Paris on the Potomac (or) A Tale of Two Cities

Francis Cianfrocca, a/k/a Blackhedd from Redstate, has started his own blog called Markets and Policy. Although our political opinions are frequently poles apart, his purely economic analysis is excellent, and always intelligent. If you are interested in reading well-done analysis from the "other" side, I highly recommend him.

Needless to say, he is opposed to Obama's stimulus plan, calling it Paris-on-Potomac:

My prediction is that the public sector will soak up a far higher proportion of national production. I've never joined in the chorus of "the Democrats want to make the US look like Europe circa 1980." But now I think that's an entirely reasonable expectation. This year's federal spending will be 26% of GDP, up sharply from the 20 to 22 percent that we've had every year for decades. As soon as we get it up to 45 or 50 percent, we're in France territory.

And the reduction of free-market choices and incentives just about everywhere will create the inefficiency that could get us there.

Cianfrocca says this will create huge incentives for businesses to operate with "radical efficiency" and that someday Reagan revolution 2 will re-appear to save us all (or our descendants anyway).

Here's the problem: in a word, deflation. which Cianfrocca agrees is a very bad thing.

There are a few voices out there, like Mike Shedlock, who advocate essentially doing nothing and letting deflation rip. The problem with this approach is that it will produce exactly the kind of horrifying economic implosion the US economy sustained during 1929-32. As I've spelled out previously, the suffering isn't academic. By 1932 there was a very real starvation problem, with for example one in four schoolchildren in New York City being malnourished.

But the Shedlock approach has a seductive mantra: "you can't get out of debt by going into more debt." Actually, that isn't true. A young couple might buy a house, and pay it off by starting a successful business -- which entails going into more debt. The point is, it has to be productive debt, and you have to be able to sustain the cost at the beginning, before success.

In our present debt-deflation scenario, if we are not to have a deflationary implosion, somebody has to be able to spend, and spend enough to keep deflation at bay. That won't be ordinary consumers, who have been bled dry by existing debt. And it won't be by trickle-down from the wealthy, who have so much idle wealth that it cannot be spent. So tax cuts, especially supply-sided tax cuts which tend to be deflationary in any event, and which aren't paid by the poorer in society anyway -- will not help that much in this situation.

There is only one actor left who -- relatively -- is able to withstand the initial increase in indebtedness necessary to jump start the economy and keep it out of deflation, and that is the government. As it happens, there are literally billions of dollars of infrastructure projects which have been delayed for years if not decades and can be built now more cheaply than they could possibly be during a boom.

This spending will serve to replenish consumer saving, which ought to be encouraged, to form the basis for the next leg of economic expansion. Once the consumer is replenished, and the crisis passes, the government spending can and should retreat to more normal levels.

"Paris-on-Potomac" doesn't exist in a vacuum. It exists compared with other choices, and if the other choice is the pre-revolutionary Paris of "A Tale of Two Cities", then Paris on the Potomac it will be.

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Comments

Paris is pretty damn nice

I wonder if any of these people who blast Western Europe have ever lived there? Even in the 1980's, it was nice...
they act like they are talking about the Sudan or Guatemala and it's just weird....

The problem I have with the Stimulus is ....it is a sieve, the government expenditures are going to run out of the domestic economy through offshore outsourcing, offshore subsidiaries, tax havens and plain not tying the jobs to be U.S. citizens, perm residents. Seriously and this is especially true in the I.T. type jobs, as well as the Academic funds. Medical records, while a great goal to modernize them and get them all in a large database...that job, those contracts, well, let's watch but I'll bet money they are offshore outsourced. In the research areas as well, even Academia is offshore outsourcing these days.

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