Monday, February 02, 2009

What does "stimulus" mean, anway?

So it has come down to this, a stimulus plan. Everyone is talking about it.

All this after an economic calamity that resulted in shriveled retirement accounts, deflated property values, and diminished expectations for employment. Estimates of losses in real estate and stocks amount to the trillions.

And there is plenty of news about how the financial industry, in recognition of their superior advice, talent and transparent management, gave themselves $18.4 billion in bonuses last year. There are some who are saying that the bonuses and compensation paid could not be justified by technology or experience. Who could've known? They're lucky they aren't in China - for they surely would be doing hard time in prison for their mistakes, instead of getting a handout.

More recently, we saw the story of Bernie Madoff, who ran the biggest Ponzi scheme in history. Harry Markopolos had been telling the Securities and Exchange Commission about Madoff for many years. But the SEC was unwilling to look at the scam and chose to remain willfully ignorant for as long as possible until it could not be ignored any more. That was when Madoff finally admitted to it in public. This is the free market at work. And for all you Southern California people, remember that former Senator Chris Cox, that great free market champion, failed to catch this on his watch. The free market will regulate itself, right?

I think it's also worth noting that during these hard times, CEO's aren't going to bed hungry. The vast majority in the financial industry aren't going to be out on the street anytime soon. They will try to find smaller firms to work for so that their bonuses don't make the news. And by the way, if you're looking for a good advisor that doesn't do Ponzi, check this out.

President Obama has made it clear that the middle class has been subject to plenty of abuse by the upper class. Those losses discussed above, were the most painful for the middle class. The middle class can't afford to lose half of their retirement account. For the upper class, they'll make it back in a few years. Even if they don't, they can probably take some time off to make a better plan while living in a house they still own.
The point of this post, is that for at least the last 8 years, the middle class has received a beating like none other since the great depression. And what the uppity class seems to have forgotten is that they really need the middle class. You see, when the upper class thinks of Mexico, they don't think of going there for vacation. No, they think of that great, captive employment market and yearn to bring it here. Just ask Gore Vidal.

The stimulus plans being discussed mean one thing, plain and simple: Ooops. We just beat the living daylights out of the middle class and we're so sorry. If we don't give them something to work for, they will stop working for what we are willing to pay them. We need to make sure they keep working until we can find a way to ship their jobs overseas.

Just how are we going to fix this? We can start by making the bailout plans god-awfully painful for executives who come to the government hat in hand after making really dumb mistakes. We can put an end to the conservative nanny state. This is the land where conservatives get their government intervention into the economy without the headlines the way progressives get it.

I used to consider myself a conservative, but I noticed over the years that I felt more and more uncomfortable with that association. At one point I was a libertarian, and I still hold some libertarian values (but I don't eat any books). The nanny state conservative is what the extreme "Right" has become: theologically dominant, morally "superior", belligerent, paranoid, and above all, self-righteous (just one ego fills a typical aircraft hangar when uncompressed). To the nanny-state conservative, economic policy is great if it drives income up and grants advantages to people who already have money and power. But somehow, it's really bad for the economy if the middle class gets to make more money.

Notice that the conservative Republicans are again pushing tax cuts. They're really, really worried that we're spending too much money on this stimulus plan. Gosh, we just spent $350 billion on banks who aren't even telling us how they spent their TARP money (though there is substantial evidence that domestic banks are buying other banks around the world rather than making loans at home). And we're getting ready to unload another $350 billion on them. Only this time around, we're going to make them accountable. Yeah, right. I didn't see anyone floating a tax cut to fix that problem. Notice that there was "bipartisan" support for that measure, too. And I didn't see any Democrats holding their breath in a pouting contest before that measure got passed.

I don't like the idea of spending, and I would prefer that we did nothing when it came to bailing out the banks. But if we have to choose between spending and tax cuts to save the economy, I'll take spending. Why? There is empirical evidence weighing against tax cuts. One really obvious clue is that tax cuts aren't going to do you any good if you're not making money. With many people out of work, and many more fearing for their jobs, people just aren't going to be making any discretionary spending decisions in favor of spending money. And let's not forget that we have eight long years of nothing but tax cuts for the benefit of the top 5% who saw their income grow at a much faster rate than the rest of us. Did they spend their money? If they did, would we be in a recession now?

For any of your doubters out there, here's an interesting quote to consider:

"As I've often said... this [increasing income inequality] is not the type of thing which a democratic society—a capitalist democratic society—can really accept without addressing." - Alan Greenspan, June 2005

...that subtle, yet discernable admission is from a fierce capitalist, a really big fan of Ayn Rand (see also, the libertarian link above), and an acknowledged expert on economic policy who was in charge of the Federal Reserve Bank for about 20 years.

So what is the return on investment when comparing a tax cut vs. spending? The simplest explanation put forth by Robert Reich, the former Labor Secretary in the Clinton Administration, is this: giving tax cuts to people who already have money doesn't make them spend more money. They've already spent the money they want to spend and so they only save more of it with tax cuts. On the other hand, giving money to people who have none guarantees they will spend it since they live paycheck to paycheck if they have one.

Here is one example of how a tax credit (which is a synonym for tax cut) didn't work. According to this article, between 1994 and 2004, the telecommunication companies, like AT&T, Verizon, and Comcast, were given an opportunity to improve their Internet access services with $200 billion in tax credits. What they did instead is cut costs, jobs, and increased prices for their services. So instead of remaining at No. 1 in the world for high-speed Internet access market penetration, we're No. 15 and falling. Oh, and they also gave the executives bonuses. Yeah, tax cuts are really great if you're making money.

By now, you may have noticed that I've been citing Dean Baker here and there. I like him because he's the only economist I've seen who is willing to go on camera and say what he really means. Dean points out another reason why spending is better than tax cuts. If the government doesn't spend the money, NO ONE ELSE WILL.

So let's look at the stimulus plan as a way to say "Sorry, my bad," all around, from those wonderful free-market conservatives. Who could blame them for having faith in the market.

And lets hope that the current administration is and continues to be mindful that we can make a meaningful change here for the better. Kudos to President Obama for making the effort to reach out to the other side. This is the first President I've ever seen that is actively seeking ideas from around the country instead of just inside the beltway. Perhaps the conservatives, noticing some of their ideas didn't work last time around, will wait their turn and give this new president a chance, too.
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