The Democrats in Congress, led by Nancy Pelosi and Harry Reid, are debating a stimulus bill that is, by definition, designed to stimulate the economy. This is pure Keynesian, demand side, economic theory: spend massive amounts of "government" money to stimulate demand in the private sector. The only problem is, however, that Keynesian economics never works and there is virtually nothing stimulative in the roughly $825 billion bill.
So, what is the probable outcome of passing a stimulus bill substantially similar to the one being debated right now? A bill that spends close to $1 trillion of taxpayer money, that we don't have and our children will have to pay for, that produces little growth? Just think about it: no growth and huge amounts of dollars pushed into inefficient government programs and projects? We have the makings of a massive stagflation train wreck! Think late 70's Jimmy Carter economic stagflation.
But how can we design a stimulus bill that promotes growth (government never creates growth), promotes job creation (government never creates jobs), and avoids stagflation? Well, quite simply you have to design the bill to address the problems in the economy. For example, we have a financial crisis that has led to a massive contraction of available credit. Any stimulus bill should therefore include measures to stabilize the balance sheets of the banks (get rid of mark-to-market accounting and institute mark-to-model accounting) and increase liquidity in the financial markets (zero capital gains rate for at least the next two years and double IRA and 401K contribution limits) (see December 9, 2008 post). It might also include measures to stabilize the housing market (reduce real estate transaction costs or provide house purchase tax credit). Measures to increase demand and promote productivity in the private sector (research and development tax credits, accelerated capital expense depreciation, and pass free-trade agreements) would also be a vital elements.
My point is you have to write a bill to take care of the real problems. Unfortunately, solving the problems with the economy comes a distant second to the interests of politicians who are more concerned with spending taxpayer money on their favorite pet projects so they can show up at a ribbon cutting ceremony or to pay back their favorite constituent interest groups. So keep in mind that the next time a politician says they are going to create jobs and grow the economy, they are either delusional because they think can (only the private sector creates jobs) or think you are stupid enough to believe them. Then do your own due diligence to see if the bill they are voting for actually promotes growth and long-term sustainable demand. Chances are, if the politician believes in Keynesian/New Deal economics, and most Democrats do, it won't do either. The current stimulus bill doesn't do either and will be an absolute train wreck and will lead to horrible consequences for our country.
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3 comments:
Great words Sean! I don't see anything that is stimulating in what our elected representatives are trying to do. I forget which republican said it the other day on Fox but I like his idea of creating a 1-2 year payroll tax holiday. What do you think of that idea?
I think a payroll tax holiday is on the right track. The only problem I see is that I don't know if it would promote long-term employment growth. I am inclined to support ideas that have a chance at creating sustainable growth. That is why I like tax incentives for investment, research and development, and business productivity enhancements. Tax incentives like that would be reduced capital gains taxes, increased contribution limits for retirement accounts, research and development tax credits, and accelerated business depreciation for capital expenditures (like new machines, computers, etc.). I just don't honestly know what the implications for a temporary payroll tax holiday would be.
The problem with the economy is that millions of Americans (and foreigners) lied about their ability to repay their debt obligations. And then a hundred or so institutions that should have known better accepted those lies and lent money to the liars.
The banks are now sick because they hold assets worth less than the related liabilities. The sick banking system is limiting access to credit, which has crippled the value of the stock market by making liquidity events nearly impossible, and by interfering with the cash management of the largest global enterprises.
The problem the government has to address is just keeping people working. The problems with the banks will sort themselves out, but it will take time. In the meanwhile, if government takes no action, we'll have a massive, massive spike in unemployment, which will make the problems the banks have even worse.
So the real point of the "stimulus" package is to provide a jobs reservoir to give the economy time to heal itself. It doesn't really matter how they spend that money, so long as most of it translates into a paycheck for someone, somewhere.
This is why we need much stricter limits on what kinds of loans can be made and to whom, and much stricter limits on what kinds of bespoke "insurance" agreements can be struck between enterprises. If they want to merge and become "too big to fail", then the cost needs to be crippling regulation of their actions, for the good of everyone else in the economy.
RyanD
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