Stimulus, Recovery and the Problem with Politicians

There seems to be a lot of agreement that the positive GDP report for Q3 was in retrospect not as positive as the headline number might lead one to assume. Coupled with the disappointing personal income data on Friday as well as the sales numbers and many seem to have concluded that we’re still deeper in the woods than we think.

Henry Blodget has a nice short post on this subject with some good links that I recommend. Other than that, I don’t want to spend much time merely echoing points of view with which I find myself in agreement, rather let me offer another observation.

Recall if you will that when the shape that any fiscal stimulus plan should take was being debated there was a sharp divide as to whether it should be accomplished via tax policy or direct government spending. A lot of the discussion was centered around multiplier effects with many arguing that government spending represented a better bang for the buck.

The tax advocates argued for broad based tax relief and some of the proposals suggested a suspension of the payroll tax, tax credits for businesses that increased employment, accelerated depreciation for new equipment purchases as well as a cut in personal and corporate taxes. Of course, those in favor of government spending won the debate.

We may now be seeing the fruits of that decision. The problem isn’t so much that direct fiscal stimulus is better or worse than a tax reduction approach as it is that the former allows the political class to get their hands on the money as it flows through the government coffers and direct it those whom they support or perhaps it would be more correct to say those that support the politicians.

To be sure, tax policy can be narrowly focused as well and in fact it was tax policy — the new homebuyer tax credit — that drove the increase in residential investment. That doesn’t necessarily mean that a tax focused approach to stimulus would result in the same distortions, just that the denizens of Capitol Hill are capable of corrupting just about anything if given the chance.

One of the more vexing problems that afflicts the human race seems to be its inability to learn anything from past lessons. We spent the better part of the twentieth century proving that centrally planned economies don’t work. It seemed pretty clear by the ’90s that generally speaking letting people and the market make their own choices resulted in an optimal economic outcome and the best application of scarce resources. Did we learn the lesson? Of course not.

The upshot has been that we now have a “recovery” that’s so far been driven by improved performance in the residential real estate and auto sectors based on extraordinary stimulus directed towards those areas. More to the point, much of the improvement may well be illusory. It isn’t so much a testament to good government policy as it is an example of Americans jumping on a temporary sales promotion. Like 0% loans, the showrooms get flooded so long as the deal lasts and when it ends, the buyers stay home and play a game of chicken with the sellers, daring them not to bring it back.

Would we have been further towards real recovery if the stimulus had been more tax oriented? Who knows. I think it is fair to say, however, that any progress might have well been more substantial had it relied on broad based tax reduction. I doubt that we would be having discussions about auto sales cratering and the real estate market falling once more once the props are removed from them. Rather, we would most likely be seeing upticks throughout the economy and had tax cuts been used to promote employment we might well be witnessing much better numbers on that front.

The enduring lesson is that no matter how dire the situation, politicians will see to their interests first and those of the nation thereafter. Any stimulus program will involve a great deal of waste. A stimulus program that relies on significant control of expenditures by the ruling class will result in maximum waste and inefficiency.

Or to put it another way, politicians will eviscerate any multiplier effect if you let them get their hands on the money.

Comments

[Carlos Lam:]

The problem with any stimulus -- be it Keynesian government spending or Lafferite tax relief -- is that it is used by the political classes to further certain interests. The "new homeowner" tax credit (actually available to anyone who hasn't owned a home in 3 years) has been a boon to the real estate industry. Cash for Clunkers was a giveaway to automakers and auto dealers. The tax credits for insulation, geothermal systems, and other forms of energy conservation are payback to the environmental folks.

Herein lies the problem with our current system: it doesn't matter whether it is Keynesian Democrats or Lafferite Republicans planning the "bailout." Each will seek to feather the nest of those who support them, whether it be public sector unions or real estate developers.

The only "stimulus" there should be is a wholesale slashing of the federal government to lower our tax burden and an attempt by the Fed to protect the purchasing power of savers. Anything less keeps us overburdened and punishes savers.

Nov 01 07:05 AM

[Jim in Virg...:]

Our schools have left many without the ability to think things through. As an example, the single payer health system. The single payer system has failed in Maine, Mass, Tenn and others. Canada, England and others are rethinking their system. People should be asking their leaders who seem to be a pompous and arrogant group why this new system is different from those that have been tried and why we should expect a different outcome than that which the other plans have failed. Since we are not likely going to be able to pay down our national debt, I think it is highly likely that we will devalue the dollar to the point where inflation will eat away at the standard of living for the average American.

Nov 01 08:53 AM

[User 405473:]

Stimulus package #1, the health care plan, the proposed Cap & Trade, the talked about 2nd Stimulus plan. Accomplish one thing, additional debt. Why? To collapse our country and its constitution.
The debt will be so great that we can not pay it off. Then we will be bankrupt and our currency will have no value.
That means that the health care plan, Social Security, Medicare and all of the Baby Boomers retirements will be virtually worthless.
Our country will be totally under control of our worthless government, probably under Marshall Law.
If our money now has no value, how do you buy food, gas for the car, medicine, heat for the house or electricity.
Millions of children and the elderly and the sick WILL DIE.
Of course after a period of time the country will gradually pull itself back up. But at what cost?
The only way to stop this horrific event is to cleanse Washington of the Socialist, Marxist and Moa loving Radicals. Demand that your politician vote no on any bill that would increase our debt or attack or alter or infringe on our rights under the constitution.
That means especially the 1st and 2nd amendments.
Demand that our politicians vote yes only on programs that will strengthen our economy and support a stronger dollar.
We need to stabilize the economy and the dollar before we can afford to fix any other program.

Nov 01 10:45 AM

[The Geoffster:]

"We are spending more money than we have ever spent before, and it does not work. After eight years we have just as much unemployment as when we started, and an enormous debt to boot."

-Treasury Secretary Henry Morgenthau May 1939

Nov 01 10:48 AM

[DormRoom:]

Uhmm... The biggest problem with the stimulus plan was that it WASN"T LARGE ENOUGH.

China had a $500 bln stimulus package for a $4.5 trillion GDP; or about 11% of GDP. And China's economy is growing over 8% on an annualized bases..

The U.S. has a 750bln stimulus package for a $14 trillion GDP; or about 5.35% of GDP.

The truth is America needed a $1.3 trillion dollar stimulus package. That's what the economist wanted. But Rahm Emmanuel knew he couldn't get that much from Congress. He knew he could get ~$700 bln. And he did it. It wasn't nearly enough, but a lot better than the $500 bln those wiley Republicans were offering. The recovery is limping along, despite of the stimulus package's insufficiency.

A two party system, and vitriol partisanship is the real problem. It's a huge bottleneck in the flow of stimulus to the economy.

Nov 01 03:02 PM

[untrusting ...:]

The enduring lesson is that no matter how dire the situation, politicians will see to their interests first and those of the nation thereafter.
======================...
Yes, that is true about politicans. But it is also true of our public companies, Wall Street bankers, inept regulators, and generally the financial elite in the US. One could cite tens of thousands of examples of that from: Madoff, Enron, Worldcom, dotcom frauds, rating agency fraudlent ratings, securitized mortgage frauds, AIG, Pfizer frauds, Haliburton frauds, grossly overpaid public company executives, and on and on To even consider that our private sector oligarchs will self-regulate and operate in the best interests of the country is as laughable as thinking politicans are not corrupt and self-serving.

So what is your solution? Somebody has to make the rules, somebody has to enforce them, somebody has to prosecute the white collar criminals and even the government criminals. Most folks are aware of the problems, but what are the solutions?

Nov 01 07:26 PM

[a fat panda:]

"It seemed pretty clear by the ’90s that generally speaking letting people and the market make their own choices resulted in an optimal economic outcome and the best application of scarce resources."

I am not sure what resource you are talking about. Capital was allocated very poorly in the 90s as demonstrated by MCI and Enron. Greenspan started a monetary policy which many blame for the current economic crisis. Stock options became currency. The 90s ended in a massive bubble in technology, which caused terrible financial harm.

If you think capital was well allocated, look at the returns since 1990. The economic results of the 1990s were not due to any government policy. It was due to increased productivity as computers enabled 1 person to do the work of 10. It was the result of expanding markets globally. In conjunction, it should have been the greatest wealth generation since the dawn of man. Yet, the Dow is up a little under 7% since 1990, which is mostly inline with historical norms.

Loose monetary policy is a little like cheap whiskey. It tastes good at first, but it will give you a massive headache. You are looking back at the 90s which was the first taste of the whiskey, but you are forgetting that it was the cause of our current headache.

Nov 01 09:54 PM

[chris coonan:]

Hiring focused stimulus would have been a much better, broader and effective use of a trillion dollars than throwing it to cars and houses, two things that people could put off until the economy improves.

The fundamental problem is gov't wants to encourage the masses to spend every dime they have, and live for today...and then, the tomorrows just get worse.

Nov 02 12:49 AM

[Carlos Lam:]

On Nov 01 03:02 PM DormRoom wrote:
> Uhmm... The biggest problem with the stimulus plan was that it WASN"T
> LARGE ENOUGH.

This is more Keynesian drivel. Do you honestly believe that wealth is somehow created when money is spent by government, which necessarily had to take that money from somebody else, be it a taxpayer or saver? Moreover, do you honestly believe that central planning by Rahm Emmanuel in DC works better than the billions of decisions made by individuals across the country?

You mention China's $500 billion stimulus. The difference between the US and China is that China can afford to use those funds to "stimulate" its economy. The Chinese have savings and reserves. We have a $12 TRILLION debt, not including the unfunded liabilities in SS/Medicare/Rx. Instead of a stimulus plan, it would have been better for the Chinese people if their government merely let the yuan rise in value; their purchasing power would increase. At least the Chinese government HAD the necessary funds to spend without borrowing, though.

Nov 03 05:27 AM