October 22, 2011

Why Not Stimulate?

If you believe in America's future, we should stimulate.

The purpose of a stimulus is not to create permanent jobs. Its purpose is to increase the demand for goods and services produced by the private sector, which results in the private sector hiring more permanent workers  so they can fill the new demand from the market. Once the stimulus kicks in, the cycle of creating permanent jobs continues as demand continues to expand..

The problem is the nation must go deeper in debt to fund the stimulus and the average American has been "burned" by his debt load and he is in no mood to increase his debt burden, personal or national. For the past 20 years, the average American lived beyond his means. He maxed out his credit cards and used his home equity loan as a piggy bank to consume way more than he was earning. When the housing bubble burst, he not only was unable to use his home equity line to maintain his life style, but his net worth dropped as a result of a 40% decline in the value of his home.This is also why the stimulus should be significantly funded by those who benefited the most from our recent excesses - The super wealthy.

Many Americans looked at the equity in their home as a nest egg for retirement and their children's education. This was wiped out. Who can blame them for being adverse to more debt, whether personal or national? He has experienced first hand what can happen by excessive borrowing.

To further complicate the problem, to get back to the employment levels of 2006-2007 we must match the demand for goods and services that was present during the period when everyone was maximizing their debt. This cannot, should not and will not happen. This demand must be made up by concentrating on increasing our exports to growing countries such as China, India and Brazil.

A stimulus can help. The question is do we believe in America. Can we overcome the problems that we all helped create? Yes, much of the blame can be placed on our leaders. We should have never invaded Iraq. When we went into Afghanistan we should have taken austerity measures, including raising taxes, to pay for the war. Our government failed to properly regulate Wall Street, banking and the rating agencies that all heavily contributed to the housing bubble and sub-prime loan debacle.

If you believe, we should be upgrading and building infrastructure. Competition from the rest of the world demands it. Without it, we cannot compete. Now is the time to do it; interest rates are low and there is an excess supply of labor.

If you believe, we must invest in education. Competition from the rest of the world demands it.

If you believe, we must invest in research and development. We cannot compete with the low labor rates of developing countries. To offset this, we must be the leaders in the development of new ideas, inventions and processes. We then must do a better job of protecting what we create.

If you believe in America, we also need to amend the constitution outlawing campaign contributions from corporations and unions. They cannot vote for our elected officals. Why should they be able to buy votes.

If you believe in America we also must demand our elected offical enforce anti-trust laws. We have lost our "Free Markets" to oligoplolies and monopolies.  This must change if free markets are to work.

Can we afford it? Can we afford not to do it?

The Director of the Congressional Budget Office, Douglas W, Elmendorf, recently said,
"There is no inherent contradiction between using fiscal policy to support the economy today and imposing fiscal restraint several years from now.”

3 comments:

  1. Absolutely, we need stimulus spending. To go further, economic growth needs actual money creation -- deficit spending on the part of our currency-creator. It's a math issue.

    Assume the average money velocity remains constant. If GDP increases but the money supply remains constant or doesn't increase sufficiently, the price has to decrease -- deflation. If the money supply increases too much, we have inflation.

    Include velocity variation: with deflation, people are less likely to spend. Money velocity drops, worsening deflation. With inflation, people are more likely to spend, worsening inflation.

    It seems as though the happy medium is an unstable point. But in any case, as long as we have economic growth, we need growth in our money supply -- deficit spending on the part of the government.

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  2. A government with a printing press doesn't have the same kind of "debt" that you and I have. Unfortunately the myth that the U.S. has to fund itself via loans (treasury sales) has tied up our national conversation is knots.

    We can and should simply print our way out of this economic malaise. The fact that we have mis-spent trillions in recent years (via bailouts, wars and tax breaks for the rich) doesn't mean wise spending shouldn't be done.

    The US Gov "debt" doesn't have to be paid back. It is money that is in the system - for the Gov to have no "debt" it requires taxing 100% of US dollars out of circulation. And lowering the debt means removing money from circulation. The only wise lowering of the debt is via increasing our exports and/or lowering our imports. That would require a weaker dollar or tarrifs.

    So the easiest solution is to simply print more money (which may weaken the dollar), but this time make sure it ends up in the hands of the people who need it and would spend it - those earning $250,000 or less.

    You can either give everyone a tax break (a year long one given how much money the economy needs) or a gigantic jobs program - probably quadruple what Obama has proposed - with NO part of the bill trying to "pay for it".

    Of course these ideas are politically impossible right now because everyone believes the debt and deficit is a problem. It isn't. Well, it is in the sense that we have mis-spent it. But it isn't because it never needs to be paid back.

    The only other solution to our current problem is a massive re-distributive tax on the rich that then is transferred to the bottom 80%. And that definitely will never happen.

    Given that no one seems to understand that deficits are NOT bad, what we are likely to get it more of the same. A slow trickle of government spending, a slow paying off of private sector debt, many years of high unemployment, and finally, ever to slowly the economy comes back once consumers can spend again.

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