The Case for No Confidence: On the economy, forget the White House's happy talk.

The White House recently unveiled its latest economic strategy: cheerlead the economy and the stock market back to good health. In early October, Commerce Secretary Don Evans released an upbeat report, "The Case for Confidence," which argues that, despite catastrophic stock-market losses, there is much good news on the economic front. "We are not being Pollyannish," insists White House spokesman Dan Bartlett. "We are being accurate." The Bush administration is making a dangerous gamble here, hoping that economic pep talks can substitute for a genuine, growth- oriented plan of action.

One cause for optimism cited by the Bush economic team is the recent jobs data from the Labor Department. The employment report for September reveals that the unemployment rate dipped to 5.6 percent-the lowest rate of any industrialized country. What a relief! Or was it? Even though unemployment fell, the economy still lost 43,000 jobs. In fact, the only major sector of the economy to gain jobs last month was the government.

Over the past two years, public payrolls have been growing at about three times the pace of private payrolls, creating only an illusion of a vibrant job market. To put it another way: These are good times if you're a mailman, an airport screener, or a Defense Department contractor. For the rest of us, this sure has the feel of a lingering recession.

It's not just jobs that are shifting from the private to the public sector- output is shifting as well. For example, Department of Commerce statistics indicate that in the second half of 2000 the private GDP (overall GDP minus government) was treading water, growing at a rate of 0.1 percent. Meanwhile, government spending grew by 5 percent. In 2001, the private- sector economy actually shrank by -1.1 percent while government was in a full-scale spending boom, growing by 6.3 percent. So far this year, private-sector growth is stuck at a still-anemic 1.7 percent rate, but the government has luxuriated in an 11.3 percent expansion.

The gap between the government haves and the private-sector have-nots is widening. In the just-released second-quarter GDP numbers for 2002, we find that the private-sector economy contracted by -0.4 percent. The bottom line is, over the past two years the fastest growing industry in America has not been housing, construction, or anything of the kind-it's been government.

In 1999 and 2000, all levels of government-cities, states, and Uncle Sam- were partaking equally in the spending binge. That changed last year. The combined financial jolt of decelerating tax revenues and strict balanced- budget requirements has at last returned state- and city-agency budgets to sane rates of growth. Not so in Washington, however, where the economic slump hasn't even created a speed bump for congressional spenders.

In just the past two years, the entire federal budget has increased by $200 billion-that's more money than the entire GDP of many of our international trading partners. Congress is about to approve another $150 billion expenditure hike for 2003. Just the one-year increase in Uncle Sam, Inc., will be more than twice the amount of capital raised in a typical year by the entire venture-capital industry. (And don't forget the half-trillion- dollar prescription-drug benefit for the elderly that President Bush will probably sign into law-the most expensive and expansive new entitlement program since LBJ's Great Society.) It would appear that Sen. Robert Byrd, with the willful collaboration of Republican Senate and House appropriators, has created the world's first recession-proof government.

Of course, half of the buildup is justifiably devoted to post-9/11 defense and homeland-security spending. Nevertheless, that still leaves a 15 percent two-year expansion in non-essential government spending. In the past twelve months Congress has passed the priciest education spending bill ever (the House Republican Study Committee recently reported that Department of Education spending has soared by 104 percent since 1995) and the most expensive farm-welfare bill ever. It will soon enact the most expensive foreign-aid bill.

Rep. John Shadegg, the fiscally responsible Arizona Republican, laments that "the appropriators are on a spending rampage and there's no political will in an election year to block them." Normally, in a national- security/foreign-policy crisis, government spends less on butter to buy more guns. Now we get more of both.

Conventional wisdom has it that a boost in government spending keeps a flagging economy afloat, a Keynesian analysis that is widely held in Washington, even-unfortunately-among members of the Bush administration. In fact, from the standpoint of economic recovery, the expansion of government budgets could hardly be worse news. Real wealth creation is driven by private businesses, entrepreneurs, and workers expanding their output, not by inflating public-agency balance sheets. There is some talk among the Bush team that a further government-spending stimulus might steer the economy out of its malaise. According to this simple-minded theory, when the government spends, it encourages an increase in demand for goods and services, which encourages businesses to put Americans back to work.

The problem is that this theory has never panned out. If government is spending more, the private sector necessarily has less to spend, not more. The government can finance its spending in one of three ways: It can tax, it can borrow, or it can print money (i.e., inflate the currency). In each case, there's less money for private business, the true driver of the economy.

Take the riches-to-rags story of Japan, which responded to a recession by pumping money into huge public-works programs. Over the past decade, Japan has suffered the lowest rate of economic growth, the deepest stock-market crash (from 35,000 to 9,000), and the highest rate of growth of government spending-heavily financed with debt-of any of the industrialized nations. The Japanese economy has been a case study in Keynesianism on steroids.

For 18 months now the political class in Washington in both parties has been aping that economic strategy. Funds that otherwise could go to business owners, entrepreneurs, venture capitalists, and investors are being misspent by Congress and government agencies instead.

All of this may explain why Americans feel more agitated by the performance of the economy than the official statistics would seem to warrant. Nearly half of voters now say that things are going "in the wrong direction," and the state of the economy has now replaced terrorism as their number-one concern. We are in merely a statistical economic recovery, not a real-world one.

This summer I traveled to San Francisco to ask Milton Friedman, the world's greatest living economist, what we should do to end the economic malaise and promote long-term growth. "Cut government spending," he said-"by as much as possible." That's the kind of clear thinking that you find little of in Washington. The economy could get back on a virtuous 4-percent-growth path soon if Congress and the White House would only listen to Friedman and not the ghost of Lord Keynes.