Captain Capitalism has a great post today on the merits of GDP. GDP is just a formula of economic output, but it does not take into account actual prosperity. If a city is destroyed by a tornado and we rebuild the city, GDP will increase. The problem is you are no better off than you were before the tornado even though GDP tells you there has been economic growth. Actually, you are worse off because the resources that went into getting you back to square one would have been used otherwise to increase your standard of living.  If you’ve studied economics, this is known as the broken window fallacy. Stimulus and government programs are nothing but the broken window fallacy on steroids.

Here’s part of the Captains post. I highly recommend reading the entire article. Even the commentors have great comments. Read those too.

In the video I posted below about China essentially building a city that nobody is living in, the reporter kept emphasizing the importance of GDP. That the government wanted to boost “GDP.” However, given this “stimulus” plan of Ordos as well as the “stimulus plan” here in the US to boost GDP, I think it's high time we have a simple economics lesson in GDP.

Understand the goal of economics is NOT to increase GDP, but rather to increase standards of living. We simply USE GDP as a measure of all the goods and services produced within an economy, ASSUMING those goods and services when consumed help increase our standard of living. That by eating the grapes we produce and watching the movies we produce, we get utility from that, enjoyment from it, and therefore we enjoy our lives more, thus increased standards of living.

This is a logical assumption in that typically, TYPICALLY, we produce what we want to consume. We produce things that are only going to benefit us. Nobody produces ebola for consumption on account that why would we? Nobody produces styrafoam dogs. Nor do we make our roads out of cake. It not only would not benefit us, it just plain doesn't make sense.

However, this assumes an INCREDIBLY important assumption about how we go and produce things. We ASSUME that the free market is going to be in charge of what is produced. We assume that a free people, in control of their own money, is going to decide how many Big Macs we should make, how many I-Pods we should produce and how much sushi we should make. But what if this assumption is faulty?

The reason why it is faulty is the progressively less and less money is being spent by the people. A higher and higher percentage of our economy is being spent by the government. Going from essentially 3% of GDP in 1900 to 46% today.

Read the full article at  Captain Capitalism: There is No Merit to GDP Unto Itself.

Alan S. Blinder wrote another half witted op-ed about financial regulation and Wall Street’s return to “greed”. As all half witted intellectuals, he recognizes a symptom, but never questions the source. Here is a paragraph where he talks about Adam Smith.

When economists first heard Gekko’s now-famous dictum, “Greed is good,” they thought it a crude expression of Adam Smith’s “Invisible Hand”—which is one of history’s great ideas. But in Smith’s vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call “asymmetric information” (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and—when relevant—protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.

via Alan S. Blinder: When Greed Is Not Good – WSJ.com.

Binder says “in Smith’s vision, greed is socially beneficial only when properly harnessed and channeled”, and I’m guessing he thinks the geniuses in Washington should be the ones to do the harnessing and channeling. Is Binder really this ignorant, or is he so trapped in his own reality that he can’t see past his old ideas? By giving Washington the power to “harness and channel” Wall Street, the economy or anything else, you create the source of corruption. Washington has become Wall Street. Look at who occupies the White House staff. This isn’t just Obama. This was Bush as well.

Greed is only harmful to society when the negative results of greed are forced on society instead of the source of the greed. In this case, Wall Street’s greed led to subprime mortgages, but instead of them being harmed by the negative results, they used government force to dish the negative results on the tax payers.

People aren’t typically greedy, despite all the negative comments by the like of Blinder. Something usually entices you into greed. Someone sees the chance of unearned profits, and they get…. well “greedy” for it. In this case, Wall Street got greedy because the Fed was printing “free” money. Who benefits from this money? Well, the banks are the ones who get the money first before it’s devalued. They get to loan it out and make their profit before the damage is done. In their ability to do this, because of the Fed, would they not be making unearned profits? It would be no different than a man giving you $1,000 and saying go ahead lend that out at whatever interest rate you can to make a profit. You pay the man back one percent interest and keep the rest. You really don’t have any risk there. Inflation is typically three to four percent. Hmm, just think how much you can make with no risk if you make even more of these loans. What if you loaned out $1 million? Now you can see where greed comes from.

If we didn’t have the Fed in bed with Wall Street bankers, we wouldn’t have had the easy money that created the last bubble in which Wall Street so enriched themselves. Then when the bubble burst did Wall Street have to take their punishment? Nope. Because of government force and collusion, they were able to force all of America to pay the bill.

What Blinder doesn’t understand is the problem isn’t an unregulated “invisible hand”. The problem is because of government the “invisible hand” now has a gun in it. When there is a gun, this is when “greed is not good”.

So, the Dems always act like they are fighting against the big insurance and drug companies for the people. Yeah right. Looks who’s coming to the democrats rescue to save health care reform.

We’ve been following the special election in Massachusetts, where the GOP hopes to pull a surprise upset in the race to fill Ted Kennedy’s seat.

If they do pull it off, healthcare reform is instantly in trouble, as the Democrats drop below 60.

But money is coming to the rescue of Democrat Martha Coakley — healthcare industry lobbyist money, specifically.

Tim Carney identifies several of her top fundraisers. Take a look at who they represent:

• Thomas Boggs, Patton Boggs: Bristol-Myers Squibb
• Chuck Brain, Capitol Hill Strategies: Amgen, BIO, Merck, PhRMA
• Susan Brophy, Glover Park Group: Blue Cross, Pfizer
• Steven Champlin, Duberstein Group: AHIP, Novartis, Sanofi-Aventis
• Licy Do Canto, Raben Group: Amgen
• Gerald Cassidy, Cassidy & Associates: U. Mass Memorial Health Care
• David Castagnetti, Mehlman, Vogel, Castagnetti: Abbot Labs, AHIP, Astra-Zenaca, General Electric, Humana, Merck, PhRMA.
• Steven Elmendorf, Elmendorf Strategies: Medicines Company, PhRMA, United Health
• Shannon Finley, Capitol Counsel: Amgen, Astra-Zeneca, Blue Cross, GE, PhRMA, Sanofi-Aventis.
• Heather Podesta, Heather Podesta & Partners: Cigna, Eli Lilly, HealthSouth
• Tony Podesta, Podesta Group: Amgen, GE, Merck, Novartis.
• Robert Raben, Raben Group: Amgen, GE.

Of course, this is how politics works. Lobbyists for various corporations and causes get involved wherever they can for candidates of both parties. But when you see all these big pharma (and insurance!) representatives coming with cash for a crucial vote, you know which side they’re on.

via Panicked Healthcare Lobbyists Descend On Massachusetts To Save The 60th Democratic Vote For Reform.

I’m sure no one that reads this blog is surprised. If the health care bill wasn’t in the best interest of the drug and health care companies, they would not be coming to the rescue for the democrats. Why do they want this bill? Well, government is forcing people at gun point to buy their products. How much easier can business be for them? They don’t have to convince you to buy their product anymore. You can’t decide that you only need a minimal plan, because their buddies in congress are going to make sure you have a “qualified plan”. Oh, but we’ll figure out what that is after the bill is past. Let’s not worry about the details right now.

What a joke our government has become. The mafia must be looking on with envy. The big drug companies have all signed up for protection, and they are all doing their part to protect the turf of the ruling class.

Over the holidays, AT&T had bandwidth issues with their iPhones. Here is an example of what you get when government controls resources.

AT&T previously acknowledged that its network has been overwhelmed by iPhone users in New York and San Francisco, where dropped connections and long waits for running programs are not uncommon. These data-hungry cell phones compete for bandwidth with broadcast TV, radio and Wi-Fi networks, and wireless carriers like AT&T and Verizon say that they’re running out of capacity.

We’re told that the situation in New York City over the weekend had mostly to do with AT&T underestimating iPhone demand. But unless policies for allocating spectrum become more conducive to new technologies, turning away potential customers could become more frequent.

The reality is that the demand for mobile broadband is exploding, thanks to the popularity of the iPhone and rivals like the Palm Pre, the Blackberry and Verizon's Droid. According to the Federal Communications Commission, the use of smart phones has grown by nearly 700% the past four years, and mobile data are increasing at a projected rate of 130% annually as more people use their phones to send photos and watch videos.

Spectrum is finite, but it doesn’t need to be as scarce as it is. The problem is how the frequencies are being managed. Less than 10% of the spectrum coveted by wireless carriers has been allocated for commercial use. Much of the rest is controlled by the government. Television broadcasters and satellite companies also possess excess spectrum that could be made available to wireless carriers. Competitive bidding is the best way to allocate spectrum, but the government auctions are much too infrequent—only two in the past four years—and the licenses often come with cumbersome restrictions. The result is congested networks, frustrated customers and slower innovation.

Legislation sponsored by John Kerry and Olympia Snowe in the Senate, along with Henry Waxman and Rick Boucher in the House, would mandate an inventory of available spectrum to identify bands that are unused or underused. It’s a good place to start.

via Wireless Carriers Running Out of Capacity – WSJ.com.

Government action, especially from idiots like John Kerry, is not a good start in my opinion. The reason the allocation of spectrums is not in accordance with the demand of users is because the government allocates them. The government decides which bands are allocated for which type of technology.

Government never allocates resouces well, so why would anyone think that this is different. The market should allocate the spectrums. In the market, if cell phone usage is growing, the value of spectrums used by another technology would increase. If that technology is not growing, or in many cases shrinking, then those spectrums would naturally be put up for sale to make profits for the companies who’s technology isn’t in as much demand anymore.

Why aren’t these allocated by the market? Well, I’m sure people believe these are a public good, and that government must control these. Government must protect us from…. Anyway, they probably say that some wealthy guy will swoop in and buy them all up. Yeah, I’m sure a very rich guy would outbid the likes of AT&T, Verizon, Apple, etc. I’m also sure he’d love to have his money tied up in something if he can’t produce profits from it.

“Yeah Prof, but what about the speculators?”, you say. Well, what’s wrong with speculators. If speculators bought up some spectrums, what would be wrong with that? “Well, they’d drive up the price, Prof.” True, but who says that’s a bad thing. Ask yourself, what are they speculating on. Speculators don’t just buy things up for grins and giggles. They buy them up in anticipation of some news that will make their investment worth more money. Let’s say there is a new technology that comes out next week, and that technology needs a band on the spectrum. Now, let’s say all the spectrums are taken. Oh, wait, the speculator has a band. It may be pricey, but it’s available for sale. The speculator made a good bet, and he’s about to reap his reward. Now, if it wasn’t for that speculator, there would have been no unused bands available for sale. The speculator rationed the bands for us. Not only that, he didn’t sell it at low fixed price like the government would (just to be fair) to someone who would willy nilly buy it for some technology that no one uses. He held it out for a technology that had enough demand that the price he was charging was still a good investment. In other words, he made sure that the most people possible got the benefit.

The government on the other hand would allocate bands based on politics. What is the most beneficial way for them to use these spectrums to get re-elected. It always comes down to re-election. They use our supposed public goods against us to entice us to re-elect them again and again. All this does is encourage them to find new public goods, which is confiscated from private goods, to gain more power over us.

This is what socialism brings.

Poverty has forced at least 225,000 children in Haiti’s cities into slavery as unpaid household servants, far more than previously thought, a report said Tuesday.

The Pan American Development Foundation’s report also said some of those children — mostly young girls — suffer sexual, psychological and physical abuse while toiling in extreme hardship.

The report recommends Haiti’s government and international donors focus efforts on educating the poor and expanding social services such as shelters for girls, who make up an estimated two-thirds of the child servant population.

Young servants are known as “restavek” — Haitian Creole for “stays with” — and their plight is both widely known and a source of great shame in the Caribbean nation that was founded by a slave revolt more than 200 years ago.

via Report says 225,000 Haiti children work as slaves | Top AP Latin America Stories | Chron.com – Houston Chronicle.

Just a couple thoughts on this. This is what happens when you have a socialist/welfare mentality as a society. Haiti has long been looked at as a nation that needs handouts. All handouts do is destroy the incentive to work. We should allow nations like Haiti to fail, and when they do, real leaders will step up to eventually move the country forward. The problem is countries, like the United States, always rush in to save them from failure, and what you get is a worsening condition that would have long ago ended if rock bottom was allowed to be hit.

Also, child slavery is somewhat of a red herring. Is a child having to work to help support their family slavery? Were children slaves when we were more agricultural, and they worked on the farm? It’s silly to automatically say they are slaves. If there is sexual abuse that is much different. That is something that should be severly punished, because it is an act of violence on an individual (even worse that it’s a child). Work is not violence, and it is not slavery. If the child is prevented from working by do gooder liberals, there is a much larger chance that the child will die of starvation, be pushed into criminal enterprises, or become an orphan.

I love how our media and liberal elites love to sit back and judge other countries. “They can’t have child labor. Look at us. We are outlawed that long ago.” Do they really think that Haitian parents care or love their children any less than they do? Talk about arrogance. We once had child labor too. Not because we loved our children less back then, but because it was a necessity of life.

The solution again is to let the country stand on its own. If Haiti’s citizens embrace a more capitalistic economy and are allowed to prosper, child slavery(labor) will eventually disappear. It disappears as productivity and prosperity increase, and child labor is no longer needed to sustain the livelihood of Haitian families. Why is it no longer needed? Because prosperity is increased by productivity increases. The more productive a society is, the more prosperous it is. Productivity and prosperity feed on each other moving society continually upward. Productivity increases prosperity by giving more goods and services with less inputs, and prosperity when reinvested (not confiscated by gov’t) increases productivity by being able to afford technologies that can produce without more labor (example: machinery). The more productive the society, the less people that need to work for a given standard of living. Needing less people to work means eventually children will not need to work. Haitian parents, if given the opportunity, will choose to not have their children work, just like American parents. That opportunity won’t present itself though until liberals let them fail, and they embrace capitalism.

In today’s Wall Street Journal, there is an op-ed by David B. Rivkin Jr. and Lee A. Casey about giving the states the ability to propose constitutional amendments.

For nearly a hundred years, federal power has expanded at the expense of the states—to a point where the even the wages and hours of state employees are subject to federal control. Basic health and safety regulations that were long exercised by states under their “police power” are now dominated by Washington.

The courts have similarly distorted the Constitution by inventing new constitutional rights and failing to limit governmental power as provided for in the document. The aggrandizement of judicial power has been a particularly vexing challenge, since it is inherently incapable of correction through the normal political channels.

There is a way to deter further constitutional mischief from Congress and the federal courts, and restore some semblance of the proper federal-state balance. That is to give to states—and through them the people—a greater role in the constitutional amendment process.

The idea is simple, and is already being mooted in conservative legal circles. Today, only Congress can propose constitutional amendments—and Congress of course has little interest in proposing limits on its own power. Since the mid-19th century, no amendment has actually limited federal authority.

But what if a number of states, acting together, also could propose amendments? That has the potential to reinvigorate the states as a check on federal power. It could also return states to a more central policy-making role.

via David Rivkin and Lee Casey: The States Can Check Washington’s Power – WSJ.com.

While the authors have a good idea and a great point, they completely leave out what happened “nearly a hundred years” ago that allowed federal power to expand. Several things happened, but one thing in particular happened that if it had not happened would given the authors what they are asking for and would have prevented the massive expansion of the federal government. In 1913, the 17th amendment was ratified. That amendment changed Senators from being elected by state legislatures to being elected by the people via the popular vote.

The original point of the Senate was to represent state interests and to keep the Federal government from infringing on states rights. Once that barrier was removed, there was no longer a check on the federal powers. You get what we have now.

Prior to the 17th amendment, states could do exactly what the article is proposing. States could propose amendments via their state’s senators, who were accountable to the state legislators. Now, senators aren’t accountable to state legislators, so all they care about is the popular vote of the people, which is easily manipulated.

Come to think about it, do you think Senators could be as corrupt as they are if they were accountable to state legislators? Could corporations buy off US Senators at the expense of their citizens if they new that the state legislators could kick them out of office? While I’m sure there would still be corruption, I don’t think you would have it on the scale that we do now. I also don’t think you would necessarily have these career politicians and the rotating door between government and lobbying.

As time goes on, the great intellect of our founders avails itself more an more. They put controls in place knowing what would happen without those controls. Unfortunately, we allowed Woodrow Wilson, who was a “progressive” to undermine so much of what the founders put in place. Under Wilson, we got the 17th amendment, ending state rights. We got the federal reserve act, which allows the federal government to spend by printing money, robs the middle class and poor through inflation, and creates boom bust cycles. We got the progressive income tax, which punishes productivity and instigates class warfare. The list of Wilson’s destructive acts could go on with drug laws, antiwar suppression, etc.

If we ever want to take the country back towards more liberty, states without a doubt need to start reasserting themselves. It does seem to be happening underneath the surface. There is a growing 10th amendment movement. There are even discussions on some websites and TVs shows about secession. While I don’t see secession ever happening with everyone being programmed that the south was evil for seceded, I can see states voiding federal laws if the people get loud enough. Ultimately, it comes down to people rising up against these federal laws. The first chance at this will be this enslaving health care bill. The people need to get extremely loud about it and tell their state legislators to ignore the federal law. If states ignored the law, as some have ignored the drug laws, they can in effect void the laws.

Maybe it will happen. More likely it won’t. One can only hope that states reassert themselves. If they do, we have a fighting chance at re-establishing our country. If not, Rome will continue to burn until it is no longer.

Wow, stumbled across this blog post this morning on Mish’s Global Economic Trend Analysis. It’s obvious we are becoming a society dominated by the state. You cannot have government employees making twice as much as the private sector. The incentive becomes working for the government, and not building our economy from the private sector, the sector that actually produces something. Also, with that comes the incentive to grow the state and to defend that state at all costs. When the state comes calling for the highly paid government workers to put down any civil unrest with the general population, the government employees will no doubt try to earn their pay. Anyway, here is a letter to Mish about the absurdity of his salary.

Hello Mish.

I read your article about the salaries of government workers compared with the private sector. I am a police officer. I won’t say where, let’s just say it’s one of the most expensive cities.

I am 29 years old and I make about $130k a year with overtime. Most of the officers make this and some even make $185k a year. A few supervisors in Internal Affairs have made of $200k along with detective sergeants.

To be honest, I think our salaries are totally out of touch with not only the private sector, but with America. It’s absolutely ridiculous. When I became a police officer we were all making way below what private sector employees made. I took the job knowing I will never be rich but knowing I will have a stable job with benefits.

Little did I know my union would secure very good contracts at the expense of pillaging the public. This cannot go on. I have studied and read Robert Prechter’s Conquer The Crash book and how he (and you also) say we will have a deflationary collapse. I agree totally.

I’m just paying off debt while the going is good and have put most of my money in gold (at $800 an ounce). I’ll probably sell that gold soon because it’s getting popular in the media and on the radio. So yes, I just wanted to let you know that these govt/federal/state jobs are ridiculous. I know because I have one. 90% of the workers sit around and work for about 2 hours throughout the day and get paid 6 figure salaries. They have full benefits and pensions, 6 week vacation plans, and sick days galore.

It’s gotten to the point where the private sector cannot compete because these senators keep bringing home the pork for these bloated corporations with unions. The small business man can never compete. This is socialism at its worst that has crept into America over the past quarter century.

via Mish’s Global Economic Trend Analysis: Police Officer Responds To “Six-Figure Federal Salary Gravy Train” Post.

There are only a few ways that all this absurdity is going to end. All of them are bad. Time to prepare for TEOTWAWKI.

Last night I’m watching John Stossel’s new show on Fox Business. His topic was health care. As usual, Stossel was right on blaming health insurance (third party payer) for the rising prices. Of course, the socialists in the audience and in some of the on the street interviews were having none of it. What was to blame? PROFITS! These idiots think that profits drive up the costs. I even debated a socialist on Facebook who said under socialism goods and services would be the cheapest they can be, because there would be no profit. By definition, he thinks removing profit lowers price. His exact words were, “Profit wouldn’t even be considered in a socialist state, so drugs would automatically be at their lowest possible price.”

It’s silly to think that removing profit makes things cheaper. Price is a function of supply and demand, not profit. Socialism always generates more demand while dwindling supply, so there is no reason to think that not having profits would lower price. That is a simple economic fact. The other hazard of removing profit though is lack of innovation. This is where removing profit is deadly.

The biggest profits are generated with the introduction of a new innovation. The innovator has first dibs on the market. They can charge the most to recoup their investment costs. After investment costs are recouped, they generate tons of profit. I know that sounds horrible in the eyes of many socialists, but what happens next is competitors see the huge profits. They then rush in to capture some of the profits for themselves. By jumping on the profit bandwagon, they bring the goods and services to more people. How do they differentiate themselves in order to get a piece of the profits? They either innovate, making the product or service even better, they seek efficiencies, which lowers costs, or they undercut their competitors, seeking less profits in hopes of taking some of the market. This whole process drives down the cost through innovation, efficiencies, and out right price wars.

This competition always drives profit margins down. Anyone who gets in on the early stage of a new technology can tell you “enjoy it while it lasts.” Once the profit margins are driven down so far, you end up with the companies who can deliver the products or services with the best quality and efficiency.

Meanwhile, the innovators are back at it seeking the massive profits that come from new products and services. This is what leads to our ever improving livelihood.

So what does this mean for health care? If we remove the boot of the government, we can have this same process in health care. It does happen inspite of the government now, but there is no doubt that it is hampered and slowed. For instance, moving a drug through the FDA is estimated to cost close to $1 billion dollars and takes 15 years. How many drugs are there that are needed, but can’t produce the profits necessary to overcome the costs imposed by the FDA? How many people die without those drugs?

If you remove profits, you remove innovation. If you remove innovation, people die. New drugs, treatments and cures are not developed.  If you remove profit, you remove competition. It’s competition that brings products and services at ever cheaper prices to the masses. If people can’t get the products and services, people die. While all these socialists scream, “No profits in health care!”, they should be screaming “Let people die, let people die!”

Watch Stossel’s Health Care show here:

http://www.therightscoop.com/watch-%e2%80%98stossel%e2%80%99-from-fox-business-%e2%80%93-december-17-2009/

The WSJ’s token liberal comments on how to save the news papers.

This is a terrible time for newspapers, but the solutions suggested over the last year by the deep thinkers of the floundering industry give one little hope.

Back in September, the ombudsman of the Washington Post, Andrew Alexander, lamented his paper's failure to keep up with conservative outlets after they described footage showing Acorn employees apparently advising people how to evade the law. The Post's slowness on the story, Mr. Alexander wrote, raised the possibility that the paper didn't “pay sufficient attention to conservative media or viewpoints.”

Continuing the next day on the newspaper's Web site, he decided that the blame for this unhappy situation lay with the newspaper industry's workforce, which is apparently made up of the wrong kind of people. According to “surveys,” Mr. Alexander wrote, “newsrooms . . . are more liberal than the population.” Newspapers might mean well, but they are handicapped by their monocultural politics. The obvious answer is to hire for political diversity.

via Thomas Frank: Newsrooms Don’t Need More Conservatives – WSJ.com.

Sorry, for making you read that piece of the article. It’s completely a completely useless article. He basically said the problem isn’t lack of conservatives, and that having more conservatives wouldn’t have changed anything in regards to the media malpractice with the Iraq war lead up and the mortgage meltdown. He is probably right about that, but what difference does it make.  Newspapers don’t need saved. Here was my comment on the piece.

Who says we need to save the newspapers? If no one wants to buy the newspapers, it’s because the value they offer doesn’t justify their price. Should we talk about how to save heiroglyphics? No, times change, and the way people get their news is changing. The mainstream media has been exposed for it’s corruption, and society is now bypassing them. Why should I read about the economy from someone who majored in journalism, when I can read an economist’s blog? Why should I read about war from someone who majored in journalism or polysci, when I can read the blog of someone who spent years in intelligence and the military? The list goes on and on; health care, finance, sports, etc. Blogs and the internet in general provide better news via direct sources. There is no reason to have your information filtered through journalists, and thus no reason to save the newspapers.

In the Wall Street Journal today, Alan Blinder, talks up the economy and show’s his optimism (naivete) of things to come.

By ALAN S. BLINDER

The U.S. economy is digging itself out of a deep hole. You have probably heard a lot of doom and gloom lately, including talk of a jobless recovery, an L-shaped recovery (which means no recovery at all), or even a W—the feared double-dip recession. The Scrooges have a point: There are serious dangers to the nascent recovery. But you’ve heard all that many times. Let me offer instead, in deliberately one-sided fashion, the case for optimism. It is, after all, the holiday season.

The case begins with the “slingshot effect” I wrote about on this page last summer (“The Economy Has Hit Bottom,” July 24, 2009). When the growth rate of any component of GDP rises, it gives overall GDP growth a boost. And going from sharply negative growth to zero is a notable rise. In July, the slingshot scenario was hypothetical—though likely. In today’s economy, it’s a real phenomenon.

During the first half of this year, the investment component of GDP declined at a stunning 38% annual rate. Since the investment share of GDP was then about 14%, this implosion accounted for minus 5.4 percentage points of GDP growth. But since overall GDP declined “only” 3.6% in those two quarters, the rest of GDP (the 86%) actually rose. It was a small but real reason for optimism in a stormy sea.

Then came the third quarter. Like a woozy prizefighter lifting himself off the canvas, the battered investment component of GDP managed to rise (at an 11% annual rate), which added 1.3 points to GDP growth rather than subtracting 5.4 points. That 6.7 point swing was the start of the slingshot effect, which is not yet over.

Investment has three components: business investment, inventory stocking, and homebuilding. Inventory stocks were still declining at near-record rates in the third quarter; they simply must level off within a few quarters because sales are rising and firms will not want to deplete their stocks indefinitely. Business investment remains 20% below its 2008 peak; its likely course is up, not down, because plants and equipment wear out. And housing? Well, you know. Homebuilding is still in the doldrums—limping along at less than half the level of 1960. The only way to go is up.

This is where Keynesians think they have things right by using their assumptions to prove their assumptions. Blinder says while investment decreased, the other GPD components picked up the slack, so GPD didn’t decline as much as it would have otherwise. The problem is the slack was government spending. This is how they reinforce their own assumptions. They believe the government can boost the economy with stimulus, printing money, etc. Then they create a GDP calculation that includes government spending as one of it’s components. Then to increase GDP, they use that component to minupulate the calculation. The problem is that component does nothing to create wealth for our economy. It does not create real economic value. Gross Domestic Product is about production, but the government produces nothing. If this was the way to economic growth, why don’t we just focus on that component of GDP? Why not just quadruple the government spending? GDP would skyrocket!

Of course, the investment slingshot won’t last forever. Sometime in 2010, consumer spending must take over. And this is where the pessimists go into full throttle. Burdened by huge losses of both wealth and jobs, American households will start saving like mad, we are told. Sounds plausible, but it hasn’t really happened. True, the average personal saving rate has risen to 4.5% of disposable income so far this year from 2.7% in 2008. That’s higher, but a long way from the 8%-10% saving rates the doomsayers have foreseen. A saving rate near 5% is consistent with 3%-4% GDP growth in 2010.

Let’s hope consumers don’t listen to Blinder. Our country is badly in the need for savings. Savings are used for investment, which is what creates real economic growth. Yes, ultimately consumers need to spend, because we need to buy much of what we produce. If we don’t, it won’t be produced. The problem is when that consumption is heavily leveraged as it has been. I’m sure the Fed will eventually trick the public into going more in debt as things start to get back to normal.

The second major source of optimism is the amazing performance of productivity during the recession. To be sure, that performance had a downside: While real GDP was falling 3.7%, payroll employment dropped 5%, devastating many American families. But by definition, that discrepancy means that productivity—output per hour of work—rose substantially during the recession, which is pretty unusual.

The last two quarters were even more extreme: Productivity in the nonfarm business sector grew at a shocking 8.1% annual rate. There are two possible explanations. One: The last two quarters were among the most technologically innovative and entrepreneurial in the history of the United States. Two: Fearful businesses pared payrolls to the bone. If the second is closer to the truth, payrolls are extraordinarily lean right now. Which means that firms will need to hire more workers as their sales and production grow. Which means that employment may start growing sooner than the pessimists think.

I have been pointing this out for months, but until the last employment report, it was a hypothesis supported by no evidence. Not anymore. While payrolls continued to decline in November, it was by only a scant 11,000 jobs; and the job counts for September and October were revised upward. The data now show a clear trend that suggests that net job creation may be only a month or two away. We’ll see.

Here again, the problem is Blinder is counting the government as if all jobs are created equal. Jobs do the economy no good if they aren’t producing value to the economy, and government jobs do not produce value. The latest jobs report showed increases in government jobs and temporary employment. All other jobs, the ones we want, were down. More government jobs, used to distort the jobs report, is not a good thing.

There is more to the case for optimism. For one thing, less than 30% of February’s $787 billion fiscal stimulus has been spent to date; over 70% is still in the pipeline. Pessimists dote on the fact that the rate of increase of stimulus spending has probably peaked and will be lower in 2010. True. But the level of GDP will continue to get support from fiscal policy, and a second job-creation package (“Please don’t call it a stimulus!”) looks to be in the works.

Back to increasing the government component of GDP. See why government spending should be taken out of GDP?

Then there is the Federal Reserve’s stupendously expansionary monetary policy. It is well known that interest rates work on the economy with long lags. But the Fed’s last rate cut came a year ago. So isn’t the monetary policy pipeline empty? The answer is no, for at least three reasons. First, history suggests that the time lag is closer to two years than to one. So even the normal policy lags are not over.

But second, and more important, the lags are likely to be abnormally long this time around. As long as the economy’s credit-granting arteries were blocked, they could not carry the Fed’s lower-interest-rate medicine into the economy’s bloodstream. Sadly, some of these arteries remain blocked today—such as for small business lending. But the Fed, Treasury, FDIC and others have created a bewildering variety of stents and bypasses to get credit flowing again. The credit markets are now healing, though slower than we would like. Hence there is still monetary stimulus in the pipeline.

And third, the Fed continues to inject more medicine. Not by cutting interest rates, of course. Zero is as low as you can go, and the Fed arrived there a year ago. But “quantitative easing” is still in play. One example is the mortgage-backed securities (MBS) purchase program, which is adding MBS to the Fed’s balance sheet and providing vital support to the mortgage market. Yes, the Fed has begun to think about its exit strategy. But that is for the future, not for now.

The Fed’s “stupendously expansionary monetary policy” is what we should fear the most. The author may be right on the lag, and that would be the most devasting blow to the economy. Many are predicting massive inflation as the Fed’s stimulus finally leaves the reserves and enters the economy. I wouldn’t call that a case for optimism. As I highlighted in a previous blog, even the best case inflation scenario is not too comforting. If not severely contracted, we’ll have massive inflation. If severely contracted, we could be looking at a serious contraction in the economy. Pick your poison.

I warned at the outset that I would present a deliberately biased case. So let me admit, once again, that serious downside risks remain. The investment slingshot and the fiscal stimulus will both peter out in 2010. Consumer finances and confidence are shaky. Banks are still failing and commercial real estate is a mess. We cannot count on exports to pull us out of this slump. All true. And all reasons not to expect the kind of exuberant boom that typically follows a deep recession—such as the 7.7% growth spurt in the six quarters following the 1981-82 slump. No one expects that.

So my optimism is guarded. The 3%-4% growth rate that I anticipate for the rest of this year and for 2010 is a lot worse than 7.7%, to be sure. But compared to what we’ve been through, it will feel a whole lot better.

Mr. Blinder, a professor of economics and public affairs at Princeton University and vice chairman of the Promontory Interfinancial Network, is a former vice chairman of the Federal Reserve Board.

via Alan S. Blinder: The Case for Optimism on the Economy – WSJ.com.

Blinder doesn’t even consider the effects of the health care takeover, national debt, etc. Then again why would he? Keynesians think government spending is as valuable as business investment. Why? Because GDP says so.