Upping the Stimulus Dosage

Insanity is often defined as repeating the same action while expecting a different result. Recent Congressional activity to push through this year’s second economic “stimulus” package certainly indicates that many of our political leaders may have special needs.

Responding to the $150 billion stimulus that was passed at the beginning of the year, I made the following observation in my February 15th commentary Upping the Inflation Dosage:

The failure of the stimulus plan to cure the economy will cause the government, and the Wall Street brain trust, to conclude that it was simply too small. Their next solution will be to administer an even stronger dose.

It’s interesting to recall that at the time, just 9 months ago, the $150 billion package caused much hand wringing, especially from Republicans still clinging to notions of Federal restraint. This was before an avalanche of more than $2 trillion in new spending initiatives -- before Bear Stearns, wide open discount windows, AIG, Fannie/Freddie, Federal Mortgage Auctions, Detroit loan guarantees, and preferred shares in the banks. In retrospect, the $150 billion stimulus seems quaint. It is not surprising that the latest package is expected to be twice as large. When this one fizzles, look for “Stimulus III” to be even larger.

The problem with our government’s version of economic stimuli is that it encourages the very activity that brought our economy to the brink of financial ruin in the first place. Quite plainly, the goal of all these plans is to give consumers more money to spend. However, excess consumer spending is part of the problem, not part of the solution. After a decade long spending orgy, market forces are finally trying to restrict consumer spending and dampen credit. But the stimulus looks to provide a new source of funds after savings, income, and credit have been exhausted. Our imbalanced economy is in desperate need of retrenchment, but stimulus plans will effectively hold the firemen at bay while throwing gasoline on the flames.

Politicians may say that the plan is not all about consumer spending, but is designed to fund investment. But investments conceived and executed by governments, and guided by political considerations rather than profit, often yield poor returns. The clumsy hand of the state is no substitute for the invisible hand of the free market. In addition, public sector “investment” often soaks up much of the capital which otherwise would have been available for more efficient private sector uses.

If the government were sitting on a pile of foreign reserves, then at least a stimulus plan could make some economic sense. But of course, that’s not where the money comes from. To finance their largesse, the government either borrows more money from abroad, or gets it from the Fed, which simply creates it out of thin air. Either way, we undermine our economy with additional debt or inflation.

Unfortunately, the one stimulus we do need will not be supplied. To fix our current economic mess we need to diminish the activity that undermined our economy and encourage the behavior that will restore balance. Instead of encouraging Americans to go deeper into debt to buy more foreign products that we cannot afford, Americans should be encouraged to save their money, and produce more goods for export.

Fortunately, no government policy is needed to achieve this. Market forces would produce such incentives on their own. Higher interest rates and tighter credit world force people to borrow less, while simultaneously rewarding those who saved. A falling dollar that would eventually result from a recession would diminish our capacity to import while helping to restore our global competitiveness (provided it was accompanied by lower regulations and taxes) in manufacturing. Of course a lower dollar is not a good thing, but unfortunately it is the necessary consequence of our past profligacy.

Market based solutions would not be painless, which is precisely why our leaders resist them. However, as the saying goes, “no pain no gain”. If we ever expect to make any legitimate progress, a higher pain threshold must be accepted.

If our elected officials really were concerned about easing the burden on consumers, they would be looking for way to reduce government spending. If government was less expensive, taxes could be lowered across the board. The only way for American citizens to spend more is for their government to spend less. Unfortunately, our government and the leading private economists believe that everyone can spend more without any serious consequences on the downside. It’s a comforting idea, but it’s a lie. The truth may not be pretty, but it’s the only path towards a sustainable recovery.

Comments

[LCACM:]

The current crisis is being caused by the ineptness of the Free Market, in the current situation. Communist China is taking advantage of the slavish adherence to Free Market ideology to destroy world economies. Dumping of goods by Communist China is destroying economies world wide and leading to a massive loss of wealth in all countries. To counter the depressed economies Reserve banks had to lower interest rates causing bubbles which are now bursting. The sensible solution is for the Governments to find ways to deal with the Chinese dumping to prevent external damage to the economy. To rebuild internally Governments need to rebuild their crumbling infrastructure (roads, bridges, medical/engineering research centers etc) and invest more seriously in alternative energy. Worldwide governments spend trillions on defense, why not spend some of it on economic defense as well?

2008 Oct 26 06:33 AM

[vbierschwale:]

Good article.

Virgil
www.KeepAmericaAtWork....

2008 Oct 26 08:50 AM

[Novice6:]

Thanks for the note Peter. I don't know about: "the state is no substitute for the invisible hand of the free market". Seems like AIG had something going on for $123B to disappear, eh? Both the "government" and the "free market" were cheating and lying. Now no one trusts them. I think your analysis of the foreign economies changing their production to satisfy domestic demands, as noted in "Crash Proof"is going to start soon. It should if foreign producers are smart and move quickly.

2008 Oct 26 03:37 PM

[Emerald:]

Peter, it sounds good but, like John McCain, you don't say where to cut. The average American, Democrat or Republican, is not looking for the government to cut social security, medicare or medicaid. We can't easily cut interest on the national debt and can only slowly cut defense spending on economically draining wars that play right into extremists hands.. Since 70%+ of the federal budget is tied up in entitlements, veterans benefits, etc. what limited discretionary spending are you suggesting we cut? Earmarks are rounding errors. If citizens want all this, then they have to pay for it. Living on credit to get the next new car, new high def TV, iphone, etc. won't cut it. LCACM has it right. Yes, there is a great deal of wasteful government spending and more efficiency is desperately needed. We need a leader who can talk down consumer expectations over time, repay our national debt and "try" and reform government agencies and spending.

2008 Oct 26 03:43 PM

[fran:]

EMERALD--

either the 70%[entitlements] must be reduced or taxes increased. the solution is obvious; the personal and political will is not obvious.

it will take generations to solve the debt problem. when does this generation make its start?

2008 Oct 26 05:45 PM

[alajac:]

Debt is the cause and government cover for fraud is the problem. We can create our own money out of thin air a helluva lot cheaper.

PROTEST THE FED`S EXTORTION RACKET

A WRITE-IN ELECTION CAMPAIGN

TO REVOLUTIONIZE RESOURCE DISTRIBUTION AND TAXATION

The `HOW TO FIX THE ECONOMY` plan addresses three problems with America`s economic system which are destroying our financial security.

Problem 1.

America`s National Debt is approaching 10 trillion dollars and the system is less than 100 years old. Nice work. If human bodies worked like America's currency supply, every time a kid grew a little he would need to take out a loan to buy a transfusion of new blood. We can easily replace the bankrupt Federal Reserve with debt-free U.S. money and non-FDIC-backed private banks.

Problem 2.

The Income Tax law was drafted by the same rich guys who invented the Federal Reserve system. They came up with a way to tax us `cash cows` while simultaneously avoiding paying taxes on their own wealth. A kid right out of college shouldn`t be paying a greater percentage of his accumulated wealth in taxes than Bill Gates. We need a flat, transparent, automatically-collecte... tax that produces results corresponding closely to `benefits previously received`.

Problem 3.

Thanks to automation, robotics and computers, the days of plentiful, highly-paid jobs employing vast numbers of manual and mental laborers are gone. Remember the days when there were millions of jobs that paid well enough to buy a house, two cars, an RV and a cottage on the lake...and still save plenty for retirement? If you do, then you`re pretty old. For most of us, those days are gone and they`re not coming back. To address this problem we need to either `kill off a lot of people` or else develop a new resource distribution model suitable for a world where jobs are rapidly going the way of `the buggy whip`.

**********************...

Tell Congress we need a TOTALLY NEW DEAL!

VOTE TO

Replace the Federal Reserve System

with U.S. Government Debt-Free Money

Replace the Income Tax with a tiny, automatically-collecte... flat tax

and Create Better Social Security for ALL

BY WRITING-IN

Alan Jacquemotte for U.S. President

(in states which allow write-in voting)

WRITE-IN VOTES CAN`T BE HACKED!

Make them hand-count your vote

Send no money

JUST MAKE COPIES OF THIS PLAN AND HAND THEM OUT.

HOW TO FIX THE ECONOMY

a plan to stimulate the economy, lower taxes, start paying off the National Debt, alleviate poverty and decrease crime

by replacing our OLD economic system with a NEW system based on

a new and debt-free U.S. currency to replace Federal Reserve Debt-Money,

a 0.5% tax on electronic transfers to replace the Federal Income Tax and the IRS,

and $1000 per month government privatization compensation for legal U.S. residents

The problem is always THE SYSTEM, never just `the people who screwed up`. Until we fix THE SYSTEM, similar bad things will keep on happening. Fault for the credit scam lies not with the banks and borrowers who lost their shirts and homes, but with our predecessors for allowing this SYSTEM to become and remain law, and with ourselves for not getting rid of it earlier.

The primary problem with the OLD SYSTEM is that `our` money (actually the Federal Reserve`s Debt-Money) leaks its purchasing power like a bucket with a hole in the bottom leaks water. The Fed dollar currently buys less than 5% of what it bought in 1913. (To view a video that makes the problems inherent in our use of the Fed`s Debt-Money much clearer, do an online search for `Zeitgeist Fed`.) There is NO BENEFIT AT ALL in having a Central Bank (well, none for us) compared to having the U.S. Treasury print and distribute to ourselves our own debt-free money, and THE ONLY DIFFERENCE between having a central bank (like the Federal Reserve System) or not, is that ``One system costs us 95% of our wealth every hundred years and puts us and our posterity into mind-boggling debt until the end of time``... and the other one doesn`t. So the first thing we need for our NEW SYSTEM is our own, debt-free U.S. Government currency, backed by the value of all of the property within the nation`s borders. Bankers will tell you this will cause `the end of civilization as we know it`. It will certainly end it as THEY knew it.

Another problem is that the OLD SYSTEM`s income-based taxation creates wasteful tax avoidance behavior, requires an expensive tax reporting industry and an intrusive collection bureaucracy, and is, arguably, a form of `involuntary servitude`. Under a NEW SYSTEM, we could replace all income-related taxes with a one-half percent, automatically-collecte... electronic transfer tax (also known as a `debit tax`) which would be avoidable by business transactions that used only cash or barter. This change will not only rid us of the IRS (saving us the billions of dollars that are currently spent on `tax reporting`), it will also end the OLD SYSTEM`s penalization of work and entrepreneurism, as well as freeing up further untold billions currently spent on `tax avoidance`. (Also inhibits market speculation.)

The third problem with the OLD SYSTEM is that, because governments privatize all of their claimed property (allocating it however they like), everyone winds up being denied their natural right to free access to all property without being compensated for that loss. That`s not a problem for those with access to capital and property ownership, but for the rest of us, it is totally unfair and creates a slanted playing field upon which wealth tends to gravitate to the rich and well-connected. Free-market or socialist, every government`s allocation method results in `denial to everyone of free access to all land`, for which ALL governments should provide compensation.

Consequently, our NEW SYSTEM should pay to every legal adult resident $1000 per month (of the new, non-Fed, non-Debt-Money) which can REPLACE ALL FORMS OF PERSONAL AND CORPORATE WELFARE AND SUBSIDIES, no financial qualification required and no restriction on earning additional income (saving us billons in Social Security and Welfare bureauracracy costs and leaving Congress very little to do). Compensation for minors should be held in a trust fund to avoid incentivizing `baby factories`. Since everyone gets the same amount of compensation, this plan does NOT redistribute wealth, but will be of most help to those with the least accumulated wealth.

Besides its immediate and direct assault on poverty, the benefits of this part of our NEW SYSTEM should include a reduction in crimes of all sorts, more jobs at better pay, better childcare, more rural homesteading, better maintained urban areas, no more `homeless veterans`, less intrusive and cheaper government with lower military-related expenses and a safer world in general. We can expect residents of other countries to insist their governments either copy our NEW SYSTEM or else apply for U.S. statehood (as Texas did in 1845) as soon as the see how well this NEW SYSTEM works.

HEALTH CARE...the AMA and FDA work to constrain competition in order to maximize the medical and pharmaceutical industries` ability to extort unconscionable prices for services and substances that should be affordable out-of-pocket. We need to train up thousands more doctors and other healthcare professionals and to decriminalize and unbridle access for adults to WHATEVER drugs adults feel they need and let the market work to make prices of normal medical help and pharmacology affordable.

TO KICK OUR CRUDE (OIL) HABIT, Congress could add on a 10% surcharge at the gas pump, bump it up another 10% every 6 months, and rebate the surcharge revenue in monthly equi-dollar amounts to every registered car OWNER, regardless of how much they drive. The surcharge will incentivize cheaper alternatives which will rapidly come to market, no government subsidies or mandates required.

HELP ME SEND THIS MESSAGE to candidates running for Congress in 2010 and 2012. In order to get elected, you will need to pledge to help us THROW OFF the predatory Federal Reserve System and devise a NEW SYSTEM, one that ``provides new Guards for our future Security``. We can send a very clear message to those candidates with a MASS WRITE-IN CAMPAIGN for an unknown candidate running for no other purpose than to send that message. (That`s where I come in.) With the major parties fielding candidates who seem to be decent people but who are apparently unaware of the damage the present system is causing to us NORMAL folk, and with the 3rd parties addressing only symptoms rather than the BAD SYSTEM at cause, this election is the ideal time to vote for REAL CHANGE, not just new faces. I will register as a write-in candidate in every state that allows write-in votes from which I get emails expressing support. Pass this message along to several people every day (or, even better, to everyone you know today, and to everyone you meet from now on). IF EACH OF US EVERY DAY CONVINCE EVEN ONE OTHER PERSON TO JOIN US, OVER ONE BILLION PEOPLE CAN BE `ON BOARD` IN 30 DAYS. Get out (and online) and DO IT! For questions or more info, email alan_jacquemotte@yahoo...

Protest the Bailout! Remember The Tea Party!

WRITE-IN Alan Jacquemotte for U.S. President

Send no money

JUST MAKE COPIES OF THE PLAN AND HAND THEM OUT

2008 Oct 27 09:24 AM