Tuesday, December 30, 2008

Economic Stimulus will Prolong Crisis

The United States in engaged in a relentless effort to reinvigorate its ailing economy. With the booming days of the 1990s, and even the past 3 years, a fading memory, politicos are caught in a fire-fight with the killers of prosperity. However, just as putting water on a grease fire only worsens the flames, so too will this government led "stimulus" bitterly fail its objective. I realize this is a counter-intuitive claim to the bastions of government intervention, but it is a reality played out in the history of this great nation.

Franklin D. Roosevelt has been memorialized as a great reformer who held the hand of many a destitute American during the years of the Great Depression. He is also generally credited with the eventual turnaround of the U.S. economy. Specifically, his champions cite the many social programs he established as the impetus to economic reform and eventual prosperity. The Civilian Conservation Corp and and WPA programs are held up as government labor programs that dramatically reduced unemployment. Based on the assumption of FDR's success at curtailing further economic disarray, it is little wonder that President Elect Barack Hussein Obama is echoing many Rooseveltian intentions in his plans for handling the massive recession currently playing out in America. Among them a massive increase in public works projects.

However, FDR loyalists confuse sentiment and presidential approval ratings for economic well being. Although 1929 is often regarded as the lowest point in the Great Depression, few people recall that 1937 was the worst year - well into Roosevelt's presidency and his New Deal programs. Furthermore, the programs established by Roosevelt intended to control the markets and prevent another Great Depression have failed to curtail the current woes of our economy despite their extravagant cost to the American taxpayers. Roosevelt's WPA is credited with reducing unemployment, but few are willing to admit that it better served as a vehicle to reelect this 4-term president than to add jobs. In particular, the southern states still suffered from rampant unemployment while the western states garnered most of the WPA work despite their lower than average unemployment rates. While this imbalance in federal funds makes little economic sense, it is entirely transparent when considering the western states were swing states needed for Democratic election and re-election. Hence the reason socialism and communism never result in the maximum prosperity, even in good economic times: the distribution of wealth, production, and consumption are driven by political agenda rather than the needs and desires of consumers.

Similarly, Obama's public works program will provide jobs, but at the vast expense to the taxpayer and with ineffectual results. Infrastructure will be built where it is not most needed, earmarks will siphon billions of dollars in wasteful spending for the purposes of fulfilling IOUs owed by or to Washington bureaucrats, and much needed projects will remain untouched. Paying for this exercise in futility will cost taxpayers (individuals and corporations) for many years to come. If funded via issuance of more U.S. Treasury securities the reduction in the money supply and divergence of investment funds from corporate equities will retard private sector growth.

The injection of hundreds of billions of dollars at the hands of Congress, Henry Paulson, and George Bush will have similar effects. The Big 3 automaker bailout offers a splendid example of the inevitable prolongation of economic ruination. Ford, GM, and Chrysler have been held captive by the UAW. While edicted to produce more fuel efficient vehicles by the Federal Government, the conversion of their factories is fiscally untenable because they must pay the unions 4 years of labor costs if a plant is shuttered. Furthermore, they either must charge more for their automobiles than their foreign competitors (a losing proposition), reduce profit ratios on each vehicle (Ford was already losing money on their small cars), or pay less for component parts. This is because the Big 3 have far greater expenditures for unskilled labor than their non-union foreign counterparts. Speaking to a former GM engineer, he elucidated the problem and revealed that many GM engineers left their engineering jobs to take higher paying manufacturing jobs in the factories. American consumers have spoken; Toyota is the biggest car manufacturer in the United States on the basis of sales. Not only does Toyota produce a product more Americans want to buy, but they do it more economically.

Giving billions of dollars to the Big 3 does nothing to fix the fundamental problems with the American auto industry. It neither relieves them of the stranglehold on labor imposed by the monopolistic UAW nor does it make their automobiles more desirable to consumers. Therefore, the funds only delay the inevitable bankruptcy of these former stalwarts of American capitalism. While undesirable, bankruptcy would afford these companies an opportunity to de-leverage the UAW, abandon costly and inefficient assets, and restructure burdensome debt. Instead, the U.S. political machine has decided to prolong their restructure while simultaneously taking money away from the consumers and investors which the Big 3 need to purchase their goods and invest in their equity, respectively.

Instead of manipulating the "free market" in directions it does not want to go, the government needs to institute a policy of contraction. Instead of spending billions, the government should be cutting billions of dollars from its budget and simultaneously reducing taxes. Putting more money in the hands of the consumers (private citizens and public corporations alike) stimulates consumption and investment, the two things our ailing economy needs most. Adding more government at the expense of private sector productivity reduces the ability for the market to recover. Our country's historical record proves this point.

In 1815, 1837, 1873, 1893, 1920, 1958, 1979 the United States experienced economic downturns resulting in rampant unemployment. However, contractionary government reaction by Van Buren in 1837, Cleveland in 1893, Harding in 1921, Regan in 1980, and Bush in 1990 aided in the rapid turnaround of the recessionary economies in those years. Contrast those successes (the longest period being 2 years) with the liberalization of our country under Roosevelt and during the "enlightened" period of the 1960s. The Great Depression endured for 10 years and ended only because of the U.S. involvement in World War II. Furthermore, the ramification of FDRs socializing programs is the victimization of otherwise capable people.

Instead of creating an environment within which people can succeed and advance, social programs serve to place the destitute in a victim mentality from which they lack the motivation and means to propel themselves into prosperity. Although people occasionally benefit from the assistance during personal hardships, such as the loss of a job, government programs often reinforce failure rather than promote new success. For instance, consider unemployment benefits: they don’t pay a subsistence wage and the recipient cannot supplement his income with another job lest he lose the miserly unemployment benefits. A similar circumstance faces the “beneficiaries” of Social Security Survivor’s benefits and Welfare. So too will the government bailouts manifest a new era of corporate victimization whereby our former paragons of prosperity consider themselves the casualty of unscrupulous mortgagees who failed to pay their debts. When companies are rewarded for failures, and commensurately fail to take responsibility for their own recovery, they are no longer guided by their customers and are destined to become utter failures.

Companies that were financially responsible, listened to their customers, and do not need government funding to avoid bankruptcy will be at a disadvantage to their government bailed-out competitors. In fact, they will pay the consequences of the bailout via higher taxes and lower investment without any of the financial benefit. In an economic environment where the losers are rewarded for rampant mismanagement, where is the incentive for responsible business decisions that advance incomes and prosperity?

Hence, it takes very little economic sense and even less historical perspective to realize the U.S. Government’s economic stimulus is a cruel protraction of the current recession. While it may be unpalatable to consider the ramifications of rampant bankruptcy across a multitude of major corporations to a society accustomed to immediate gratification, the harsh reality is that direct intervention is unlikely to prove any benefit. Our government’s history with unsuccessful social programs, our nation’s successful history with government contraction during recessions, and common sense should be sufficient to prove the positive benefits of a laisse faire approach to the current downturn.

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