So the Associate Publisher of The Nation sends me an email asking me, “Have any lefty relics gathering dust in your closet?” They’re having a fundraising auction.

As it happens, I do have some lefty relics I’d like to get rid of. I have:

• Keynesianism
• Wilsonianism
• Nationalized health care
• Government Motors
• The idea that the Constitution grants “plenary” powers to the federal government
• The War on Poverty
• Racial preferences

Over at Downsizing the Federal Government, we focused on the following issues this past week:

• Federal infrastructure spending has a long and painful history of pork-barrel politics and bureaucratic bungling, with money often going to wasteful and environmentally damaging projects.
• Chris Edwards responds to critics of his critique of federal infrastructure spending.
• Mark Calabria thinks President Obama’s new mortgage plan should be held under water.
• My thoughts on the spending reforms proposed by Rick Perry.
• The president’s student loan plan: borrowers won’t get much relief, and taxpayers will get saddled with additional costs.
• The State Department spreads democracy—and money.

Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.

A friend points me to a recent article on Foreign Policy’s website written by a career State Department employee who spent a year in Iraq trying to “win the hearts and minds” of the Iraqi people. I’ve pretty much become numb to stories about government failure, but this one left me with my forehead planted on my desk.

Here are some of the ideas that government officials actually gave the green light to, using your tax dollars:

• French pastry classes for Iraqi women.
• A play about a town’s dispute over “the value of shade cast by a donkey.”
• A road constructed to facilitate commerce was instead used by insurgents to carry out attacks.
• A local artist was paid to paint a mural of “oiled, homoerotic Steve Reeves musclemen” on the wall of a gym.
• Bicycles were bought for impoverished children in a Baghdad neighborhood. However, the roads were too damaged and dangerous for the kids to ride their bikes, so the bike wheels ended up being used on wheelchairs for injured Iraqis.
• The creation of a Baghdad Yellow Pages even though only 250 businesses with permanent landlines could be found.

I suspect that some readers will respond that the federal government should instead be using taxpayer dollars to build roads and fund the arts here in the United States. However, as we demonstrate over and over again at Down​siz​ing​Gov​ern​ment​.org, the federal government does a lousy job of spending other people’s money at home or abroad—period.

Yesterday the Federal Housing Finance Agency (FHFA) released its updated projections of the cost of rescuing Fannie Mae and Freddie Mac. These estimates update projections last made in October 2010. The big headline has so far read that costs have been revised lower. But will that really be the case?

If one digs into the revised numbers, a few striking facts emerge. First, FHFA states losses since October 2010 have been lower than projected for a variety of reasons, including that “foreclosure delays [have] pushed some defaults into later years” and “net interest income is higher … due to lower interest rates.” The first reason just sounds like a delay of the ultimate cost to me, rather than a reduction. And given that homes often lose value during the foreclosure process (who bothers to maintain a home he is going to lose ?), these foreclosure delays are just as likely to increase the ultimate costs, even if they do delay those costs.

On the interest rate question, first, do we believe rates are going to remain low indefinitely? Seems to me we could easily be in a situation in three to five years where the GSE funding costs are above their interest income. This especially becomes the case if Obama has his way and Fannie/​Freddie re-finance a large share of their book into lower rates.

All this aside, the revisions are still a brutal reminder that taxpayers have so far sunk $169 billion into Fannie and Freddie, more than the ultimate costs of the TARP and more than the cost of the savings-and-loan crisis. The FHFA projects that, by the end of 2014, total taxpayer costs will be between $220 billion and $311 billion. 

Any way you slice it, Fannie and Freddie have been a massive drain on taxpayers. The sooner we put an end to these entities, the sooner we can avoid having taxpayers pick up the dime for the next housing bubble.

Professor Allan Meltzer of Carnegie Mellon University has a must-read column in today’s Wall Street Journal, beginning with what should be an obvious statement.

Those who heaped high praise on Keynesian policies have grown silent as government spending has failed to bring an economic recovery. Except for a few diehards who want still more government spending, and those who make the unverifiable claim that the economy would have collapsed without it, most now recognize that more than a trillion dollars of spending by the Bush and Obama administrations has left the economy in a slump and unemployment hovering above 9%.

He then asks a rather important question.

Why is the economic response to increased government spending so different from the response predicted by Keynesian models?

Prof. Meltzer gives four reasons, beginning with the threat of higher taxes.

First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later. Meanwhile, President Obama makes certain that many more will reach that conclusion by continuing to demand permanent tax increases. His demands are a deterrent for those who do most of the saving and investing.

I especially like how he highlights Obama’s actions, which clearly show the link between more spending and more taxes. I also would have added the European fiscal crisis, which has made more people aware of the negative long-run consequences of excessive government.

He then lists the negative impact of having the government distort the allocation of resources, a point that is music to my ears.

Second, most of the government spending programs redistribute income from workers to the unemployed. This, Keynesians argue, increases the welfare of many hurt by the recession. What their models ignore, however, is the reduced productivity that follows a shift of resources toward redistribution and away from productive investment.

He then discusses the impact of red tape, a point which I’ve never addressed, but obviously is very important if politicians use Keynesian spending as an excuse for expanding the scope of government as well as the size of government.

Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy. Who can guess the size of the cost increases required by these programs? ObamaCare is not the only source of this uncertainty, though it makes a large contribution.

Prof. Meltzer then dings the short-term mentality of Keynesians.

Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result. The estimated cost of new jobs in President Obama’s latest jobs bill is at least $200,000 per job, based on administration estimates of the number of jobs and their cost. How can that appeal to the taxpayers who will pay those costs? Once the subsidies end, the jobs disappear—but the bonds that financed them remain and must be serviced. These medium and long-term effects are ignored in Keynesian models.

The only thing I would change about this argument is that he also could have explained that so-called stimulus spending actually destroys jobs, on net, when you consider the loss of private-sector jobs that takes place when government diverts resources from the productive sector of the economy.

A minor oversight, though, in a blistering indictment of Keynesian economics. Heck, Prof. Meltzer should have taken my place at the NYC debate on stimulus. I suspect, however, that the crowd would have been reached the wrong conclusion even if the ghosts of Milton Friedman and Friedrich Hayek has been resuscitated for the event (yes, I’m still sulking).

In addition to explaining why Keynesian economics does not work, Prof. Meltzer also outlines the policies that should be implemented.

Clearly, a more effective economic policy would aim at restoring the long-term growth rate by reducing uncertainty and restoring investor and consumer confidence. Here are four proposals to help get us there: First, Congress and the administration should agree on a 10-year program of government spending cuts to reduce the deficit. The Ryan and Simpson-Bowles budget proposals are a constructive start. (Note to Republican presidential candidates: Permanent tax reduction can only be achieved by reducing government spending.) Second, reduce corporate tax rates and expense capital investment by closing loopholes. Third, announce a five-year moratorium on new regulations. Fourth, adopt an enforceable 0%-2% inflation target to allay fears of future high inflation.

These are all good ideas, though I would have written that we need a “10-year program of government spending cuts” rather than saying we need “10-year program of government spending cuts to reduce the deficit.”

After all, the federal government is too big and the damage to the economy would still exist even if the deficit disappeared because $1 trillion of new revenue magically floated down from heaven.

The problem is spending. That’s the fiscal disease facing America. Deficits and debt are just symptoms of that disease.

Our longtime colleague Bill Niskanen passed away yesterday. I will miss him dearly for his good nature, scholarship, wisdom and insight. In light of the debate on inequality, here’s an example of such insight in which he critiques philosopher John Rawls’s views. It is from footnote 21 (page 23) of his book, Autocratic, Democratic, and Optimal Government.

Rawls recognizes that individual well-being is dependent on more than income and wealth, but he does not acknowledge the implications of the fact that the other dimensions of well-being are not fungible. Consider the following example.

One young man is healthy and handsome, spends his days on the beach, has his pick of young women companions, and makes $10,000 a year by busing tables in the evening. Another young man is confined to a wheelchair, has congenital body odor, has never had an intimate relationship, and, with no other life, makes $100,000 a year as an expert computer programmer. In this case, who is worse off? Who should redistribute what to whom and how?

One of the worse kept secrets in Latin America is that Colombian President Juan Manuel Santos believes in drug legalization. Back in the 1990s he co-signed an open letter to then UN Secretary General Kofi Annan calling for an end to the war on drugs. And, since assuming office last year, Santos has hinted on several occasions that a new approach is needed in drug policy.

Earlier this week, Santos finally came out supporting the legalization of soft drugs, such as marijuana. In an interview published by Metro World News, Santos said that he favors legalization “provided everyone does it at the same time.” However, Santos balked at the idea of being the first sitting president to propose this in an international forum, citing mostly political reasons: “I would be crucified if I took the first step,” he said.

Despite Santos’s lukewarm endorsement of drug legalization, he adds his voice to the growing number of Latin American leaders calling for ending prohibition. Cato will host a big conference on November 15 on ending the international war on drugs, featuring some of the leading voices in the region on this issue: Fernando Henrique Cardoso, former President of Brazil, Jorge Castañeda, former Minister of Foreign Relations of Mexico, former Colombian Senator Enrique Gómez Hurtado, and Luis Alberto Lacalle Pou, Uruguay’s current Speaker of the House of Deputies. You can see the full program of the event and register here.