February 10, 2009

How to Craft a Stimulus if You Absolutely Must & Why Obama’s Will Fail

By Julian Dunraven, J.D., M.P.A.

Honorable friends:

Last night, sounding quite defensive, President Obama gave a press conference to resentfully explain his stimulus package to the nation and insist that it be passed without further delays or questions—or we risk catastrophe. So much for the change we were promised. I have heard this tune before, from Mr. Bush. Pass the Patriot Act immediately for the safety of all Americans; yet we ended up mutilating the Constitution and the Supreme Court is still performing reconstructive surgery. We must invade Iraq or be destroyed by WMDs; but there were no WMDs. We must pass the TARP bailout now or the economy will collapse; and it is still collapsing with no sign of recovery on the horizon. Now our Dear Leader, singing the same song with a new voice, wants us to pass an even bigger ‘stimulus’ package lest the economy collapse . . . further. Whenever a politician asks to be trusted on faith alone and for action to be taken without delay or question, that is the time to settle comfortably into your chair, pull out your spectacles, and peruse the supposedly vital proposal most closely. So far, I have not found much to be pleased with—starting with the pork.

Mr. Obama’s claim that the stimulus bill does not contain pork is laughable. While it does not contain any earmarks inserted by individual lawmakers, it does fund a host of local projects that look identical to traditional earmarks. This might not be so objectionable if the projects stood a chance of building an economic infrastructure that generated more wealth than we are spending. It does not. According to the Congressional Budget Office, the cost of this bill alone will increase our annual budget deficits by $884 billion over the next ten years. It represents approximately one tenth of our GDP. Add to that the $9 trillion we have spent on prior bailouts and federal backstopping and we have devoted almost our entire GDP to deficit spending on bailouts. Thus, the stimulus will hurt us, not help us.

The money for this cannot even be financed with debt any longer. U.S. Treasury bonds are becoming increasingly difficult to sell as the world loses confidence in our ability to handle our massive debt. As such, the U.S. must either raise taxes or print the money. Even the Democrats seem to be leery of raising taxes during such hard times, which means the money must be printed. As Dick Army has stated in The Wall Street Journal, “If the government prints the money, it will increase inflation, which will decrease the value of the dollar. That would, in effect, rob Paul to pay Paul back with devalued currency.

“Taking money out of the private economy -- either through taxes or inflation -- and spending it in a way that doesn't offset the loss of money with real economic gains is worse than doing nothing.”

Doing nothing is exactly what some economists argue would be best right now, given the damage the current stimulus could do. Even those economists who want to see some sort of stimulus are not confident in Mr. Obama’s plan and certainly against taking any overly hasty action to pass it. On the right, Martin Feldstein argues that “The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.” On the left, former CBO Director Alice Rivlin echoes the need to carefully consider the stimulus and its long and short term goals, warning that acting too quickly on one giant bill could ensure that “money will be wasted because the investment elements were not carefully crafted,” and, “that it will be harder to return to fiscal discipline as the economy recovers if the longer run spending is not offset by reductions or new revenues.”

These economists are correct. Too much is at stake to rush into this massive stimulus package just because Mr. Obama wants his first hundred days to be wildly productive. A good stimulus plan should include a large reduction in taxation so as to free up money for investment. Currently, the tax cuts in Mr. Obama’s package are too small and too brief to have any real effect. Second, a good stimulus should focus heavily on infrastructure and production. Currently, the stimulus bill devotes only about 5% of its spending to true infrastructure. The great bulk goes to social service spending such as unemployment, food stamps, et cetera. While such social service spending may be noble, as Jim Puplava has stated on the “Financial Sense Newshour,” it is like giving people fish instead of teaching them how to fish. Once they have eaten the fish, they will be hungry again.

When Japan experienced its terrible recession of the 90’s, its government quadrupled its debt in an attempt to spend its way to recovery through public works. The effort failed. Only when Japan reinvested in infrastructure, boosted productive capacity, and started selling their products to China did they begin to recover. In short, they had to create a “fishing industry,” rather than just distribute fish. America, too, must create a “fishing industry” if it wants to recover. The current stimulus contains nowhere near enough infrastructure spending and virtually nothing that could boost our productive capacity.

Even if these deficiencies were corrected though, the problem of financing any stimulus with our massive debt remains. The people supervising the process are still the same people who failed to see the problem coming, who failed to manage the first bailouts effectively, and who now fail to properly pay their own taxes. No one in Washington is even attempting to reform the banking and securities laws or the Federal Reserve’s meddling which brought us here. Trust has been lost. Moreover, the U.S. cannot possibly afford the trillions of dollars it would take to counter the contraction in consumer spending. We are entering a depression, characterized by massive deleveraging. The stimulus, as written, is doomed to failure and, at this point, can only add to our woes. Truly, it would be better to do nothing and allow the market to purge itself.

None of this, of course, will stop our government from passing the stimulus package. That will require a great deal of anger on the part of the people. Ben DeGrow of Mount Virtus has issued an appeal to speak out against it and I echo that call. We will not be able to stop it entirely, but we might convince Congress to take the advice of Ms. Rivlin and Mr. Feldstein to continue working on it for a while so that it is not a complete shambles.

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