Federal Judiciary

Government Spending Can?t Fix the Economy -- By: Michael Barone

Home-mortgage interest rates are the lowest in history, but house sales are plunging. Banks can make money easily because of the Federal Reserve's low interest rates, but they're not making many loans. Major corporations are sitting on something like $2 trillion in cash, but they're not investing.

Unemployment is running at 10 percent, rounded off, for the eleventh straight month, but few employers are hiring, and a million people have stopped looking for work in the last year. Small-business hiring is at a nine-month low, and retail sales are tailing off.

#ad#Government policies designed to stimulate the economy seem to be having the opposite effect. Consumers aren't buying, businesses aren't hiring, and those fortunate enough to have some cash on hand don't seem to be investing.

I call it the mattress economy.

People seem to be following this investment strategy. Step one: Go to Mattress Discounters and buy the biggest mattress you can find. Step two: Take it home, and stuff all your money in it. Step three: Lie down, and get some rest.

This hurts the economy, but it's a rational response to the Obama Democrats' public policies. And that's not just the view of their political opponents.

Consider the plaint of Verizon CEO Ivan Seidenberg, head of the Business Roundtable, which has been playing footsie with the Obama administration for most of the last 18 months. 'By reaching into virtually every sector of economic life,' Seidenberg recently wrote, 'government is injecting uncertainty into the marketplace and making it harder to raise new capital and create new businesses.'

Or take a look at Obama backer Nate Silver's fivethirtyeight.com website. 'Why aren't businesses hiring?' asks tax lawyer Hale 'Bonddad' Stewart. 'Uncertainty: There has been a tremendous amount of change over the last 12 months. Businesses are still trying to figure out what this means for their bottom line. Until there are firm answers, they will freeze hiring.'

In other words, the Obama Democrats' vast expansion of the size and scope of government -- and the threat that they may pass even more such legislation in a lame-duck session of Congress after the November election -- has chilled the animal spirits that John Maynard Keynes said were the driving force for economic growth.

Instead of stimulating the economy, the Obama Democrats' policies have shocked it into immobility. People are lying on their mattresses, waiting for the next shock. At least one is definitely coming: The Bush tax cuts expire at the end of the year, which means that high earners can be sure they will very soon keep less of what they make.

Politicians up for reelection are taking notice. Congressional Democratic leaders can't round up the votes for another stimulus package and have not dared to ask their members to vote for a budget resolution.

New York Times columnist Paul Krugman keeps beating the drum for even more increases in federal spending. But congressional Democrats are refusing to dance.

Democrats can plausibly claim that their 2009 stimulus package, passed less than a month after Barack Obama was sworn in, prevented a 1932-style downward spiral. But it didn't hold unemployment below 8 percent, as they promised it would.

#page#They can argue that Treasury Secretary Timothy Geithner's stress tests prevented a meltdown of the big banks. The problem is that it didn't get them back into the lending business.

And Democrats can claim that the General Motors and Chrysler bailouts are working out better than some of us doomsayers predicted. Unfortunately, the transfer of assets from secured creditors to the United Auto Workers -- which I dubbed 'gangster government' last year -- has undoubtedly deterred investment in similar enterprises.

#ad#But the brute fact remains that even enormous government spending can't revive an economy when government threatens to take away anything you earn.

America has seen this kind of thing before. In the late 1930s, when Franklin Roosevelt raised taxes on high earners, encouraged lawless sit-in strikes by labor unions, and took over utility businesses, the response was a 'capital strike.'

Instead of creating jobs, businesses and investors put their money in mattresses. The result was a stagnant economy and double-digit unemployment -- and a 75-seat Republican gain in the 1938 off-year elections.

Back then, the economy eventually perked up thanks to mobilization for World War II. No such mobilization appears on the horizon today. You may need to get a bigger mattress.

-- Michael Barone is senior political analyst for the Washington Examiner. © 2010 the Washington Examiner. Distributed by Creators.com.

Full post as published by Bench Memos - National Review Online on July 12, 2010 (boomark / email).