The Real Cost of Economic Stimulus

I highly recommend this article by Malcolm Gladwell. According to Gladwell, General Motors (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.

Comments

[ratsky:]

I agree with the basic premise. There is an interesting "test case' going on right now that may in its devolution shed some light on what we could face as a "socialized Obama economy." Look at Japan! It is, demographically, where the US will be in less than a generation. Japan has the longest life spans of all major nations, and one of the earliest full retirement ages: 60. Its overall population has been SHRINKING for quite some time (birth rate is about the lowest of all major nations), and the average age is increasing almost year-for-year! If it wasn't for the high percentage of smokers, Japan would have collapsed 10 or more years ago! The "producer ratio" is less than 2.0 TODAY, and going down quickly. Want a sure bet: sell the Japanese economy SHORT! Another indicator (especially significant in a traditionally static society) is the political turmoil of the past decade, with leadership tenures of only a few months before replacement.

Feb 04 02:28 PM

[John D:]

This being the tale end of the "baby boomers" means that there are more retiring now than even 15 years ago, but, once the global economy gets moving again and the boomers start going to greener pastures so to say, it is predidcted that there will be a shortage of people for the amount of jobs that will be available .... the only thing is that we have to get through this crisis 1st.

Feb 04 02:35 PM

[prudentinve...:]

You are spot on. Too many people want something for nothing. Bailouts and stimuli are just another way to re-distribute wealth from the productive and the prudent, to the unproductive and wasteful. A sure way to increase the number of dependents per productive member of society, taking us along the GM slippery path.

Feb 04 02:45 PM

[Mark Hines:]

prudentinvestor- speaking of redistributing wealth from the productive and the prudent, to the unproductive and wasteful... check out Todd Chalem's other article: The Stimulative Sitmulating Stimulus...

www.investorwalk.com/i...

the Fama link in this article exactly describes the redistribution of wealth you are talking about... it's worth the read.

Feb 04 02:52 PM

[Chris B:]

The root problems:

GM: Executives were rewarded for ending strikes by creating future liabilities, which only encouraged more strikes and threats and more unpayable future liabilities. The net result is long-term value destruction - for everyone except that first set of retirees who are now dying before the benefits run out (much like early investors in a ponzi scheme).

African poverty: Current generations do not want to, or are too desperate to, sacrifice now in order to invest in future generations through education and infrastructure. Thus each new generation finds itself uneducated, with few options due to lack of infrastructure, and forced to fight against each other for the remaining scraps. Then the cycle repeats. Lesson learned: invest in the future, or we end up like them.

Social Security: SS is a tax we pay so that old people don't starve in the streets like they do in other countries. It is not a retirement fund and don't let anyone tell you there is a "trust fund" set aside for you. Old people are more likely to vote than young people, and they will always vote to seize the income of the young to support themselves (self-interest). The only constraint would be if the taxes became high enough to motivate workers to vote to cut retirees' payments.

Feb 04 03:26 PM

[overtaxed42...:]

Social Security-what a rip off and great scam to steal from the producers. Nowadays they tell the producers,"you better invest and save for your retirement." So why the hell do we pay this rip off tax that is spent 2 years before it is even collected because the politicians can't stop their country ruining spending? Do not make the mistake of blaming this whole financial mess on the banks or the borrowers. Government decided it needed to stick its nose into the financial sector and play around with it as if they knew what to do. Look what it has accomplished. The downfall of the greatest country on earth due to lack of oversight they insisted on and regulation they don't even follow or enforce. It is impossible for the debt from the houses defaulted on to cause this much mess without some help from above. Enter big government. We know what to do, we'll just fine and tax and charge fees and assesments and that will make it all better......(for us, hahahaha). Ooops...that didn't work, we know what to do now, we'll regulate and tax more and charge hidden surplus fees and more unique taxes and call those capital gains taxes and lets see what else we can shove down the country's throat to choke it to death. Yeah for DC, thank you, you worthless thieves of inept doings.

Feb 04 04:58 PM

[huangjin:]

Airlines, steel mills, automakers, local and state governments, and Social Security/Medicare all shared the same retirement plan at one point—today's workers pay today's retirees. First, businesses in competitive industries failed as productivity increased and headcount declined. The airlines went bankrupt, the steel mills went bankrupt, the automakers with these types of plans are bankrupt without a bailout.

Governments rely on straight population demographics, and fertility declined in the past 40 years. Various local governments are declaring bankruptcy as we speak, state governments are whispering about pension reforms, i.e. cutting benefits, and Social Security and Medicare...

Feb 04 05:18 PM

[Tetrapod:]

I say thank goodness for immigrants. Young hispanic immigrants are going to bail us out during retirement. Japan doesn't have that as their society has never dealt with massive immigration. So when we see immigrants taking over major sections of the country, we should be warmly welcoming our future benefactors.

Feb 04 05:27 PM

[Moon Kil Woong:]

Every case in history points to the fact once the government gets involved in a system it is almost impossible to extricate itself from it. The best case is probably 1913 when government made the Federal Reserve in the banking sector. Are we better off with it. Should we let someone mess up our economy by artificially affecting interest rates. Why shouldn't the government have open auctioning of treasuries from competing banks.

Social security too. It has become a vast piggybank for government overspending not a retirement fund.

Bush Jr.'s no child left behind has also shocked the system in the intrusiveness of government regulation into kids lives at the very start. Do you really need to lab rat 3rd grade kids with tons of tests every quarter. People develop differently. Should you really punish schools who have higher populations of less educated or poorer kids and encorage schools to get rid of problemed kids to boost their scores. This is an absolute travisty in my eyes.

Unfortunately, Bush Jr. from the party of fiscal restraint and less government has made the biggest government deficits, sponsored the biggest single pork handout in history (TARP which could be called a national catastrophe itself), created the biggest debt financed stimulus plan (until the new one passes), financed a costly war we can't afford, and last but not least, he has stuck government meddling on every child in America in an unprecedented scale (no child left behind).

Now kids can wake up with a battery of tests to prepare for every quarter. This is one reason why the vast amount of American have utterly abandoned the Republican party.

Feb 04 08:17 PM

[Dave Wrixon:]

Yes, and that is Obamas problem. The more people there are that are unemployed means that Governments cost go up just as it revenue plummets.

To some extent that is why the stimulus is essential and urgent. But it doesn't count for very much until private investment backs up all those tax payer dollars. Whilst Uncle Sam is the only one put his shoulder to the cart, it will only make things worse.

To get others to chip in the conditions have to be right, which means that America has to compete on both quality and cost. Having driven a Vauxhall for the first time in ages, I have to say there is a long way to go. You only had to turn on the wipers to figure that things were just about held together with string.

Feb 04 08:50 PM

[Dave Wrixon:]

So somebody has finally worked out that you cannot base a stable and vibrant economy purely on shopping for foreign imports? With genius like that available, no wonder the US leads the World!

It is just where they have lead us that worries me!

Feb 05 07:02 AM

[Duude:]

Unfortunately, the "young hispanic immigrants" you speak of aren't crowding our higher education institutions and thus will likely remain worker bees who will find it increasingly difficult to continue working in a country without a new generation of entrepreneurs and innovators whose ideas will create and draw capital and thus support their worker bee employment. Worker bee employees lives off the 'fat of the land'. The 'fat of the land' in America is best summed up as entrepreneurship and innovation. We would be best served as a nation if we opened more wide our doors to those that will contribute rather than milk the system.


On Feb 04 05:27 PM Tetrapod wrote:

> I say thank goodness for immigrants. Young hispanic immigrants are
> going to bail us out during retirement. Japan doesn't have that
> as their society has never dealt with massive immigration. So when
> we see immigrants taking over major sections of the country, we should
> be warmly welcoming our future benefactors.

Feb 05 01:44 PM

[nab2807:]

Well that's the whole problem of basing a system of unfunded liabilities, it gives the government too much latitude with current spending. The amount of money the government collects from SS tax exceeds the amount that is paid out in SS benefits. The difference is utilised by the government to fund its various projects and it writes a "promise" to future retirees to make good on its commitment to pay their SS benefits.

The enormous current levels of spending are therefore ultimately mortgaging the future of a whole generation and this "promise" which the government is making is looking increasingly shaky. Somewhere down the line, the government will have to either hike up taxes or decrease its promised SS benefits. The current situation is untenable and a whole generation will most likely suffer from a combination of high taxes
and poor benefits as a result.

Also the inward migration of highly skilled foreign workers into the US and other Western countries will not last for much longer. Why would a highly skilled foreign worker come to the US only to be taxed at an exorbitant rate and subsidize the current excesses of the US state.

Ultimately the path engaged by Western governments will see their empire crumble to pieces. Politicians are being short-sighted and not realising the long-term implications of their actions. Stimulus packages ignore the real problem which is excessive indebtedness followed by over-consumption. A contraction is needed so that Western nations start living within their means, it is painful but necessary!

Obama's plan to invest in infrastructure makes sense but it should not be funded out of more borrowing and taxation. Funding cuts need to be made and the elephant in the room here is the cost of the military. Take that out and the budget doesn't look so bad! For years the US government has conned its people into believing that increasing defence spending will make them "safer". All it has done is create outposts and interfere in parts of the world where the US presence is neither needed nor wanted. This has fostered an enormous amount of Anti-American sentiment across the globe, ultimately making Americans unsafe in their own country or wherever they are situated in the world.

Feb 05 07:06 PM