Category Archives: policy

enforced guidance

Short-term Stimulus with Long-term Benefits

Please pardon my absence.  (I didn’t know that I had a few regular readers.)  I have been waiting to see the new administration’s true colors.  Although it is still too early to know them, I am beginning to once again feel compelled to sow my little seeds of thought.  So here is one:

What should the government do to help the economy?

First of all, do not save the companies that crashed full speed into this mess.  They did that despite glaringly obvious signs that trouble lay ahead.  Instead of being careful, short sighted business leaders and investors obsesivly followed unsustainable economic incentives.  If we keep them around to lead after the economy recovers, then they will do the same thing out of habit.

While we are getting rid of those bums, re-invigorate the economy in the short-term by investing in projects that have long-term benefits.  Besides investing in sustainable home-made energy sources and transpertaion networks to do that, also fund education.  Give students or their parents vouchers that will fund the hiring of more teachers.  Give shcools vouchers for hiring construction workers to improve their buildings.  Save the commercial publishing industry, (and access to their low-cost content), by sponsoring a nation-wide marketing campaign that targets the audience of every publication.  Have it encourage American’s to value education, hygiene, and courteousness.  Employ graduates by sponsoring research and developement of technologies that are more efficient.  Then give the results to domestic employers.  Investment in these kinds of economic fields will yield short-term stimulus while providing long-term benefits.

The culture of American business and the irresponsible consumerism it fostered are what caused most of our economic and environmental problems.  The business environment encourages corporate gluttony.  And its leaders are familiar with only that system.  A fresh start is needed.  It is time to dismiss the old corporate guards to find new employment.  They should consider learning a new skill; a sustainable business skill.

In the meantime, our government must take charge.  Only the government has the resources and authority to correct the economy.  It can begin doing that by using short-term economic stimulous money to invest in labor-intensive endevours that provide long-term benefits.  While that is putting money back into the hands of wage earners, the government can reform market regulations.  A network that employs the most talented professionals can be created to develop a system of sustainable economic incentives.  Irresponsible business leaders, by their own hands, have given us this opportunity to replace them and their unsustainable ways.

Bryant Arms

Ticking Inflation Bomb

The front page of the New York Times on 1/6/09 passed on to the public a warning from President Elect Barak Obama. He warned that trillion-dollar deficit spending by the government will likely happen for “years to come”. This spending is supposed to fund the great economic rescue. Barack Obama also acknowledged the burden that this will have on future tax payers.

Most of the money in the world’s failing economy has been invested in US government bonds. These bonds are one of the best ways to keep money safe in times like these. Average Americans don’t have the money to invest in government bonds. If they did, then the economy wouldn’t be in this mess. Wealthy investors now own most of the government’s debt. They fund the government’s deficits. And they will try to sell it when better investments become available.

When the economy finally recovers, these creditors will take back their loans to the government and invest in companies that are poised to supply consumer demand. Investors simply will stop buying new government bonds. At that time there will be only four options for the government: default, raise taxes to pay off maturing bonds, reduce government spending, encourage inflation to make debts worthless.

The United States government defaulting on it’s debt would severely inhibit its ability to run future budget deficits for bailouts. Too many investors won’t buy government bonds if they are not guaranteed. Without funds from government bonds to pay for deficit spending, the United States would be forced to create extra money.

Raising taxes to keep up with the demands from government creditors will be, well, taxing. The effect will stunt economic growth. That defeats the whole point of using government debt to get the economy growing again.

Reducing government spending during an economic recovery is politically problematic. It would stunt economic growth when it is still needed. Government deficit spending is supposed to be what rescues this economy.

Creating extra money, even to pay for bonds, causes inflation. Normally, that discourages both saving and long term investing. Money needs to be spent before it looses much value. So consumers cannot save for major purchases. Commodities get hoarded. In the extreme, a primitive trade and barter economy emerges as the currency becomes worthless.

The good thing about inflation is that the value of debts also decrease with time. As the value of the currency drops, so does the value of the debt based on that currency. Wages go up during inflation. So a borrower will have more money to pay for a debt that is worth less.

For many reasons the result of trillion-dollar deficit spending will inevitably be high inflation. Taxes will not be enough to pay back the bonds used to rescue the economy. The sale of new bonds will not be enough to roll over that debt. Without income from either new taxes or enough new bond sales, the government cannot run a budget deficit. Severely reducing government spending to balance the budget is politically problematic. Eventually, the government will be forced to create extra money to pay its bills.

When the economy finally begins to recover, hoarded cash approximately equal to what investor’s withdraw from the government bond market plus the bailout monies that have been squirreled away will suddenly be dumped into other markets in a spending spree. The supply of goods will not be able to meet demand. Various market bubbles will inflate and pop as investors desperately try to beat inflation. And as the inflation spiral tightens, the spending frenzy will increase.

The government will have several tools available for slowing down the demand driving the inflation when it comes. It could reform the banking system and raise interest rates. But that won’t remove the excess money that would already be in circulation. Taxes can also be used to take excess money out of the economy. But taxes have notoriously uneven effects. And they are not nimble enough to cope with economic changes. There will be few practical options for the government to stop that runaway inflation.

Severely reducing government spending at that time may be a practical option.  Not many Americans or businesses would need to continue receiving government assistance. The economy would no longer be dependent on government spending. And the extra goods, labor, and services available to the rest of the economy after government spending cuts would help increas the supply needed to keep demand under control. It would also reduce the flow of money into the economy. It would be a perfect time to reform government.

International Bailout Competition Begins

The US has provided its American automobile industry access to money that it otherwise would not be able to get.  Car companies in other countries around the world say that this bailout is a subsidy that gives American manufacturers an unfair advantage over their foreign competitors.  Consequently, foreign car companies are asking their governments for bailouts too.  Due to the nature of international competition, we can safely expect other industries around the world to behave the same way.

Congress Abandons Consumers

The reason why the economy is collapsing is because too many average consumers have lost their purchasing power. From the beginning of the crisis this has been obvious. So why are policymakers concentrating on implementing a trickle-down approach to rescuing the economy?

They have put their faith in the directors of big businesses to save our economy. Almost all of the cash meant to rescue the economy, (last count = more than 2.7 trillion), has been given to them. This is despite the widespread belief that free markets most efficiently direct investments to where they would be most useful. Our leaders need to remember why free markets work well.

Free markets democratize the economy. They give consumers the power to direct the economy. Consumers do this with their purchasing power. They give money to sellers and investors who offer the best deals for the things consumers want. In a free market anyone can hope to become a self-made business magnate. And the customers get to choose them. Free market economies serve the will of the people.

Our free market economy is quickly disappearing. The people have lost their purchasing power and Congress has abandoned them. Money for saving the economy has been given to the leaders of big businesses. They are not investing that money in people who would compete against them. The directors of big businesses are using their purchasing power to help themselves.  Regular consumers are left to fend for themselves.

Congress’s mistake must be corrected soon. The bailout money is being hoarded by big businesses that are laying off employees. More consumers are losing their purchasing power. If centralized control over the economy remains for the long term, then innovation would probably be stifled by timid bureaucrats and big business leaders eager to protect their profit margins. The situation is getting worse.

Policymakers and Congress can easily correct this situation. Simply direct the bailout money to average consumers. Let them choose which businesses deserve a bailout. Chances are almost everyone will get what they want.