deficits

There are two news stories on the “front page” of nytimes.com today that make for an interesting exercise in juxtaposition.

First, there’s the suicide of an entrepreneurial billionaire.

Adolf Merckle, the German billionaire whose speculation in volatile Volkswagen stock had pushed his sprawling business empire to the edge of ruin, has committed suicide, his family said Tuesday.

A native of Dresden who made his way to western Germany after World War II, Mr. Merckle parlayed a family business in chemicals into one of the biggest pharmaceutical concerns in the world. Ratiopharm, a maker of generic medicines that nonetheless became a recognized brand itself, became the pride of the family.

Forbes estimated Mr. Merckle’s fortune at $9.2 billion in 2008, making him No. 94 on its list of the world’s richest.

“The distress to his firms caused by the financial crisis and the related uncertainties of recent weeks, along with the helplessness of no longer being able to handle the situation, broke the passionate family businessman, and he ended his life,” the family said in a statement.

More than any other single investment, Mr. Merckle’s poorly timed bet on Volkswagen shares caused the financial distress that led to his death.

In November, it emerged that Mr. Merckle had lost an amount of money in the “low hundreds of millions” by wagering that shares in Volkswagen would fall, a financial transaction known as short-selling.

The bet had put him up squarely against a positively world-famous family, the Porsches. The sports car manufacturer from nearby Stuttgart was in the process of taking over Volkswagen.

On Oct. 26, Porsche announced it had secured stock and options equivalent to about 75 percent of Volkswagen shares. Short sellers, who borrow shares and sell them, hoping to buy them back later at a lower cost, were caught in a bind, since the revelation implied a shortage of VW shares to “cover” the short-selling.

Sad story about a man overwhelmed by the consequences of his horrible decisions. He lost hundreds of millions of euros and was clearly moved to despair by the effects of those decisions on his family, his employees, his investors. Obviously one wishes that he had not taken his own life, and I won’t debate here the morality of that decision. However, I cannot help but think that Merkle felt, correctly, the weight of his responsibility for losing so much, and however maladaptive his response was to that feeling, it was the right feeling.

Then, there’s the headline story, Obama Warns of ‘Trillion-Dollar Deficits’

Mr. Obama also warned that the country faced the prospect of “trillion-dollar deficits for years to come, even with the economic recovery that we are working on.” He said he was troubled by the staggering $1 trillion figure, adding: “I’m going to be willing to make some very difficult choices on how we get a handle on this deficit.”

Mr. Obama said the $775 billion recovery plan was urgently needed to jumpstart the economy. He pledged to be a watchful steward over the money, offering the restriction on earmarks as an example of how he intended to be mindful of Republican criticism that the package could be too costly.

Of course, the deficits weren’t created by Obama and it’s possible to drive oneself crazy quoting W about his “advocacy” of free markets in light of his epic levels of deficit-driven government growth. But now look at Obama’s “plan,” his response to years of W’s deficit spending.

More deficit spending.

The government can’t pay its bills. It’s mortgaging the future earnings of taxpayers to the hilt and printing money out of thin air. It’s on proverbial life support. Will Obama’s plan reduce the size of the federal government? No, of course not. The government will become more expensive under Obama.  And taxpayers are being asked AGAIN to believe that it is necessary for the federal government to augment its already skyscraping, market-distorting expenditures (over a hundred BILLION to AIG, over $750 BILLION in additionally authorized spending, nearly half of which was given to banks [$25 BILLION to each of ~8 "big" banks], more BILLIONS to automakers whose cars are not being purchased, BILLIONS more to foreign banks and financial insurance companies).

I won’t go on at length about the intellectual bankruptcy of this approach. My focus here is on the public response by the president-elect to what have proved to be bad decisions. Deficit spending defers today’s tough decisions, rendering them tomorrow’s tougher decisions. It’s not a strategy for economic growth, it’s a tactic for delaying dealing with reality. And it’s based on people’s faith that politicians are operating on the premise of serving the taxpayers’ best interests.

Obama voted for all of the aforementioned spending packages, even those laden with pork, and they did not “turn the economy around.” And now he’s going to do more of the same thing, with impunity. He is saying that there will be no pork or earmarks in the planned spending, but a huge cut of his spending will involve infrastructure improvements and highways, which happen locally in states, so of course there will be lobbying for spending by interested parties in every state. It will be a feeding frenzy as coalitions of pols and builders jockey for position with their “shovel-ready” projects. The pork is built into his spending plan.

Just as one wishes somebody had been there to engage Merkle before he took his own like (ie, “you don’t have to do this, there are other ways, opting for death is not practical, c’mon, let’s give this second thought and come up with a better response), I’d love to stage an intervention with Obama, to implore him to start from scratch and check his premises about the underpinnings of economic growth. But if he’s unwilling to do that, if he’s firmly convinced that his plan will work, then Obama really must not only explain to us why it is “urgent” that the federal government spend $750,000,000,000.00 that it does not have, that it will have to borrow from foreign banks and/or print into existence, but also share with us his expectations of the effect of that spending. So that its impact can be measured and evaluated by all of us in the context of the originally intended target. How else can we know that Obama in fact has a plan with concrete goals? Hey it’s our money, right? Obama says the federal government “may” have to spend a trillion dollars over budget next year and the year after? Okay, why? And what exactly do we get for it? And if we don’t achieve those milestones, when will you, President “Learn From Mistakes Instead of Perpetuating Them” Obama, reverse this approach, pass deep tax cuts, reduce the size and expense of government, and spend only money that the U.S. Treasury has in hand?

Obama’s error is the same as Merkle’s. Both responses are maladaptive and irreversible. Once Obama authorizes another huge spending package, that wealth will be lost. All of the uses to which you and I and every other taxpayer, born and unborn, would have put that value will be obliterated out of deference for the spending preferences of bureaucrats in DC. The error is the same, but would Obama feel as responsible for making a horrible mistake as Merkle? Would any professional politician every feel as bad as Merkle for a failed, exorbitantly costly program he or she spear-headed?

And why not? Perhaps because Merkle lost what was his, and professional politicians only ever lose what was never theirs in the first place.

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