Governors of five states urged the federal government to provide $1 trillion in aid to the country’s 50 states to help pay for education, welfare and infrastructure, as states struggle with steep budget deficits amid a deepening recession.

The governors of New York, New Jersey, Massachusetts, Ohio and Wisconsin - all Democrats - said the initiative for the two-year aid package was backed by other governors and follows a meeting in December where governors called on President-elect Barack Obama to help them maintain services in the face of slumping revenues.

Gov. David Paterson of New York said 43 states now have budget deficits totaling some $100 billion as tax revenues plunge.

“It’s clear that the federal government needs to step in and jump-start the economy,” said Gov. Deval Patrick of Massachusetts.

The latest package calls for $350 billion to create jobs by building or repairing roads, bridges and other public works; $250 billion to maintain education; and another $250 billion in “counter-cyclical” spending such as extending unemployment benefits and food stamps, which are typically a responsibility of the states.

The remainder would be used to fund middle-class tax cuts, stimulate the embattled housing market and stem the tide of home foreclosures through a loan-modification program.

Gov. Jon Corzine of New Jersey said he hoped some of the $700 billion authorized by Congress in the Troubled Asset Relief Program would be available to help the housing market.

The governors said during a conference call with reporters that the plan had been discussed with Congressional leaders and the incoming administration, which had indicated its willingness to help.

“The Obama team has been very receptive in listening to us,” said Gov. Jim Doyle of Wisconsin. He said “quite a number” of other governors back the initiative.

The Republican Governors Association, however, said the level of federal aid being sought would create a burden for the future.

“The proposal by the Democratic governors goes beyond things like ’shovel-ready’ infrastructure projects and is essentially a bailout of these states’ general funds,” Nick Ayers, executive director of the Republican Governors Association, said in a statement. “Now is the time to focus on finding cost-effective ways to provide essential services without burdening future generations with ever greater debt.”

Doyle of Wisconsin said the plan would allow states to maintain essential services at about the current level until 2010, when the national economy is expected to begin a recovery.

The proposal comes amid expectations that the Obama administration, which takes office on Jan. 20, will provide hundreds of billions of dollars in economic stimulus to boost the shrinking U.S. economy and halt the loss of jobs.

In a letter addressed to President-elect Obama and his wife, Michelle, James Hansen, head of NASA’s Goddard Institute for Space Studies, makes an appeal for a carbon tax, ostensibly as a means for cutting emissions of carbon dioxide, a gas that’s allegedly causing a dangerous greenhouse effect and warming trend.

Hansen suggests that the tax be levied “at the well-head or port of entry” from where it “will then appropriately affect all products and activities that use fossil fuels.”

This tax will have “near-term, mid-term, and long-term” effects on “lifestyle choices,” Hansen acknowledges. But he seems unconcerned about how such coercion will rearrange the lives and manage the behavior of a people who should be free of state coercion.

Acting either out of boldness or desperation, Hansen goes on to reveal the environmentalist left’s deeper ambition: a collectivist redistribution of wealth. He recommends that the carbon tax be returned to the public in “equal shares on a per capita basis.”

That means wealthier Americans whose activities emit more CO2 will pay more in carbon taxes than they get back, while those who earn less will receive more in refunds than they will lose through taxes.

“A person reducing his carbon footprint more than average makes money,” explains Hansen, while “a person with large cars and a big house will pay a tax much higher than the dividend.”

Hansen and his ilk never seem to question whether the government should be involved in behavior modification. They believe so zealously in their cause — establishing an egalitarian society where conspicuous consumption is limited to the few who make the rules — that they have no misgivings about using the police power of the federal and state governments to beat society into shape.

Nor do they question their hunch — the idea doesn’t even rise to the level of theory — that CO2 emissions are causing climate change even as there are ample reasons to doubt it.

To his credit, Hansen expresses support in the letter for fourth-generation “nuclear power and coal-fired power plants with carbon capture and sequestration.” But he’s done so much yammering about global warming and encouraging “young people” to do “whatever is necessary to block construction of dirty coal-fired power plants,” that any sensible ideas he might have are lost.

That’s what happens, though, when a first-rate mind latches onto a third-rate assumption.

Most economic and social problems the government tries to solve are so complex they cannot be understood by a single person in their entirety. Therefore, a community of reality-based thinkers who propose solutions based “only on their judicious study of discernible reality” are not reality-based at all.

The problem is that the left, when making economic decisions in reality-based mode, never has complete information. Yet, from their perspective, they understand the problem completely. How? They fill in the missing information by assuming all people should want the same things.

This assumption manifests a couple of ways. The first is the simple, unthinking way in which a person reflexively assumes that other people wants what he wants. This bears a striking resemblance to the way we teach children to be sympathetic to others. We ask them, “How would you like that if someone did it to you?” Slipping into this mode of thought when trying to understand an economic problem is forgivable, as it simply a sign of immature thought.

The second manifestation, though, is unforgivable. It is the idea that all people should want a certain thing, even if their personal needs and desires are different. To someone in this mindset, wanting something different than what should be wanted is a sign of inferiority that can’t be tolerated. This idea is at the heart of leftist policy.

Now, the left tries to cover these bans with appeals to the public good or health and safety, but really they just don’t want you to have cigarettes, trans fats, internet poker, bacon dogs, incandescent light bulbs, aluminum baseball bats, etc. because they think you shouldn’t want them in the first place.

It works the other direction, too. The left thinks that everyone wants certain things from their health insurance, and so mandates them with the force of law. Thanks, but being a single guy, I really don’t want to pay for an OB/GYN benefit. Too bad, I should want it, therefore I get it no matter what.

It’s the same thing with prescription drugs. There’s only one valid risk-reward calculation in this country, the FDA’s. It doesn’t matter if a person is dying of cancer and is willing to take a chance most would find unreasonable. The left has determined that you should only take the chances they think are good for you, therefore all you can do is die.

The truth is we all have different wants and needs based on our situation in life and our personal preferences and that it is impossible for government decision makers to know these. An ideology that truly respects diversity would be in favor of free markets where diverse people can have their diverse needs met to their satisfaction. Instead, when confronted with this real diversity, all the leftist can say is, “you should want what I want.”

It’s hardly a news flash that many people who are widely regarded as lions of the pro-market side have gone over to the dark side in recent months. I am not going to name any names; if you are one of the guilty parties, you know who you are; and the rest of us know, too, owing to your public expressions of anti-market sentiment in newspapers and on the World Wide Web. Why have so many notable economists and others jumped ship?

Many, it appears, have simply panicked. Starting late last summer, the financial markets began to exhibit tremendous volatility, officials at the Fed and the Treasury began to act as if imminent disaster loomed, and media commentators and reporters completely lost their composure. Even people who should have known better began to talk and to act as if the economy stood on the brink of complete collapse unless the government took unprecedented actions immediately. When one extraordinary action failed to calm the waters at once, another extraordinary action was taken, then another, and another.

We now look back on four months littered with ad hoc bailouts, new regulations, institutional takeovers, a gigantic bail-out statute, massive lending, asset exchanges, and loan guarantees never before made by the Fed and the Treasury—all on a scale that no one foresaw six months ago. We might understand that the big bankers and other financial masters of the universe who had got themselves and their mega-institutions into such deep trouble would have worked hard to create a sense of crisis and to exploit it as a pretext for cushioning their slide from the financial pinnacles—peaks so high that the air is thin and the brain does not function effectively, so that even such workaday necessities as due diligence are overlooked. Blessed with friends in high places, these financial titans snatched loot by the hundreds of billions while the snatching was good.

But why have free-market economists and other commentators expressed approval of this blatant piracy? It now appears, I am saddened to report, that these free-market experts were not so expert after all. Indeed, many of them seem to have failed to understand how markets work and how government actions can hobble or kill those workings. Many have talked as if they actually believe in vulgar Keynesianism or other crackpot ideas—about “systemic risk” where none exists or about “missing markets” for poor-quality assets that only a fool would try to sell privately when the alternative of a munificent government buyout shimmers on the horizon.

Despite the evidence of how counterproductive all of these frantic government actions have been, of how they have served above all to produce “regime uncertainty” about what the rules will be tomorrow or the next day, and thereby to paralyze private arrangements, the market’s fair weather friends are now clamoring for various species of government “stimulus” as soon as the Obama regime takes power. Of course, the Obamistas’ motives are purely political, as befits a pack of office holders and their lackeys, so it is pointless to indict them—a rattlesnake is not to be blamed if it strikes, because its nature impels it to do so. But why are well-known free-market economists going along with this nonsense?

Treasuries recorded their biggest annual gain since 1995 as falling stocks and frozen credit markets drove investors to the relative safety of U.S. government debt.

Yields of all maturities touched record lows as financial firms’ losses in the credit crisis exceeded $1 trillion and policy makers made unprecedented moves to rescue the country from recession. Foreign companies and institutions increased their stake in U.S. government debt by 29 percent in the first 10 months of the year, Treasury Department data shows.

“It’s one heck of a run for 2008,” said George Goncalves, chief Treasury and agency strategist with Morgan Stanley, one of 17 primary dealers that trade with the Fed. “The capital markets are going to be about the Treasury market next year.”

Treasuries returned 14 percent in 2008, according to Merrill Lynch & Co.’s Treasury Master index. It was the best performance since 1995, when they rose 18.5 percent after the Federal Reserve began lowering its benchmark interest rate from 6 percent. The Standard & Poor’s 500 Index lost more than 38 percent for the year, the most since 1937.

The U.S. economy entered a recession in December 2007, the National Bureau of Economic Research said this month. The Cambridge, Massachusetts-based group sets dates on U.S. business cycles. The slump began about four months after financial markets started seizing up as rising defaults on subprime mortgages began to affect the value of other assets in the credit markets.

Milton Friedman responds to questions of morality and principle regarding capitalism

Bankruptcy is a blessing, not a curse. Contrary to common perception, bankruptcy doesn’t mean that the Big Three will disappear. Not at all, and quite the opposite. It will insure that they’ll be around 50 years from now. While in bankruptcy, they will be able to break contracts with unions that are choking them, lower their debt burdens by turning debt holders into equity holders (and regrettably wiping out existing shareholders). Their hands will be untied to right-size by shrinking their operations, cutting costs and becoming competitive again.

Jobs will be lost, factories will be closed, benefits cut. Yes, all these things will take place, but the layers of fat that these companies accumulated over the decades need to be shed to confront the marketplace that is only getting more competitive. Today, the Big Three compete mostly with Japanese and European automakers. But competition will only intensify as the world flattens, the quality of Korean cars improves (in many cases, it already has), and Chinese and Indian cars come to the U.S. and the rest of the developed world.

An automaker bailout is simply bad for capitalism. It will put competitors at an unfair disadvantage. It will cost taxpayers money, which at some point will lead to higher interest rates and higher taxes. It will lower economic growth, and it will send an army of other failing companies lobbying to Washington asking the taxpayers to bail them out (though this will likely happen anyway). Finally, and most importantly, it will raise the likelihood of a Japanese-like 15-year recession. We’ll be repeating their mistakes by not letting failed companies go bankrupt and thereby creating an economy full of zombie-like, semi-dead companies.

Capitalism is what needs a bailout. Though we often don’t appreciate it, capitalism is what made this country great. It allows for the fit to succeed by allowing the unfit to fail. Let’s bail capitalism out by letting the Big Three face their fates and not allowing them to become leeches on the backs of the U.S. taxpayer and our economy.

Advocates of capitalism must come to see that self-sacrifice is not moral but evil—evil because it is irrational and anti-life. Man’s life does not require that he give up the values on which his life depends. It requires the opposite. It requires that he pursue and protect his life-serving values. And it requires a social system that enables him to do so. Human life requires capitalism: the social system of universal selfishness and prosperity. And if we are to defend capitalism, we must repudiate the morality of self-sacrifice and embrace the morality of self-interest: rational egoism.

Rational egoism calls not for self-sacrifice but for rational self-interest (the only kind of self-interest there is). It calls for everyone to pursue his life-serving values while respecting the rights of others to do the same.

Egoism does not call for “doing whatever one pleases” or “doing whatever one feels like doing” or “stabbing others in the back to get what one wants.” Those are caricatures of egoism perpetrated by pushers of altruism who seek to equate egoism with hedonism and subjectivism. Egoism does not hold pleasure or feelings as the standard of value. It holds man’s life as the standard of value—and reason as man’s basic means of living.

According to rational egoism, that which promotes man’s life is good, and that which harms or destroys man’s life is evil. There are several highly developed principles involved in this morality—including the supreme value of reason; the crucial need of purposeful goals and self-esteem; and the virtues of productiveness, independence, honesty, integrity, justice, and pride. But the key political principle of rational egoism is the principle of individual rights.

Whereas egoism identifies the fact that people must think rationally and act accordingly in order to live and prosper, the principle of individual rights identifies the fact that if people are to act in accordance with their judgment, they must be free to do so. Whereas altruism underlies and supports statism, egoism underlies and supports capitalism.

As the politics of self-interest, capitalism cannot be defended with the ethics of self-sacrifice—nor can it be defended apart from a moral foundation (e.g., via libertarianism or mere economics). We who wish to advocate capitalism must advocate it explicitly on moral grounds. We must unabashedly explain to our allies and potential allies (i.e., people who are willing to think) that human life requires rationally self-interested action; that each individual has a moral right to act on his own judgment for his own sake, so long as he does not violate the same rights of others; that capitalism is moral because it enables everyone to act in a rationally self-interested manner; and that a mixed economy—in which no one’s rights are fully protected, and everyone’s rights are partially violated—is immoral because it precludes people from acting fully as human life requires.

We who wish to advocate capitalism must take the moral high ground—which is ours by logical right—and we must never cede an inch to those who claim that self-sacrifice is a virtue. It is not. Self-interest is a virtue. Indeed, acting in one’s rational self-interest while respecting the rights of others to do the same is the basic requirement of human life. And capitalism is the only social system that fully legalizes it. Grounds do not get more moral than that.

To understand the scope of Obama’s dirigiste designs, it’s useful to recall his campaign gaffe (a “gaffe,” of course, is an instance in which a politician is caught candidly disclosing his intentions) in which he informed an audience in Roseburg, Oregon that “We can’t drive our SUVs and eat as much as we want and keep our homes on 72 degrees at all times … and then just expect that other countries are going to say OK.”

Obama seeks not merely to control the means of production, but also to regiment individual consumption in order to bring the population into compliance with his vision of a better society. He won’t be content merely to restructure the auto industry, or to preside over vast, corruption-fattened liturgies of infrastructure renovation; he’s after nothing less than a complete reconstruction of our individual lives. That’s the hideous truth lurking behind his anodyne promise to be the “president of all Americans,” whether we care to have someone preside over us or not.

George W. Bush was a conspicuous failure as a dilettante businessman. Barack Obama – so far as we can tell from his uniquely opaque biography – has never operated a business, met a payroll, or set his hands to honest work in the productive sector. His brow has never been beaded with the sweat of honest private labor, nor has it been creased by the stress familiar to businessmen seeking to meet the needs of customers while navigating the hazards of government regulation and taxation.

Yet he assures us that he possesses some numinous quality – “the vision of change … comes from me,” to quote one of his more recent Olympian pronouncements – that equips him to direct a $16 trillion economy, correct the multifarious errors of made by lesser beings in their private transactions, and reorient that economy in order to address the future that he and his enlightened associates infallibly foresee.

Given the wonder-working powers Obama implicitly claims for himself, the most intriguing question is not whether he was born in Hawaii or in Kenya, but rather if he was immaculately conceived.

Obama must be nothing less than a necromancer if he is serious about spending trillions of dollars on Keynesian public works projects: With the dollar’s demise imminent, Obama’s plans will require the ability to transmute a worthless currency into real money with actual value. Either that, or he will simply task Ben Bernanke to run the printing presses at such a speed that their friction-heated surfaces could be used to fry bacon.

Which brings us back to the Zimbabwe scenario.

For most students of hyperinflation, Weimar Germany – with its shoppers toting huge stacks of worthless marks in bags or wheelbarrows, and the government issuing single-side mark notes because the presses couldn’t keep place with currency depreciation – exemplified the worst case scenario.

But Zimbabwe – land of the $200,000,000 dollar note and the $2 million loaf of bread – has overtaken Weimar as the most potent negative example.

People in that nation – once the chief agricultural producer for the entire continent – are dealing with the full menu of misery offered by a centrally planned fiat money state. The basics of daily life are constantly priced beyond their income; food shortages are commonplace, as are shortages of cash when the Government imposes arbitrary limits on daily withdrawals. Some of those residing in the country that was once the breadbasket of the Dark Continent have been reduced to devouring dirty, canine offal, or bovine excrement, and Zimbabwean children by the thousands are being felled by cholera.

Hyperinflation is the fastest and most efficient way to strip-mine a society of its civility. The barbarization of Zimbabwe is merely the latest example, but it won’t be the last. The architects of our economic distress have deliberately created the conditions for global hyperinflation in the knowledge that doing so will result in hardship and death on an unimaginable scale.

“The world is not going back to normal after the magnitude of what [central bankers and the political class] have done,” wrote Tom Fitzpatrick, chief technical strategist for Citigroup, in an “internal client note” privately circulated by the bank. “When the dust settles this will either work, and the money they have pushed into the system will feed through into an inflation shock. Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration.”

As January 20 nears, Barack Obama’s ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the “stimulus” at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.

Not to spoil the party, but this is not a new idea. Keynesian “pump-priming” in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.

In the Age of Obama, we seem fated to re-explain these eternal lessons. So for today we thought we’d recount the history of the last major country that tried to spend its way to “stimulus” — Japan during its “lost decade” of the 1990s. In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a “lifestyle superpower.” The country embarked on a great Keynesian experiment. [see original article for timeline]

Japan’s economy grew anemically over that decade, but as the nearby chart shows, its national debt exploded. Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi’s decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover. Yet recent governments have rolled back Mr. Koizumi’s reforms and returned to their spending habits. But Japan does have better roads.

Now we’re told that a similar spending program — a new New Deal — will revive the U.S. economy. How do you say “good luck” in Japanese?

In the same way, many people will bemoan the loss of the US car industry and wax eloquent on the glory days of the 1957 Chevy or what have you. But we need to deal with the reality that all that is in the past. Economics demands forward motion, a conforming to the facts on the ground and a relentless and realistic assessment of the relationship between cost and price, supply and demand. We must learn to love these forces in society because they are the only things that keep rationality alive in the way we use resources. Without them, there would be nothing but waste and chaos, and eventual starvation and death. We simply cannot live outside economic reality.

Let’s say that FDR had initiated a bailout of the piano industry and then even taken it over and nationalized it. The same firms would have made the same pianos for decades and decades. But that wouldn’t have stopped the Japanese industry from taking off in the 1960s and ’70s. Americans would have far preferred them because they would have been cheaper. American pianos, because they would be state owned, would fall in quality, lower and lower to the point that they would become like a Soviet car in the 1960s. Of course you could set up tariff barriers. That would have forced American pianos on us. Except for one thing: demand would still have collapsed. The pianos still have to have a market. But let’s say you find a workaround for that problem by requiring everyone to own a piano. You still can’t make people play them and value them.

In the end you have to ask, is it really worth trillions in subsidies, vast tariffs, impositions all around, just to keep what you declare to be an essential industry alive? Well, eventually, as we have learned in the case of pianos, this is not essential. Things come and things go. Such is the world. Such is the course of events. Such is the forward motion of history in a world of relentless progress generated by the free market. Thank goodness that FDR didn’t bother saving the US piano industry! As a result, Americans can get a huge range of instruments from all countries in the world at any price they are willing to pay.

Today government is even more arrogant and absurd, and it actually believes that by passing legislation it can save the US car industry. It can subsidize and pay for uneconomic activities, and pay ever more every year. The government can also pay millions of people to make mud pies because mud pies are deemed to be an essential industry. You can do this, but at what cost and what would possibly be the point? Eventually, even the government will have to accord itself to the reality that economics reminds us of on a daily basis.

In July, rioters laid siege to several Pakistani stock exchanges to protest declining prices in the stock market. At the Karachi Stock Exchange, a mob of small investors destroyed equipment and files, smashed windows, and burned tires in a rage over falling prices.

In a similarly-themed if less violent protest, two little girls in Utah, upset that their parents could no longer afford cable television due to increased gas prices, recently marched around downtown Salt Lake City with signs protesting the price of gas. One girl explained, “Gas prices are too high. I just decided to come and protest so they’d go down.” Most would agree that this is a childish way to attempt to change prices, yet many adults share the basic idea on which the protest is based.

Both the Pakistani rioters’ and the girls’ protests are rooted in the idea that the market, and in particular, prices, are arbitrary. They believe that stock exchange executives or foreign investors or the oil companies set prices to any level they choose—and that therefore, the effective response to rising or falling prices is simply to demand that someone change the prices back to the desired higher or lower level.

This view of prices—that producers can set whatever prices they wish without consequence—is fundamentally mistaken. If producers could really set prices per their whims, why did oil companies wait so long to start selling oil at $100+ a barrel? Why, only a few years ago, did they choose to sell oil at less than $20 a barrel rather than rake in the profits at a higher price? If businesses can name their prices, what explains the steady decline of prices of goods like computers, cell phones, and flat screen televisions—even as these devices are sold with ever-greater capacities and improved features? The (inflation-adjusted) prices of virtually all material goods have gone down, not up, over time. If businesses could arbitrarily set prices, why would prices ever go down?

The answers to these questions can be found in any basic economics textbook. While producers seek to get the highest possible price for their goods, consumers want to pay as little as possible for the goods they buy, and the market price is some equilibrium state resulting from the two competing pressures. Producers supply goods and consumers, offering their own wealth in exchange, generate demand for goods; absent government intervention, price is a product of the two. This is the law of supply and demand, the fundamental principle of economics. Many factors affect the quantity and type of goods producers supply and the quantity and types of goods consumers buy, and all these variables are integrated into one unit: the price. In a free market, prices are based on the interaction of supply and demand, which themselves are based on individual judgments and values, not on executive caprice. Prices are not subjective.

There are three major problems with the events of 1913, 1944, and 1971. The first is that the Fed, the World Bank, and the IMF are allowed to create money out of nothing. This is the primary cause of global inflation. Global inflation devalues our work and our savings by raising the prices of necessities.

For example, when gas prices soared, many people said that the price of oil was going up. In reality, the main cause of the high price of oil is the decreasing value of the dollar. The Fed, the World Bank, and the IMF, like Zimbabwe, are mass-producing funny money, thereby increasing prices and devaluing our quality of life.

The second problem is that our economic crises are getting bigger. In the 1970s, the Fed faced and solved million-dollar crises. In the 1980s, it was billion-dollar crises. Today, we have trillion-dollar crises. Unfortunately, these bigger crises mean more funny money entering the system.

The third problem is that in 1913, the Fed only protected the large commercial banks such as Bank of America. After 1944, the Fed, the World Bank, and the IMF began bailing out Third World nations such as Tanzania and Mexico. Then, in 2008, the Fed began bailing out investment banks such as Bear Sterns, and its role in the Fannie Mae and Freddie Mac debacle is well known. By 2020, the biggest of bailout of all will probably occur: Social Security and Medicare, which will cost at least a $100 trillion.

Even if we find more oil and produce more food, prices will continue to rise because the value of the dollar will continue to decline. The dollar has lost over 90 percent of its value since the Fed was created. The U.S. dollar will continue to decline because of those seven men on Jekyll Island in 1910.