The wisest thing I’ve read so far about the President’s proposal for economic policy is the focus on job creation. I think this is the right way to approach the current challenges, though I fear some of the specifics are not consonant with the desired goal. Since the President will not make his official policy announcement until Tuesday, I’ll hold off on criticisms and analysis but will lay down some observations. I think they are mostly common sense, a commodity in short supply in Washington, DC.
The idea that the government can "stimulate" the economy is hubris of the first order. Think about the basics, supply and demand. The reason we are getting low business investment, low employment, low tax receipts is demand is dwarfed by supply. Though I’m hesitant to add to confusion by introducing economic terminology (partially from the fear that as an amateur I will not use them with precision) I think the term aggregate (not the concrete kind) should be considered.
IF the economic assets of our nation can produce goods and services with a value of $10.00 but the consumers only demand (want/need/can afford) goods and services with a value of $9.00 then what happens to the other $1.00? There are only 3 possibilities. It can be produced and sold at a loss, not produced at all or a combination of the two. The simple answer is that our economy can provide more goods and services than we want to pay for. Things are not in equilibrium.
This imbalance between potential supply and demand can be corrected, but only over time. To think that the state can ride to the rescue with some sort of stimulus is to assume a level of ability and disinterest in government that has never been demonstrated on a large scale. In the example (value of supply $10, potential purchasing power $9.00) you would think that a solution would be for the state to "give" to the consumers an additional $1.00 in money, balancing the equation. Mathematically that’s correct, but it overlooks a very fundamental consideration: consumers have free choice. If they choose to save the money then the net impact of the "stimulus" is less than intended. It also assumes that all economic goods are equal, which they are not.
There will be many reasons why the excess capacity exists: poor forecasting by business management. obsolescence of products or capacity, high cost, low value of goods or services.
To step up to larger numbers and the influence on consumer behavior (and here I’m referring both to individuals and business enterprises) the question has to be: How much money will be necessary to influence consumer purchasing? Remember, we are a nation of over 200 million people, and there are tens of thousands of business enterprises. Suppose your "stimulus" plan is to send checks directly to everyone in the nation to cover the shortfall in demand. (Let’s overlook for now the mechanics of how that would actually be done.) This is precisely the policy of the so called "tax rebates" from last year. At most people received a check for $600, many less and some none at all.
What can you buy with $600? Certainly not a home, or a car. Perhaps a refrigerator, maybe some video equipment. A new set of tires? The reality is that for most Americans a windfall of $600 is not nearly enough to change their economic behavior. And by it’s very distribution where some get all, some get some and some get none; you guarantee that the impact on anyone’s decision will be nearly zero. If the purpose of any sort of "rebate" is to drive consumer purchases you can see that at most there would be a one time boost in demand for relatively inexpensive items. This is not the stuff of sustaining increased demand for any product or service.
I think the logic of any attempt to stimulate demand by showering checks on consumers is doomed unless we are talking real money. And by that I mean thousands of dollars at every level of the society. I hate to make the jump from our simple example to real numbers, but I think that when you see the scale that I’m talking about you will see how foolish the idea of any sort of "stimulus" is.
For the sake of argument assume that to move the needle (i.e. increase demand) we have decided to "give" consumers a check that will impact their behavior. An amount so large that this "free" money will cause them to purchase lots of things, or a few big things. Assumed population to be stimulated: 100,000,000 (estimated US adult population for our example)
Value of stimulus: $5,000 per person
Total Cost to the US Treasury: $500,000,000,000.00
That’s 500 BILLION DOLLARS. An amount greater than we spend on national defense.
An amount just shy of 30% of the total federal budget.
If you want stimulus, that’s the sort of check that will have to be written. That by the way is roughly equal to 6% of our total domestic product of goods and services (GDP).
I hope you can see that the idea of any sort of stimulus is no more than a fool’s errand. It is nothing more than political talking points waved about by both parties. A set of policies designed to convince the public that their elected representatives are "doing something". Because the likelihood of any "stimulus" plan that is actually large enough to have an impact is ZERO.
The road to wisdom begins with the realization that our current problems have no short term solution. The only possible policies and programs that will have any impact are those that meet one of two tests:
- To ameliorate the plight of those who are unemployed/underemployed
- To sow the seeds of improvement in business investment and/or productivity
Republicans will argue that expansion of unemployment benefits does not create more employment. And they are right. But then that’s not the purpose of unemployment insurance, is it? The purpose of unemployment insurance (which workers and employers pay into from wages) is to provide a cushion against unemployment. It is a bridge between jobs. But for some reason the length bridge is set in an arbitrary manner. The laws and rules attempt to predict an uncertain path to re-employment and to discourage malingerers. Ideally the time definite facet of unemployment insurance acts as a spur to job searches. And in a perfect world where jobs are available this feature works just fine. But what happens when jobs are not readily available.
If we lived in an environment where the state did it’s job of making policies that promote economic growth, then unemployment insurance would work fine, as it is. But we don’t live in that perfect world. We live in a world where the state in many cases actually discourages job creation through "living wages" or demands for health insurance coverage of natural healing, zoning restrictions, environmental restrictions etc.
Acting as a secondary force is the idea that once a person gets a new job, they lose their unemployment insurance. Shouldn’t we at least consider the idea that unemployment funds could provide a form of supplemental income for some period of time. Isn’t the idea to get people back into the work force. We shouldn’t be in the business of discouraging people from taking a job because of what they loose from unemployment.
And did you ever wonder why unemployment benefits are taxable? That seems ridiculous to me.
Now, lest you think I’ve been won over to the dark side, it is not my idea that unemployment becomes some sort of cocoon of dependency on the state. But I think that when the Republicans act to oppose what is essentially a modest proposal to extend benefits, they come off looking like exactly what they are, a bunch of green eye shaded bean counters with no ear for the politics of compassion. Why not use the extension of benefits as a bargaining chip for something they want? To allow the Democrats to portray themselves as some sort of benevolent and caring party while the Republicans get labeled as the part of the rich is foolish in the extreme.
The Republicans need a short term two year program to address the needs of the people who have suffered the most from the collapse of the Clinton Boom. Making a rational attempt to extend benefits and provide other support as necessary can be done for relatively little money, a hundred billion or so over the next two years. And surely this is more important, and will have more benefit, to the middle class voters than farm price supports, tax credits for overseas sales of airplanes or subsidies for ethanol.
A true conservative program will focus on the medium to long term needs of the economy. The short term is written already. One lesson that needs to be chiseled into stone is that the time to address our current problems was in the year 2000. Rarely if ever do I see anyone mention that Clinton opposed a $500 billion multi year tax cut that was proposed by the Republicans in 1999. We will never know how much impact that would have had, but we do know that today is too late to fix tomorrow.
1. Increase business demand for investment in plant, equipment and workers
In an age when technology marches at a rapid pace the true productive value of business investment declines very rapidly. And yet most businesses are chained to obsolete thinking of the IRS as to the so called "life" of assets. Shouldn’t business be the best judge of the value of it’s assets? Companies burdened with writing off computers over three years are not going to be in the market for new machines unless the economics of replacement make sense for THEM. It should be the goal of the federal policy to remove tax considerations from all business decisions. Tax consequences should be neutral.
2. Make the future predictable
Business can not operate in a vacuum. The thicket of regulations, policies and rules they must navigate creates uncertainty. Investors do not like uncertainty, they like quantifiable risks and rewards. I propose a moratorium on implementing new federal regulations on business for a period of 5 years. This would include a series of panels of experts in all facets of business and regulation with an eye to eliminating or at least rationalizing government regulation. This does not mean that current rules would not be enforced, only that new rule making would be suspended. And I would even include an exception, that the Congress would pass, if necessary, new rules if there is a demonstrable benefit for life and health reasons.
3. Provide Incentives for New Business
Risk taking by entrepreneurs drives much of our economic activity. We should recognize this by crafting tax laws that do not penalize new businesses. The majority of new jobs (excluding government) are created by small entrepreneurial firms. Why not give these risk takers a financial incentive to expand. Make profits from small business exempt from income taxes for the first 5 years. And further, exempt the founder’s investments from capital gains taxes for the first 10 years. These ideas are not original, a variation of this plan was proposed by William J. O’Neill, publisher of Investors Business Daily in 2000.
4. Fix the Health Insurance System
I would adopt, and encourage through the tax code, medical savings accounts. I would also move to capture the value of employer provided health insurance. Maybe by limiting the deductibility to employers and providing a deduction for employees. The current system is broken and the quicker we move to a more consumer directed system the easier it will be.
A word on cutting the Payroll Tax
I think this is a great idea, if they do it properly. The goal should be a permanent reduction but I would settle for a "temporary" reduction of say 4 years. Only I would not adopt any plan that included tax credits or rebates. I would go with simple is better. An outright reduction of say 1% from current rates, split between the employer and the employee. I think this is another one of those battles that the Republicans will mishandle. Tax cuts are good, even this one. What’s better is that this tax effects all workers. It will demonstrate that the Republican party is not just about "tax cuts for the rich". Instead of talking about how much this will cost, the R’s should talk about how many jobs it could create or how much "stimulus" this will provide. Yes, I know that both of those claims are speculative, but we might as well get some mileage if the Democrats are going to make those arguments. Dividends
I think the idea of taxing dividends only once is a great idea. But the idea that it should or could be the central tenet of any economic policy is silly. I would even be willing to trade it away for flatter tax rates or a capital gains reduction. It’s just not enough to move the needle.
If it were up to me I would be working two policies at this point. First, I would be pressuring our Saudi allies to increase production to displace Venezuelan oil in toto. While this will have a time lag of about two months, I think the promise of improved oil supplies will drop the price down to closer to $25 a barrel, sooner rather than later. The tax on the economy from higher oil prices is a drag on growth. Second, I would begin pumping crude from the SPR, as a means to stabilize prices. In fact I might even consider dumping it in large quantities to destabilize the market in anticipation of war with Iraq. I think the idea that we are keeping it as some sort of hole card against unforeseen circumstances is commendable, but wrong. Rising oil prices are an impediment that we can manage, if we apply some foresight. Is it market manipulation? You bet it is, but in our interests to lower prices and enhance growth.
The future is now!
Odds and Ends
Did you ever notice that when the Democrats disagree with Bush foreign policy they accuse him of acting "unilaterally"? Is this a bad thing? What I think is funny is that our unilateral policy with Iraq has taken us from status quo to the brink of war, while our allies have scurried behind us every step of the way. Does anyone really believe that the inspectors would be in Iraq today if Bush and Blair had not led the way?
Could we be on the brink of a regime change and not even know it? I would say that the odds of Saddam being out of power at our hands in the next 3 months is even with the odds of Saddam being out of power at the hands of his entourage. I imagine the atmosphere in his bunker is getting pretty crazy right about now. As we begin to move significant numbers of troops into the Gulf the pucker factor has to be rising in Baghdad. No rational person on the Iraqi General Staff can expect to win in a military confrontation with us. So what do they do?
I would not be surprised that we would have troops in place, ready to advance when the phone rings in the Oval Office. The guy on the other end of the line will be Tariq Assiz, and he will announce that Hussein has been "retired" by his people. He will be requesting a meeting with Colin Powell in Geneva to arrange for the verification that all their WMD stocks will be destroyed. And could Mr. Powell bring his check book to begin the reconstruction of Iraq?
It would be a great victory. But then Bush would not get much credit, since the New York Times will be the first to announce that it was obvious all along. That all Bush did was happen to be there when the wall came down. You know, like Reagan. Just passing by when the USSR melted down. Any right thinking person knew the end was near.
I think Bush could care less who gets the credit. That’s what leadership is all about. You give credit to your subordinates for success and take responsibility for failures.