By Michelle Seitz

Think back to speeches President Bush gave during spring of 2008 assuring Americans and the rest of the world that the fiscal stimulus package, which gave checks to a select group of taxpayers (lower income people who pay little, if any tax), would keep America out of a recession. We saw the results of this effort in the latter part of the summer – a hemorrhaging Dow Jones Industrial Average and negative third-quarter GDP growth. Remember Bear Stearns, and the assurance to taxpayers that if they bailed them out, it would stop a domino effect of collapsing banks and investment houses? Then came Fannie Mae, Freddie Mac (both partly owned by the government) AIG, Citigroup, Bank of America, Goldman Sachs and many others lining up for federal handouts. The line for free money has now expanded to the auto industry, possibly the airline industry and network television.

On one side, we have the federal government handing out money with little consequence; and on the other side, the recipients of said federal dollars have plenty to spend lobbying the government. These actions give merit to the old saying “money grows on trees.”

All of the financial institutions who received government assistance actively lobby the federal government. As a matter of fact all of these institutions have received a very nice return-on-investment (ROI)*:

By Michelle Seitz

I’m sure I’m not the only taxpayer frustrated by Washington’s generosity to irresponsible, politically connected corporations. We hear that the credit markets are frozen. Without federal dollars, America would see a domino effect of banks failing one after the other. If you believe this, I have some land I’d like to sell you. Look through your “junk mail,” both snail and online, and see how many invites you receive for credit. Take a stroll to your local car dealership this weekend and see how quickly they’ll get you financed. While it may be true that people who have less than appealing credit or are overextended may not be getting offers, but is that a bad thing? Aren’t reckless loans what got us here in the first place? Isn’t it natural for banks to hold back on lending in harsh economic times? What is the demand for borrowing when people are afraid of losing their jobs?

President Bush’s $168 billion economic stimulus plan in February of this year was supposed to give the economy the boost it needed. Then, along came Bear Stearns. The federal government extended a discounted loan to JP Morgan Chase to entice them to buy Bear’s troubled liabilities. Case closed – economy saved…hardly. In October, the market began to hemorrhage. State governments are now asking for federal dollars along with the troubled auto industry. President Bush addressed the nation assuring us that the federal government would rescue the falling economy. The government being the rescuer is the equivalent of a small raft being thrown to someone drowning in the ocean in the middle of a hurricane, when the one throwing the raft was the cause of the storm!

The federal government now has plans to take stakes in nine of America’s top financial institutions and equity investments in potentially thousands of other banks. One month later, the DOW continues to plunge, consumer confidence is in the tank and the threat of more foreclosures still exists. The threat of a global recession is eminent. What does our President-elect say? More economic stimulus is needed! Why not, as it has worked so well thus far. Don’t forget; he was hired to fix the economy!

One only needs to take a look at history to see how well government intervention works. Did President Hoover’s Reconstruction Finance Corporation of 1931 and 1932 end the Great Depression? Hoover gave federal loans to politically connected companies much like the Paulson/Bush plan. When President Roosevelt took over, he invested heavily in the country’s infrastructure and took the Keynesian approach. Both of these approaches turned a bad recession into the Great Depression and further prolonged misery.

Critics of capitalism and a laissez-faire approach fail to realize that economic downturns are part of the overall economic cycle. Recessions do not mean that capitalism has failed. That also doesn't mean that government oversight is not needed; but there is a difference between proper oversight and intervention. The problem with government intervention is that it prolongs the downturn and creates new problems in the future. Fannie Mae and Freddie Mac were the outgrowth of “The New Deal” along with the waves of entitlement programs that the government is currently having a difficult time funding.

The Bush administration wasn’t interested in bailing out the “dot com” companies at the beginning of this decade. Is the tech sector dead as a result? America had an 8-month recession with a decent recovery. While the credit crisis is far more severe, over-reaction can make a bad situation worse. The federal government has already spent over $1 trillion to try and stop the bleeding. The new administration plans on spending more and possibly a move to bail out the ailing auto industry. As it stands, the federal deficit will exceed $1 trillion next year. The potential effects these actions will have on the value of our dollar and impending inflation, one has to ask if we are pouring water into a leaky bucket and what the opportunity cost will be from allocating an incredible amount of resources to banks, individual states and companies that are poorly run.

Call me Cassandra, but I'd like to point to the new Cardinal law #1: Thou shalt not underestimate the political phenomenon better known as Obama. He is not the same ultra-liberal senator we strongly disagreed with. The people he has appointed to key economic positions, (look at Dr. Romer for CEA, Jason Furman, Larry Summers etc.) are in the middle of the political spectrum and certainly qualify as supporters of the free market. They are NOT progressives or any other ultra-liberal flavor! Don't take it from me though, Bush's ex head of the CEA Professor Mankiw writes,

What would you call a group of economists who are skeptical of regulating mortgage markets, who think unemployment insurance and unions increase unemployment, who say that tax hikes retard economic growth, and who believe that the recovery from the Great Depression was a monetary phenomenon rather than the result of New Deal fiscal policy?

No, it is not a right-wing cabal. It's Team Obama.

Here's the evidence:

When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of “risky exotic and subprime mortgages,” he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.....Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much.

--Austan Goolsbee

Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a percentage point, which means that the number of unemployed people would fall by about 750,000. This is all the more significant in light of the fact that less than half of the unemployed receive insurance benefits, largely because many have not worked enough to qualify.

Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions.

--Larry Summers

Tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.

--Christina Romer (writing with husband David)

Given the key roles of monetary contraction and the gold standard in causing the Great Depression, it is not surprising that currency devaluations and monetary expansion became the leading sources of recovery throughout the world....the new spending programs initiated by the New Deal had little direct expansionary effect on the economy.

--Christina Romer

I'm sounding the alarm bell early here because the more centrist he is the better his/their chances are for 2010, 2012, etc... There are three types of policies/politics, economic, social/cultural, and foreign/national-security. He passed a CinC test already, or perhaps we failed ours. Interestingly enough, or perhaps with little surprise, he is already enraging the left because he is continuing Bush's national security policies, sans Gitmo. He already has come to the center with Israel. If he takes the center/center-right position for economics, what are we left with? Social and cultural politics? Forgive me for saying this but people are sick of Republican culture wars. Most of y'all aren't but now we're in the minority. I’m not saying the Dems are going to rule forever, their party is not competent enough for that. And we all know that the liberal Dems like Pelosi and Reid would be horrible for this country. But in the short run I don't think we've hit bottom. McCain was our best shot this year.
I’m not all doom and gloom though. In order to not have another Clinton we need to figure out how to fight back. I think we need to invent a completely new set of public policies we would pursue. Let me give you some examples: Education, income inequality, global warming, legal immigration… etc.
People want a party with solutions. And even though the do-nothing Dem Congress accomplished zilch from 06-08 who took the blame for that? We somehow did.
Newt Gingrich rebuilt the party by organization through the state level. If we accomplish our goal here we could see that same success. There is a caveat though. Gingrich was a man of ideas and our party became the party of ideas. We need to live up to that legacy as we rebuild.
Lastly let us not forget the lesson of Tony Blair - who snatched the Conservatives' clothes and wore them to victory in 1996. Obama campaigned as a center-left to center-right politician depending on the issue (some issues have no left or right, granted). He is now pivoting skillfully towards center-right. In other words he is browsing through our outfits and picking out what he likes. This is good for us as individuals but not good for our party. Later on I will type what we can learn from British Conservatives like David Cameron who was/is the remedy to the Blair//Brown dominance.

As usual I cross posted this at another blog...http://neighborhoodgop.wordpress.com/