"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace. We ask not your counsels or your arms. Crouch down and lick the hands which feed you. May your chains set lightly upon you, and may posterity forget that you were our countrymen."
-Samuel Adams

the Misanthropic Humanist:


01 February 2009

Depression Package

The stimulus package that Congress is about to pass will not stimulate the economy. The past weeks have seen Liberals saying that it will work, conservatives believing it will not work, and most citizens just hoping blindly that it can. It cannot. What I haven't seen is a good explanation of exactly why it cannot work, so I'm going to take a crack at that myself. I apologize, but this will probably be a little long.

I read a comment recently on somebody else's blog that basically claimed an economy is a closed system; that whether you spend your own money, or the government spends it for you, the money is still being spent, so economically speaking the results are the same. You can't get rid of the money unless you burn it. I suddenly realized that this misconception, shared by millions of people, is the false concept behind the idea that spending makes an economy work. It is a self-falsifying argument, because in a closed system it shouldn't matter who does the spending, the effect would be the same. Therefore a government stimulus would be useless. About the only possible difference is when the spending would happen: You might have plans to spend your money during your retirement, but the government wants to spend it for you right now instead. Either way it's a moot point, since an economy is not a closed system. If it were, we would still be banging rocks together in a field and hunting with sticks. Instead, we have space ships and internet video. This change would be impossible in a closed system.

The value that is traded with money, represented by gold, sought after by politicians and measured by economists is called work. That's it. If the economy goes up, more work happened. Now, a narrow view of work would mean that more people were simply busy. That's almost right, but not quite. The real definition of work (here, not in physics) is not the busyness itself, but the results of people being busy. So if two companies produce the same thing with the same number of employees, but one company produces more of those things, then that company did more work.

Now, who's to say what's worth working for? Is a car worth more than a motorcycle? Which car? Which motorcycle? Is it better for the economy to produce lots and lots of cars, or is it better for the economy to produce one diamond bracelet? If you happen to work in congress, you'd probably say lots and lots of cars, because that keeps more people in jobs. You'd be wrong. The correct answer is that it's better for an economy to produce something that can be sold, whatever that is. If nobody wants it, it isn't worth making. If you think it's objectively useless, but someone else will pay you exorbitant amounts of money for it, then it's worth producing. Things have value only because people want them. Beyond the basic necessities of life like food and shelter, everything we have is luxury. We're not talking about perishing in this bad economy; we're talking about mediocrity. A recession won’t to kill you; it will prevent you from accomplishing, buying, or doing something that you want to do.

Now, this all sounds very basic and simple. You knew all this, right? But what does it have to do with the stimulus package? Waste. Busyness is made more efficient when it is applied intelligently. You could stay busy for a week building something in your garage and sell it for $100. Or, you could sit for the exact same amount of time on an assembly line and make $800. The difference between the two is that whoever is paying you has made you more efficient with his assembly line. You now do more work. He used his own intelligence and through invested money used the collected work of other intelligent people to increase your efficiency. You both win. The only reason he, or anybody, would do this is for profit. For his own good, not for yours. But he needs you to do the producing, so it's worth paying you that $800 which, by a happy coincidence, is exactly what is good for you!

These kinds of transactions, uncountable numbers of them per day, are not just A stimulus, but THE stimulus of our economy and every other economy possible. What the government plans to do now is to take some of your work and spread it around as they see fit. A lot of people seem to think that this is a fine plan, so long as when something is produced with that stolen money, they get it back.

The problem is, it never works out like that. It can't work out like that. From the very start, there is the overhead cost of the government itself. You have to pay somebody at the IRS to collect those taxes, the collection of which doesn't produce anything to sell. Then there are accountants and bureaucrats and others involved along the way that get their salaries paid. Somebody has to author bid requests, sort through responses, study environmental impacts, investigate banks' financial documents, pay for over-runs, and then have dinner with a congressman. In the end, not all of the money makes it out the other end. Sure, the people paid in between will spend it again, but what value did they create with it in the mean time? And in the end, how much of the money intended for… let's say infrastructure, is actually used for infrastructure? Eighty percent? If only we were so lucky. It's never even close (As you can see here with transportation spending as an example) How much does that missing 20% matter? It's more than a business’ average profit, that's for sure. So the government just lost more than a company would make with that same investment, and that is the harm. There are inefficiencies in everything, including the private sector, but two things control business inefficiencies: 1. The need for the value of what they create to compete with other products of value to see which one is the best. 2. The need to make a profit from that value. If they do this, they stay in business and their work is rewarded. If not, they don't and it isn't.

Government never submits to these controls. Never. They don't have to sell you their roads, and they have nobody under-bidding them.

These differences in spending through government and spending through the private sector may seem small. If the total outcome is a difference of 5% in production, what does that matter? Well, many companies hold on for many years without much more than a 5% profit. If that's lost through misappropriated funds and work with no value, then what has been created? How has this helped the economy? The answer is that it hasn't.

A simple real world example comes down to this: If GM isn't producing something that people want to buy, it is not helping the economy. If we give them billions of dollars to continue producing something people don't want to buy, that is not helping the economy. If the billions of dollars the government just gave GM are taxes that would have otherwise been used to buy or produce something of value, then taking that money away does not help the economy. So the rescue of GM damages the economy three times over. If GM goes under and everybody -- even the working age retirees who were consuming money but not making any -- gets jobs making something people actually want, that would improve the economy.

Beyond simply leaving the market alone, tax cuts are the only way to stimulate an economy. Tax cuts get money back into the hands of the people who produce. But not tax cuts in lower-income tax brackets. In fact, just ignore income taxes entirely. If you want money to be used to make even more money, and thus get the economy going, there are two taxes you should cut: capital gains and corporate Income. Capital gains taxes are on the money that you make on investments. People who are smart enough to make money by investing keep re-investing money when they make it. If you cut that tax, they'll invest more. Period. Corporate income taxes are taxes on the profit made by companies. The federal rate right now is 35% (link) http://www.taxfoundation.org/publications/show/22917.html If you’re barely making a profit, losing 35% of it is disastrous. This is the highest rate in the modern world and it is a really poor incentive to hiring more people or reinvesting in your own business. In effect, our tax rates are so high that even very efficient companies go out of business. In both situations, tax cuts here would get money, and therefore work, back into the hands of the people who use it most efficiently.

There are many, many reasons to oppose these bailouts, but only one that you need to know: They will not end the recession. They will prolong it, deepen it, and risk a true depression. The American economy is an amazing and powerful thing. It has pulled out of previous depressions even with poor policy and no leadership. While not likely, it could do the same thing again. Attitude does matter, and ours is indomitable. But no matter how short or long this recession would be, Congress will make it longer. No matter how deep or shallow, it will be deeper because of them. Throw the bums out.