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Posts Tagged ‘Economic Stimulus’

Well, I think they’re great, anyway.  I guess Barack and I aren’t quite on the same page yet.  Here’s the way I see it:

There are two basic ways to structure an economy: the economy can be cash-based or credit based.  An economy that is cash-based is essentially a barter economy where your cash represents a tangible object that could have been exchanged for your cash.  For example, I could trade you an ear of corn for a carrot, or I could give you a dollar for your carrot, both of us having agreed that both an ear of corn and a carrot are each exactly worth a dollar.  We also agree that my dollar simply represents an ear of corn in my warehouse and you can redeem it at any time for your ear of corn.  The dollar simply makes it easier for us to carry out our trading transactions.  This sort of economy can grow in a way that the dollar can be used to represent many other things, like maybe 5,000 dollars represents a car or a boat.  The essence of this economy is that there are only so many dollars and they always actually represent something tangible and they can be redeemed for these tangible goods.  Such an economy can be very stable but it is unlikely to grow very fast because of a scarcity of dollars for investment.

A credit based economy could have the same value for a dollar, but in this economy cash transactions are augmented by credit transactions. For example, I tell you that I will give you a dollar for a carrot next week, right after I sell my corn.  You agree and give me the carrot trusting that you will get the dollar next week.  This type of economy can grow fast because it makes use of the promise of future dollars rather than an actual exchange of dollars at the time of sale.  Our U.S. economy is very much this type of economy. Credit is absolutely essential for this economy to operate; however, we now find ourselves in a situation where the usual granters of credit – the banks – are afraid to grant credit.  Without the credit the economy withers, and when the economy withers the banks become more afraid to grant credit, and the economy then withers even faster. That is what is happening now.  Our credit-based economy is spiraling downward to a dreary cash-based economy – also known these days as a depression.

If one wishes to stimulate our economy, it is not enough to pump dollars into the economy by creating jobs.  It is not enough to give dollars to the banks.  It is not enough to reduce taxes.  Because the U.S. economy is not a barter type economy, and it is based upon credit, credit must be restored.  Unless the banks are willing to provide massive credit – and they are not – we cannot recover from this recession (or depression).  That is really the essence of the problem now.  So how do we make the banks grant credit? I suggest that the U.S. government create a set of  rival, government-operated banks that do provide credit – almost unlimited credit to almost everyone (for reasonable purchases of course – not for buying and flipping houses). The government can do this because it can always get back any money it loses through future taxes.  There is no real risk involved for the government.  Once people are able to obtain low cost credit from a government bank the economy will start to grow. Almost immediately, when the private banks realize that the government banks are lending money, they will start lending too because 1) they will have to compete if they want to make money and 2) they will feel confident that with the government directly lending money the economy is once again a really, really good bet.  Our government’s  stimulus package should include this capability, but it doesn’t.

Let’s suppose we gave every single person a $1,000 stimulus check today, with the stipulation that it had to be spent right away and not banked.  What would happen? There would be a huge buying spree and lots of things would be sold. Good for the economy, right? Sort of – for a while anyway. Why? Because when everyone goes out and buys all their stuff, we will find that most stuff these days does not come with a tag saying “Made in USA”.  Most likely it says “Made in China”. Or Mexico, or Pakistan, or Egypt, or a lot of other places.  And the money we spend on our stuff will eventually migrate to Mexico and Pakistan and China and Egypt and everywhere else.  So how does that stimulate the U.S. economy?  Not very well, or not for long anyway.  We are in a global economy now and things that worked pretty well in 1933 probably won’t work so well this time.  I think our country’s stimulus response could be rather muted and short-lived.

Our country leaks money, and we can’t create jobs here if we don’t make things here any more.  Our job stimulus needs to create new jobs here, and not jobs that can easily be outsourced.  Some sort of new high tech industry might be good. Especially if it creates a product that sells well and is only made here – maybe something like 3-D televisions or a new health food where the more you eat the more weight you lose.  The roads and bridges thing is good, but it’s a temporary blip.  It’ll create some jobs initially, but the money will eventually wind up in China’s economy, not ours.  That’s because the people who build the roads and bridges will spend their money at Wal-Mart and other stores and these stores will turn around and send the money to China so they can get their next shipment of stuff.

So, I guess my two cents says to first create Federal Lending Banks, and second, fund lots and lots of high tech, really far out ideas.  The first concept will stimulate our economy (and our banks) immediately by providing badly needed credit again, and the second will create a new, vibrant, modern American economy with jobs for Americans that won’t be outsourced tomorrow.

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As Barack Obama’s plan to save the U.S. economy takes shape economists and politicans have begun offering their opinions about its potential effectiveness.  Many economists, like Nobel Prize winner Paul Krugman have said that the plan is not grand enough to be effective.  There are also some Republican Hooverites who feel it goes too far.  His plan seems to have two basic components for creating jobs: rebuilding roads and bridges, and creating an alternative energy source.  He also plans to inject a financial stimulus into the economy by reducing income tax withholding.  At first glance the rebuilding roads and bridges concept sounds good. These are mostly construction jobs and they would hopefully provide employment for many people who lost their construction jobs when the housing market imploded.

The alternative energy idea is a good one too because it potentially frees us from the blackmail of the Arab oil producing states and it helps staunch the outflow of U.S. dollars to foreign countries.  It remains to be seen how many jobs this will create in the short term.  It’s hard to believe this would create millions of new jobs.  I would guess that these jobs would be mostly high tech engineering jobs – at least until someone actually figures out a cost effective alternative to oil.  It’s not a JFK space-program-to-the-moon sort of vision – but its OK.  However, I wonder if  just “OK” is good enough.

The tax reduction stimulus thing sounds unexciting.  It’s just a few bucks here, a few bucks there.  Personally, I would rather receive a $10,000 debit card in the mail that expires in three months and can only be used to buy stuff, i.e. it can’t be used in ATM machines to get cash because people would just do that and then bank the cash. If we all received these $10,000 debit cards I can guarantee you it would be like a lightning bolt jolt to the economy. Don’t get your hopes up though – it’s not going to happen.

Here’s something no one is talking about: the danger that outsourcing will severely erode the impact of Obama’s plan.  First, let’s look at the road construction idea.  Giving jobs to American construction workers is a great idea – it goes directly to a group of people who have already been severely affected by the economic downturn. However, it is no secret that a lot of the construction workers who built America’s houses during the Great Bubble were immigrants – and not all of them were legal. If we don’t find a way to ensure that these new jobs go only to U.S. citizens then all we will have done is outsource the work to foreigners – and the money they receive will migrate from the U.S.  to their families back home – wherever that may be.  That won’t help the U.S. economy so much.

How about the high tech jobs?  Outsourcing will be a problem there too. Today the Irish government announced that Dell Computer Company (a U.S. company big on outsourcing)  is eliminating 1900 jobs in Limerick, Ireland and outsourcing these, already outsourced, jobs to Poland because the Poles will work for less than the Irish who work for less than the Americans.  We shouldn’t think for a heartbeat that America’s high tech companies will hesitate to outsource any of Barack’s energy related research jobs to any of a couple of dozen countries with highly educated workforces who work for less money that Americans. These highly capable countries include not only Ireland, but also Singapore, India, China, Malaysia, Korea, and on, and on.  Unless Obama does something to ensure that these jobs can only go to U.S. citizens who actually physically reside in the United States then the U.S. economic rescue plan will simply become an Economic Rescue Plan for the Entire World – and we can’t rescue the world all by ourselves.

Outsourcing of jobs is one of the underlying causes that led to the housing bubble.  That grand Ponzi scheme became just about the only way a lot of Americans could make a lot of money because too many good jobs had already been outsourced. Our economy is sort of like a big bucket that can hold a lot of water; however, when outsourcing is allowed it is like punching holes in the bucket – all the water (i.e. money) flows out. So, if Obama’s plan is to simply put more water in our economic bucket, but he doesn’t plan to take strong action to patch the holes, well, all that money (your tax dollars to be exact) will just flow away to foreign countries.  And make no mistake, our U.S. companies have no sense of patriotism when it comes to making money – they have already shown they will cut your economic throat and send your job overseas without blinking an eye.  It’s all about money with these businesses – it’s not personal. This is a lesson the Irish are now learning as they face an economic crisis at least as bad as ours, and it’s one the Poles will undoubtedly learn in a few years when Dell outsources their jobs to Rwanda and Zimbabwe.

So, my question to Barack is this: does your plan include seriously plugging the outsourcing holes in our bucket or not?  Because if it doesn’t then why don’t we just save ourselves a whole lot of heartache and tax dollars and forget about it?   You can’t fill an economic bucket that leaks like a sieve.

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The economic news today is not good: consumer spending has dropped off significantly and the retail industry is therefore suffering. This news is apparently the cause of today’s massive sell-off in the stock market. People are not buying because they are uncertain of their own economic future and are unwilling to spend money on anything other than necessities. This drop in purchasing leads to a drop in business profits which eventually will lead to job reductions and the loss of family income.  The whole cyclic process becomes a self-fulfilling prophecy, because economies operate on confidence, and the lack of confidence in an economy can lead to a recession or worse.

Several months ago, President Bush created a stimulus package whereby taxpayers could get a rebate of up to $600 per person.  Millions of checks were sent out, but not everyone spent the money. Approximately half the money was deposited into savings accounts and therefore did not have the effect of massively increasing retail sales.  Senator Obama has been calling for a second stimulus package of $1,000 per person, but how could the government ensure that the recipients would actually spend money, and therefore stimulate the economy, instead of just banking i- t which might seem to make a lot more sense for a lot of people right now?

I think there is a straightforward solution to this problem that, if employed, would ensure that essentially all the money would be spent in the desired amount of time.  I would suggest sending every authorized recipient of the stimulus a $1,000 debit card with a two month expiration date instead of a check.  This debit card would not be capable of obtaining cash from ATM machines and could only be used for purchases by using the recipient’s PIN number.  When the people realize that the value of the card goes to zero in two months they will definitely spend the entire value of the card soon, thus injecting large amounts of cash into retail businesses.

I would expect that if the government announced a plan like this we might immediately see a stabilization of the stock market.  Then, as people start spending the money this may well perform the  “priming of the pump” function that is needed to start getting the economy back on track.

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