The White House neglected to mention that the deficit reduction was primarily realized over the four years since the GOP took majority control of the House of Representative and divided the government. It takes a special kind of chutzpah for the President to complain about "mindless austerity" and congressional obstruction when they are the very reason for the declining deficit he is bragging about. But he did. The cognitive dissonance is only made worse by a few inconvenient facts:
Happy Thanksgiving everyone! Time to count our blessings. The Dividist is particularly thankful that after only two years, the electorate has seen fit to restore divided government, a full two years before he thought it possible. The Dividist is less thankful about what our leaders are doing to our currency.
Your Thanksgiving dollar dinner is served: For our main course, let us check in with Peter Schiff, who you may recall was right in 2006-07 predicting the impending recession and crash of the real estate bubble caused by inflationary monetary policy at the fed, misguided public policy in Washington, lax lending by the banks, and criminal fraud on Wall Street. He was also right in 2008 when he warned President-elect Obama about the folly of trying to borrow and spend ourselves into prosperity. Monotonously he was right again exactly one year ago in 2009 when he told us to keep buying gold at the record price of $1,186 /oz (15% lower than Wednesday's close of $1,372/oz) as a hedge against the devaluing dollar.
Serving up the meat and potatoes - Schiff on the insanity of Congress mandating a two headed Fed charter. They are required to manage monetary policy to maintain a stable currency, and also to promote maximum employment by umm.. devaluing the currency:
"Prior to 1977, the Fed only had one job: maintaining price stability. However, the stagflation of the 1970s inspired politicians to assign another task: promoting maximum employment. This “mission creep” has transformed the Fed from a monetary watchdog into an instrument of social policy. We would do well to give them back their original job.
The imposition of the “dual mandate” was informed by the Keynesian belief that inflation and unemployment don’t mix. An economic concept known as the ”Phillips curve” postulates that low levels of one cause high levels of the other. But, like many things in modern economics, the curve is a fiction. There is no real reason why low inflation would produce unemployment or full employment would create inflation...
The real reason that prices rise, for both goods and wages, is that the Fed creates inflation. This policy undermines the economy by destroying both current savings and the incentives to accumulate future savings. Since savings finance capital investment, lower savings equal weaker economic growth.
So, the best way for the Fed to create maximum employment is to focus on the single mandate of price stability. While a few elected officials seem to be figuring this out, most are just as clueless as the Fed. Unfortunately, even if Congress succeeds in changing the Fed’s mandate, there is not much chance that monetary policy will change significantly. Keynesian thinking is so ingrained in Bernanke and his colleagues that they will exploit any wiggle room in their directives to jump back in the driver’s seat and send us ever faster toward the edge of an economic cliff."
For a side dish, Peter Schiff checks in with CNBC and browbeats the usual suspects on Fast Money:
Tasty. The most amazing thing about this video - it is closing in on almost 3 million views after being posted on YouTube for only 3 weeks. After knocking this out in an afternoon, its creator is in demand by the media, being interviewed by the likes of Slate and CNBC.
C'mon. A six minute long primitive animation about economics, Fed policy, and Quantitative Easing - going viral? Three million views? How does that happen? The Dividist has no explanation.
Finally, for a relaxing after dinner smoke - "The Bernanke" hits the road to defend the QE2 policy to the world. Good luck with that, Ben.
Last week David Lightman wrote a column for McClatchy Newspapers comparing the spending record of the current Bush administration to the generally acknowledged gold standard of big government spending - LBJ. The column was entitled "Bush is the biggest spender since LBJ", but the statistics quoted in the article crown George W. Bush as the U.S. discretionary spending champion of the modern era:
"Take almost any yardstick and Bush generally exceeds the spending of his predecessors. When adjusted for inflation, discretionary spending — or budget items that Congress and the president can control, including defense and domestic programs, but not entitlements such as Social Security and Medicare — shot up at an average annual rate of 5.3 percent during Bush’s first six years, Slivinski calculates. That tops the 4.6 percent annual rate Johnson logged during his 1963-69 presidency. By these standards, Ronald Reagan was a tightwad; discretionary spending grew by only 1.9 percent a year on his watch ... Brian Riedl, a budget analyst at the Heritage Foundation, a conservative research group, points to education spending. Adjusted for inflation, it's up 18 percent annually since 2001, thanks largely to Bush’s No Child Left Behind act. The 2002 farm bill, he said, caused agriculture spending to double its 1990s levels. Then there was the 2003 Medicare prescription drug benefit — the biggest single expansion in the program’s history — whose 10-year costs are estimated at more than $700 billion. And the 2005 highway bill, which included thousands of “earmarks,” or special local projects stuck into the legislation by individual lawmakers without review, cost $295 billion. “He has presided over massive increases in almost every category … a dramatic change of pace from most previous presidents,” said Slivinski."
The most interesting aspect of this coverage, is that they all missed the real story, including David Lightman. The source of the data used in Lightman's story is the research done by Stephen Slivinski, Director of Budget Studies at the Cato Institute, author of Buck Wild, and DWSUWF favorite. As Stephen himself explains:
"Further to Dan’s post below, here’s the McClatchy story arguing that President Bush is the biggest spending president since LBJ. The article got lots of notice — probably because it was linked on the Drudge Report for most of Wednesday. The story is mostly old news — I’ve been making the same pointforyears. But, because it is based on updated data that I provided to the reporter, I’m happy to see the message ripple through the news cycle."
This is also old news to DWSUWF readers, as we have been covering Slivinski's analysis of this story since May, 2006. So what is the real story? It is not about whether GWB or LBJ is the biggest spender. It is not about whether Republicans or Democrats are bigger spenders. It is about spending under divided vs. single party control of the government. Once more, lets go to the source of the research for the Lightman column - Stephen Slivinski from September, 2006:
"...government grows slower when at least one house of Congress is controlled by a political party different than the president's—a condition known to political scientists as "divided government," or popularly known as "gridlock. Since 1965, government has grown slower in periods of divided government than in periods of united government. On average, united government tends to lead to a 3.4% annual increase in federal spending in real per capita terms—over double the growth under divided government: 1.5%. When you look at the data in terms of how fast government grew in relation to the economy, the results still favor divided government. The average yearly increase in government above and beyond GDP growth is 25 times faster when one party has a monopoly over both the legislative and executive branches than it does when gridlock is present. The one thing you can usually count on in Washington is partisanship. When Republicans are the beleaguered minority—or a congressional majority fighting a big-spending White House—they are in their element. Big Government is the clear enemy. But once they find themselves in control of it all, they don't rein each other in. Instead, they egg each other on. We can see this by comparing how a GOP Congress treated the proposed non-defense budgets of Bill Clinton and George W. Bush. During the years of divided government under Clinton, a sort of gridlock ensued. The Republican Congress managed to cut Clinton's domestic spending requests by an average of $9 billion each year between fiscal 1996 and 2001. Contrast that with the budget outcomes under President Bush—specifically the years in which Congress was held entirely by Republicans. Between fiscal years 2003 and 2006, Congress passed, and Bush refused to veto, non-defense budgets that were an average of $16 billion more than the president proposed each year."
To my knowledge, William Niskanen, former chairman of President Reagan's Council of Economic Advisers, was the first to document this effect. Slivisnski's research has built on and amplified Niskanen's work. It is beyond dispute that the two biggest spending Presidents of the last 50+ years are GWB and LBJ. Depending on which metrics are used, one can quibble about who is the single biggest spending pig, but by any measure, they are the top two. LBJ led a unified Democratic government during his tenure. GWB led a unified Republican government for the first six years of his administration. During the time this administration also enjoyed majority control in the legislature, discretionary spending was increasing at over 7% per year, blowing away LBJ's record. Since GWB faced a divided government this year, the annual spending increase has dropped to a 3% rate. I am not going to try and explain the mechanism of why it works. It just does. Every time, without exception. If the objective of limiting the growth of federal spending is important to you, there is one sure way to get there - keep this government divided.
Let's not kid ourselves. A single party Democratic government in 2009 will be every bit as bad as the single party Republican government of the last six years. The only difference will be which special interests and lobbyists will be the beneficiary of the increased spending of our tax dollars. The logical vote in 2006 was to vote for a straight Democratic ticket to divide our government. The logical vote to avoid LBJ Redux in 2009 is to vote for a Republican president in 2008 to keep it divided.
The big surprise in the Congressional Budget Office mid-year budget estimates released today isn’t that the year-to-year deficit shrank again. Or that the long-term liabilities in Medicare and Social Security continue to impend. The surprise is that federal spending will only grow about 3% in the current fiscal year that ends this October. That’s a big improvement over the annual average 7% growth we’ve seen since the first day of the George W. Bush presidency. How did that happen? Those familiar with my previous research will probably not be surprised to hear that the new political reality – divided government – has something to do with it... Earlier this year, the new Democratic Congress decided to put the federal budget on auto-pilot until October. Instead of passing new appropriations bills to fund the government for the entire year, they passed what is called a “continuing resolution” to keep the government operating. This didn’t happen because the Democrats were all that interested in spending less money. They just wanted to get the old budget work left to them by the outgoing Republican Congress off the table so they could get on with more ideological-base-friendly legislation, like the minimum wage increase. And the Democrats knew that the president might finally start vetoing legislation, too. A protracted battle over the budget wasn’t something they wanted to spend their energy on in the first half of the year. Thus, the auto-pilot continuing resolution: a piece of legislation that keeps the government running at basically the inflation-adjusted level of the previous year. With the White House veto strategy finally a credible threat, it looks like we might have a similar sort of outcome on spending this year, too. Isn’t divided government wonderful?
Good news. Since its inception, this blog has been in the service of promoting the concept of voting for divided government as a way of limiting the growth of federal government spending, among other beneficial effects. After divided government was re-established in the 2006 midterms we outlined assumptions for continuing to support this concept in the 2008 presidential election in the post - "2008 Election Prologue - Check your assumptions":
Assumption 1) The Divided Government hypothesis holds true to form.
We will have divided government for the next two years. Minimally, we expect to see restraint in the growth of spending and some evidence for more fiscal discipline on the part of the federal government. If that does not happen, the foundation for advocating divided government will collapse, and we will refocus on abalone diving on the Mendocino coast.
Looks like the abalone will have to wait. Divided Government Rules!
Reminder - We are one week away from the next edition of the Carnival of Divided Government. The Carnival of Divided Government Sextus Decimus- Special Labor Day Edition, will be posted on or about September 3rd, 2007. Blog articles may be submitted for thecarnival of divided government using the carnival submission form. Past posts can be found here or on our blog carnival index page.
Director of Budget Analysis for the Cato Institute, and 
