A Stimulus Epiphany

I have had trouble trying to understand the rationale behind President Obama's stimulus. How exactly do liberals think that the stimulus program is really going to 'stimulate' the economy?

I think I am starting to figure it out.

A bunch of liberal commentators over the past few weeks have made the point, whether true or not, that government spending is 'more' stimulative than tax cuts, because with tax cuts people may actually save the money instead of spending. Or, God forbid, they spend it on something that 'we' don't want them to spend it on.

Robert Reich, former Labor Secretary under Bill Clinton, was on CNBC on Friday morning. He made this exact point. He stated that if we gave tax cuts, people would pay off their loans instead of spending it. Reich even made the argument that for the individual this would be beneficial, but for the nation it would not be helpful at all.

This is a bunch of bull.

Liberals simply don't have the pliable intellect to understand anything past cause and effect. Let me spell it out. First of all, the country is made up of individuals. There is no 'nation' without 'individuals'. What benefits the most number of individuals will inherently benefit the country as a whole. Second, Government can never spend as much as the public. You can only confiscate so much of public wealth via taxes to then spend as stimulus before you stop the economy. But the public can spend to their maximum level when possible. What makes this possible? People must have expendable income; that is, money that they don't have to spend. So when someone pays off their debt immediately, what does that do long term? It increases their long term expendable income, because they have reduced their nonexpendable expenses. Understand?

What would be more accurate from Reich and others is that tax cuts will actually stimulate the economy more, but may have more of a lag effect, although even this is disputable. So what liberals really should say is that tax cuts don't immediately benefit politicians. It is fair to say that government stimulus could provide relief to the workforce more immediately than tax cuts and other free market methods, although studies have shown that the supposed 'shovel ready' projects are not as effective as one would think.

However, this is the problem we often when we talk government policy. It is less important to worry about the short term, and more important to worry about the long term.

Short term, it may cheaper to just hand money over to the unemployed. I understand the need for a welfare safety net, and that is what we need during the immediat onslaught of an economic downturn. But it is a mistake to turn that short term need into long term policy.

Longer term, only the free market can produce the stimulative effect to make the economy perpetually grow. Nothing proved this more than FDR's New Deal. FDR saved the nation, because we were on the brink. He gave people access to jobs, and thus a living, that they otherwise did not have. What FDR did was necessary.

However, it did not provide longterm growth! In a series on why on the stimulus wouldn't work that I wrote in late January and early February (that can be read here: Part 1, Part 2, Part 3), I demonstrated how FDR did not really provide any long term fiscal growth for the country, and only the start of World War II was able to get the free market moving again in such a way that unemployment fell below 10%. In fact, unemployement in 1932 was 25%; six years later under FDR in 1938, it was 18%.

Long term growth is provided by establishing a market place that promotes risk, innovation, investment and profit. That can be done many ways.

FDR did it with World War II. There clearly was a lot of innovation at the time, and the war effort made a lot of businesses on the homefront rich. Additionally, a new cadre of workers were found: women. By the time the war was over, most of the returning GIs were able to find jobs; an astounding feat, but only because American's had invested heavily, and were at the time the majority of commercial producers in the world.

We had another shift in 1981. Ronald Reagan shifted the entire focus of economy into a innovation economy rather than a manufacturing one, for good or ill. By reducing taxes and regulations across the board, he allowed businesses and individuals to profit from their innovation, investments and hard work like no other time in history. Many liberals are trying to denounce it now, but for all practical purposes, other than 5 quarters in the past 26 years, we have had positive growth. No country in the world can say that. After the recession in 1982, which ended in the third quarter, we had two mini recessions in 1992 and 2001 each lasting 2 quarters. The one exception is the last quarter of 2001, which largely had a downturn because of September 11th. That means, we had virtually 105 quarters of growth out of the last 110. That is a remarkable feat that no one can come close to touching.

Mr. Obama is reversing that now. The question really is, will he be able to create a new paradigm of growth? He is now creating an aura of fear among executives of corporation; some of it deserved, some of it not. Executives have behaved badly over the past decade, from Enron to Worldcom to Bernie Madoff to AIG. They needed to be reigned in. But the pendulum is quickly swinging the other way. The hatred toward this group of people is out of control, and out of bounds, especially since our President seems to be leading the mob with pitchforks for political expediency.

More worrisome, however, is why any of these people would risk anything for growth. Risk is an essetial part of the free market capitalism; without risk, there is little reward to be had. Without risk, innovation and investment have little upside.

Green technologies is a perfect example. I am a huge believer in green technologies. I believe as a nation we have been slow to realize this evolving field. However, Mr. Obama seems to think that block grants and small tax relief to these companies is going to get the job done. He is wrong. You need a huge program with huge money and huge risks to get green technology to work effectively.

What would I do? I have a more complete plan that can be read here, but in simple terms I would eliminate all federal taxes for companies that meet requirements of investing in green technologies. That would flood these companies with captial from many sources; people who would love to get tax free income potential. It would drive innovation in the field. Companies that had not invested in green would all of a sudden invest in it.

This is the simple difference between a big government liberal and a small government conservative. Obama believes the government can provide long term growth, and that risk in the market is evil. I believe that government can provide short term relief, but long term growth is dependent on risk, investment, innovation and profit.

For the time being, my group has lost this battle. But I fear that the nation will suffer greatly if I am right and Mr. Obama is wrong.