US Government is a notoriously bad spender

Oct 7, 2011

Paris, France

The news was good yesterday. Investors heard that Europe had its problems under control. Then, Obama told them that he was going to give the economy a jolt.

Investors breathed a little easier. The feds were on the case.

The Dow rose 183 points. Meanwhile, bonds went down, with the yield on the 10-year note rising to almost 2%. Oil rose too, and ended the day trading over $80. Even gold went up -- $11.

Here's the New York Times' report on Obama's press conference: In perhaps his most sober remarks about the economy this year, President Obama on Thursday described the weakening economy as "an emergency" and made the case for his jobs bill as "an insurance policy against a possible double-dip recession."

"Our economy really needs a jolt right now," Mr. Obama said...

"This is not the time for the usual political gridlock," the president added. "The problems Europe is having today could have a very real effect on our economy at a time when it's already fragile."

Mr. Obama proposes to spend $447 billion to reduce joblessness. He doesn't have $447 billion, of course. So the money has to come from elsewhere.

Remind us how that works. You take $447 billion from people who are investing and you can give to other people. Why? So they can invest and spend! We must be missing something.

Wait! Here is it...the NYT continues...

To allay the concerns of Senate Democrats, Mr. Obama said that he could support their proposal to pay for the jobs plan by imposing a 5.6 percent surtax on individual taxpayers' income above $1 million.

Oh...that must be it. The millionaires don't need the money. They don't spend it. But don't they invest it? Of course they do.

The Obama plan is just another redistribution scam. You take money from one group of people and you give it to another group. Corrupt, degenerate and ineffective, right? Wrong. It's actually worse. Because government is a notoriously bad spender. It takes resources and wastes them. Its wars...its welfare programs...its prisons...its education...its subsidies and boondoggles - more often than not, these investments of capital are not just stupid and larcenous. They also destroy wealth. You put a dollar in. You get 50 cents back, if you're lucky.

Federal spending on education has soared over the last 40 years. Guess how much higher test scores have gone. Go ahead, take a guess. Well...the answer is zero. Billions and billions invested. No return. Nada. Zilch.

You're probably may not pay off overall, but at least it pays for the student, right? Wrong. Guess how much the typical college graduate's income has gone up in real terms over the last 40 years. Go ahead, take a guess. Zero!

Or how about spending money to fight drugs? Guess how effective that has been. Never know the answer.

Or take spending on health care. The US spends far more on health care - both in terms of raw numbers and in terms of its GDP - than anywhere else. Compared to a nation such as Chile, for example, it spends more than twice as much. But do Americans live twice as long as Chileans? Nope. The Chileans live longer than Americans. What's the rate of return on all those extra billions we spend? Zero.

Well, there's always national defense and police protection. That's where government knows what it is doing. "Political power comes out of the barrel of a gun," said Mao. So they must know what they're doing with guns, right? That's where we get our money's worth...a good return on our investment, right?

Are you kidding, dear reader? We spend about as much as the entire rest of the world combined... but are we safer? Not a bit. At home, our crime rates are as high as almost any other country you care to look at - even though we keep a far larger percentage of our population behind bars. As for being protected from terrorism, US military spending probably brings a negative return; terrorists are more likely to target Americans because the Pentagon sticks its nose into everybody's business all over the planet.

In short, government spending kills capital. It makes a nation poorer. It doesn't matter whether the money is taxed from the rich...or from the poor, the result is the same. Resources...real things of real value...are destroyed, used up, consumed...with little or no pay back.

You ask...why is the US economy growing so slowly? Why can't it recover? Why do we seem to lurch from one crisis to another?

Here's an answer: because more and more of the economy's resources are controlled -- mismanaged...and misallocated -- by the government.

Some are directly misallocated - spent by the government itself.

Others are indirectly misallocated - tricked into bad investments by the Fed's low interest rates, tax policies, regulations and subsidies. (For example, there has been an explosion in student debt since the crisis of '07-'09 began - up 300%. The government invests in a lot more "education." What is the return on investment?)

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*** "Five million dollars!?"

We couldn't believe it.

"No, if this apartment were sold it would probably bring five million euros."

We share a modest office on the Boulevard Raspail in a nice part of town, not far from Montparnasse station. It is in what used to be an apartment and is now used as offices. About 2,300 square feet in total.

"How is that possible? Who can afford to pay that much?" we wanted to know.

Europe may be on the edge of a nervous breakdown...or a banking collapse. But the restaurants are still full. Prices are still high. And the euro is still at $1.34.

Not only that, while prices of real estate fall in the US, they rise here. Go figure.

"Well, the French don't trust banks or stocks," explained our co-locataire. "So they tend to put money into property. People with matter where they are from in to have an apartment in Paris."

The French know what can happen to paper assets. Many people remember when the 'old franc' was replaced by 'new francs' at a rate of 100 to 1. Old people still quote prices - occasionally - in terms of old francs, even though it has been gone for half a century.

And almost everyone remembers when the franc gave way to the euro a decade ago. It was supposed to be an even exchange; no one was supposed to lose money on the deal. But shoppers soon realized that prices had risen. Merchants rounded prices upwards...and then added on a few centimes for good measure.

Currencies come. Currencies go. You can't trust them. So, people buy things they can trust. And an apartment in Paris is something you can trust. It may go up in price. It may go down. But it won't go away. Not unless there is something much bigger to worry about!

*** We have given up trying to follow the European debt crisis story. There are too many plots and too many languages; we can't keep up with them. So, we turn to the New York Times for an update:

Despite the fact that economists and bank analysts now widely expect that Greece will have to default on its debt, no European leader will say so, at least for the record. Instead, the countries in the euro zone are continuing to act as if measures agreed to in July to shore up Greek finances, and that slow-moving European parliaments have yet to fully approve, are sufficient to contain the crisis

...European leaders, especially in France and Germany, whose own banks are exposed, are reluctant to broach the inevitable. Why? Because they do not yet have in place a big pool of funds to ensure that an orderly Greek default does not lead markets to assume that the much larger economies of Spain and Italy will soon follow it into insolvency. And partly because they do not have the political will to commit those funds.

Ultimately, only the European Central Bank can intervene with the firepower necessary to set a floor under the price of the region's sovereign debt. But its departing chairman, Jean-Claude Trichet, has ruled out the idea of the bank's acting as the lender of last resort, even if it only guarantees the bond purchases of another fund, the European Financial Stability Facility.

Germany, the Dutch and the Finns, too, are against allowing the bank to make unlimited bond purchases from sovereign states.

The reluctance blocks even obvious moves, like marking down the value of Greek debt to something approaching the market price, which is now only 40 percent of its face value.

Europe may be on the rim of a volcano...but no one seems to care.

*** We wonder why we bother to rent an office at all. When we are in Paris we spend much of our time working in cafes. Our current favorite is the Cafe Vavin, just a block from the office. Like Sartre in the Cafe de Flore, we buy a cup of coffee and sit for hours, happily working...and observing. Sartre didn't have a laptop computer. He wrote with pen and paper. Someone should have stopped him.

The Cafe Vavin is a pleasure. It is on a corner. We see people walking by in 4 directions. And then, when things are slow, the bartender opens his mouth and lets go with a baritone line from an Italian opera. But generally, there is a lively crowd at the bar...reading newspapers...chatting...laughing...drinking coffee. Later in the day they switch from coffee to beer and wine. But we are usually on our way home by then.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "US Government is a notoriously bad spender"


Oct 7, 2011

In my opinion your comments are off track and written by some one with typical indian mentality (paralyse everything by criticism)
The critic has forgotten that for a country the poison is massive nonessential imports (wherein money goes out othe country without any value addition and the nation gets poorer by that amount ) and the "Amrit" for the country are exports(wherein money comes into othe country and the nation gets richer by that amount and internal domestic spending(From the govt. & big corporates the money travels first to few rich then from there to large upper middle class and then to larger lower middle and a very very large poor class in terms of wages for their work)generates industrial growth.
When toys' industry in japan was in doldrums then- the govt. there distributed a toy allowance to all workmen having children in 1 to 10 yr age and this revived the industry- once the industry is revived the Govt. got its return in a dignified way through corporate taxes on profits.
So, on this analogy, if you take the view on all the actions of the US govt you will find them fully justified from a positive national growth
"Mr. Obama proposes to spend $447 billion to reduce joblessness" what is wrong with this which is upsetting the writer
"You take $447 billion from people who are investing and you can give to other people. Why? So they can invest and spend!" again-- what is wrong with this - the people he is projecting to take money from is people having income more than $ 1,000,000 pa- isn't this the right approach.
The millionares invest to make more millions but what is wrong if Govt. channels a small part of their income for nation development?
I -some years back was gifted a special design pillow from a friend in US which aids in good sleep posture and was not available here . On seeing the lable on this pillow, I was surprized to read that "-the cotton and the Pllow cover- made in China , packed in USA" If the said millionaire had got the total job done in USA his profit would have been eaten up but would have generated some jobs. Literally every consumable item falls in this category which has led to current state ou job losses in the USA(and they were -at one time- blaming India for this).they also in this case have forgotten the mantra "non essential Imports are a poison for country" and made filthy profits at the cost of sacrificing local employment. Now if they are asked to share some of their profits for the country -what is wrong ?
All the other arguments presented do not stand to reason and , in my opinion , are written on a coloured / biased basis thinking .

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