Posted by
john on Thursday, December 04, 2008 12:08:34 PM
Reading the sometimes-excellent Steve Sailer's lengthy piece yesterday on infrastructure spending, the old lightbulb-in-a-balloon over my head illuminated. Actually, it was the last segment of Sailer's piece that caused this phenomenon(?), in combination with a 24-month chart of crude prices that went up on CNBC. Try this on for size: we are now in the hangover phase of a Keynesian stimulus, whose origins lie with Alan Greenspan's (aka, "The Maestro") post-9/11 efforts to postpone the economic effects of the terrorist calamity by creating a housing bubble. Now, it seems, we are going to try to power our way out of this hangover with even greater Keynesian stimulus. How should we expect this to end?
Here's how I came up with this crazy theory. First, per Mr. Sailer, "California got us into this mess." How? A classic, banana-republic 2-step: (a) as epicenter of an affirmative action housing bubble, which was engineered as a post-9/11 stimulus; and (b) as poster child for the irresponsible and clueless inability of state and local governments to balance a budget even during boom times.
Next, of course, is the federal gummint, and its massive deficits during a lengthy expansionary phase. And third, there is the bursting of the oil bubble. Not that the oil bubble was stimulative, of course, but that it may have been symptomatic of all of the above-mentioned, 1960s-style, guns-and-butter, over-stimulation and hangover.
Conclusion? The problem with Keynesian stimulus is that, as with so many ingestibles, recreational or otherwise, the more you use it, the bigger the dose that's needed to achieve ever-decreasing effect, ending eventually in a painful detoxification (see 1981-82, depression of). Washington is now determined to drink its way out of the current hangover, by throwing cash by the tens of billions at failed business models, inept state governments, and jobs programs slated to cost upwards of $1M per job created (per WSJ editor Stephen Moore). As the highly-esteemed Holman Jenkins describes in yesterday's WSJ with the wonderfully apropos athletic/religious metaphor of the "Hail Mary" pass, "unless Gerard Phelan catches the ball (from Doug Flutie) in the end zone and GDP bounces back strongly, the bailout's end result may be towering tax rates, domestic spending cuts or serious inflation - or all three."
All of this points back to November, 2006. In fact, it really points back to a time many moons earlier when "The Maestro" pounded his fist on the table and told us all to buy houses and take loans, because he's going to keep rates low. I felt at the time that this was an appropriate response to the 9/11-caused recession, provided that responsible fiscal policy could pick up the slack once the bill on this gambit came due. As dubious a proposition as "responsible fiscal policy" may have seemed at the time, as of November, 2006, it became completely implausible (and the markets knew it). Thus, the current hangover, and it looks to me like the Obamalama is prescribing (at least) a liter of Vodka therapy. So unless, per Holman Jenkins, Flutie actually connects with Phelan, the next stop on this Keynesian ride is going to be a lengthy detox.