When the Clintons came to power they pushed hard for socialized medicine via national health care. And that helped bring Republicans to power in Congress two years later. When the President is a Democrat and Congress is controlled by Republicans, that seems the best combination (short of having both controlled by Jeffersonians).The new trillion-dollar Fed infusion is standard monetarist policy, I think. A Forbes columnist recommended it a month ago. The MV in the monetary equation means that when velocity slows down dramatically, which it did, money supply drops dramatically.

So the Fed pumps in a trillion to rebalance the equation. This at least is better than Congress spending another trillion on pork-barrel infrastructure and green-energy projects.I would prefer a private currency system, or a gold-standard, but I don't see the Fed move as a disaster. Better the Fed try to deal with monetary problems than Congress and the Administration. Of course when velocity picks up, the Fed has to pull all that cash and credit back out.

Private firms and individuals trying to cope with heavy debt loads sell assets. The Federal Government has a vast array of assets to sell, from commercial lands in the west, to off-shore acreage, to buildings, parks, freeways, airports, unneeded military bases, etc. Moving these mismanaged and underutilized assets from opaque bureaucratic ownership to transparent publicly-traded firms (or to non-profits in the case of parks and wilderness areas), is an attractive option for soaking up dollars when the time comes, and shrink the physical size of the Federal Government in the process.

Last week's newspapers headlined the news that $11 trillion in American wealth "vanished." The articles complained that economy and American wealth is back where it was in 2004. But in 2004 Americans were the most prosperous people in the history of the world, with the highest living standards, most disposable income, cleanest environment, best working conditions, biggest houses, safest cars, and on and on.

The U.S. economy was heavily regulated then, and now it is more heavily regulated. Americans were heavily taxed then, with the upper 1/10, 1/5 and 1/3 of taxpayers paying way more of the tax bill than the bottom 50% (and getting little in the way of services besides traffic jams, foreign wars, and tax and regulatory confusion). Now upper-income Americans will face higher tax rates. This will likely lead to lower tax revenue for the government, as it has in the past, which could again lead to reducing tax rates.

China and India are in terrific shape compared to 2004 or to any year before that. "Millions are unemployed" scream the headlines. But what were these folks doing in 2004? How many were planting rice by hand in their villages. James Fallows article in the April Atlantic Monthly ("China's Way Forward") makes clear that the average Chinese worker is well aware of how much better off they are than just a few years ago.

Wealth has increased dramatically in China and India, and billions upon billions of dollars worth of incredibly productive machinery has been deployed across their economies for hundreds of millions of moderately-skilled workers. Skill levels are rising driving productivity up in places where production has stagnated for centuries. People who are used to working 60 hours a week with wood ploughs and old shovels now work with modern machinery. Farmers are increasing productivity (where they have property rights and access to markets), and have cell phones to track prices and nearby markets. This productivity train has been gathering momentum for over a decade in India and over two decades in China. Even without an additional capital and consumption push from the U.S., India and China are adjusting and coasting forward, lifting living standards for hundreds of millions more.

In Eastern Europe, Southeast Asia, and Chile, Brazil, Peru, and Mexico in Latin America, market reforms and new machinery lift productivity and living standards. The dramatic drop in U.S imports of clothes and other goods (our closets and kitchens were stuffed full anyway), will encourage firms to market their goods and services across their own economies, where vast numbers are reaching productivity and wage levels that allow them to enjoy living standards the U.S. and Western Europe enjoyed a century ago.

So… I am optimistic. Had the current Administration come to power with a strong and growing economy, I don't think anything would have stopped the rush to national health care, green taxes via cap and trade, and pervasive new government intervention across the economy. Now at least we have a chance of avoiding these long-term disasters.


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