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Thread: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

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    Default early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

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    (snip)"With the Olympics about to kick off in all its glorious celebration, the sad reality of UK's GDP shrinking 0.7% as the empire drops further into a double-dip. As Bloomberg Brief notes, this came along with a 5.2% plunge in construction output as the IMF estimates austerity has cut 2.5% off GDP. What is most concerning is that GDP has fallen for five of the last seven quarters and is now 4.5% below pre-crisis levels. The level of disbelief is palpable though since the BoE sees only a 10% chance of this recession lasting into 2013 and while it estimates that it will take until 2014 before the UK gets back to the 2008 level (magically), we note that that is already longer than it took during The Great Depression.







    Source : Bloomberg Brief "(snip)

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    ^^^Thank God we didn't follow their austerity plan.

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    And the alternative was what ? Just keep piling up more and more debt ?

    As I have pointed out repeatedly , the European idea of "austerity" is to make small cuts in the size of spending increases and to increase tax rates. With such policies nobody should be surprised at the lack of growth. Spending has still gone up and higher taxes have drained more money from the private sector.

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    Quote Originally Posted by Eric Stoner View Post
    And the alternative was what ? Just keep piling up more and more debt ?
    The alternative would have been to do what most of the countries who have had somewhat of a recovery from the financial crises have done, temporarily increase debt to get out of the crisis (ideally putting funds into infrastructure) and then when the economy was more stabilized you pay down the debt from a position of strength- as the US did in the '90s.

    As I have pointed out repeatedly , the European idea of "austerity" is to make small cuts in the size of spending increases and to increase tax rates. With such policies nobody should be surprised at the lack of growth. Spending has still gone up and higher taxes have drained more money from the private sector.
    You don't know what you are talking about- there is no "European" idea of austerity, the plans varied by the different countries that implemented them. The UK program which is the subject of this post was most certainly not "small cuts in the size of spending".

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    Jimboe is right. Unfortunately, the Obama administration has not followed his excellent prescription of spending on infrastructure. I submit that there are a number if policy changes that need to be made to bring the country out of what I believe is more of a bouncing along the bottom than much of a recovery.

    First, as Jimboe suggests, we need to increase infrastructure spending and do so at a deficit. Deficits spur economic growth, the evidence is conclusive. Then when we get a solid recovery going, we need to start paying off the debt increases. Mark the last four years up as a mistake and move on.

    Second, we need to separate the insured deposit taking, commercial and residential lending businesses from investment banking. Restore Glass-Steagal. Repeal was a bi-partisan mistake. It resulted in a moral hazard of placing all the risk of loss on the taxpayers but giving all the rewards of gains to a few bankers.

    Third, we need to restore the housing market. Senator Jeff Merkley, (D. Ore.) has a thoughtful proposal at:http://www.merkley.senate.gov/newsro...2-c59662ab3f80. While not perfect, Merkley's proposal has the virtue of avoiding moral hazards associated with mortgage reductions to fair market value while still restarting the housing market.

    HTH
    Z

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    Quote Originally Posted by Eric Stoner View Post
    And the alternative was what ? Just keep piling up more and more debt ?

    As I have pointed out repeatedly , the European idea of "austerity" is to make small cuts in the size of spending increases and to increase tax rates. With such policies nobody should be surprised at the lack of growth. Spending has still gone up and higher taxes have drained more money from the private sector.
    The British government cut spending. Here's one example where the number of police first responders has been reduced by more than 5,000 since the last election:

    http://www.guardian.co.uk/uk/2012/ma...-spending-cuts

    The British government has also cut taxes for businesses and the rich:

    http://www.globalpost.com/dispatches...-cuts-the-rich

    So far, these policies have been disastrous.

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    Deficits spur economic growth, the evidence is conclusive
    Agreed that this has been the case in the past ... in economic environments that fell within certain limits, and using 'creative' methods to measure 'growth'. However, many now conclude that today's economic environment now falls outside the limits necessary for additional gov't deficit spending to create a 'positive net return'.

    (snip)"The fact that government failed to spend its way to prosperity is not an isolated incident:

    • During the 1930s, New Deal lawmakers doubled federal spending--yet unemployment remained above 20 percent until World War II.

    • Japan responded to a 1990 recession by passing 10 stimulus spending bills over 8 years (building the largest national debt in the industrialized world)--yet its economy remained stagnant.

    • In 2001, President Bush responded to a recession by "injecting" tax rebates into the economy. The economy did not respond until two years later, when tax rate reductions were implemented.

    • In 2008, President Bush tried to head off the current recession with another round of tax rebates. The recession continued to worsen.

    • Now, the most recent $787 billion stimulus bill was intended to keep the unemployment rate from exceeding 8 percent. In November, it topped 10 percent.[2]

    Undeterred by these repeated stimulus failures, President Obama is calling for yet another stimulus bill.[3] There is every reason to expect another round to fail as miserably as the past ones, and it would bury the nation deeper in debt.

    The Stimulus Myth

    The economic theory behind the stimulus builds on the work of John Maynard Keynes eight decades ago. It begins with the idea that an economic shock has left demand persistently and significantly below potential supply. As people stop spending money, businesses pull back production, and the ensuing vicious circle of falling demand and production shrinks the economy.

    Keynesians believe that government spending can make up this shortfall in private demand. Their models assume that--in an underperforming economy--government spending adds money to the economy, taxes remove money from the economy, and so the increase in the budget deficit represents net new dollars injected. Therefore, it scarcely matters how the dollars are spent. Keynes is said to have famously asserted that a government program that pays people to dig and refill ditches would provide new income for those workers to spend and circulate through the economy, creating even more jobs and income.

    The Keynesian argument also assumes that consumption spending adds to immediate economic growth while savings do not. By this reasoning, unemployment benefits, food stamps, and low-income tax rebates are among the most effective stimulus policies because of their likelihood to be consumed rather than saved.

    Taking this analysis to its logical extreme, Mark Zandi of Economy.com has boiled down the government's influence on America's broad and diverse $14 trillion economy into a simple menu of stimulus policy options, whereby Congress can decide how much economic growth it wants and then pull the appropriate levers. Zandi asserts that for each dollar of new government spending: temporary food stamps adds $1.73 to the economy, extended unemployment benefits adds $1.63, increased infrastructure spending adds $1.59, and aid to state and local governments adds $1.38.[4] Jointly, these figures imply that, in a recession, a typical dollar in new deficit spending expands the economy by roughly $1.50. Over the past 40 years, this idea of government spending as stimulus has fallen out of favor among many economists. As this paper shows, it is contradicted both by empirical data and economic logic.

    The Evidence Is In

    Economic data contradict Keynesian stimulus theory. If deficits represented "new dollars" in the economy, the record $1.2 trillion in FY 2009 deficit spending that began in October 2008--well before the stimulus added $200 billion more[5]--would have already overheated the economy. Yet despite the historic 7 percent increase in GDP deficit spending over the previous year, the economy shrank by 2.3 percent in FY 2009.[6] To argue that deficits represent new money injected into the economy is to argue that the economy would have contracted by 9.3 percent without this "infusion" of added deficit spending (or even more, given the Keynesian multiplier effect that was supposed to further boost the impact). That is simply not plausible, and few if any economists have claimed otherwise.

    And if the original $1.2 trillion in deficit spending failed to slow the economy's slide, there was no reason to believe that adding $200 billion more in 2009 deficit spending from the stimulus bill would suddenly do the trick. Proponents of yet another stimulus should answer the following questions: (1) If nearly $1.4 trillion budget deficits are not enough stimulus, how much is enough? (2) If Keynesian stimulus repeatedly fails, why still rely on the theory?

    This is no longer a theoretical exercise. The idea that increased deficit spending can cure recessions has been tested repeatedly, and it has failed repeatedly. The economic models that assert that every $1 of deficit spending grows the economy by $1.50 cannot explain why $1.4 trillion in deficit spending did not create a $2.1 trillion explosion of new economic activity.

    Why Government Spending Does Not End Recessions

    Moving forward, the important question is why government spending fails to end recessions. Spending-stimulus advocates claim that Congress can "inject" new money into the economy, increasing demand and therefore production. This raises the obvious question: From where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.[7]

    Congress cannot create new purchasing power out of thin air. If it funds new spending with taxes, it is simply redistributing existing purchasing power (while decreasing incentives to produce income and output). If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If they borrow the money from foreigners, the balance of payments will adjust by equally raising net imports, leaving total demand and output unchanged. Every dollar Congress spends must first come from somewhere else.

    For example, many lawmakers claim that every $1 billion in highway stimulus can create 47,576 new construction jobs. But Congress must first borrow that $1 billion from the private economy, which will then lose at least as many jobs.[8] Highway spending simply transfers jobs and income from one part of the economy to another. As Heritage Foundation economist Ronald Utt has explained, "The only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven."[9] This statement has been confirmed by the Department of Transportation[10] and the General Accounting Office (since renamed the Government Accountability Office),[11] yet lawmakers continue to base policy on this economic fallacy.

    Removing water from one end of a swimming pool and pouring it in the other end will not raise the overall water level. Similarly, taking dollars from one part of the economy and distributing it to another part of the economy will not expand the economy."(snip)

    from
    Last edited by Melonie; 07-26-2012 at 11:16 PM.

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    as to UK taxation of the 'rich' ...


    (snip)"U.K.'s 25% Tax Hike on the 'Rich' Produces Less Revenue
    The Telegraph, 50p Tax Rate 'Failing to Boost Revenues’:

    The Treasury received Ł10.35 billion in income tax payments from those paying by self-assessment last month, a drop of Ł509 million compared with January 2011. Most other taxes produced higher revenues over the same period.

    Senior sources said that the first official figures indicated that there had been “manoeuvring” by well-off Britons to avoid the new higher rate. The figures will add to pressure on the Coalition to drop the levy amid fears it is forcing entrepreneurs to relocate abroad.

    The self-assessment returns from January, when most income tax is paid by the better-off, have been eagerly awaited by the Treasury and government ministers as they provide the first evidence of the success, or failure, of the 50p rate. It is the first year following the introduction of the 50p rate which had been expected to boost tax revenues from self-assessment by more than Ł1billion.

    Advisor One, U.K. Wealth Tax Brought Less Revenue Than Before Tax Hike:

    As taxes assume a leading role in U.S. policy debate ... the first receipts on a new wealth tax in the U.K. have brought disappointing results to British Treasury officials.... [S]ome observers, political conservatives among them, are taking the recent experience in the U.K., which last year raised its top rate on high income earners from 40% to 50%, as a demonstration of the ineffectiveness of a tax-the-rich policy.

    Britain’s Telegraph newspaper reported that the U.K. Treasury–in the first test of the wealth tax policy introduced last year–received 509 million pounds less for January than the same month in 2011. The Treasury had projected that monthly revenues would actually increase by more than 1 billion pounds. ...

    The disappointing results could move Chancellor of the Exchequer George Osborne to drop the tax after an official analysis is completed next month, but the Tory official’s Liberal Democrat coalition partners remain strongly committed to higher rates for Britain’s highest earners.

    Wall Street Journal editorial, David Cameron's Tax Lesson: A 50% Tax Rate Yields Less Revenue Than Advertised:

    Speaking of higher taxes (and President Obama always does), there's news from once fair Britannia.

    Preliminary figures out this week show that Britain's 50% top marginal income-tax rate may have reduced tax revenue from top earners by as much as 5%, compared to the old 40% top rate. Tax revenue from those filing self-assessments due January 31 was down some Ł500 million versus last year. ...

    What this week's numbers teach, however, is that Britain's richest taxpayers are simply shifting their incomes, or themselves, offshore, or deferring income, or otherwise arranging their affairs to avoid the confiscatory new top tax rate. Maybe that's unfair, too—the rich are usually better at protecting their assets—but it's the predictable consequence of a tax rate whose animating purposes are envy and spite."(snip)


    However, in the interest of fairness, it must be pointed out that the Brits are now actually gaining 'rich' residents who will in all likelihood reverse the trend of falling UK tax revenues. The 'rich' residents the UK has recently been gaining are 'rich' emigrants from France and other EuroZone countries whose gov'ts are attempting to impose draconian tax rates !!!

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    I am going to try and avoid the circular argumentation as much as possible. With regard to spending "cuts" , for the most part Europe has NOT made any. Huh ? Whaaat ? Oh Eric, how you can possibly say that ? I say it for the simple reason that it is true. All that most "austerity cuts" have consisted of is reduction in the rate of increase in spending. If last year, 100 Euros was spent on something and it was originally planned to spend 110 this year and 120 next year and instead they only spent 105 this year and plan to spend 110 next year, those are "cuts". Allowing for inflation or not, spending has still gone up.

    Next we have to look at the bloated baseline for most European economies and more particularly, government spending. Traffic control agents in towns and villages with no traffic ? Forest rangers for tiny patches of woods ? Hospitals and clinics with very few patients ? Day care centers with very few children ? Europe is chock full of these and even worse examples of sinecures and featherbedding. Very few have been eliminated. Most importantly Europe is getting OLD. Especially Western Europe. Their aged population is increasing and the younger workers who ought to be paying the the taxes to pay for their pensions and health care but too many of them are unemployed.

    Now let's add in the tax increases on those most likely to work, save, invest and create jobs. That is where European stagnation comes from.

    I haven't even touched all the good money thrown after bad with the PIIGS.

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    Quote Originally Posted by jimboe7373 View Post
    The alternative would have been to do what most of the countries who have had somewhat of a recovery from the financial crises have done, temporarily increase debt to get out of the crisis (ideally putting funds into infrastructure) and then when the economy was more stabilized you pay down the debt from a position of strength- as the US did in the '90s.

    You don't know what you are talking about- there is no "European" idea of austerity, the plans varied by the different countries that implemented them. The UK program which is the subject of this post was most certainly not "small cuts in the size of spending".
    What about all the countries that weathered the downturn without following your prescriptions : The Baltics ; Sweden ; Canada ( Yes, Yes, they benefitted greatly from high gold and oil prices ) ?

    I would have loved it if the Obama Porkulus package had gone into infrastructure. It didn't. But just as the WPA didn't do anything to end the Depression , neither will more infrastructure spending. And as for turning off the spending tap at some unknown time in the future, fuhgeddabout it ! Congress has not and will not work that way. They can't even pass a budget now and you expect them to pay down debt in the future ?

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    I hate to quibble with my soulmate Melonie but there are definitely corollary benefits to the economy and society as a whole from sensible infrastructure spending. An infrastructure dollar goes further than money spent on, for example, hiring or retaining a government worker. Infrastructure money has been shown to circulate further and longer than almost any other type of spending. More importantly, borrowing the money needed to fund a highway or a bridge does not necessarily decrease employment elsewhere in the private sector. If that were true, then unemployment under Reagan and Clinton would have increased , not decreased. There is something to be said for encouraging people to take money out from under their mattresses and investing in bonds so long as those funds go to pay for sensible projects.

    Now optimally , we would do such long term borrowing and spending in times when we could best afford to do so. Adding to our already unmanageable debt is probably not the best way to go. Nobody is confident that Congress will have the sense to put on the brakes sometime in the future and know when to reduce borrowing and spending.

    Now before somebody says I am talking out of both sides of my mouth and trying to have it both ways , all I am saying is that we must promote growth. The numbers just do not work any other way. We can increase taxes on the rich and raise enough money to run the government for about eight ( 8 ) days. Regardless of what we spend it on. We can make cuts , which history has proven over and over again are just reductions in the increases in spending or we can cut tax rates, close loopholes and enjoy increased revenues while controlling spending. The resulting economic growth will generate enough revenue for us to afford our debt load. We have done it before and ought to be able to do it again.

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    ^^^ no cause for quibbling ... I fully agree that gov't spending on NECESSARY or ECONOMICALLY JUSTIFIED infrastructure projects could help future US economic growth far more than an equal amount of tax dollars being spent on 'cushy' gov't employee jobs, or politically correct but economically doomed projects such as high speed rail or a 'bridge to nowhere'. In fact, I'll even volunteer a short list ...

    - LNG terminal construction at Eastern US ports ... to allow the export of the local surplus of natural gas
    - Nuclear Power Plant construction ... to reduce electricity costs for every American business and individual
    - Canada pipeline construction ... to allow for greater imports of Canadian oil versus Middle East

    Not only is the US gov't not investing in such projects, they are erecting obstacles to private sector investors doing so !!!

    Instead, federal taxpayers are spending 3 billion dollars ( initially ) to bankroll a California 'high speed' rail project which, even if completed anywhere near budget ( which won't happen ), will require continuous future subsidies at the expense of US federal and California state taxpayers to continue future operations.

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    Quote Originally Posted by Melonie View Post
    ^^^ no cause for quibbling ... I fully agree that gov't spending on NECESSARY or ECONOMICALLY JUSTIFIED infrastructure projects could help future US economic growth far more than an equal amount of tax dollars being spent on 'cushy' gov't employee jobs, or politically correct but economically doomed projects such as high speed rail or a 'bridge to nowhere'. In fact, I'll even volunteer a short list ...

    - LNG terminal construction at Eastern US ports ... to allow the export of the local surplus of natural gas
    - Nuclear Power Plant construction ... to reduce electricity costs for every American business and individual
    - Canada pipeline construction ... to allow for greater imports of Canadian oil versus Middle East

    Not only is the US gov't not investing in such projects, they are erecting obstacles to private sector investors doing so !!!

    Instead, federal taxpayers are spending 3 billion dollars ( initially ) to bankroll a California 'high speed' rail project which, even if completed anywhere near budget ( which won't happen ), will require continuous future subsidies at the expense of US federal and California state taxpayers to continue future operations.
    It's worse than that. Who is going to take the train when the preferred mode of travel between L.A. and Frisco is FLYING ? Which will be faster and CHEAPER than high speed rail !

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    ^^^ well, that's where the ongoing subsidies come in. In order to apparently reduce high speed rail ticket prices to the point where some number of riders will actually choose to take the train instead of flying, California will wind up having to institute 'stealth' subsidies for high speed rail via higher California gasoline taxes, via higher California state income taxes, etc. ... all of which will have a negative effect on both future consumption and future business / economic growth ! This is already SOP in regard to New York City Subway 'stealth' subsidies - where the actual 'break even' subway token price is somewhere around $6 but actual subway token prices are set at 1/3rd of that level, with the shortfall being covered by 'stealth' transfers of NY statewide gasoline taxes, state income taxes, higher than necessary interstate highway / bridge / tunnel tolls etc. But we digress ...

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    Quote Originally Posted by Melonie View Post
    ^^^ well, that's where the ongoing subsidies come in. In order to apparently reduce high speed rail ticket prices to the point where some number of riders will actually choose to take the train instead of flying, California will wind up having to institute 'stealth' subsidies for high speed rail via higher California gasoline taxes, via higher California state income taxes, etc. ... all of which will have a negative effect on both future consumption and future business / economic growth ! This is already SOP in regard to New York City Subway 'stealth' subsidies - where the actual 'break even' subway token price is somewhere around $6 but actual subway token prices are set at 1/3rd of that level, with the shortfall being covered by 'stealth' transfers of NY statewide gasoline taxes, state income taxes, higher than necessary interstate highway / bridge / tunnel tolls etc. But we digress ...
    Hmmm. In general, I support mass transit and when necessary, subsidies to keep it affordable. I have survived three ( 3 ) transit strikes in my lifetime. Mass transit keeps a lot of cars off the road.

    With HSR, it might, repeat MIGHT work out if , repeat IF, we are talking about downtown to downtown service. I DON'T KNOW. But when you consider that it takes time to get to LAX and/or San Francisco International and there are other potential time savings with rail compared to flying, it MIGHT be viable. I would like to see the feasibility studies with ( hopefully ) serious surveys of those most likely to be interested in such service : How many are there ? How many would prefer rail to flying ? How long does it take to get from business hubs to LAX ? What price points make sense ? Are there enough people willing and able to pay it. I don't know but it looked like Jerry Brown and the other "greenies" jumped on the HSR bandwagon without answering these and a lot of other questions. As things stand now, this is a potential white elephant and sinkhole of major proportions

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    ^^^ and nobody has bothered to perform an operating cost analysis above and beyond the original construction costs - or if they have, they lack the political courage to release it. If it's anything like AMTRAK, the ongoing union labor and benefit costs will absolutely guarantee that the 'break even' price of train tickets will make them more expensive than commercial air travel.

    Similar ongoing subsidies for UK gov't operated mass transporation contribute significantly to the UK gov'ts growing deficit.

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    Quote Originally Posted by Melonie View Post
    ^^^ and nobody has bothered to perform an operating cost analysis above and beyond the original construction costs - or if they have, they lack the political courage to release it. If it's anything like AMTRAK, the ongoing union labor and benefit costs will absolutely guarantee that the 'break even' price of train tickets will make them more expensive than commercial air travel.

    Similar ongoing subsidies for UK gov't operated mass transporation contribute significantly to the UK gov'ts growing deficit.
    That is what the admittedly older studies I have seen showed: that HSR was NOT economically feasible and could not compete with flying. I threw in a kicker. I honestly don't know whether or not it is worth it considering the time and expense of getting to and from the airport. I don't know. But the people who are supposed to know aren't saying which tells me either it is NOT a major factor or they never bothered asking.

    It seemed to me that Brown et. al. were reckless in glomming onto the Federal funding without considering the long term costs for California. Simply put, at some point they will have to get off the Federal teat and the project will have to stand on its own.

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    It seemed to me that Brown et. al. were reckless in glomming onto the Federal funding without considering the long term costs for California. Simply put, at some point they will have to get off the Federal teat and the project will have to stand on its own.
    Sez who ? All that needs to happen is for California's new high speed rail system to be absorbed by AMTRAK, so taxpayers in Wyoming and Texas and North Dakota can be forced to involuntarily 'subsidize' those California gov't worker high speed rail jobs !

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    Default Re: early weekend commentary - 'Forget Double Dip, the UK is Now In a Depression'

    Quote Originally Posted by Melonie View Post
    Sez who ? All that needs to happen is for California's new high speed rail system to be absorbed by AMTRAK, so taxpayers in Wyoming and Texas and North Dakota can be forced to involuntarily 'subsidize' those California gov't worker high speed rail jobs !
    Hmmm. I don't know about that. Possible but unlikely.

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