Bogus Stimulus; Real Recession

I am not a formally trained economist, but I have taken a good bit of economics as I studied political science, and I liked the subject. Strangely, I find myself able to see right through the bogus claims of the stimulators in Washington, despite their supposedly being the Smartest Economic Brains In The World.

I just have to break this down, because the stimulus is all over the news here in Washington again, and Omessiah is talking about more stimulus because the recession doesn’t seem to be obeying the rules. Unfortunately for him, the recession is obeying the rules of economics, he is not.

Economics is like math; which might explain why so many people hate to know anything about it. It is like math enough that it has basic rules and principles that work always in a predictable manner. Let me demonstrate one.

Lets say we have high unemployment; I am a benevolent government official, and I want to “create jobs”, so I decide to build something we don’t actually need in order to give unemployed people something to do. Let’s say I give this boondoggling a name. For the sake of argument, call it “stimulus”.

I either tax or borrow (or borrow now and tax later) to get together a $100 million. This is spent on a new bridge, and we can all see tangible benefits. A new bridge to someplace (which we didn’t really need), or nowhere as the case may be, a lot of people working on it, money those workers spend in stores, buying things with their paychecks from the project. Looks good, what’s the problem?

I had to tax $100 million to do it. That means I took $100 million from other things; the new suit a farmer wanted to buy, the new laptop a family was going to buy for a student in college, the new car for an accountant in New York, whatever. This $100 million worth of stuff will never be produced, will never create jobs, will never “stimulate” because of the bridge to nowhere I just built and put my Congressional name on.

It get’s worse. Say I tell you “we don’t need to take it from anywhere; we can just borrow it”. The problem with this is that it increases our national debt. The problem is, our dollar is valued based entirely and ONLY on what people THINK its value is. This means that the worth of our paper currency is only as good as the strength of the US economy. If our debt goes up, the value of our currency must go down. (Don’t you hate math?)

It gets even worse than that. Let’s say that the project for the bridge was $100 million, so you say I have to tax or borrow $100 million, right? Wrong. I have to tax or borrow at least $200 million or so to pay for the $100 million bridge to nowhere. Why? Because of what I call “friction”. To get the money from the sweaty clutches of the worker in the factory in South Carolina or Michigan and into the sweaty clutches of the construction worker on my bridge to stimulus, I have to use a thing called the IRS; one of the least efficient bureaucracies ever created by man. They add at least 20% to the cost because they have to pay a few thousand paper pushers in Washington. I have to pay somebody in the Department of Labor to make a report about my bridge, I have to pay the EPA to tell me the design is kosher, I have to get a few dozen agencies involved that all have staff and overhead costs and which do not function as efficiently as a private industry would. This adds a lot. Now, I don’t want to burden the economy with this activity, so I am borrowing the money from the Chinese, which means it accrues interest (you know, like a car payment), so I don’t pay back $100 million, but more like $160 million. Add in my bureaucratic “friction” and you have doubled the cost.

Now, there are other costs too; for example, I might raise taxes on the “wealthy” to pay for this. Well, when I do that, they will; find ways to not pay taxes by sheltering their money in various legal ways overseas, hire fewer people in the small businesses many of them own, buy less stuff, and even move overseas completely, none of which serves my purpose of hosing the rich at all. In fact, this depresses the economy.

And there’s more. An inflationary cycle (which is fancy talk for my borrowing too much and people selling off US dollars so the value of the currency goes down; also called “printing money”) makes the dollar in the pocket of every blue-collar family worth less. This hurts mostly poor people, not rich people. Poor people usually have all their money in cash form, so if cash decreases in value, they can’t buy as many groceries and have to hold off on getting the car fixed. Rich people (and plenty of upper middle class nowadays) own gold and stocks and bonds and various things to shield them from the currency problem. What else does inflation do? It drives up costs of business, which means they hire fewer people.

One other thing about that bridge. Because I had to take the $100 million (or $200 million as the case may be) from other areas to pay for my bridge-to-stimulus, that money won’t just not be spent on other things, it will be spent, by definition, on something less economically worth while for future growth than it would have been. See, we don’t need the government to build the bridge if some private individual wanted to do it for profit anyway. If nobody wanted to do it for profit, there wasn’t profit to be had (considering how much people like money). On the other hand, if people were going to spend that money on other things if it hadn’t been taxed or inflated out of them; those other things would have been profitable in some way, or at least very efficient, because people don’t like to spend money, and want to get a lot for what they spend. That means that we took away $200 million that would have been spent efficiently and profitably to stimulate the economy and gave back $100 million in a non-profitable, less efficient project. Why is this not working?

You know, I think, given the incredible amount already spent on stimulus and the rampant unemployment, that what we really need right now is more stimulus, right Omessiah?

What do you think?

[Note; a real economist would tell me the money spent on bureaucrats is not “lost” like friction in an engine, but government employees make very bad stimulators. Of course, such an economist would probably be paid by a federal grant anyway.]

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~ by Jubal Biggs on July 21, 2010.

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