Dr. Sherry Jarrell

State Run Media is here

I hope none of you is watching Obama's gig on ABC tonight.  Apparently, no dissenting opinions are allowed on the program, nor did ABC allow anyone with a competing view to purchase air time before or after Obama's "show."  

I think it is very likely that this was a condition imposed on ABC by the Obama team, and in some ways you can't blame ABC for taking them up on it.  

On second thought, I take that back.  Yes, you can blame ABC for going forward with this sham.  

Obama's health care plan is a frightening subrogation of our privacy and our freedoms.  Once the government is footing the bill for your medical care,it will assert the right to protect its investment, just as it did with the financial industry bailout and the auto company bailout.  The government will attach conditions to the health care expenditures to ensure that those dollars are used wisely, just like they did with AIG and GM...Conditions like mandating what we eat, what risks we take, what kind of medical examinations we have -- and ,of course, our medical records will now belong to the government as well. 

A government-created "right" to universal health care trumps our right to decide how healthy or unhealthy we want to be.

Oh no, Not Health Care, too!

No! No! No! Everyone please just take a breath, and THINK. When Obama says he wants to reduce the cost of health care, he does not mean he is going to reduce the price we pay for prescription drugs, doctor's visits, or health insurance. He means that he wants to reduce the cost of health-related government programs, like Medicaid, Medicare,and CHIPs. The reason those costs are going up is because the Government is using someone else's money to decide what medical services we can and cannot have without any mechanism for providing those services efficiently or in ways that enable us to make our own choices about how to take care of ourselves, whether to self-insure, how much insurance to buy if any, and how often to see a doctor and about what. Obama's plan is "Health care by committee" - regulated, limited, delayed, depersonalized. Can you name five bureaucrats whom you would entrust with the medical decisions for you and your children? I certainly can't. 

Obama has it so wrong.  He constantly confuses sound bites for fact.  Consider his question from today's press conference on health care: "Why would it drive private insurers out of business?" asked Obama. "If they tell you they're offering a good deal, why is it that government, which they say can't run anything, can drive them out of business? There are gonna be some legitimate debates to be had about how this takes shape. But conceptually, if they can't compete against a public plan as one option, with consumers making the decision on the best plan, that defies logic."  Notice his assumption that private industry would be "competing" against a government sponsored medical plan?  How patently ridiculous. The government doesn't compete in ANY sense of the word. If it were that simple -- if the best provider wins -- then how did we get into this single-payer Medicare/Medicaid disaster that Obama is saying will bankrupt the government unless we do something about it?  No, the government makes up the rules! The government directs, orders, fines, and imprisons, and that's here in a free country!  Their presence as a provider in the health care services and insurance industry will shift that industry as far away from a competitive, efficient, desirable equilibrium as anything you can imagine.

It is an incontrovertible fact that competition improves quality and reduces costs.  You don't think that applies to health care?  Think again.  Consider elective cosmetic surgery.  We all know that it is not generally covered by medical insurance. What you may not have realized, however, is that, as a result, it is a competitively supplied service, with malpractice laws in place to limit abuse. The quality of facelifts and tummy tucks? Up. Their price tag? Down. Dramatically!  (not that I would know personally, of course.....!)  We could all enjoy the same developments if we could get the government out of the health care business. Unlikely, I know; once the government starts a program that takes from some to give to others, we are pretty much stuck with it (except defense spending, of course.)  But let's not make it worse by expanding the role of government provided health care. 

Stay tuned...financial crisis explained

Okay, the time has come.  I just heard Diane Rehm and Eamon Javers on NPR discussing the causes of the financial crisis, the mispricing of risk, and the need for financial regulation.  I just heard Diane Rehm tell a caller that there was not a single example of a financial innovation that has helped the US economy.  And Eamon Javers conclude that it was those greedy market participants who got it wrong, caused the collapse, and need to be further regulated. 

It may be a little dry to read through a factual, accurate overview of financial capital markets work, how risk is priced, and what really caused the problems in the credit markets, but that is what I am composing over the next few days and plan to post as soon as I can.  It is time. If someone doesn't say something, listeners and voters may confuse this dribble with fact, and we'll end up with the exact wrong policies to right the ship.

President Obama: Economics 101

Dear President Obama:

    I am very concerned that your advisory team is completely devoid of a real economist who will tell you the truth about the impact your policies will have on the U.S. economy. You seem, instead, to have surrounded yourself with political scientists,theorists, and yes-men and yes-women who either don't know any better or,even worse, do know better but are afraid to speak up.  Speak up clearly and honestly, that is.  Many of your appointees seem fairly adept at doublespeak.

   I hardly know where to begin: health care reform? executive pay czar? demonizing capitalists? regulating the financial services industry? cap and trade? allowing Treasury to abolish the independence of the Federal Reserve? sharing ownership of the auto industry with the UAW?  encouraging threats of private-citizen AIG executives by Congress?

   What do all of these "initiatives" have in common?  A complete and arrogant ignorance of the advantages and benefits of a free market system; the willful overwrite of the individual's choice with collective government preference.   The exhorbitant costs of substituting the collective will of government for individual choice in a free society makes sense only when we are talking about the provision of public goods, such as defense.  Otherwise, it destroys the very core of what makes this country so strong, so promising, so free.

   Two instances are most egregious.  One is the interference in the financial capital markets.  No one, no regulator, no political appointee, no committee, is better able to determine the credit-worthiness of a borrower than the local lender, than the entity putting its cash flows at risk.  They and they alone will make a good loan at a fair rate, or they will lose money and either learn their lesson or go out of business.  The government cannot improve the borrower-lender relationship from afar; they should not require lenders to make bad loans; they should not create by legislation a phantom market for these bad loans; and they most certainly should not then blame the market for the crisis they created in an attempt to justify further interference in what should be a private business decision between lender and borrower. 

   Healh care.  It is an outright lie that the reform you propose will reduce health care costs.  Your plan will limit access to health care.  It will no longer be our decision, in conjunction with our doctor, what kind of health care we want and can afford.  Your plan will replace what should be the most private and individual of decisons -- a parent or child or spouse sitting down with their doctor, discussing their health and well being, and deciding together what is the best health decision given that person's budget, preferences and priorities -- with some committee who is charged with capping the national health care annual budget. The proposed health care reform moves this decison away from a one-on-one discussion between doctor and patient to some group of bureaucrats somewhere "out there."  This is a disaster.  The U.S. has the best healh care system in the world.  And why is that?  Because of government regulation?  No.  Medicaid and medicare are unmitigated failures.  They are the reason you feel the need to "fix" the health care system in the first place. Again, the problem was caused by the government trying to run private industry, which you then use to try to justify further interference by the government.

   Please, Mr. President, for the sake of our country, our health and well-being, our freedom, our future, ask a real economist for the truth about what you are proposing.  Ask me.  I will tell you.  I will explain it until you get it.  Just ask.

Sincerely,

Sherry Jarrell, Economist

Gas Prices: Seeing Red!

Have you found yourself wondering why the price of gasoline has gone up so much lately? And when it might start to fall again?  I have, too, so I looked into it and found that, as with nearly every other privately produced good, the price of gasoline is determined by supply and demand.  But, in this case, neither demand nor supply is without significant complications, which makes predicting the price of gasoline that much more complex.  But, let’s give it a shot, and start with demand.

When we think about what drives the demand for gasoline, we have to think in terms of world demand.  This is an international product; demand for the various products that are processed from crude oil comes from literally every corner of the world.  So even if U.S. demand were to fall significantly, world demand would still very nearly exhaust world supply, and the price of gas would not fall measurably.

According to Oil-Gasoline.com (a wonderful site for those who like data as much as I do), demand for products refined in the U.S. has actually fallen recently, down from 92% of capacity (16,065 million barrels demanded per day out of a capacity of 17,448 millions bpd) to 86.7% of that capacity, due in part to the conservation efforts of consumers and businesses.  

Despite the recent softening in some segments of demand, the price of gas is still high, due largely to the singularly dominant role played by supply.  And the supply side of this industry is an interesting but complex story.  First, crude oil is a depletable natural resource.  There is an essentially fixed world supply of extractable oil.  Estimates vary but, if we assume that the current levels of demand, extraction, and technology prevail, we will essentially run out of the known supplies of crude oil in about 2075.   

This statistic is a little misleading because we will never actually get to the point where we pull the last drop from the ground.   As we approach that point, crude will be very scarce.   The more scarce the resource, the higher its price and the more the market will pay for its relatively cheaper substitute – in this case, alternative fuel.  The more the market is willing to pay for alternative fuel, the more a firm can expend on R&D and still be profitable.   It is the promise of profits large enough to offset the high upfront investment costs required to develop alternative energy sources that gives us hope that market forces, not government edict, will solve the energy problem.   But the market has to want alternative energy very badly, very loudly, and over a sustained period of time, before companies and entrepreneurs will take the risks necessary to get it done.

The second factor that makes the supply of this particular commodity unique and interesting is OPEC, which may be the last surviving example of a real cartel.   A cartel is an organization with a small number of members whose goal is to maximize joint profits by limiting supply and raising market price.   Because each cartel member profits by “cheating,” i.e., producing more than its quota and selling at the inflated cartel price, successful cartels must be able to both detect cheating, and inflict sufficient punishment on those caught cheating.  No cartel survives overproduction.  Most cartels, in fact, have collapsed because the profits from cheating were high and the punishment for getting caught was too low.  In my view, OPEC is still going strong primarily because the cost of cheating on OPEC is so very high…..like beheading, torture, and other not-so-pleasant forms of “discipline.”

OPEC very effectively constrains the world supply of oil and pushes the price we pay at the pump for gasoline up.  This, despite the fact that the U.S. imports only about 56% of its petroleum products consumed, and only about 50% of the cost of a gallon of gasoline comes from crude oil.  OPEC provides a very wide umbrella of high prices under which other oil-supplying countries – cartel members or not -- profit. 

Stagnant U.S. refining capacity is another significant supply issue.  It represents the real bottleneck in the crude oil-to-gasoline conversion process. In fact, even if the supply of crude oil were to somehow triple by tomorrow, there would be zero increase in the supply of gasoline.  The reason?  There hasn’t been a new refinery built in the U.S. since 1976, in part because they are politically unpopular and in part because used refineries cost half that of a new one, so companies buy those and upgrade them.   Most of the easy, cheap production facility upgrades have already been done.  Refineries now spend most of their limited investment dollars, not on additional capacity – which may actually fall in the next several years – but on upgrades required to meet tougher environmental regulations. 

These regulations serve to further limit the available supply of refined crude.  Beyond the usual regular, mid- and premium grades of gasoline, myriad local, state, and federal clean air requirements create a patchwork of dozens of different blends that need to be produced to serve specific regional demands.  Not all refineries are set up to make all blends. The result: gasoline produced for sale in one area may not be used to supplement insufficient supply in another.  Inadequate supply means higher prices.

The most ironic twist of all may be that the U.S. oil industry actually competes with its own government for the limited world supply of crude oil. The U. S. Department of Energy maintains the Strategic Petroleum Reserve (SPR), an emergency supply of crude oil begun in 1975 after oil supplies were cut off during the oil embargo.  The SPR holds up to 727 million barrels of crude oil (about a 57-day supply) in several artificial salt dome caverns on the Gulf of Mexico.   Keeping the SPR filled is clearly a priority of the executive branch:  it has authorized the sale of crude oil in the open market only twice in the history of the SPR, first in 1991 with Desert Storm, and again in 2005 after Hurricane Katrina.    The SPR re-entered the crude oil market this past August to resume filling the SPR.  Since the U.S. government is more interested in filling the reserve than in getting the best price, it pays higher prices for the crude.  These higher reported trade prices fuel higher worldwide crude oil prices which, in turn, lead to higher prices at the pump.  The very act of trying to guarantee an uninterrupted, albeit short-term, supply of gasoline actually causes its retail price to climb! 

So, what can we expect of gasoline prices over the next several months?  Most likely, more of the same.  World demand is currently soft, but I expect that this is a temporary lull in otherwise relentless world growth, ruling out a demand-driven reduction in prices.  And any effective increase in the world supply of crude oil or alternative energy – the only viable long-term solution to our energy problem -- will take many years and more political will than I can personally imagine. 

Shotgun Merger: Bank of America and Merrill Lynch

Almost without exception, the press would lead you to believe that the banks are the real culprits behind the financial crisis.   The media coverage implies, assumes, or outright states that it was the banks who first asked the government for a bailout.  And because the banks asked, the argument goes, the government has every right to tell them what to do.  But, to my knowledge, the banks did NOT "go to the government and ask for help," and I have been trying to make that very point to every local and national reporter who's talked to me on the topic for the last several months, without success.  

 

I have very reliable information (including the Fall 2008 memos from Hank Paulson to Bank of America, among others, revealing that the banks were required to take the TARP money whether they wanted it or not) that it was the bailout architects who first approached the strongest banks about taking bailout money to help ease the financial crisis.  Bank of America initially declined.  In very short order, however, the regulators' request became an outright order; Bank of America would take the bailout money, or else.  Or else what?  Read on.

Back in January of this year a reporter for a newswire service asked me if I thought Ken Lewis should be fired because of the negative stock price reaction to the Merrill Lynch deal.  My answer was no, because I thought that BAC had generated a healthy return for its stockholders over the years under Mr. Lewis' watch. I noted that Mr. Lewis now had a very difficult job in trying to both appease the Treasury Department and keep shareholders happy. It's like having two Gods -- which do you follow? The exact quote is:

 

"Ken Lewis is in a very difficult spot," said Sherry Jarrell, a business professor at Wake Forest University in Winston-Salem, North Carolina. "He cannot please the political interest that the government role entails and the market interest in maximizing value for
shareholders."

 

It was evident to me at the time that BAC had significant conflicts about revealing what it knew about Merrill Lynch's problems to the public in accordance with its fiduciary responsibilities, versus obeying "suggestions" from the Federal Reserve and the all-powerful Treasury Department about proceeding with the deal.  

 

Shortly after this story appeared, Ken Lewis' testimony in a New York AG investigation into the Merrill Lynch bonuses was released.  In it, he stated that Bank of America was told by the Treasury and the Fed to go forward with the Merrill Lynch deal, even though BAC sought to kill the merger bid when they discovered negative new material information about Merrill's performance.  I wondered, "or else what?"

 

Until today, it was just a guess on my part that the "or else" meant that the CEO or board member(s) would be fired.  Today, my suspicion was confirmed.  In testimony in Washington, Ken Lewis, ex CEO of  Bank of America, stated that the regulators essentially told him in December of 2008 that if Bank of America did not proceed with the Merrill Lynch takeover that he and certain board members would be replaced.  (Turns out that this was reported in a February 5th Wall Street Journal article but I have to admit that I missed it then! Apparently I wasn't alone.)

 

I have to say I'm relieved that the "or else" didn't involve more explicit corruption on the part of government officials, like drumming up fake criminal charges with the threat of jail time.  Sad to say, but at this point, I wouldn't be surprised. 

Piling on....

Has anyone else noticed how many significant, serious, and urgent issues seem to be coming out of the White House of late?   Bailouts, TARP money repayment, environmental regulations, government takeover of the auto industry, supreme court nominees, Gitmo detainees coming ashore, major health care reform, executive pay caps, monetization of debt, historic deficits, shifts in Isael-Palestinian policy, internet regulations, tax reform, state government bailouts,the appointment of dozens of Czars, accountable to no one, in charge of forming policy on everything from the future of capitalism to sucker fish.

I wonder if the intent isn't to overwhelm, like a magician who uses the hand showing us the cards to focus our attention away from the hand behind the back which is busy making the switch.  Congress simply doesn't have enough hours in the day, and media doesn't have enough objectivity or expertise, to give these incredibly important issues the coverage or consideration they need.   So we are rushing, making irreversible decisions with little or no understanding of the onerous consequences with which we will be stuck for decades to come.  

I wonder if the intent isn't to get as much into law, to reshape the rules of the game, to shift as much power to government as possible before we all sit up, look around, realize what is going on, and then try to do something to stop it.

I wonder.

Government Motors

So the “government” now owns a large chunk of General Motors, Inc.  Is this a big deal, or a non-event in the life of the average US citizen?  What real difference does it make who owns a company? 

Typically, this is how a company is “governed” (no pun intended!).   A person or group of people purchase equipment and hire labor to produce a product or service to sell.  The intent is to sell the product for more than it cost to make it.  The difference between the revenue and the costs is profit, and private industry is the ONLY entity in the United States that can create – i.e., give birth to – economic wealth. Consumers can’t do it, and certainly the government can’t do it!  More on that in a separate posting. 

So far in this example the company is private.  Its assets are privately owned and its equity is private equity.  The owners of the company make all the decisions and absorb all the risks, profits, and losses.  Only private wealth is at stake. 

Let’s say the company wants to expand beyond the ability of its private owners to generate funds.  So the owners have to approach the external financing markets for financial capital.  They have to go public.  They approach the market to raise funds by selling debt or equity, or some hybrid combination of the two.  Debt is a fixed income instrument, a legally-binding contract to repay lenders a set of cash flows over a specified period of time.  If the company misses a payment, it is in default, and the parties go to court.  Equity is a residual income instrument; if, after paying for physical capital, labor, taxes, and debt payments, there are profits remaining, it is management who decides how much of those profits will be paid out as dividends, and how much will be reinvested in the company each period in an attempt to grow the firm, to increase the level of future profits (i.e., to generate capital gains or to increase the stock price of the company). 

What governs how management decides how to invest or distribute its profits?  For a typical public corporation, it’s the Board of Directors that hires, fires, compensates, and otherwise manages the management on behalf of the shareholders.  These are the  shareholders who chose to lend the company financial capital by buying its stock (directly in the primary market through an IPO or stock offering; indirectly through the secondary market by buying and selling shares of outstanding stock from and to other shareholders – more in a separate posting) in order to make a decent rate of return.  These shareholders, under U.S. Corporate Governance rules, typically have one vote per share. Depending on the corporate bylaws, the shareholders vote on such important corporate matters as takeovers, seats on the board, and executive compensation.  And they own the ultimate voting right of selling their share if they don’t like the direction the company is taking or aren’t getting the rate of return they expected. 

This principal – agent relationship between owners and managers – i.e., between shareholders via their vote and the Board of Directors, and executives – has worked very well for our economy for a very long time.  It’s the private economy at its best. The government and the courts have a role, too.  They enforce the “rules of the game.”  If laws are broken – e.g., fraud, theft, or insider trading – individuals or corporations are prosecuted and punished and replaced. Businesses operate within a set of laws and regulations intended to create a fair environment. 

What happens to a company when the government becomes a majority stockholder in the company?   What happens when a voting stockholder also has the power to change the rules of the game, has the power to replace management’s decisions with its own view of the “correct” product and business strategy?  How does this actually play out?  Not well, that much we know. 

When “the government” owns a block of GM shares, who in fact is “the shareholder?”  Who gets to decide how to cast the one vote per share (or whatever the ratio is that someone dictates in some unknown negotiation with some mystery authority)?  And what decision criteria are they going to use to cast their vote?  Are they going to vote in favor of value-maximizing strategies, those that maximize the shareholders’ rate of return?  Or, are they going to vote for strategies that maximize their power, that make them most attractive to the voting public at large, or that enable them to implement their political or macroeconomic policies?  The government as shareholder is necessarily schizophrenic – it is both residual claimant whose only real exit strategy is to sell the share, and dictators who can force the company to build a certain car.  Management is no longer in charge of GM – they can not make their own decisions about what cars to build.   If management does not please the policymaker shareholders, Obama via the Auto Czar can literally obliterate the company with the stroke of a pen, or through taxation, regulations, or executive order.   And Obama has said as much, and in those very words.  “We will allow GM to set its own policies, follow its own strategies, unless of course we don’t like the direction they are taking…”  

And therein lies another dirty little secret of public ownership of private industry.  Not only does the amorphous, unidentified “government” get to decide how the company operates, the government also substitutes its preferences for that of the consumers.  GM no longer is incented to build the kinds of cars that consumers prefer.  They are going to have to build the kinds of cars that the government dictates will help the White House to reach their policy objectives.  What if people don’t want to buy the cars that GM builds under Obama’s rule?  GM will (continue to) lose money.  Under normal circumstances, GM would go out of business, and other companies who build cars that we want to purchase will prosper. That is the way a free economy is supposed to work.  But what happens to an unprofitable government and union-owned GM?  I can think of only two scenarios:  the government continues to pour our tax dollars into a failing business, or the government requires us to buy the car that GM is making, whether we like it or not.  And have no doubt, the government can and, in the current insanity that is the Obama White House, will do that. 

The Coming Inflation...

My guess is that within the next year or two, we will experience significant levels of price inflation in the US.  Let me explain why. 

Inflation is the percentage increase in the price level of goods and services sold in a geographic region.   There are several different measures of inflation: the consumer price index, producer price index, the chain-weighted deflator, and so on.  Each has issues: it is estimated on a limited basket of goods and services which may or may not represent what each of us buys; it is a biased measure of our quality of life; and, it is frequently reported only to be significantly revised later.  But as long as our measure of inflation is equally crappy through time, it will give us a reasonably reliable measure of the changes in the rate of inflation. 

Inflation occurs when the rate of growth of the money supply exceeds the level of real growth in the economy.  It doesn’t occur in the short run.  In the short run, in fact, an increase in the money supply actually lowers the interest rate, or the “price” of money. For us to see a pervasive and wide-spread increase in prices, the growth in money has to exceed the real growth rate for an extended period of time.  

What causes the growth rate in the money supply to increase?  It’s complicated, but there are basically three things the Federal Reserve can do to increase the money supply:  decrease the discount rate (which is basically as low as it can go right now); reduce the reserve requirements of banks (which isn’t likely to happen); or buy a lot of newly issued treasury bonds (or any asset for that matter – more on the creative acquisition of “special purpose” assets by Geithner and gang in a separate post) and pay for them with newly created deposits that it injects into the commercial banking system.   This last one is called Open Market Operations (OMO).  OMO give the Federal Reserve enormous power and responsibility: it basically gives the Fed the ability to create money out of thin air, and it is the only entity in the US economy that can do that.  Banks can’t; businesses can’t; consumers can’t. Just the Fed. 

And the Fed is doing a whole lot of that lately.  It is hard to surmise from the press reports exactly what fraction of the $300 billion in additional purchases of long-term treasury bonds and the $750 billion purchases of mortgage assets announced on March 18, 2009 were financed with deposit creation, but to the extent they were, the money supply is skyrocketing.  Given the subdued growth in real productivity in the US economy, this increase in money supply will translate into period of inflation, the likes of which we’ve not seen in this country for decades.  We see evidence of it already in the bond markets. 

True Cost of Government Spending

I think we all know on some level that every dollar of government spending is a dollar of income created by a business.  But this fact seems to be lost in the rhetoric of the press and the politicians.  Congress, the White House, and your local press would have you believe that the new government spending associated with the so-called “stimulus” program is going to help increase US output and create jobs.   This is just fundamentally not true.   Let me explain why.

Let’s begin with the current value of US output, whatever it is.  How can we increase the level of that economic wealth? Through government spending, consumption, or investment?   No.  None of these increase the level of wealth.  The ONLY activity in the US economy, actually in any economy, that creates wealth is what happens inside of a business.  When a business – any business, from a small private family business to a large international public corporation – hires labor, buys materials, and purchases or leases machines and equipment, and combines them to produce a good or service to sell, there is the potential for value creation.  If, for example, the business pays $100 for all the inputs, taxes, and fees to produce the good or service, and sells it for $120, then $20 of wealth has been created.  And I mean “created” in the true sense of that word:  through the “magical” inputs-to-output transformation process of business, what was worth $100 yesterday is worth $120 today. 

These profits are used to pay dividends, if any, to stockholders, and to reinvest in the company in the hopes of creating additional profits next period.   If the profit level remains the same, there is zero growth.  If the profit level goes up, we have positive growth.

Notice that all tax revenues collected by the government, from either individuals or companies, originate in business.  Employees use the income they earn from businesses to pay income, sales, and other taxes to the government.  Businesses use the revenue they earn to pay income taxes, licenses and fees to the government.   These taxes and fees are the government’s revenue.  The government sells bonds to generate revenues as well but these funds must be paid back later, so I distinguish borrowing from tax revenues.  (I discuss the impact of government borrowing and debt on the US economy in a separate posting.)

So what happens to that dollar of business earnings if it gets siphoned away from retained earnings and the promise of future growth they represent and becomes a part of government tax revenues instead?  Let’s follow the dollar: It begins life as a dollar of business profit.  Then it gets collected by the government and begins to wind its way through the layers of bureaucracy, each of which chips away pennies, nickels, and dimes of each dollar collected. The government then uses what is left of these tax revenues to pay the wages of government employees, and to support all government programs, including welfare, Medicare, roads, defense, bailouts, grants, and foreign aid.   

This relationship between the original dollar of business profit, and the impact on US output or income generation is known as “the government spending multiplier.”  Despite what Dr. Christina Romer says today, which contradicts the findings of her very own research when in academia, the government multiplier is less than one; MUCH less than one.  My belief is that every dollar of tax revenue results in about 50 cents of US wealth; in other words, government spending destroys US wealth. 

Claims to the contrary are just plain silly.  If it were true that government spending increased output, and increased job creation and wealth, then all we would need to do to do to pay for the bailout and TARP and all the government programs we want and to get out of the recession is to spend!  If, as some in the White House have recently claimed, the government spending multiplier is equal to 3, and we need $9 trillion dollars to recover, then all we need is for the government to spend $3 trillion!  Magic! 

Of course that is patently ridiculous.  In fact, had that dollar remained in the private sector, and the business that earned it did exactly the same thing it did to generate it in the first place, the income multiplier would be equal to one.  In other words, that dollar of income would generate, at a minimum, another dollar of income.  That is already double the wealth generation of government spending.   

Without the profit-motivated activities of business, there would be no increase in economic wealth, no increase in employment, no growth.   Taxes reduce economic wealth.  Government spending wastes economic wealth.   Government spending is inherently inefficient.  It may support programs that we as a society deem important and necessary, but don't confuse that with an increase in economic wealth and jobs.  It’s just not possible.