Stimulus spending not a quick fix for the economy

When the stimulus package was passed by Congress this past February, President Barack Obama assured Americans that this huge unfunded spending proposal was necessary to keep unemployment from rising and would restore growth to the recessionary economy.

On July 11, President Obama said the stimulus package “worked as intended.”

“The recovery plan was not designed to work over four months. It is designed to work over two years,” he said.

Unfortunately this is not how the stimulus package was sold to the American people. In his Jan. 24 radio address, the President said the purpose of the stimulus plan is “to immediately jumpstart job creation as well as long-term economic growth.” Immediately is not two years.

In fairness to President Obama, he also told the American people “this is not just a short-term program to boost employment. It’s one that will invest in our most important priorities like energy and education; health care and a new infrastructure.” In other words, the real purpose of the stimulus package was to substantially increase government spending using economic stimulus and job recovery as a smoke screen to sell the American people.

Unfortunately, at the time, mainstream media was too intoxicated with “Obama mania” to point out the real purpose of the stimulus package to the American people.

It is instructive to review several of the administration’s policies to understand why economic growth and job recovery have stalled. In the unlikely event the administration changes its priorities and puts “immediate” job recovery and economic growth before big government, this review may also suggest a path.

First, government is not known for quick action and efficient spending of taxpayer money. It is not a surprise that only 10 to 15 percent of the stimulus package has been spent thus far. The bulk will be spent after 2009.

Bureaucracy and procedures add time and costs to any government spending program. To make matters worse, much of the stimulus proceeds went to state and local governments. This adds another layer of government delay and inefficiency.

These governments are spending much of the proceeds to plug deficits generated by their improvident spending habits. This is not new stimulus spending, but paying for unfunded bloated state budgets.

The shovel ready infrastructure projects that President Obama promised would put Americans back to work, take too long to stimulate the economy in the short term.

The quickest way for the government to pump stimulus money into the economy is to distribute it directly to taxpayers through lower taxes and direct grants. Unfortunately, the administration and

Congress largely rejected returning money to the taxpayers. They prefer to leave stimulus spending decisions in the hands of politicians and bureaucrats rather than productive American taxpayers.

Second, the overhang created by record government deficits is threatening the economy with the prospect of higher taxes and inflation. The bloated deficit of $1.8 trillion created by the stimulus package and the existing budget is unprecedented in a “peace time” economy.

The government deficit is expected to be 13 percent of GDP in 2009. The next largest “peace time” deficit was 5.9 percent in 1983. At the end of the year 2008, the national debt was 70 percent of GDP.

At the end of Obama’s current term it is estimated to be 100 percent of GDP.

There are three ways to fund this deficit; higher taxes, borrowing or monetizing the deficit- a PC way of saying inflation. Higher taxes hurt the recovery because it takes funds out of the private economy.

Borrowing the astronomical sums required by the US government may not be a viable option. Many foreign lenders, including China, Brazil and India, have indicated that they no longer have an appetite for additional US debt. This means that the government will have to rely on domestic debt to a greater extent than the recent past. This will crowd out private sector borrowing necessary to recover from a recession and create new jobs. In order to kindle a recovery with lower interest rates, expect=2 0the FED to monetize the debt. This will ultimately lead to inflation. The dangers of inflation to the economy speak for themselves.

Third, if the U.S. Senate passes “Cap and Trade”, expect higher energy prices. As recently as 2008, most Americans felt the negative impact of high oil costs on their budgets and remember its negative impact on the American economy. It is inconceivable that a year later Congress and the President want to impose increased energy costs on the American people in the middle of a recession.

According to an MIT study of a 2007 version of the Cap and Trade bill, Cap and Trade will cost the average American family $3,100. Even if that estimate is high, taking any money out of the pockets of working or unemployed Americans at this time is unconscionable and unnecessarily retards economic recovery.

Furthermore without participation of emerging market countries, Cap and Trade will have a disastrous impact on the US economy and job creation.

China, India and most other emerging nations have said they do not plan to participate in capping carbon emissions. Therefore, expect US companies to transfer the manufacture of energy intensive products overseas to low cost energy countries, and expect US jobs to follow.

Fourth, the Federal government has disrupted the “creative destruction” process of the recession by keeping failed businesses afloat. GM, Chrysler, AIG, Citibank, Bank of America and other institutions are now effectively owned and controlled by the US government.

The government has created a “moral hazard” with it’s “too big to fail” policy. Aside from the direct costs to the taxpayer, the government is undermining the efficiency of American capitalism by keeping failing companies afloat.

Based on this review, the recommend course of action to get the economy back on track is straightforward. First, repeal the stimulus package that has not yet been spent. If the government must enact a fiscal stimulus program, enact a permanent tax cut directed at both consumers and businesses.

Second, reduce the deficit by cutting government spending. Start with reductions in health care and pension benefits to Congress and the civil service. Everybody outside of government in America makes a substantial contribution to his or her health care and pensions costs. Almost every business in America has gone through the pain of becoming lean in order to survive this economy. Washington should lead the way by becoming lean with the rest of America.

Third, forget about health care reform and cap and trade until the economy recovers. America can’t afford them at this time.
Fourth, get out of the corporate turnaround business. Sell government interests in bailed out companies and pledge not to contribute another nickel of taxpayer money to corporate bailouts.