect.

At least, somebody will. And that’s the real problem here. So long as appropriators enjoy carte blanche to spend today while deferring taxes until they’re out of office (or even until they have shuffled off this mortal coil), then they will have bad incentives, and they will act in accord with those bad incentives. That’s a pretty intuitive proposition, but there’s good empirical evidence for it, too: for instance, the performance of the United States Congress for the past 60 years or so.

Now, Republicans might as easily turn the question around and ask: How is an unfunded tax cut today different from an unfunded stimulus-spending bill today? Both increase the deficit, both perform a wealth transfer from the future to the present under the theory that doing so will increase growth and spur the economy. Both are irresponsible. Both are rooted in magical thinking: Naïve supply-siders believe tax cuts pay for themselves, naïve Keynesians believe spending pays for itself through the magic of the multiplier effect.

Tax cuts without spending cuts, spending increases without tax increases: These are not merely irresponsible, they are impossible — unless you think that nobody is going to pay the debt. You might make a reasonable case that tax cuts without spending cuts are, in some cases, preferable to deficit stimulus spending, especially since the stimulus spending has been channeled to a lot of dumb and wasteful projects. But, broadly speaking, the two things are equivalent. The Democrats prefer unfunded spending, the Republicans unfunded tax cuts. And almost nobody is serious about reducing spending, because spending is where power dwells in Washington.

Not to go all 1776 on you, but: You want to talk about taxation without representation? That’s exactly what we’re engaging in: taxing the future to meet present wants, without ever having the common courtesy to ask the future whether it wants to accept a social contract that is radically different from the one we inherited. Picture a bunch of angry babies with muskets and tri-corner hats: You think the tea-party protesters are overflowing with high dudgeon, just wait until you see the poor people who actually get the bill. They don’t get a vote, which is why we have to look after the interests of the future today. And looking after the interests of the future in the present is one possible working definition of conservatism, is it not?

I like Gov. Rick Perry’s theory of economics: Don’t spend all the money.

As I recently noted, even as the Obama administration is trying to wring money out of BP, Nancy Pelosi & Co. are putting $600 million a year into the enviro-offender’s pockets through the ethanol program (aka corn gas). BP, along with the other oil companies, gets a fat tax credit for blending corn gas into its gasoline. As has been voluminously and lavishly documented, this unicorn ranch of a program is a ridiculous waste of money, subsidizing a non-viable fuel that is bad for the environment and bad for the economy and pretty much bad for everybody except BP, Shell, Hugo Chávez, and Archer Daniels Midland.

But this is politics, so there’s always room to make things worse: Madame Speaker, Harry Reid, and President Obama are at the moment trying to buy themselves a carbon-cap bill, and the price keeps going up. In need of greasing the wheels with some Midwestern Democrats (you know, the kind with constituents who wear meshback trucker caps non-ironically) backers of the carbon caps are planning to pack into the bill a long-term extension of the VEETC — that’s Volumetric Ethanol Excise Tax Credit, or, as I like to call it, the Let’s Give Away a Bunch of Taxpayers’ Money to Some Well-Connected Corporate Yahoos Program. Ethanol subsidies run into the low billions: big enough for a few people to fight for, but not big enough for very many to fight against — a classic case of concentrated benefits and dispersed costs.

This new extension of the corn-gas giveaway comes on the heels of a Congressional Budget Office report on Washington’s ethanol shenanigans, the findings of which are bracing. First, there’s the environmental aspect: “Producing ethanol from corn requires much more energy from natural gas or coal than does producing petroleum fuel, cellulosic ethanol, or biodiesel. . . . Because the production of ethanol draws so much energy from coal and natural gas, it can be thought of as a method for converting natural gas or coal to a liquid fuel that can be used for transportation.” Translation: Your ethanol-powered car is actually a coal-powered car. Congratulations, Moonbeam: You should have bought a diesel.

More to the point of our concerns here, there’s the financial impact. How much do the subsidies distort the energy marketplace? CBO says: “CBO calculated that if no other biofuel policies were in place, eliminating the biofuel tax credits would reduce ethanol consumption by 32 percent and biodiesel consumption by 38 percent.” Only a third of the market? Sure, but that’s just the impact of current subsidies. You have to consider that years of subsidization created a whole ethanol infrastructure that probably never would have existed. CBO: “Determining the share of biofuel production that depends on the current federal biofuel tax credits is complicated by the history of support for biofuels and the blending mandates established by the Energy Independence and Security Act. Earlier subsidies supported the development of biofuel production facilities. More recently, EISA’s blending mandates have encouraged continued investment in such facilities by providing greater certainty to investors that there will be a market for their product. Because of those factors, the amount of biofuel consumption today that is attributable to the current tax credits is smaller than it would be if the facilities for biofuel production had not already been built—in part because of previous tax credits. In other words, current consumption of biofuels would probably be much less if the tax credits had never existed than if the credits were removed now, after the existing production capacity has been built.” What is seen and what is not seen: Frédéric Bastiat showers scorn upon us from economist heaven.

Particularly telling is that bit about ensuring investors that there will be a market for their products — kind of like Fannie Mae and mortgage-backed securities. Uncle Sam will buy any old junk, or pay somebody else to buy it — or, in the case of ethanol, pass a law forcing people to buy it. There’s a word for people whose markets are ensured by the government, and that word is not investor — it’s crony.

The Environmental Working Group chimes in with a keen observation: “It costs taxpayers $1.78 to reduce gasoline consumption by a single gallon by substituting corn ethanol. The Department of Energy says the retail gasoline price currently averages $2.78. So ethanol’s $1.78 a gallon cost to taxpayers is two-thirds of the retail price of gasoline.” In other words, in addition to the three bucks you’re paying at the pump, you’re paying another $1.78 in hidden subsidies.

Bottom line: Ethanol represents $5.5 billion a year tacked onto the federal deficit. For scale: $5.5 billion is bigger than the Transportation Security Administration’s 2010 budget and about the same size as the U.S. bottled-water market, Microsoft’s annual R&D spending, or U.S. aid to Africa. All for corn gas. Add to that untold billions in opportunity costs, and remember that a good chunk of the money ends up in the pockets of people we should not be especially keen to enrich. I don’t have any particular beef with the oil companies or ADM, but they’re big boys and they should be able to take care of themselves without taxpayer subsidies. Hands out of my pocket, Tony.

Also, it would be great if we would not be subsidizing these guys while they suck up to Gaddafi.

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

And so it was prophesied: Illinois is headed into a public-pension death spiral even sooner than predicted. The Land of Obama leads the way.

The state of Illinois — broke, overleveraged, and still refusing to get its accounts in order — is up to something interesting: selling bonds to meet its pension obligations. As one of the many states that refuse to set aside adequate money to fund its public-employee pensions, Illinois is headed to the debt markets to raise $3.7 billion for pension liabilities to get it through the year. This is a double dip: In January, Illinois sold $2.4 billion in bonds for pension obligations. Actually, make that a triple dip: It sold $10 billion in bonds to fund its pension liabilities in 2003. “States don’t traditionally fund their pensions with debt,” says CNN in a nice bit of understatement, “but the practice frees up other money that can be used for operations.” The double whammy here is that Illinois’s pensions are in trouble because it already spent the money it needed for its pension contributions in past years on other spending: Which is to say, Illinois is borrowing money it will have to repay eventually to repay the pension money it already spent to pay for other spending it couldn’t afford then and can’t afford now. If you’re wondering where Barack Obama developed his fiscal finesse, you don’t have far to look.

Naturally, it gets worse, and every taxpayer in the United States will be partly on the hook for Illinois’s fiscal incontinence. That’s because they’re also using something called “Build America Bonds,” a financial instrument created by Obama’s stimulus bill, to fund what amounts to a social-services program under the guise of a “capital project.” Build America Bonds are like municipal bonds, except that the profits are taxable — sort of. In the first version of Build America, the federal government paid 35 percent of the interest on the bonds. In the current version, investors get a 35 percent tax credit for the interest they are paid on the bonds, meaning that Washington uses the tax code to give the bonds a higher real after-tax yield, encouraging more borrowing and more reckless spending. The bonds are supposed to be used for infrastructure projects, but Illinois has made it clear it is going to be using them to fund what amounts to a make-work jobs program: Look for a lot of bridge-building, school-cafeteria retrofitting, and an asphalt jungle of expansive roadwork, regardless of whether the project is needed or makes financial sense.

Illinois desperately needs that federal interest-rate subsidy, because even the Mister Magoos at the credit-ratings agencies, myopic as they are, can see that the state is overleveraged — it has nearly $5 billion in unpaid bills lingering — and downgraded its credit in June. The bond markets are demanding ever-higher rates for Illinois’s debt. The average yield for a Build America Bond is about 200 basis points over 30-year Treasuries; Illinois is expected to have to pay about 330 basis points above Treasuries. Its borrowing costs, as Bloomberg reports, have gone up about 11 percent over the last time it issued Build America Bonds.

Bailout baby Citigroup, as the Financial Times reports, is marketing the bonds, and therefore is the only party to this transaction likely to come out ahead. Citi gave two-thirds of its political money to Democrats in the 2008 cycle. Former Citi executive Jacob Lew (who ran Citi’s short-the-housing-market operation) has just been selected by President Obama to replace Peter Orszag at OMB. Citi was Obama’s sixth-largest donor in 2008, chipping in about $700,000.

Illinois’s state spending, by the way, has not exactly been the model of austerity: It rose from $55 billion in 2006 to $81 billion today — nearly a 50 percent increase. But why cut spending when Washington will pay you to borrow more money?

Here’s a concern about Build America Bonds: They are a creation of the federal government, and the federal government picks up a piece of the tab through its tax subsidy. The law says that the federal government is not to be considered a guarantor of the bonds — but how firm is that commitment? If Illinois reneges on a few billion dollars’ worth of securities created by Obama’s stimulus act, there is going to be tremendous political pressure for Uncle Sam to make good on the balance. In other words, U.S. taxpayers, already on the hook for a piece of this boondoggle, may end up on the hook for the whole rotten enchilada.

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

I spent some time yesterday with Rand Paul, the Republican candidate for U.S. Senate from Kentucky and the son of U.S. Rep. Ron Paul. He dropped by National Review for a long interview with the editors and then did an event in the evening at Webster Hall in New York. I found him surprisingly impressive. A few thoughts:

1.      Rand Paul cares about the national debt. It’s his No. 1 issue. It’s also his No. 2 issue and his No. 3 issue.

2.      Rand Paul is willing to go after his fellow Republicans on spending: “They didn’t balance the budget a single year when they were in power,” he complains. “We have to cut taxes—but we also have to cut spending.” Music to Exchequer’s ears.

3.      Rand Paul is a committed vote to repeal Obamacare.

4.      Rand Paul said the Five Magic Words: “Nothing Is Off The Table” when it comes to cutting government spending. No hedging, no hemming and hawing. You want to get serious about putting Leviathan back in his box, Rand Paul is your kind of guy. Of all the office-seekers and politicians I’ve spoken with in the past two years, Paul is easily the most confidence-inspiring when it comes to the question of debt and deficits.

5.      Rand Paul is not Ron Paul. Paul fils may not appreciate my saying so, but this is a very good thing. Ron Paul has a unique talent for taking very good ideas and extending them to the point of absurdity. Ron Paul is the kind of libertarian who makes libertarians wish they weren’t libertarians. Rand Paul is not that kind of guy.

6.      Rand Paul is not Sharron Angle. Whereas Angle comes off as the emotionally charged crusader, Paul’s style is a little bit detached and ironic, his humor self-deprecating. He has a strong command of the issues and presents his case persuasively. The paint-’em-all-as-kooks strategy is going to be hard for Democrats to pull off against him.

7.      Rand Paul has strongly libertarian leanings, but he is much more of a traditional conservative than is his father and the movement associated with him. He prefers to call himself a “constitutional conservative.” He’s not shy about talking about abortion or immigration. His views on national security, Iraq, and the Patriot Act are not Rich Lowry’s or Andy McCarthy’s, but they’re reasonable.

8.      Rand Paul got a rock star’s welcome at Webster Hall. Not a huge crowd, maybe a couple of hundred people — almost all of them under 40, I noticed — but that’s a pretty good showing for a week night, in Manhattan, for a Republican from Kentucky. (The oldsters with the money were at a separate event, with Steve Forbes.)

9.      Rand Paul knows he blew that Rachel Maddow interview, big time. He totally owns up to it, says he knew that they had it in for him going into the interview but overestimated his own ability to shine through the media fog. “I was feeling my oats,” he says, sheepishly, and then shakes his head. Unspoken conclusion: That was stupid. He is understandably a little media-shy now.

10.  Rand Paul is winning the fund-raising race. Paul raised $1.1 million in the last quarter. His opponent raised $1.4 million, but $400,000 of that is a personal loan—from himself. The polls are neck-and-neck, Cook Political Report calls it a tie, but the fact that the other guy is dipping into his own bank account is a good sign for Paul, given that the other guy is not named Mike Bloomberg.

For those of us whose top issue is the debt, Paul is pretty refreshing. From my perspective, there are really two things going on here: One is the question of whether Republicans retake one or both houses of Congress in the next couple of elections. The other question—and, in some ways, the more important one—is: What is the character of that (potentially) emerging Republican majority? The GOP is really at an ideological crossroads, and it’s not clear whether the future of the party looks more like Mitt Romney or Rand Paul. The reality is that the case for small government is not being made most effectively by Rand Paul, the tea parties, or by pundits and activists: It’s being made by a worldwide financial meltdown, followed by a worldwide recession, followed by a series of sovereign-debt crises. For Rand Paul, the times are on his side.

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

Japan’s ruling Democratic party (DPJ) has taken a shellacking at the polls, leaving prime minister Naoto Kan the leader of a weakened minority government. Kan’s government is caught in a set of pincers that very probably will be felt by others, and soon: Japan’s sovereign debt is enormous, so large that it has been downgraded by S&P and is threatened by future downgrades. Hoping to close the deficit, Kan promised to double Japan’s national sales tax, from 5 percent to 10 percent. Unlike a VAT, which is largely hidden from consumers, Japan’s consumption tax, as I understand it, is imposed at the point of sale, so consumers feel it — and they are not eager to endure an even  deeper bite:

Voters were apparently unhappy with new prime minister Naoto Kan’s recently announced proposal to double the consumption tax rate to 10 percent. This despite polls showing a majority of the public say such a measure is inevitable in order to fix the creaking state finances, and it also being the policy of the opposition LDP – Sunday’s main electoral beneficiary.

“I touched on the consumption tax and the public may have felt it came all of a sudden. I also believe that my lack of explanation about it was a big factor,” a tired and slightly shaken-looking Mr. Kan told a news conference in the early hours of Monday morning.

I’m not sure what kind of explanation would have finessed the fact that you’re doubling a tax rate. My impression is that the Japanese public can calculate the difference between a 5 percent tax and a 10 percent tax (these aren’t American public-school kids we’re talking about).

Kan is sticking to his plan, damn the voters: Given a choice between cheesing off the electorate and enduring the wrath of the credit markets after another downgrade, he bowed to the markets: After all, you can always throw taxpayers in jail if they refuse to give you money, but you can’t throw investors in jail if they won’t lend to you. Even Leviathan has to worry about his credit score. Those of you who are banking on a Social Security check in old age, or a non-confiscatory rate of taxation in the near-to-middle future, keep that in mind: When the choice is between voters and the credit markets, voters lose.

This is the conundrum: The credit-rating agencies want a tax hike, voters don’t. There’s a way around that problem — deep spending cuts — but nobody is talking seriously about that, in Japan, in Europe, or in the United States.

Even as Kan presses ahead with his tax plan, Japan may end up downgraded, anyway: Kan’s weakened government, the reasoning goes, probably is not in a position to undertake the difficult and unpopular measures necessary to restore fiscal rectitude. So the outlook remains negative.

Takeaway for U.S. policymakers: The science-fiction guys were right that the future looks like Japan. But it’s not William Gibson’s dystopia — it’s Ayn Rand’s. 

A little perspective from the debt commission:

The commission leaders said that, at present, federal revenue is fully consumed by three programs: Social Security, Medicare and Medicaid. “The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans — the whole rest of the discretionary budget is being financed by China and other countries,” [Alan] Simpson said.

Three programs — Social Security, Medicare, and Medicaid — consume 100 percent of federal revenue, and everything else is paid for with borrowed money.  This is why we cannot balance the budget by cutting military spending, foreign aid, food stamps, etc. There is not going to be a serious project to address our deficit/debt problem without deep, painful entitlement reform, and the longer we wait to admit that fact and get going on it, the worse it is going to be.

So, who’s gonna grab that third rail? George W. Bush tried and got hammered — an example that few if any in Washington are eager to follow.

Joe Government added up the numbers at the end of June and found that the deficit for this year already has passed the $1 trillion mark. Go ahead and savor those dozen zeros for a moment: $1,000,000,000,000. And change.

As god-awful and depressing as that trillion-dollar hole in our national financial future is, it’s not as bad as was expected. No, really: If F. A. Hayek’s critique wasn’t enough for you, here’s the case against government economic planning: The actual plan was even worse. In fact, it was supposed to be about $80 billion worse. So, what happened?  Sudden outbreak of fiscal sobriety in Washington? A little intelligent trimming here and there in the budget? The idea is almost funny — it would be funny, if not for the penury and economic ruination party.

No, spending was $11 billion higher this June than last. What actually brought that grim deficit down under the even grimmer projections was that there was a slightly stronger private environment than had been expected, and so business-tax receipts were up, significantly: “Receipts from corporate income taxes for the first nine months were $31 billion (or 31 percent) higher than the amounts collected during the same period last year,” reports the CBO. “That increase reflects higher taxable profits in 2010, resulting both from improved economic conditions and from lower depreciation charges. The increase in corporate payments in June could indicate that the September quarterly payments also will show strength because corporate receipts in those two months tend to move in tandem.”

(We personal-income taxpayers actually put a little less into the national kitty this time around, because so many of us are unemployed.)

Translation: Thank a corporation today for reducing the deficit a little bit.

I am no fan of naïve supply-siderism, the belief, all too common among Republicans, that tax cuts pay for themselves by creating economic growth. It’s a fine theory, and I wish it were true, but the numbers don’t add up. But what we should not and must not forget is that there are growth effects, and that you can achieve the desired effects of a tax increase — higher government revenue — through means other than increasing tax rates. You can also inflict the costs of a tax cut on the government without getting the benefits that come from reducing tax rates, something Congress manages to achieve more or less daily by doing stupid things that reduce growth in the economy: for instance, adapting a cumbrous financial-reform bill that fails to resolve the moral hazard at the heart of the Washington–Wall Street axis, fails to make the system safer, and fails to prevent future bailouts — but does cost the private economy a lot of money, which will cost the government, too, in the form of lower tax receipts. Obama and his congressional allies have us on a path toward a national debt that well exceeds the entirety of the U.S. economy, so we probably aren’t going to grow our way out of this. But growth in the private economy helps the public finances, too.

What’s most worrisome still is that shadowy intersection between public and private finance. For instance, the CBO reports that a big chunk of the income that helped to reduce the deficit this year — a $35 billion chunk, to be precise — came from investments made by the Federal Reserve. Go ahead and review those numbers: The growth in revenue from Fed investments was larger than the growth in revenue from corporate income taxes, during an alleged national economic recovery. Could there possibly be a downside to having the entity that manages the U.S. monetary system acting like a giant hedge fund? Back to the CBO: “Receipts from the Federal Reserve increased by $35 billion, primarily because the central bank has increased the amount of assets that it holds and has shifted to riskier, and thus higher-yielding, investments in support of the housing market and the broader economy.”

Let’s tighten in and focus on “riskier, thus higher-yielding, investments,” words that should make your nights longer and your fingernails shorter. TARP is basically played out, and things are supposed to be back on the path to normal, and the Fed is shifting, now, to riskier investments? Why? What are they up to over there?

They’re up to a lot — a lot more than its usual mandate of keeping inflation in check while the economy grows. There are indications that we may be on the verge of a double-dip recession, a specter that panics the pants off of every blue suit in Washington. The Fed usually tries to encourage growth by cutting interest rates, but it’s already cut them down to nearly nothing, and it is worried that it can’t keep real rates at basically zero indefinitely without hurting its credibility. But the stimulus hasn’t stimulated, unemployment is high, China is slowing, deficits are soaring, the markets remain woozy — how to encourage growth in such an environment when the handy rate-cut tool is taken away? The answer is: buying lots of crap securities, thereby injecting credit and liquidity into the economy while loading up the Fed’s balance sheet with a lot of dodgy junk. That stuff’s making money right now, but subprime-backed securities made a lot of money for a long time, too.

Fed governor Kevin Warsh gave a speech ringing the alarm bells on this, in the quiet Fed way, a couple of weeks ago, telling Rotarians in Atlanta:  “Any judgment to expand the balance sheet further should be subject to strict scrutiny.”  In other words: Keep an eye on these guys. Remember, as sand-poundingly dumb as the Wall Street guys may seem sometimes, the guys who work for the government are mostly the ones who couldn’t keep up with them.

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

… or so says a majority of American voters.

The Left has two choices when it comes to this news: Get all aflutter about the alleged extremism of right-wing/tea-party antistatism, or deny that the story is a story. Our old reliable friends at Salon do both:

The right has been screaming about Obama’s “socialism” since the summer of 2008 (at least) — long before he was elected, long before he was sworn in, and long before he signed a single piece of legislation. In other words, the right reached its conclusion before there was any evidence. (This is the “thinking with my gut” mentality that Stephen Colbert likes to mock.) I can’t immediately recall or find any polling from the ‘08 campaign about the Obama/socialism question. But it seems entirely possible that, even during that campaign, around 40 percent of the electorate would have described him as a socialist.

Steve Kornacki, you win today’s gold medal in the category of vaulting over irony. Let me help out here: There was, of course, evidence of what Barack Obama believed before he was elected president. He had a political career before that. Served in the Senate. Gave some speeches, wrote some books. Ran a primary campaign and a general-election campaign. Remember? But, if you are going to mock the Right for having “reached its conclusion before there was any evidence,” do not follow that sentence up with: “I can’t immediately recall or find any polling from the ‘08 campaign about the Obama/socialism question. But it seems entirely possible that, even during that campaign, around 40 percent of the electorate would have described him as a socialist,” which translates: “I reached my conclusion without any evidence.” That is the thinking with your … [whatever] … mentality that I like to mock.

Trying to cast doubt on the importance of the poll, Kornacki breaks out a recent liberal favorite: the poll that revealed that 18 percent of New Jersey conservatives believed Obama to be the Antichrist. Perhaps he is ignorant of the fact that a not-insignificant number of Americans interested in numerology once suspected that the Gipper was the beast described in Revelations, because each of his names — Ronald Wilson Reagan — has six letters. Kornacki’s obvious (and rather tedious) program here is to emphasize the alleged kookery in the conservative world (which has its share of it). but that same poll found that 5 percent of self-described liberals thought that Obama might be the Antichrist, and that 8 percent of the overall electorate affirmatively believed him to be the Antichrist. American kookery is bipartisan.

But is it kooky to call Obama a socialist?

Sure, if by socialist you mean Lenin or Kim Jong Il, or even Proudhon or Eugene V. Debs. If you mean somebody who believes that the government should exert significant political control over the commanding heights of the economy — such as finance and energy – and engage in some kind of economic central planning — such as a massive bureaucratic effort to reduce health-care spending as a share of GDP — whose ethic is basically redistributive, etc., then maybe it does not sound so kooky. And he does love him a good five-year plan.

There are many reasons to be grateful that John F. Kerry never was elected president of the United States of America. One of them is his unkeen financial acumen, which is so backward and strange and perplexing that I never can tell whether it is the work of some sort of mad genius or cribbed from one of those guys who hangs around public places with an apocalyptic message on a sandwich board. Matt Viser, writing in the Kerry campaign’s house organ, the Boston Globe, reports:

Senator John F. Kerry’s signature energy and climate change legislation would cut the deficit by $19 billion, according to an estimate released yesterday by the Congressional Budget Office.

The legislation faces strong opposition from Republicans and some Democrats from energy-producing states, but the report gives the Massachusetts Democrat and his allies a compelling financial argument amid concerns about the implications of a burgeoning deficit.

… The cost of the legislation, which includes various tax credits, would be more than offset by revenues collected through a cap-and-trade system, according to the report. The bill would put a price on carbon emissions, a measurement that opponents have attacked as a carbon tax.

More than offset! Ah, this is a hoot. Is Matt Viser putting us on? Is John Kerry?

That piffling $19 billion deficit reduction is achieved by imposing a tax hike of three-quarters of a trillion dollars — the CBO puts the number at $751 billion — on the American people, and then spending all but the last $19 billion of the revenue generated. Here’s a radical idea: If you want to reduce the deficit by a (paltry, embarrassingly tiny, too slightly to really seriously mention it) $19 billion, how about you just pass a $19 billion tax hike and skip the part where you spend more than the cost of the Iraq War creating a new politically driven securities market to chase marginal atmospheric benefits related to the emission of carbon dioxide, which is not even the most important greenhouse gas? For perspective, you could just cancel the Depression-era farm-income stabilization program and save a nice round $20 billion.

That $19 billion in savings is great — if you only look at the balance sheet at Treasury and ignore cap-and-trade’s effects on the economy, the actual economy that exists out there in the real world. The Obama administration estimates the cost of cap-and-trade at 1 percent of GDP per year ($146 billion dollars), scholars at the Heritage Foundation put it at $393 billion per year, and others have estimated even higher costs. You know what the Obama administration’s numbers and the Heritage Foundation’s numbers have in common? They’re all a heck of a lot more than $19 billion — orders of magnitude bigger.

And the estimated impact of cap-and-trade on global warming trends over the next century? Approximately zilch. Great deal, geniuses!

There are lots of legitimate reasons to support cap-and-trade. One is that you are too cowardly to just straight up impose a carbon tax. The other is that you don’t think Al Gore is rich enough yet, and that his green-investment portfolio could use some political help. But supporting cap-and-trade because you think it is going to save the nation money? I’ll believe that when I see John Kerry’s pictures from his Christmas in Cambodia.

Nancy Pelosi has sneaked a $10 billion government-union bailout, and another $10 billion in domestic spending, into the supplemental military-spending bill.

The war supplemental was only supposed to be $37 billion as it was — that’s $20 billion in grease to pass $37 billion in war spending. Bad form, Nancy. Way to let the troops in Iraq and Afghanistan know exactly where they stand on the political totem pole back home!

The $10 billion bailout to the states — more accurately, to the states’ government-employee unions — was passed on the argument that, without it, there would be massive layoffs of teachers. That is not and was not ever going to happen. But if it were going to happen — so what? Most of our public schools are massively overfunded and ludicrously inefficient. Why punish taxpayers in the more frugal districts to bail out northeastern suburban schools that spend in excess of $20,000 per student annually?

This is a Big Labor, Big Government bailout — a $10 billion payoff to one of Nancy Pelosi’s most favored special-interest groups. And it won’t be the last: State personnel spending, particularly on pensions and benefits, is unsustainable, with Barack Obama’s home state of Illinois leading the way to bankruptcy. There will be more, and rewarding the spendthrift today encourages even worse behavior that will make tomorrow’s bailouts even more expensive.

Who didn’t think that $37 billion supplemental was expensive enough as it was and needed to be bumped up 50 percent?

I like Fisker, but this makes me a little sick: Asked if this economic environment really presents the best occasion for starting a car company, Henrik Fisker answered:

It’s the perfect time. Especially for an environmentally minded automaker. Governments are handing out money.

Question for investors: What happens to the Fisker business model if governments stop handing out money?

There’s nothing quite like the sensation of waiting for a socialist government to do the smart thing fiscally, but Greece-watchers are reasonably confident that the Papandreou deficit-reduction plan will pass when put to a vote on Thursday. But even if the legislators all fall in line, there’s another problem facing Plan Papandreou: the Greek courts, which may decide that the program is unconstitutional.

… Despite the giveaways that may find IMF and EU resistance, another issue on the horizon is whether some aspects of this legislation will be deemed unconstitutional by local courts. One of the measures in the proposed bill likely to be quashed by the judiciary is that public servants and private sector employees can be insured by an amalgamated pension and health-care fund.

And if there are many more articles that fall foul of Greek constitutional strictures, the socialist legislative branch of government may be check-mated by a judicial coup. Then the government could find itself back to square one in relation to its toughest austerity measures — even if all its deputies tow the party line.

It is uncomfortably easy to imagine a similar scenario playing out in the United States in ten years. How do you say “Antonin Scalia” in Greek?

Speaking of things Italian, if all goes well in Greece, Justice Scalia’s ancestral homeland will be moving into the international crosshairs next. Italy has done some things right — like keeping its deficit relatively low by not engaging in massive stimulus spending — but it went into the crisis with such a high debt-to-GDP ratio that it is still struggling. The word “default” is being thrown around by responsible people:

“A default is a distinct possibility,” said the managing director of Capital Markets, Roger Bootle, and its chief European economist, Jonathan Loynes, in a report.

Its banks would be hard hit and foreign investors faced losses of €400 million if Italy defaulted.

Italy has fared better than other markets, such as Spain and Portugal, since Greece’s crisis. It limited its stimulus spending and emerged from the recession with a budget deficit of 5.3 per cent of GDP, less than half that of Spain and Greece, but it still boosted government debt to 115.8 per cent of GDP.

So the world is waiting for Greek socialists to enact social-spending restraints and for fiscal Puritanism to catch on in Italy. Okey-dokey.

In other news of the non-obviously self-evident: Ezra Klein thinks that we’ve got this deficit thing licked in the United States, just so long as Congress doesn’t mess it up. No, really. He writes: “Either Congress can pass and implement policies that will bring the long-term deficit under control or it can’t. Those are the only two choices here. But there’s no real mechanism for getting the deficit under control aside from Congress passing laws and then sticking to them.” Well, raise my rent.

It’s hard to disagree with Klein’s analysis here, except for the part where he assumes there’s a reasonable chance of the U.S. Congress not being populated by jackasses.

Michael A. Fletcher of the Washington Post deserves some sort of prize for D.C. conventional-wisdom regurgitation for his piece on the states’ budget crises. Check out this lead:

State governments desperately need money. Congress is in no mood to spend it. And the reckoning will begin Thursday, when the new fiscal year will start for most states.

Nothing less than the nation’s nascent economic recovery hangs in the balance. States say that if they do not find financial rescue they will have to cut services and workers. That would deliver a potentially crippling blow to the economy, which needs higher employment levels to fatten wallets, promote spending, bolster tax revenue and reduce dependence on expensive social services.

The paradox of spending ourselves out of a budget crisis is beyond the powers of the best and the brightest at the Washington Post. Later in the piece, he writes:

… with the emergency federal money drying up, states are being forced to make draconian cuts that economists warn undermine the stimulus effort.

Which economists would those be? The 73 percent of economists who think the stimulus accomplished approximately zilch?

And what about those “expensive social services” programs? You know what the most expensive social-service program is? A government job. The wage premium for government employees is enormous, especially when one considers the pensions and other benefits attached to those inflated salaries. The states are running out of money in no small part because they are running out of well-off people to steal from, and because they are spending faster than they can steal. And I use the word “steal” advisedly: What’s going on with state employees, who are using their political muscle to capture economic benefits far beyond anything they could win in a competitive marketplace, is theft. If a bunch of them lose their jobs, that’s not an economic crisis: It’s a first step toward rationalizing our economy.

Question for Mr. Fletcher: Where exactly would that state-aid money come from? Taxpayers on Mars? Lawmakers, he writes, “are reluctant to raise taxes, particularly as the economies in so many states are listing, leaving governors little option but to make deep cuts.” But some taxpayer somewhere has to put up the money for that aid. So if we’re going to bail out a spendthrift state like Maryland, we have a choice: Tax Marylanders to fund their state’s uncontrolled spending, or tax non-Marylanders to fund their state’s uncontrolled spending. What exactly is the case for punishing more responsible states to subsidize less responsible states? Either way, federal tax dollars don’t get miracled into existence any more than state tax dollars do.

Or we can borrow, taxing future taxpayers to underwrite present stupidity. But our ability to borrow has its limits, even at the federal level. You do not want to discover those limits the hard way.

Nowhere in the piece does Fletcher even briefly consider the possibility that states are spending too much money, and that their spending less money would be a good thing for the economy and for the country. Every source he talks to is either a member of a liberal advocacy group or somebody who makes his living spending taxpayers’ money (to the extent that one can distinguish between those two categories). It’s pretty shoddy journalism, and it reveals an underlying assumption: Every time a possible spending cut is mentioned, it is presented as a tragedy and as something that will harm the overall economy, even though lots of government spending produces zero economic value, or marginal economic value: Random example, one of many thousands, here.

It would not have been too terribly difficult for a Washington Post reporter to find an economist with a different perspective on this issue, or an actual taxpayer who suspects that fruit-fly research in Paris is not an especially high-yield use of American tax dollars. These are not radical ideas. But, as Upton Sinclair put it, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

The report of Rep. Barney Frank’s Sustainable Defense Task Force, issued in June, is a strange document. Titled “Debt, Deficits, and Defense: A Way Forward,” its first word is “conservatives,” which suggests that Mr. Frank’s intended audience is not Barack Obama, Nancy Pelosi, and Harry Reid, the people who actually control our debt, deficits, and defense. It begins with a quotation from Kori Schake of the Hoover Institution, whom the reports’ authors are careful to identify as a McCain-Palin foreign-policy adviser: “Conservatives need to hearken back to our Eisenhower heritage,” Schake writes, “and develop a defense leadership that understands military power is fundamentally premised on the solvency of the American government and the vibrancy of the U.S. economy.” This is followed by a second quotation, from John Podesta of the Center for American Progress, which of course is of no interest.

What we discover in this report is not a budgetary document, but a pacifists’ manifesto: significant policy changes masquerading as deficit-hawking and penny-pinching. Buried in the report’s vasty depths is an eight-paragraph disquisition on the “Logic of Restraint,” the ideological framework undergirding the report’s book-balancing exercise. In other words, the conclusions precede the premises.

In its opening shot, the report identifies 19 broad categories of potential savings, and its authors suggest that nearly $1 trillion can be sweated out of military spending over the coming decade. There are only four categories in which the savings add up to more than $100 billion, and examining those gives one a taste of the ideological particularism and wishful thinking at work here. The first of them is diminishing the U.S. nuclear arsenal for a savings of $113.5 billion. The second is reversing the growth in the Army and Marine Corps budgets that accompanied the Iraq and Afghanistan wars, saving $147 billion. The third is reducing the Navy’s fleet to 230 ships, saving $126.6 billion. And the final chunk comes in the nice round figure of $100 billion, to be realized by having Congress “require commensurate savings in command, support, and infrastructure,” which is to say — magic! Smaller line items do away with the Osprey helicopter program, two Air Force fighter wings, and 50,000 troops stationed in Europe and Asia.

The policy preferences expressed in this report, and the slightly cavalier approach to the subject, come as no surprise: The authors of the report include no leading minds from the armed forces or the Pentagon, but multiple representatives from the Project on Defense Alternatives, an envoy from Peace Action, and like-minded colleagues from the Center for American Progress, the Center for Arms Control and Non-Proliferation, the New America Foundation, etc. (There are two Cato Institute scholars on the panel as well, along with Prof. Prasannan Parthasarathi of Boston College, an expert on the British empire and the author of a highly regarded history of cotton textiles.)

The Pentagon’s budget is as bloated as any typical federal agency’s, and its operations as poorly administered. There is ample room for cuts in its budget. But there is not at present occasion for these cuts, which presuppose a major change in the military posture of the United States. As crucial as spending reform is — even the chairman of the Joint Chiefs calls the federal debt our top long-term national-security threat — we should not conduct a major rethinking of our national-defense policy under the cover of budget-balancing. That is a debate that deserves to be had on its own terms.

And it is a debate that deserves to be conducted honestly. Unhappily, the authors of this report engage in the usual Washington budgetary shenanigans, calculating that military spending is responsible for two-thirds of the growth in annual discretionary spending since 2001. The key is that word “discretionary,” which functions as a way to wall off Social Security, Medicare, and Medicaid from budgetary scrutiny. Article I, Section 8 of the Constitution suggests that all spending is discretionary; certainly, all spending should be treated that way. It is inevitable that if one sets aside the largest items on the federal budget — the so-called entitlements — then the relative size of military spending will be exaggerated. In truth, defense spending represents about 20 percent of the budget; in the 2010 budget, the Department of Health and Human Services will spend $200 billion more than the Department of Defense, its budget 28 percent larger. As a share of GDP, we spend about twice as much on entitlements as we do on national defense. To exclude those facts from discussion of national defense as a fiscal issue is to present a distorted picture of federal spending.

For instance, the authors of the report propose to eliminate 24,000 personnel from the U.S. Army. Why that number? Which 24,000? Why Army personnel, and not OSHA or IRS or Interior Department staff? Paying 24,000 Army personnel for a year costs about one day’s worth of Social Security spending, probably a bit less. Talking about military spending out of the broader budget context is nonsensical, particularly given that national defense is one of the few theaters in which the federal government unquestionably is executing a legitimate sovereign responsibility, the measure of which is largely non-economic. Modest Medicare reform easily could save more money than reducing our nuclear arsenal and our missile-defense programs; but if Medicare is not up for discussion, and if one has a disinclination against nuclear munitions and missile defense to begin with, then why bother asking the question? On the other hand, what is the economic value of a single successful deployment of an antimissile interceptor? There are some gentlemen in Tehran promising to force the question.

This shoddy report is an opportunity missed, and particularly frustrating for those of us on the right who advocate a less expansive, and less expensive, national-security apparatus — those of us who share (disquieting as it is to acknowledge the commonality) Mr. Frank’s belief that the presence of thousands of U.S. troops in such non-hotspots as Germany is an extravagance and an invitation to excess. Likewise, those who are serious about setting America’s public finances aright will have to include reductions in military spending in their calculations — and the Pentagon’s budget is ripe with savings opportunities. But we must develop a sensible national-defense doctrine before working out the details of its economical implementation, rather than taking the covert, backward approach of using budget-balancing to overturn our existing arrangements. There is hard work to be done here, and Mr. Frank’s panel has failed to do it. There are many arguments for returning Mr. Frank and his party to the minority, and their inability to treat this serious issue seriously adds to them.

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

Moody’s apparently is ready to follow S&P’s lead and downgrade Spain.

A little theme music for the occasion?