Japan

At 06:00 this fine Saturday morning, the Obama folks released an analysis by their economic team of how their economic stimulus package is supposed to work (see full text here).  Quite frankly, I think there would be more stimulus from handing out coupons to Starbucks for a good shot of Joe, than this stimulus plan suggests.

Among the first things to catch my eye was the following statement:

“It should be understood that all of the estimates presented in this memo are subject to significant margins of error.”

There’s nothing like a good caveat to start off an explanation of how you’re going to spend nearly $1 trillion.  It brings to mind the old economic joke of how economists have successfully predicted eight out of the last five recessions.  While I understand the need to explain that these economists don’t have a crystal ball, you wish they were sitting at the table with a much smaller pile of our chips.

The thrust of the plan calls for “ substantial investments in infrastructure, education, health, and energy. “  To me that translates into bigger government than we have now.  Infrastructure is largely government owned.  There is also a significant lag effect in infrastructure projects.  Education is also government run.  After over $1 trillion in spending by the Department of Education, our education system is no better and probably worse than when it started.  Teacher employment has skyrocketed with the goal of making class sizes smaller with no demonstrable improvement in learning.  So, let’s pour more money into that arena and make sure we saddle communities with higher property taxes for years to come.  Sounds great!  Where do I sign up?  But, it does make the teacher’s unions happy.

Another chunk of the stimulus packages is to provide:

“State fiscal relief designed to alleviate cuts in healthcare, education, and prevent increases in state and local taxes.”

In other words, let’s take money from one government entity and give it to another, the reason being so that they don’t have to run a deficit at the state level.  Instead, we’ll run a deficit at the federal level.  Brilliant!

When you look at the charts, here’s where it really gets interesting.  The plan says it will take 5 years for unemployment to return to a 5% level, which is higher than pre-recession levels and it will reach this level with or without a stimulus package.  The difference is that the stimulus package will provide faster relief in the intervening period.  Their forecast is that unemployment will peak at 8% in 3Q09 with the stimulus, and at 9% in 2Q10, without the stimulus.  So we are to spend ¾ of a trillion dollars for a 1% improvement in the unemployment rate, for four years.  That’s an additional $193 billion a year for four years to get us to the same place we would be without the stimulus.  What the analysis doesn’t show is the stimulative impact on the economy of not having a $775 billion dollar deficit to pay off after the economy recovers.

The analysis then addresses the effect of tax stimulus:

“It is important to note that the jobs effects of temporary broad-based tax cuts would probably be considerably smaller. Large proportions of temporary tax cuts are saved, blunting their stimulatory impact on output and employment. The prototypical recovery package only provides for the first two years of the Making Work Pay tax cut. Our analysis assumes that households treat the tax cut as permanent in determining their short-run spending.” {emphasis added}

I would take that argument a step further.  As we saw earlier in 2008, there was a minimal stimulative effect from the $300-$600 tax credit that was issued.  Given a finite dollar amount, as the proposal states, most people are inclined to save rather than spend it.  I would argue that tax relief of any fixed dollar amount, that would be realistic as we can’t give everyone a check for $1 million, is going to have a limited stimulative effect on the economy.  However, when you cut tax rates, the stimulative effect is genuine and long lasting.  Why?  In the Obama plan, the tax relief is $500 or $1000, depending on if you file individually or jointly.  If I know that I am getting $500, regardless of how much I work, the stimulative effect of the $500 depends on what portion of my income that is. But like the $300, it is likely going to be used in these times for saving or paying down debt.  The fact that I may, and I repeat, may get another $500 next year, isn’t likely going to make me splurge on a new car.  However, if I know that my taxes will be lower on every dollar I earn, because of lower tax rates,  I am encouraged to produce more, work more, keep more, and spend more.

From an article in Reason this past Monday before Obama’s speech:

“Lets break this down. Its nice to see that the change we can believe in won’t alter the way Washington plays games with taxpayer money. We can give Obama the benefit of the doubt until we hear from him later this week, but if “officials” are really committed to “historical and empirical evidence” of how to get out of a recession, they won’t stimulus spend. Japan spent 10 years–its “lost decade”–trying to spend its way out of recession and wound up doubling unemployment and increasing the debt level above GDP. “Historically” real tax cuts for the wealthy and business world increased productivity and national growth, but they aren’t politically savvy, so we’re unlikely to see those too.”

So the search is for “popular” tax cuts, not effective tax cuts.

If you ask someone today which president is most responsible for the Great Depression, the answer will likely be Herbert Hoover.  However, Hoover was president for only three years of the Great Depression, while Roosevelt was president for eight of those years.  So while Hoover, without question, make some key errors that made the situation worse, Roosevelt couldn’t find his way out of the problem for almost three times as long, and yet the Democrats are using Roosevelt as a model but saying we have to do it bigger.  Are you getting a little concerned now?

Obama can use this to his advantage.  Just like Roosevelt and Hoover, Obama can and will blame the economic problems all on George W. Bush, for as long as Obama remains in office.  No matter what he does or fails to do, he can point to Bush and then to the Great Depression and say, hey, these things take a long time to fix.

Another point the Reason article makes is that recipients of the Obama tax cuts are very likely to be people who do not pay income taxes:

“While Americans know better what to do with their money than the federal government, many people got those checks who didn’t pay taxes in the first place, so they got other people’s money back. That redistributory system doesn’t encourage growth, it just hands out money.”

Americans do know better what to do with their money.  So here’s my prescription for the economic problem:

• Make the Bush tax cuts permanent
• Explore making the tax cuts deeper, going back to the rates that Reagan put in place starting the longest peacetime expansion in history.  Face it folks, if you want to get the economy moving, you have to give tax relief to people who actually pay taxes.  That’s were the money is, and it will be put to work to invest in businesses and create jobs, not to pay off the credit cards.
• Start dismanteling the federal government.  It is too big, it spends too much money, programs that start never end, and it is eating up too much of the economy.
  • Why is education a federal issue?  Kill the Department of Education
  • Why is the Department of Agriculture as big as it is when only 2%-3% of the population work in agriculture
  • Why are food stamps a federal program rather than being at the state or local level?
  • Why can’t we fix Social Security and Medicare.  The average return on Social Security investments is about 1%-2% per year, which is dismal
  • Why was the Grace Commission report, prompted by Reagan and finding about $400 billion in savings, largely ignored?
  • Why is our tax code, that is estimated to cost taxpayers $200 billion per year to comply with, not replaced with a flat tax?
• Kill the uncertainty overhanging the economy.  Tell businesses that the bailout window is CLOSED. Go back to running your businesses like you should, or face the consequences of your actions.  Government should clearly state what it will do and what it won’t do.  Without that, everyone will sit on the sidelines waiting for the other shoe to drop.

Once people stop waiting to hear what the government plan is, they will set about doing what they have to do for themselves.  Many of the problems that got us into this mess were caused by the government (Fannie, Freddie, Community Reinvestment Act, bailing out this company but not that one, keeping interest rates too low for too long, enormous deficit spending).  How any sane person thinks that “only the government” can get us out of it, escapes me.  This great country has enjoyed tremendous growth and prosperity through much of its history, with government playing a very small role.  But government programs and initiatives (New Deal, Great Society) have saddled us with a host of problems that we will be dealing with for many years to come.  It’s time that when the doorbell rings and we open it to hear, “I’m from the federal government, and I’m here to help you,” that we slam the door and follow the age old advice, “If you want something done right, do it yourself.”