Stimulus vs. Stability

In Barack Obama’s first press conference, he says the following:

“It is absolutely true that we cannot depend on government alone to create jobs or economic growth. That is and must be the role of the private sector…But at this particular moment, with the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back to life.”

This shows a profound misunderstanding of the nature of the crisis.  The economy is driven to prosperity by those who plan for the present and the future, those who produce wealth today and deploy capital to continue producing wealth in the future.

The US Government has a role to play in this production of wealth, even though it is utterly incapable of producing wealth on its own.  It provides, at least it is supposed to provide, the stable foundation upon which an economy can thrive.  The US Constitution provides for the post office, post roads, the defense of the nation, the commerce clause, and a common currency–the physical foundation, the legal foundation, and the financial foundation.

The physical foundation of our economy is pretty sound.  People of all walks of life can count on it to get them and their things and ideas all around the country generally unmolested.  The legal and financial foundations have not fared so well over the last eight decades.

Before looking at their deterioration, let’s think for a moment about why they matter in the first place.  Prosperity comes from those who seek it today and plan for it tomorrow.  Planning for the future is easier the fewer variables are in play.  If one has a desk job, he can generally tell you where he will be a week from Tuesday at 10 AM with no effort.  Compare this with plumber who does emergency calls.  He has no idea where he’ll be because he doesn’t know who will have an emergency in his service area at that time.

Similarly, the foundations of the economy provide value and enable prosperity because they reduce the number of variables that must be considered when trying to predict the future.  Well-written, even-handed laws and stable currencies allow economic actors to devote their attention towards each other and away from government.

Since September, when the full extent of the credit crisis and Hank Paulson’s ability to panic became public knowledge, all eyes have been towards Washington.  Companies have started planning around what impact the government is going to have on them, not on what products and services will satisfy their customers.  They have started sitting on capital and have become increasingly unwilling to commit to a plan for the future.  Unsuccessful companies spend time clamoring for a teat, while successful ones want to know how much their inept competitors are going to get.

The panicked actions of Congress and the Administration have propelled the economy into a dangerous state, where the rules change by the day and the highest officials in the government insist that it’s impossible to see what’s coming just a few months away.  Only the most deft or dumb dare to plan and invest for future in this environment.  The rest are left to either retrench and wait it out or play the public money lottery.

While GM, Chrysler, and the financial sector are rolling their dice up the National Mall hoping for some luck, most companies are cutting jobs.  In his address, Obama mentioned his visit to Elkhart, Indiana, which is the city hardest hit by job losses thus far.  He mentioned the vicious cycle of job cuts leading to lower demand, leading to more job cuts.  While his characterization of the cycle is correct in describing the mechanism, his description of the cause and the cure are dead wrong.

Obama says that the credit contraction cut off the capital needed to keep people employed.  This was a short-term shock.  The real damage was done by Paulson, Bernanke, Bush, and the Congress.  The panic and shoot-from-the-hip legistlating that resulted in TARP turned both the legal and financial foundations of the economy to quicksand.  It was after this that the big retrenchment began and the job losses truly began to mount.

This closely parallels the entry of the US to the Great Depression.  After an initial credit contraction leading to Black Friday, the Federal Reserve followed with an irrational 1/3 cut in the money supply.  Combined with nonsensical laws like the Smoot-Hawley Tarriff Act, the legal and financial foundations of the economy were removed, and the country retrenched itself into a depression.

With Obama’s stimulus plan, history is continuing to repeat itself.  When FDR came into office, he brought the nation continued uncertainty about the economy even though he promised bold, decisive action.  The New Deal functioned first as a cloud, then as a permanent cloak to economic predicability.  The destabilizer in those days was direct taxation.  Washington had yet to discover the abusive and insidious inflation tax, so it instead had to resort to directly extracting taxes from those who were functioning in the private economy to fund the public one.

Today, Obama and company seek to use the printing press to tax the wealth needed for the Hope’n’Change Plan out of the economy.  This is an attack on the currency that will continue to weaken the financial foundation of the economy.   In doing so, it is also punishing those who were prudent and planned on the currency remaining fairly stable.

For companies that have been prudent and responsible, the Obama plan is a double whammy.  In addition to a destabilized currency, they now have to contend with a legislative climate where failure is rewarded and success is frowned upon.  The legal foundation upon which they have constructed their businesses was pulled out from under them, flipped upside-down, and dropped upon them.

The stimulus plan will have an effect precisely the opposite of the one Obama and crew claim it will.  Instead of spurring the economy towards growth, it will spur continued retrenchment as the foundations of the economy are further weakened.  Job losses will mount despite the massive flood of money into the economy redistribution of wealth.  Innovation and entreprenuerialism will be diminished as the capricious nature of those controlling the purse strings and the legislative pen become clear.  Companies will seek to defend themselves from the latest whiplash from Washington instead of satisfying their customers.

The Obama stimulus plan, like TARP and the Bush stimulus before it, is a direct assault on the stability and long-term viability of the economy, in addition to punishing those who made a prosperous economy possible.  Since passage seems certain at this point, one can only hope that we’re smart enough to look back to these boondoggles when it comes time to ask how we really ended up in the worst depression since the 1930s.

  • Miko

    So, to complete the analogy, we should expect that after destroying the financial system, Obama will nonetheless be hailed as a savior, right?

  • Quincy

    Miko, possibly. The difference this time is that the measures are already highly unpopular, so the mythbuilding is off to a pretty bad start.