Rate Watch #725 Misdirected Stimulus and an Alternative
V) The Futility of Misdirected Stimulus
There has been a lot of back and forth recently between economists focusing, more of less, on the relative merits of fiscal sustainability vs. Keynesian deficit spending. The problem is that this discussion really does not tell us how to create jobs and the consumer spending which goes with them. Remember that GDP = C+G+I+(X-M) Consumer spending, Government spending, Investments, eXports and iMports. The present and previous administrations reduced taxes to encourage"C" (Consumer Spending). This works as long as there is a multiplier effect on those dollars. The multiplier effect is the notion that money spent by the government gets spent again and the effect of the stimulus multiplied so that GDP grows beyond the dollars first spent. But as economist Steve Hanke points out this is effective only if the consumer is confident. High budget deficits and a government which does not even feign an explanation as to how it is going to pay for social security and Medicare does not create consumer (or investor) confidence. This means that there is no multiplier effect on those lower tax dollars which people now retain. Today's Employment Situation Report is a real confidence killer. Hanke is correct. Folks do not go out and spend money when they think they may lose their jobs and they are less likely to buy equities with a report such as this.
The key to sustained GDP growth is the guy in the middle of the GDP equation - I - investments.
The real problem is that short term thinking does not grow the economy long-term. What achieves long-term economic growth is investments. It is investments in infrastructure and technology which will produce the jobs and GDP of the future. The role of government fiscal policy should be directed to investment tax credits to those who are the angel and or early round investors in technology or investors in serious infrastructure which will enable those businesses to grow. Folks who make angel investments in new technology should be give the ultimate break of zero tax on any capital gain. Someone needs to oversee this so that M&M pretzels are not regarded as new technology.
The government cannot create 10,000,000 new jobs but if it can encourage tax policy to create 200 new billionaires those folks will create the 10,000,000 new jobs. If the attitude of the government is that getting filthy rich is bad then we are screwed. It is the possibility to get filthy rich which drives investments and which creates new and innovative technologies and the jobs which go with them. Academic economists are, from my point of view, much too dedicated to Keynesian economics and dissociate themselves from the notions of supply side economics. This may be because they dislike its association with Ronald Reagan. The reality, I believe, is that some vector combination of Keynesian theory and supply side economics is more likely to be pointing the way toward growth and fiscal sustainability. Keynes recognized that supply side economics was what created jobs but believed, correctly so, that it often wandered astray leading to macroeconomic inefficiency. Too many economists concentrate on the corrective force of government spending as being the prime mover. It is not and never will be. Business (employers and employees) is the engine of the economy. The government is that voice on you GPS telling you that you are off course.
If you have something to add to this discussion please post a comment on the blog.
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