The Real Cost of Economic Stimulus

Feb. 4.09 | About: General Motors (GM)

I highly recommend this article by Malcolm Gladwell. According to Gladwell, General Motors (NYSE:GM), Social Security and African poverty all share a root cause: too few producers for each dependent. Why is GM in a hole? Mostly because too much money that could have been reinvested in the company has gone to provide current benefits for a retiree pool growing faster than its employee base (read Lowenstein's While America Aged to see how the UAW and management bought labor peace by expanding pension benefits like crazy. GM easily made annual shortfalls while it enjoyed dominant cash flow and a small retiree base but both sides ignored the exploding future benefits). Why do poor nations stay poor? Corruption and bureaucracy for sure, but Gladwell argues it's too small a producer base relative to dependents.

Extrapolate from there: Social Security...the State of New York's budget...U.S. income taxes. The State of New York has been feeding on the huge tax base of Wall St. for years and now that Wall St.'s dead, or at least in a coma, there isn't funding to support the demand for services. Nearly all federal personal income taxes are paid by the top half of taxpayers. Amazingly, Obama campaigned on a pledge (taxpayers who make less than $250k, i.e. 95% of all taxpayers will receive a tax break) that'll exacerbate the problem (BTW, so did John McCain).

So when you think about the stimulus package, consider if it creates dependencies that, for political reasons, won't be reversed. Therein lies the real cost.