The Stimulus Hoax

I have written before in this space that government stimulus packages have failed to work in the past. The reaction of consumers has been to reduce debt rather than to engage in new spending. But no matter. As politicians are wont to do, their reaction is that what is needed is simply to have an ever bigger spending package - hence Obama's trillion dollar government stimulus. I haven't seen the details but I would wager that most of the package is for growing government rather than increasing consumer spending. However, that aside, the effectiveness of government spending depends on the so-called multiplier. That is what is the impact that increased government spending will have on the economy? Much of my academic career I have assumed that the government multiplier is less than one and probably negative. That is, if the government spends a dollar, it increases GDP by less than a dollar and may even reduce it. Why is this possible? Its because the government has to get the money from somewhere. If it borrows the money, it drives up interest rates and down private investment expenditures as it makes borrowing more expensive for businesses and households. So why isn't this a mere substitute - which would be a multiplier of one? Its because the longer term effects of reducing investment will have reverberations for years to come by reducing economic growth. Of course, Keynesians project a government multiplier greater than one. Paul Klugman is an extreme case and thinks that the multiplier is even larger. But of course Klugman gives the Nobel Prize in economics as bad a name as Al Gore gives the Nobel peace prize.It is said that the Obama package assumes a multiplier of 1.5.  Interesting though is that research by members of the Obama team find a multiplier of 1 not 1.5.  That means that when the government spends one dollar that GDP increases by one dollar not one dollar and fifty cents. What is closer to the truth? Robert Barro writing in the Wall Street Journal states that his research shows a government wartime multiplier of around 0.8. This implies that a peacetime multiplier will be less. How much less? Try a multiplier of zero. Well I am man enough to admit I might have been wrong. In the face of this evidence I will revise my view of the government multiplier from negative to zero. The important question is whether Obama is man enough to do the same.

The Coming Really Big Tax Increase

I have written before that the government generally spends a little less than 20 percent of GDP and if left unchecked Medicare, Medicaid and Social Security will take 20 percent of GDP all by themselves by 2050. Recently, government spending has exploded with all the bailouts, the assumption of Freddie and Fannie and the TARP money. Some observers say we are moving toward Federal spending of around 22 percent of GDP and if we add Obama's universal health care we will be at 27 percent. The question that the politicians never address is "how are we going to pay for it?" It is too much to assume that the government can finance these expenditures through borrowings. First, the market will become saturated, government borrowing costs will rise and crowding out will occur as rates also increase for private investment resulting in lower borrowings by businesses and consumers. Indeed, more government borrowings to finance ever increasing spending dooms the economy to slower business investment and slower economic growth. Second, the Fed can monetize the national debt - like it has been doing recently - by buying Treasurys and agency securities. This, of course is purely inflationary which will ultimately add to our economic woes. Third, the government can raise taxes. This, too, forebodes economic disaster. Higher taxes means less consumer spending and less business investment. The question is what type of taxes and on whom? Given that nearly 50 percent of all wage earners do not pay Federal income taxes, it would political suicide to start imposing taxes upon them. For the 50 percent who do pay taxes, forcing them to shoulder the load of $700 billion more would result in increased tax avoidance, a mass exodus, a revolt or both. More than likely, the new taxes will have to be in the form of a consumption tax. This is a hidden tax which will be assessed on all purchases of final goods and services. The resulting driving up of prices will lower real income and decrease the quantity of goods and services demanded. The end result will be lower wealth, less investment, and a poorer citizenry. It is very likely that government spending and taxing will cause my grandchildren to be the first American generation that is poorer than the previous one. Today more and more businesses are relocating their headquarters out of the country to avoid ever increasing burdens of regulation and taxation. However, unlike within the states when people  can move to another state, there are no other country where I would rather live. So I guess I can take some comfort in being 63 because by the time all this occurs I should be dead.

Obama Creates Jobs!

This article first appeared in the Knoxville News- Sentinel on January 4, 2009.

Happy New Year. I have some good news and some bad news. The good news is that the 110^th Congress is gone. The bad news is that the 111^th Congress will be worse. More good news is that the Bush Administration is gone with its $1 trillion in new spending before all the bailouts. The bad news is that the Obama Administration will be worse because it will increase spending by even more and likely will raise taxes as well. Lets hope that Barack Obama does not change the Bush recession into the Obama depression.

I saw a headline that said “Carmakers’ long-term fate in hands of next president”. I beg to differ: the carmakers’ long-term fate is in the hands of the American consumer. When President Bush decided – for whatever reason – to throw away $17.4 billion to Chrysler and GM, he said that the money gave them the opportunity to start to institute plans to restructure into viable companies. Huh? What have they been doing while they have been hemorrhaging money and raking up loses? I admit that I am part of the problem. I have never owned an American car – unless you count the four Saabs of my youth. However, I have never owned a foreign truck. If Ford takes a penny of the government’s money, I will seriously consider never buying another American truck.

I was struck by how many US firms are now either relocating their headquarters out of the country or contemplating doing so. It is a sad day when companies have to flee the US because of burdens from taxes and government regulations. I wish the auto execs had said that if Congress would not start to aggressively deregulate the auto industry, then they would be forced to relocate their headquarters and production overseas. There is a reason why the automakers make money everywhere but in the US.

But not to worry, another headline said “Obama increases jobs goal to 3 million.” Of course any figure could be pulled from the air because any job creation by the government is illusory. The article said that plans were being made to winterize 1 million homes, investing in disease prevention and modernizing schools. Well I guess during these times we all need comic relief. Obama seems to be obsessed with infrastructure and job creation. I presume what we are going to do is to take the displaced Wall Street bankers and retrain them as welders. By the way, crumbling infrastructure is due to failed government policies. The capitalist market would never allow this to happen.

If Barack Obama wanted to create 3 million real jobs, he could do it today. All he would have to say is the following “My fellow Americans, in order to create permanent jobs, I will eliminate both the capital gains tax and the corporate income tax. I will make permanent the Bush tax cuts and aggressively work to limit government spending to no more than 20 percent of GDP unless in the case of a national emergency. I will also seek to fully exploit all domestic energy sources. I believe that in adopting these policies, we can reignite American commerce, energize consumer confidence, restore the integrity of the dollar and guarantee that the American dream will be a reality for our children, our children’s children and for all Americans for generations to come.”