The Dead Hand Of The State

The Dead Hand Of The State

The Dead Hand Of The State

Stimulus: Washington's attempt to spend us out of our economic doldrums gets more ambitious by the day and could total more than $1 trillion once interest is figured in. The long-range implications of this are alarming.

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On Wednesday, the House passed with bipartisan opposition — all 177 Republicans and 11 Democrats voted against it — an $825 billion bill that's being sold to the public as an economic stimulus package. It's far more likely, however, to stimulate a downward spiral.

We say this because, unfortunately, the Democrat-led Congress has larded up the 647-page American Recovery and Reinvestment Act of 2009 with an assortment of spending items that have little or nothing to do with economic stimulus.

There's money to refurbish the National Mall, sponsor a carbon-capturing contest, buy alternative-energy vehicles for the Defense Department and a new computer system for the Social Security Administration, pay for testing for sexually transmitted diseases, fund the arts, and endow child-care development programs.

You might like some or all of these things. But they're not stimulus. Ans such non-stimuli add up. The full package is going to cost, according to House Ways and Means Ranking Member Rep. Dave Camp, a Republican from Michigan, $1.1 trillion, including $347 billion in interests payments.

That will push the deficit to $1.5 trillion, a little more than 10% of the entire domestic economy. Deficits aren't usually a problem as long as they don't exceed roughly 4% of GDP. But when they go beyond that, trouble begins.

Apart from the tax cuts in the bill, this political spending spree would require Washington to increase its plunder of the private sector (unless it plans to print the money and create an inflation risk).

Already federal spending as a portion of the economy is at 21%, more than four times the rate from the pre-Depression 1920s. It is projected to grow to 29% of GDP in 2030 and 42% in 2050, the same year that state and local government spending is expected to hit 20% of GDP.

Where will all that spending get us?

Think of England, where the British government's share of local output and spending is now 70% in some regions. In the northeastern part of the country, the London Times reports, "the state is expected to be responsible for 66.4% of the economy this year, up from 58.7% when a similar study was carried out four years ago."

Highly revealing is this fact: "When Labour came to power, the figure was 53.8%."

In general, 49% of the United Kingdom economy is government spending. This trend has prompted some in the U.K. to wryly refer to their homeland as "Soviet Britain."

It's not healthy to be so severely dependent on government. When it sucks wealth from the private economy, there's less capital that can be used to fund new business opportunities and create jobs, less cash in pockets to fuel commerce.

An overwhelming state presence deadens the human spirit, as the jobless increasingly live as wards of the state, paid for by a few who grow weary of supporting the indolent and the unproductive.

Under such conditions, an economy becomes sclerotic, and misery spreads where growth should flourish.

Senators need to keep that in mind as they take up the stimulus bill next week. A stimulus bill should stimulate, not grow government.

Jiabao's Jawboning

Jiabao's Jawboning

Economy: Apparently having not enough to do back home, the premier of communist China took time this week to travel halfway around the world to castigate the U.S. for its economic sins. But he's a fine one to talk.

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On the first day of the annual World Economic Forum in Davos, Switzerland, Chinese Premier Wen Jiabao had some choice words about the way the U.S. runs its economy. We weren't surprised. Outside the United Nations, Davos is the biggest forum for U.S.-bashing in the world.

The current financial crisis, Wen opined, is due "to inappropriate macroeconomic policies of some economies and their unsustainable model of development." This, he said, is "characterized by prolonged low savings and high consumption (plus) excessive expansion of financial institutions in blind pursuit of profit."

Ever the careful politician, Wen avoided direct reference to the U.S. But it was clear who he was talking about. And, you know, he's right: U.S. macroeconomic policy has been far from perfect. But let's look at the other side of the coin, shall we?

On its way to prosperity, China has rung up a record (for one country) $200 billion trade surplus with the U.S. It's not far-fetched to suggest that U.S. bargain shoppers at discount chains such as Wal-Mart have built China into an economic powerhouse, and helped literally hundreds of millions of Chinese escape poverty.

You'd think a little gratitude might be in order.

When Wen scolds the U.S. for its "high consumption," he also might want to look at what his country has done to foster that. Treasury Secretary Tim Geithner was widely criticized recently when he noted a simple fact: China "manipulates" its currency. But this is undeniably true.

China has what's called a managed float for its currency. It keeps the yuan below actual market value to boost sales of goods to the U.S., while making it harder for its own consumers to buy imports.

As a result of the persistent trade surpluses, dollars have piled up in China's reserves. That's given the country a financial cushion of nearly $2 trillion — making it easy for Wen's regime to finance a $580 billion bailout of its troubled economy.

Many of those trade dollars have been round-tripped into U.S. Treasuries, helping keep interest rates here lower than they normally would have been. This helped finance our economic expansion from 2003 to 2007 — and our housing boom.

This imbalance, of course, is both good and bad. But it's all the logical result of a strong-dollar, weak-yuan model that has created China's powerful growth.

For well over a decade, China's GDP has grown at an average rate of 10% — best in the developed world. This rapid growth has given China great clout and prestige as an up-and-coming economic power. Indeed, it has now eclipsed Germany as the world's third-largest economy (behind the U.S. and Japan).

Yet all's not well. In the fourth quarter, China's economy expanded just 6.8% year-over-year. Economists say that in an economy predicated on rapid, export-led growth, 6% or less would, in effect, signal a recession. China's dependence on the U.S. shows.

As such, China must now deal with its own "unsustainable model," based on forcing its workers to save more than 30% of their incomes while denying them access to the very consumer goods they so prolifically turn out for the rich world's markets.

How strange it is to hear a communist leader bad-mouthing the world's biggest capitalist economy, especially when that capitalist economy is largely responsible for his nation's emergence from poverty.

Memo to Wen and the rest of the Davos attendees: Before criticizing others, take a long look in the mirror. The world's economic ills won't be solved by finger-pointing