Now I don’t know what people think of Jim Jubak (MSNmoney) but i know he has a lot of online readers. I think he is so-so, being good on short term cause and effect but lacking in long term causality. His article today seems to prove this. I completely disagree with a lot of stuff and I don’t know it it would be worth someone’s time here to post a refutation, but i would sure like to see one.
It seems as if people think that when the an economic crisis arises, a potential solution would be to instantaneously force the “correct” allocation of resources in the economy, then the crisis would be averted. I could buy into this argument if someone other that humans were going to do the forcing; perhaps a God, if there is such a thing. The fact that humans are fallible and that the mistakes made are due to human error begs the question: Why would we assume that other humans that happen to be in an organization called the state know any better only because they claim too?
That pretty much sums it up. The stimulus is being made entirely wtih two purposes in mind: to prevent various companies and banks from going bankrupt and to try to “create employment”.
The first is to cripple the most fundamental mechanism in our economy that ensures the majority of economic activity being carried out is economic (and not loss making) so will simply serve to increase the percentage of companies in the economy that are making losses and delay or perhaps even prevent any return to profitability for the economy as a whole.
The second does something similar. It presumes that the government will be able to invent profitable uses for these people’s time. However the government must take the money to fund this “new employment” that they’re creating from someone. Inevitably that means either taxes or borrowing (i.e. future taxes).
If the money comes from present taxes then the government is taking money off already profitable institutions. So for the government’s plan to work they must put the money to uses which are even more profitable than the existing profitable uses to which it’s being put (despite the fact that the free market is unable to achieve this’)… so scratch that one off the list - they’re more likely to be able to part the oceans.
If the government borrows the money to achieve this then they will be crowding private companies out of the bond markets and thus making it that much more difficult for private investors to get capital, since banks that are risk adverse can simply buy government bonds (as can private investors) and this at a time when the government is trying to encourage lending. However this is hardly the only problem they face since, even if they borrow the money, they still have to invent uses for it which justify the capital + interest (yeild on their bonds). This is a feat which many entrepreneurs in the free market are having difficulty doing right now and, indeed, even in good times this is far from simple to do. So how the government propose to do this I would be interested to know - perhaps in addition to parting the oceans Obama also wants to let us know that he can walk on water.
In all liklihood, the stimulus will have as much effect as the last two - which is to say that primarily it will increase the level of debt held by the federal government, the risk of default for the US economy (in the worst case) and will necessitate, even in the best case scenario, higher long term tax rates without anything to show for it.