Monday, February 2, 2009

The right ideas

The level of household borrowing that took place over the last two decades was unsustainable. We were told by many economists that it was unsustainable, but no one, including government, listened. Now, due to the recession, consumers have battened down the hatches and are not spending. This, along with the unscrupulous lending practices and risky investments of banks due to government deregulation, helped to send our consumer-based economy into a downward spiral.

Realistically, there is no stimulus plan that can get us back to a healthy economy in the near term. The United States would have to spend such huge sums and run deficits that are so gigantic (much more than the current 2 trillion dollar TARP plus stimulus plan) that we would be saddled with a terrible amount of long term liabilities or, even worse, lead to collapse. According to many experts, we would need to allow an additional 6.3% of the GDP to be added to the deficit per year to get us out of the economic hole. The Democrats’ plan is roughly only 2.5% of GDP added to the deficit per year. So, the stimulus package would need to be 2.5 times bigger to actually help the economy turn around quickly.

The last rebate did not work well because consumers were already feeling the burden of their debt and either paid bills or saved the money. The Bush/Republican tax cuts did not work well because those earning less than $100K, who would have spent most of it for goods, got very little. The largest percentage went to the wealthy with little of it trickling down into creating jobs as promised – other than maid and gardener services. Even so, the Republicans want to give more tax cuts and rebates. Ideological at all costs, GOP proposals are absolutely unrealistic and would do little to stimulate the economy. According to the Congressional Budget Office, for each dollar in tax cuts the return to the economy is 75 cents and for each dollar of direct government spending the return is $1.50. Since tax cuts will have only about half the impact on GDP growth than direct government spending, not even getting back the amount put in, the Republican “plan” would make our deficits much worse. The Republicans are just plain wrong – as the record of the past eight years shows. Tax cuts are less effective than most other measures.

In adding in tax cuts to please the Republicans and get them on board with the stimulus bill, Pelosi said, “… we are committed to the tax cuts because they do have a positive impact on the economy, even though not as big as the investments.” But the Democrats have added increases in entitlements and not enough infrastructure spending in the stimulus bill. Yes, many entitlement programs such as Head Start need more money after having been ignored by the Republicans for about 35 years, but Democrats should not use the stimulus package to add money for these programs. So, the Democrats are on the wrong track, too.

The biggest problem is that the current structure of our consumer-based economy will cause most of the short term tax cut and rebate stimulus money to flow out of the country, increasing our already enormous trade deficit with China and other countries. We need to reverse the trend of sending jobs and manufacturing overseas, restructure the foundation of our economy to create more production of goods in this country, and bring in fewer imports. But it will take years to redevelop our manufacturing base.

President Obama’s ideas of building up our infrastructure, helping what’s left of our manufacturing to be more efficient (such as the Big 3 auto manufacturers), and starting new businesses based on our energy needs are better than what the Republicans and Democrats are putting on the table. Obama wants to establish long term projects that will give the U.S. a strong foundation for the coming decades: increasing domestic energy supplies through wind, solar, natural gas, etc; building and repairing infrastructure including roads, bridges, and schools; and creating a better educational system for future workers. In other words, make sacrifices now, turning away from instant gratification, in order to establish a brighter, more stable future.

If Obama’s ideas are so good, why are so many resisting? Because he is calling the stimulus a “recovery plan”. President Obama will eventually be attacked from both sides when people realize the economy will not recover quickly enough to suit them. Democrats will berate him for not being willing to spend enough in the short term and the Republicans, as usual, will attack government efficacy.

Obama should reframe the issue and explain why we need to make vast long term changes to our economy even though the benefits might not pay off for 5-10 years. Obama should also explain to the nation that there is little that can be done to stop our current downslide. If he does not change the presentation of his ideas, his plans may be judged a failure or derailed altogether.

The only short term spending should be an increase in unemployment insurance, food stamps and other safety nets, and help for home owners who need to renegotiate their mortgages. Many economists, both conservative and progressive, have said there is more of a stimulus to the economy by investing in food stamps and in unemployment insurance than in any tax cut.

As things stand, people will ignore the much better long term path and, instead, push for something with immediate gratification which will result in a continued downward slide. In the meantime, the drop off in U.S. consumption is hitting all the exporting countries very hard (Japan, China, Germany) and leading to a global decrease in trade. The worldwide recession, including mass unemployment, will continue to spiral downward, and like the stock market, must find a “bottom” before we can begin to slowly climb out of the chasm.

Obama has the right ideas, but few people are listening.