False Pathways to Real Economic Stimulus

On February 17, 2009 President Obama signed into law the American Recovery and Reinvestment Act of 2009. The law is better known as the stimulus bill. Historic shifts marking departures from past trends and the birth of new ones are sometimes marked by dramatic events like the fall of the Berlin Wall which heralded the unification of Germany and the fall of the Soviet empire. More often than not a succession of far less dramatic events alters the course of history. The spread of Christianity throughout the Roman Empire changed western civilization one convert at a time over centuries. The invention of the printing press in Germany was not noted by many contemporaries of Gutenberg. Yet the availability of printed information facilitated the Reformation and Renaissance and helped bring about the religious and philosophical paradigm shifts linked to them.

The stimulus bill promised new jobs and the spurring of economic growth. Nine months later growth is stagnant and unemployment is at double digit rates. Unrealized objectives belie fundamental changes. For more than two centuries economic growth in America has prospered its inhabitants and transformed the financial future of millions of immigrants by making business opportunities plentiful. Entrepreneurial initiatives were given free reign because governmental interference was minimal. Regulations were few and so too were taxes.

In the article "Keynesian Fiscal Stimulus Policies Stimulate Debt--Not the Economy"(1) J.D. Foster, Ph.D. and a Senior Fellow at The Heritage Foundation, eloquently summarized an underemphasized problem with Keynsian ideas expressed through the stimulus bill. Foster wrote that Keynsian theory "correctly describes how deficit spending can raise the level of demand in part of the economy, and ignores how government borrowing to finance deficit spending automatically reduces demand elsewhere." Governments on all levels float bonds to secure capital. Investment capital is finite. That which is invested in government bonds is unavailable to the private sector. The economy is interconnected and money used by the public sector lessens investment capital for the private sector. Foreign sources of capital can add to the pool but only at the risk of dependency.

Farrell E. Block, a senior partner at Econometric Research, Inc., and author of "Unemployment: Causes and Cures" notes that policy decisions are trade-offs and that trade-offs are an inherent part of a system requiring policy formulation.(2) Do we prefer a federal government which heavily regulates business and employs public sector resources to affect social change? Does government spending jump start a contracting economy and provide work for the unemployed? Current leadership in Washington relishes government activism, implements ever more regulations of business and views increased spending as an antidote for a sluggish economy and unemployment. Government spending is project oriented. Money can be set aside to build a bridge here, a road there. Maintaining an adequate infrastructure is not controversial. But it is not a pathway to technological innovation. Nor does it result in the sustained growth that innovation fosters.

J.D. Foster cited empirical experiences of Keynesian model failures in the United Kingdom and more recently Japan. The fundamental problem with public spending is its failure to create novel productive enterprises. That was America's forte. American ingenuity generated more than half the world's patents and led in the formation of cutting edge business enterprises. None of this resulted from government spending or regulations. These were the fruits of unfettered technical genius combined with entrepreneurial skills. Add ready capital to the mix and the world's most dynamic economy was the end product.

Washington does lead the way in one financial activity that has become a contemporary symbol of the modern American economy- lobbying. Lobbyists vying for a piece of the federal treasury or favorable legislation are part of our business landscape. In recent years the trend includes hiring immediate family members of Senators and members of the House of Representatives as lobbyists with six figure incomes. That includes immediate family members of Senator Reid and Speaker Pelosi. The practice should be seen as ethically repugnant. It barely catches the media's attention.

Future historians might look back and link an era of rapid economic decline to a giddy expansion of the public sector, discouragement of new business formation, a decline of venture capital and an explosion of debt. A decline in public ethics and some apathy to boot creates fertile ground for one of history's great power shifts. There is still time to change course but if we lack the will to do so America will follow a seductive path others have previously trodden. Mediocrity lies at the end of the trail.



Footnotes:

1. Keynesian Fiscal Stimulus Policies Stimulate Debt--Not the Economy by J.D. Foster, Ph.D. http://www.heritage.org/Research/Economy/bg2302.cfm

2. Unemployment: Causes and Cures by Farrell E. Block; http://www.cato.org/pubs/pas/pa004.html

An Ill-Advised New Hampshire Bailout

The state of New Hampshire is guaranteeing 75 percent of a $250,000 loan made to Eagle Printing & Publishing LLC, owner of the Eagle Times, a newspaper located in that state. New Hampshire would be liable for $187,500 in case of default. (1) New Hampshire's action is ill-advised for two reasons.

The financial woes of the Eagle Times are shared by most newspapers in the United States. The media is evolving. The internet and cable news have become the sources of choice for many. That is particularly true for younger customers. The media is not disappearing. It is simply transforming by responding to technological and market influences.

Change is endemic to business. Tractors replaced horse drawn plows, word processors supplanted manual typewriters and autos replaced stage coaches. It's progress. The makers of plows, manual typewriters and stage coaches did lose their jobs. History shows that new products generate new jobs. New jobs in the media have been created through the internet even as some are lost within the print media. New Hampshire is on the wrong side of history.

New Hampshire's decision also highlights a clear conflict of interest. The state acquires enhanced influence over individuals and enterprises dependent on its assistance. This is particularly troubling when the dependent party is part of the media. The value placed by the founding fathers on a free press was expressed when they enacted the First Amendment. That value judgment has been vindicated over the course of time. An independent press ensures readers that information will not be tainted by a fear of government. Fear may be too strong a term to describe the relationship of a debtor to a loan guarantor but need and independence are conflicting relational characteristics. The press should avoid even the appearance of a conflict of interest.

One other caveat is in order. Don't short circuit ingenuity with stifling governmental policies. The Asbury Park Press is a newspaper published in central New Jersey. It's a large daily paper covering multiple topics and has experienced the financial pressures felt by traditional newspapers throughout the country. The company developed a strategy which may become a blueprint for other companies. Rather than abandon the print media the Asbury Park Press has found a niche by publishing multiple newspapers. Each is a mini-edition devoted to a particular community. Production costs are lowered and readers know they have a uniquely local news source. This is the type of response prompted by human ingenuity and stifled by bureaucracy . Those who govern us take heed. Don't stand in the way of history or our ability to adapt.


Footnote

1. ‘State to fund loan to save ailing newspaper’ by John P. Gregg; The Telegraph; http://www.nashuatelegraph.com/News/427626-196/state-to-fund-loan-to-save-ailing.html

Trade War Continues

BBC News has an online article titled US hits China pipes with tariffs. It tells of yet another U.S. governmental tariff increase on imported goods. This time it is on Chinese oil well pipes. Quoting the article:

The announcement is the latest in a series of trade disputes between the US and China, which called the move an "abuse of protectionist measures".

This and other actions previously documented at this website bring to mind disturbing parallels to the Smoot Hawley Act; a major contributory cause for the depression.