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The economy is like the ocean – beautiful in its bounty, terrifying in its temper and more fickle than the media in its love affair with politicians and celebrities. And with all the fancy-pants – you know, the ones who can explain things like why swaps have legs – setting up a nice crossfire of advice, recommendations and dire warnings of doom, it’s time for yet another monkey with a keyboard to offer some thoughts. So this week I give you…Frédérik’s Guide to Giving Good Stimulus (to an Economy That Needs It).
Step 1: Scorch the (Financial) Earth.
Personal accountability is just what is needed from Wall Street and, for good measure, the automakers. In both cases, they screwed up, the pooch is very sore, and they should pay the price. Wall Street let itself get too greedy and “creative,” and they failed. The automakers insisted on gas-guzzling beasts instead of investing in fuel-efficient technology, despite a history of innovation and existing inventions that have been shunted aside. They, too, failed.
I understand the hardships involved with failure – for anyone whose name isn’t succeeded by the letters C-E-O – but unless responsibility is taken and consequences accepted, nothing will change. Nothing will get better. Sometimes the earth must be scorched, the rubble of past failures swept away, so that something new can arise.
Step 2: Choose Advisors. Not the Usual Ones.
Forget Republicans. From Reagan’s supply-side voodoonomics (Thom Hartmann nicely punctures [http://www.commondreams.org/view/2009/01/26-0] that ghastly balloon) to W. Bush’s continuation of greed is good by any means, the best Republicans can do is what they always do, sing the “me, me, me” song about cutting taxes (making the Bush tax permanents) and privatization. So we’re stuck with Democrats who certainly enabled Republicans but at least aren’t quite so ideologically boxed in as St. Reagan’s disciples. That doesn’t mean we should recycle and reuse Clintonistas, however. There must be relative outsiders, like Nobel laureate Joseph Stiglitz, or Paul Krugman, who could take up the mantle of Treasury Secretary that offer a genuine alternative to the laissez-fair, corporation-uber-alles approach of the past three decades.
Step 3: Think Small.
John Cohn nailed it when he discussed the need to support small businesses. Helping the little guy (the basic unit of any economy) stand up is vital. It is the little guys who make up the transactions that drive the economy. But it’s not just business that could use the help. Homeowners, particularly those of us who are upside-down thanks to depressed property prices, could use some help, too. Members of the Two Migraines in Washington are apparently hashing out some sort of plan, with talk of tax credits for homebuyers and assistance for foreclosure risks. It’s a start, I suppose, although my feeling is that it won’t solve the underlying structural problem of the real estate market, namely, that home prices are not determined by the cost of the home, but by the ever-changing, ever-subjective, outside-the-homeowner’s control, perception of a home’s “value.”
Step 4: Think Big.
Tax cuts by themselves won’t do much on their own for the simple reason that many folks will take the extra money to pay off bills and flatter the much-neglected savings account instead of spending it. And even if they did spend it, consumers wouldn’t necessarily stimulate the institutional/enterprise level of the economy. This is where spending comes in since spending by an entity like the government can create jobs that in turn ripples through the economy in a wave of transactional activity.
For example, consider the architecture/engineering/construction industry. As it stands, a freeze on state spending means that school districts have to put their projects on hold. The school that needs an infrastructure upgrade to accommodate computer labs, or functional toilets, or new classrooms to help reduce class sizes, or a new building to accommodate new elements of a cutting-edge curriculum? Won’t happen. And the damage isn’t confined to current and future students whose education will be impacted, but also affects the large industry that makes building schools possible. With projects placed on hold, many architecture firms, general contractors and sub-trades have had to downsize. And the Governor’s furlough means that agencies such as the Division of the State Architect, responsible for overseeing compliance to California’s construction and accessibility codes, will lose up to 25 percent of their work time, resulting in approval delays for projects already underway, compromised school operations and disrupted money flows for the various players involved. Tax breaks for individual workers or businesses might be swell in that there will be more money in pockets, but the only thing that will get the a/e/c industry going again is to spend money, fund the work and create the stream of income that allows firms to hire and support employees. This lesson, I believe, holds to other industries as well.
If you want numbers, Mother Jones re-posted a nifty chart (http://www.motherjones.com/mojoblog/archives/2009/02/12147_spending_vs_tax_cuts_as_stimulus.html ) projecting differences in job creation between the tax-cutting approach and the spending- money approach. Among the winners: infrastructure spending and extended unemployment insurance. Among the losers: dividend and capital gains tax cuts, Bush income tax cuts and lump-sum tax rebates.
If steps 1 to 4 seem a little vanilla, that’s because they are. What we really need is a Step 5, bearing in mind that not only does the economy need stimulating, it WANTS to be stimulated. It likes the attention. And what is this Step 5? Tune in next week!
Frédérik invites you to discuss this week's column and more at his blog (frederik-sisa.blogspot.com).
