As much as I’ve tried not to watch the news any more than I have to, it’s hard to get away from all the talk about Washington’s “stimulus package” and the subsequent unbelievable spending that’s followed in its wake. President Bush, proving once again not really to be a fiscal conservative, participated in the first “rescue plan” last year for hundreds of billions of dollars, which was at that time the largest single charges against the federal credit card in the history of the nation. Now, President Obama, in no way conservative, has broken the record with a second package at about $800 billion dollars. Both will top $1T easily when you include interest payments. Democrats and Republicans alike (shame on those calling themselves conservatives!) have taken us from $6T to $10T in national debt under President Bush, which took 8 years. Now we’re likely to jump another $1T in the first MONTH of President Obama’s presidency, and the new budget has the deficit at $1.6T, so the debt will be climbing from this point at a rate of over $1T per year, unless something changes. Now, there’s talk of TARP 2.0, government taking over healthcare and the banks, the auto industry asking for more money, mortgage bailouts, and STILL the Omnibus for 2009-10 is packed with pork. I think the latest estimate is like 8,500 to 9,000 earmarks.
I don’t know about you, but my head’s starting to spin … and my stomach’s starting to churn.
Not only is this amount of debt totally irresponsible, it’s ridiculous. It’s borrowing against the future and writing checks our children and grandchildren and great grandchildren will have to try to cover, and likely won’t be able to. But what’s even more ridiculous to me is what we’re spending the money on, which in my view will NOT “stimulate the economy”. I didn’t like the first stimulus/rescue/crazy spending plan (whatever you want to call it) under Bush, and I like the official Obama stimulus plan even less. And I don’t even want to think about a third, which DC is already doing. If it were up to me, I’d recommend less government involvement in the free markets, not more. In my view, it’s not capitalism that’s failed here, it’s government’s interference with capitalism that’s (once again) been clearly shown to lead us down the wrong road. My concern is that we’re finally getting to the stretch of road where Socialism replaces Capitalism, and we get to be like France and Canada … yippee!
So, as much as I’ve tried not to blog political lately, I really do want to try to understand how what we’re doing right now makes any sense at all. I have a few ideas on what I’d do to stimulate the economy if I was king for a day, and they’re all totally opposite what we’re doing. But rather than posting those (and fighting over them), I’m more interested in getting answers to two basic questions…
First, how will what we’re doing actually stimulate the economy? I truly don’t understand the thinking here. First, it seems like we’re spending when we’ve already overspent. It’s like gorging yourself on the all you can eat buffet, and then when you feel sick to your stomach, someone prescribes that the solution is to chase lunch with a 3/4 pounder from Fuddruckers (with extra fries and those awesome cookies). How does that make any sense? If you came to me and said that you had credit card debt equal to 2/3 of your annual income, and I told you that what you should do is increase your spending by 60%, you’d laugh in my face. But that’s exactly what we’re doing. National debt is $10T, 2/3 of the GDP which is roughly $15T. 2008-09 budget was $2.9T (already insane). Obama’s proposed 2009-10 budget is $4.6T, an increase of 60%. How does that make any sense?
And Obama’s stimulus plan doesn’t make any sense to me. Even if I concede to his declaration that there are NO earmarks (a debatable point) and believe every word about the jobs he claims he it will create (another debatable point), still all the jobs will be government jobs and temporary at best. If the bill funds building a new road, then the government pays a construction company to build a road. That’s good. But when the road is done, the construction company is no better off than before the road was built. It seems like we’re asking for a cycle like the auto industry is in… Come ask Uncle Sam for money, spend it, then come ask for more. That’s the wrong idea. Wouldn’t it be better to use government money (if we’re going to use it at all) to give private industry the tools to create more jobs, open more lines of business, create new markets, etc? Doesn’t seem like we’re doing much of that.
All I see when I look at the current “stimulus” plans are short term fixes and more dependency. What am I missing?
Second, what would you do if you were in charge? How would you guide / lead America right now?
I’ll give you an example to get us started. If I were in charge, I would create a couple year window during which you could deduct 100% of capital investments. Currently, you have to ammortize your deduction over several years. If all of a sudden companies could buy a new piece of equipment or build a building and deduct the whole expense immediately, wouldn’t they be incented to expand NOW rather than wait to do so. Wouldn’t that create new jobs and expand business immediately and entirely in the private sector, without creating increased dependence on the government?
Another example: I’d increase military spending by 10%, not decrease it. Then we’d spend more money on planes and tanks and other equipment, which American companies could build. Why wouldn’t that stimulate the economy?
But I want to hear your ideas. What would you do?
Breaking Away: Jeff Block's Blog 
hey jeff, run for president, ill support u! i agree, the reason why i think obama upped the stimulus is for government reasons and there is something that we dont know about that has been going on…
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Lucki… Although I am flattered by your vote of confidence, I think I better steer clear of high public office. I’d get shot in a week. But let me ask you, what would YOU do to stimulate the economy if you were president?
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I liked Rush’s idea – have a one year federal tax hold – it would be the same amount of money that is being borrowed, but it would be in our hands to spend… spending our own money? What a concept – and what the governemnt misses out on is the same amount they would have borrowed BUT it comes without paying interest and getting a huge shot in the economy… the only problem is that it effects only those of us who pay taxes – Obama can’t have that… socialism pisses me off…
I do like your capital investment theory…
Jeff for President!
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Jeff, you know…the more I think about this question, the more I tend to scare away from it as well.
I think there is simply too much that myself and the general public do not know concerning current events to make an intelligent decision. I will however play along;
-I would force the “Big 3” automakers to completely revamp their automobile line-ups, and any bailout from here forward would involve re-tooling their assembly plants to begin producing other, non auto related items that this country needs. This will keep the companies from folding and keep jobs (increase new jobs)
-I would strongly encourage US companies operating in other countries to come back to the states by offering great tax benefits to the company and owners, while finding ways to tax them more if they choose not to come back to the US. Again, creating jobs and increasing flow of money in the US.
-I’d find ways to allow struggling home owners to step aside and allow other people to take over their mortgages. This is being done in several ways now, however I would allow people with not-so-perfect credit, but ample income to take over the homes. As a banker, I know many people with lower credit scores that can more than afford to buy a home. You would be surprised how many people out there have below average credit scores due to circumstances they couldn’t control, but still have the income to buy these homes that banks are holding on to…it’s win-win for all. Struggling home owners can find a way out without bankruptcy, deserving people can get into a home they would care for and pay for, and banks get to clean up their books.
…I am but one man though, what do I know?
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Holding Federal income tax for a year would, in my mind, definitely be better than what we’re currently doing, and it’s certainly the libertarian approach, again better than socialism in my estimation. But I think it’s unlikely that the government would infuse that much money back into the system TOTALLY undirected, and I don’t even argue with the ideas that President Obama has about moving us toward energy independence. (The global warming stuff annoys me of course, but what can you expect?!) I’d just rather it was targeted at new companies and supporting entrepreneurs, not government dependence.
Re: the big 3 auto makers… I agree they need to retool. I think they’re going to have to be allowed a controlled bankruptcy so that they can do so. They’ve gotta get out from under the unions. Unfortunately, Obama is pushing them the other way… to make cars that don’t sell, and to be restricted by cap and trade re: pollution.
Re: rewarding “made in America”… They’re actually doing some of this, in the form of revoking tax breaks for companies if they send labor overseas.
Re: mortgages… I’m not sure we can let your neighbor take your house if you’re struggling. Here’s where we just have to allow people who got in over their head to pay the penalty so that they won’t do it again. If we don’t, and instead we reward them for poor planning and judgment, then there’ll be no end to the handouts necessary to keep people who make bad decisions afloat. At most, I think the government could subsidize interest rates to permit people to refinance at lower rates. But otherwise, I just don’t want the government more involved in our lives … especially to reward bad decisions.
BTW, I predicted that there would be no liberal responses to this blog entry, whereas usually I’m pounced on immediately. I find that interesting. I’d definitely welcome responses on both sides to talk about ideas to help the economy (not just argue with the ideas being put out there by conservatives).
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RE: Spending on our “defences”/ military….How about we take this money that should be going to “defend us” instead it is building planes, bombs, tanks that are probably going to sit in a warehouse untouched for months or years and put that same money into our educational system. Start from top to bottom, early child-hood through our college’s and universities. Let’s overturn No child left behind which most teachers agree has left far to many children behind and overhaul as system that has been broken for years. Limit classroom size to 20 students, those jobs that are supposedly going to our US factory workers and instead are lining the pockets of Dick Chenney and his cronies over at Halliburton will go to teachers. Only hold these teachers and students accountable, bring back discipline (not abuse) but real discipline. i guarantee that those teachers salaries paychecks are going to stay in the US. My friends who work in CPS or Mike can probably attest more to the problems in public school. What I know is that at the community College level, I get 60% of my students who are not ready for college level math, another 30-40% are not ready for College level english. Over 50% of our teaching staff are adjunct professors, most who are under-qualified or simply unqualified to teach the subject they are teaching. Pump money into science and ingenuity from the college and university level. Thats where our new ideas can start and then those people will flow seamlessly into private industry. Pump money into science, most conservative estimates state that we lost 5 years of technology when Bush cut funding to science and in particular the frictionless wind turbine. Its free energy once built and doesn’t pollute, why would we use dirty old expensive forms of energy that we only have a finite amount of. Put artists to work doing what they were trained to do. Instead of letting them sit at home taking an unemployment check. To be perfectly honest, I don’t know much about the market but what I do know is that right now businesses who have stopped spending, and wealthy people who hord their money and complain about paying more taxes are the people to blame. Obama is simply trying to reverse the deregulation (of the 1980’s) that led us to this point. If you look at most of his policies, they replicate The New Deal economics of the 1930’s. Those seemed to work, will they work today? I am skeptical, but I am willing to take the ride with mine and my sons tax dollar and future. Why? Because I believe in America, I believe that trustworthy people can lead us to a good place…. a better place. A place where we don’t hide how much debt we really have, like the Bush administration did in all of his “budget calculations.” I believe that once this comes around, because it probably will, we will see a balanced budget. Until then we have to help people help themselves. I am not a complete bleeding heart liberal, you don’t deserve anything in life you didn’t bust your ass to get…thats how I feel. Sorry I am taking up all your blog space, jeff. Maybe i should start my own. I like the open dialogue, though.
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I noticed one thing in your post that seems somewhat contradictory. You say that the govt building roads, while a good product, won’t lead to recovery because it’s a one-time job. But later you say you’d increase military spending by 10% , to “build more planes and tanks and other equipment, which American companies could build.” But isn’t that the same thing — just a one-time job? And that on a weapons of war, rather than improving our national infrastructure.
Personally, I think we already spend way too much on military. Do we really need to spend $500 – $1000 billion (depending on what you count) on military every year, nearly as much as the entire rest of the world /combined/? Does our current spending really make us any safer than spending some significant amount less would?
Yes, we still have to deal with Iraq and Afghanistan in a responsible manner, and that will continue to cost us a lot. And I think some wars are necessary, in particular, Afghanistan and Al Qaeda.
I think we need to move toward eliminating the deficit and, eventually, the debt. At the same time, I think we can’t let large parts of the economy simply fail. Unfortunately, achieving these two goals seems at odds currently. The existence of FDIC is probably the only thing preventing huge runs on banks, such as in the Great Depression. Consider whether you would keep your money in the bank, if it were not insured. So some govt involvement does help to stabilize the economy.
But no, I don’t know what will or will not stimulate the economy.
(And I’m not a staunch anything. Sometimes I vote Democrat, sometimes Republican, sometimes others. I try not to be too politically minded.)
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Great discussion here.
For me, it comes down to having the government do LESS to stimulate the economy, not more. People are sitting on the sidelines waiting for the government to make things right. That mentality absolutely KILLS the individual drive and entrepreneurial spirit that made the American economy great. The message from the government should be: “We have faith that the American people will rally and turn this around. Your government isn’t going to rescue you, but we’re also not going to interfere as you roll up your sleeves and make the best decisions for yourselves.” The government should then gently poke and prod with a scalpel (rather than the shotgun approach being used now) as needed. Do NOT just throw gobs of money at a broad array of projects.
Take, for example, the government’s recent steps to “stablize” Citibank. They’ve basically taken a majority ownership position in the bank (congrats to you all – you’re now owners of Citibank). How has the market responded? It’s plummeted. Bank stocks are being dumped left and right. Everyone’s worried about a nationalized bank system. If the government really wants to help the financial sector, they’ll get out of the way. Get Obama in front of the TV cameras to tell the world that the Federal government is NOT in the business of banking and has no interest in running our banks. If Citibank fails, it will suck, but let it fail. It will be hard for a while, but Citibank’s failure will create an opportunity for smarter banks to step in and move forward. Same goes for the auto industry – untie their hands (cafe standards, union obligations, etc) but don’t throw money their way. Quit propping up a failing system with our hard-earned money.
By the way, I agree with what both Mark and Pat had to say. Mark, you’re absolutely right that we spend way too much on the military. Let’s wrap up Iraq and Afghanistan in a responsible manner and then find better uses for a lot of that money.
Pat, I also agree that investment in education would be a vastly preferable use for some of this “stimulus” money. The question there is, what’s the plan to improve education? I’ll admit that “No child left behind” has been a failure, but I do like the intent behind the program (i.e. accountability for schools to weed out the schools that aren’t performing and incent those that are). I don’t think the answer to our education woes is to just throw gobs of money at the problem. So what’s the plan there? If as you say, so many teachers are unqualified to teach where they are, how do we improve the quality of our teachers?
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I haven’t seen any discussion of demand. No company is going to expand in the absence of demand. If the government let us keep all of our money we are going to save much of it – good for us, horrible for businesses.
The government is spending all this money to create demand. Their hope is that when they are done our demand will be back and unemployment will not shoot through the roof.
I don’t see how any tax breaks, etc. will have any strong increase on demand.
I would increase military spending, but force it to go to civillian projects. I.E. the Corp of Engineers has been begging for money to improve levees in New Orleans for almost 30 years – maybe this is the right time to give it to them. We could retask TSA (Thousands Standing Around) to actually do something helpful.
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Brad – I think you make a good point about driving demand. In my mind, the most important factor driving demand is consumer confidence. If people fear losing their jobs, losing their homes, being unable to pay for medical problems, they will act extremely cautiously with their money. As you’ve said, they’ll take money and sock it away. In a way, Obama’s current job as President is much harder because of all the economic gloom and doom that Obama the candidate spread. It was a smart strategic move to help him win the election (because he did such an effective job tying McCain to the Bush administration), but now he’s got to turn all that pessimism around. If people are still fearful of the future, no amount of government spending will produce any lasting momentum. And all that borrowing just mortgages our future and the future of our kids and grandkids.
For me, it comes down to how you get people optimistic about our economic future. Looking only at myself, the thing that would make me hopeful for the economic future would be seeing the government make strong statements (and actions to back the statements) supporting untethered free market capitalism, more liberty, smaller government, and lower taxes. That’s what made our economy great and it’s what will keep us on top. Unfortunately, seeing the government taking steps to nationalize the banking industry, the health care industry, the auto industry (“car czar” anyone?) just tells me we’re moving away from capitalism and toward socialism. That only serves to make me more pessimistic about the future of our economy. But that’s just me. Does all this government spending make you more confident about our future?
By the way, I applaud your suggestion to retask some of the Thousands Standing Around. Here, here!
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Okay, I’ve resisted adding my 2 cents thus far and I think I’m ready to speak. First, I feel compelled to put my intelligence in such matters somewhere above Forest Gump (though he was quite the capitalist and leader – using the definition of leadership as “yielding to the strength of others”) and somewhere below David Hasselhoff (am I that stupid? Quite possibly!). Now that I have painted myself accurately, I’ll get to it.
Perhaps because of the season my big peeve (aside from deplorable spending on the part of the gov’t) is the tax structure. It’s not the grandest headline these days but honestly, does the tax code have to be what it is? The world is full of successful examples featuring a flat tax. We could cut government jobs (gasp! eath to the IRS as is) AND we citizens might actually have some idea what we owe in taxes. Furthermore, countries that have moved to a flat tax structure often experience an increase in revenue. Businesses like knowing what they owe Uncle Sam. Hence countries with flat-tax structures are attractive to businesses worldwide.
And let’s face it, this is a world economy. We need world business to survive. That’s a trend that is going to continue. Protectionism is not going to get us anywhere. I want the government to push for free-trade universally.
What about today and now? All I want right now is for the government to stop spending like it’s actually accomplishing anything. I’m not fooled, and I think a lot of America agrees. This is a time when good banks, lenders, home owners, investors and the like should be gobbling up market share. There are many institutions and individuals that have done things the right way and yet, the government sees fit to punish them by rescuing the corrupt and inept competition. I don’t really think it’s fooling anyone. Economics is simply the propensity for people to do something. The “something” I think we’re after is consumer spending. Is all this government spending exciting a positive response from the public? I don’t think so. We simply MUST let poorly run companies fail – it’s the only insurance there is against further corruption. Were that to happen I’ve no doubt there are businesses in this country ready to take over. That is what capitalism is all about. It’s unfortunate that doing business correctly and ethically has become a financial liability. Shame on the US government.
I could go on for a long time (concerning how a BS almost isn’t worth it and that health care is not only expensive but often poorly administered) but I think I’ll stop here. Thanks Jeff for the post. I’ll will freely admit I didn’t offer a lot of concrete suggestions (I’m not good at that really) but I feel a little better for this bit of ranting.
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Finally getting back to this post. Thanks to so many who have responded. I’ll try to address key points briefly.
Re: (Patrick) “instead it is building planes, bombs, tanks that are probably going to sit in a warehouse untouched for months or years and put that same money into our educational system.”
A) I think you have a scary view of what it takes to defend our nation. Fact is that it still needs defending, which costs money and should be one of our top priorities. I would hope anyone in power would realize that. To believe that somehow bombs and planes will probably never get used is exactly the kind of thinking that leads to the Nunns invading from the north.
B) Twice as much federal money pours into the public school system now (when Obama took office) than it did eight years ago (when Bush took office), yet the schools are worse not better. No Child Left Behind was a classic liberal program (implemented by a Replubican but not a conservative president), focusing all its efforts on the unproductive at the expense of the successful. The current congress and administration is now planning to “fix” the problem by pouring even more money into the system. Money is not the problem.
Either way, as I understand it, Patrick’s solution is to transfer funding from the military to education, and target specific educational activities. Obama is basically doing this, so rock on.
Re: (Patrick) “bring back … real discipline”
Now we’re talking. I agree completely that the lack of discipline and the emergence of a culture that believes they are owed whatever they want whether they work for it or not … that’s the problem.
Re: (Patrick) “put artists to work doing what they were trained to do”
Patrick, whom are you talking to here. Are you saying that the government should put artists to work? The private sector? Who? I’m assuming you understand that inginuity, hard work, and demand come together to create jobs. So if you have a great idea (inginuity), and work hard to turn it into reality, and people want what you’re selling (demand), and it takes artists to do what you do, then YOU can put them to work. But that’s the only “who” that really works in your “put them to work” statement.
Re: (Patrick) “wealthy people who hord their money and complain about paying more taxes are the people to blame”
Other than parroting the nightly news, how do you know this? Can you explain to me first who the evil wealthy people are and secondly why they’re to blame?
Re: (Mark) “Isn’t [building roads and building military assets] the same thing – just a one-time job? And that on a weapons of war, rather than improving our national infrastructure.”
Well, actually, yes. I see your point, and hadn’t thought of it that way. Great catch!
Re: (Mark) “Does our current spending really make us any safer than spending some significant amount less would?”
I fear this kind of thinking. I imagine there are myriad ways we could make the military more efficient. I’m very familiar with several in the IT space alone. However, I fear that under your statement is the belief (like Patrick has) that somehow we’ll just be automatically safe whether we continue to invest in military assets or not. I don’t think that’s true. By the way, did you know that we spend more money every year on welfare than we do on defense?
Re: (Mark) “I think we need to move toward eliminating the deficit and, eventually, the debt.”
I agree. I thought the deficit and debt were totally out of control under Bush, and now we’re enacting policies that make those numbers look small. I find that a bit scary (and frankly infuriating).
Re: (Chris) The message from the government should be: “We have faith that the American people will rally and turn this around. Your government isn’t going to rescue you, but we’re also not going to interfere as you roll up your sleeves and make the best decisions for yourselves.”
I agree 110%. Perfect. Here’s the problem… We have thought this message to be so harsh and horrible that we’ve fooled ourselves for 60-70 years that it doesn’t have to be this way. Eventually, we’ll run out of money and potential creditors, and we’ll be forced into this message. But even now, there are people living in America who can’t even remember when their grandparents didn’t depend on the government for half their lives. They can’t even conceive of truly doing it themselves. And we’re not talking dozens of people, we’re talking about tens of millions. Unfortunately, I think the era you’re talking about – of rugged individualism, self-determination, and entrepreneurial spirit is all but gone. We’re already in a place where 20ish% is supporting the rest, and the number’s shrinking.
Re: (Chris) “If Citibank fails, it will suck, but let it fail. It will be hard for a while, but Citibank’s failure will create an opportunity for smarter banks to step in and move forward.”
Wow, dude. You sound like a capitalist. Dying breed, my friend. I have only one question: Who is John Gault?
Re: (Chris) “No child left behind has been a failure, but I do like the intent behind the program (i.e. accountability for schools to weed out the schools that aren’t performing and incent those that are).
Accountability, good. Focusing all the resources on the least productive among us, bad. But again, I’m confused why liberals don’t love the program. It’s basically bottom-up-economics-in-schools. I thought that was how we’d save the economy too … taking from the evil rich man and giving to the little guy. What am I missing?
Re: (Brad) Demand is key
I agree, The only think I have to add to Chris’ excellent response to those thoughts is that, assuming the confidence Chris spoke of, demand is always there in our (consumer-driven) economy. It’s not a question of whether or not people want stuff, it’s whether or not they are willing and able to act on those wants. Willingness = confidence. Ability = do they have the money, or (ugh) credit.
Re: (Brad/Chris) TSA
I third this idea!
Re: (Scott) There are many institutions and individuals that have done things the right way and yet, the government sees fit to punish them by rescuing the corrupt and inept competition.
I totally agree. I’m struggling to understand how to process this reality other than to believe:
1) We’re interfering with capitalism at increasing levels then saying capitalism doesn’t work as a justification to interfere more with capitalism. Seems to me that if we just stopped screwing with the system / natural selection, then the strong would eat the weak – leaving room for new strong ideas to emerge, grow and prosper – and we would see an increasingly health and strength and natural evolution of our economy.
2) We’re stalling the (what will now be a) crash needed to restore stablity and natural selection to the economic system. What would have been many little(r) adjustments over the last 60-70 years is now balling up into one or more giant crashes that looms in our future. Because we have repeatedly been unwilling to pay the price over the last several decades, we are setting ourselves up for paying an amplified price in the future, or……………
Because we’re never going to be willing to pay the piper, we will continue to move toward socialism and ultimately worse things, because we view takeovers and bailouts as superior to allowing the market to be free and self-correcting. Given this philosophy, I believe we have no other choice than to get the government more and more involved (as Bush, Obama, Pelosi, Reid, Frank, Dodd, Geitner, and others have done and are doing). After all, there’s a reason all these people are in power. We asked for this.
Re: (Scott) We simply MUST let poorly run companies fail
You’re a dying breed, my friend.
So, to sum up… New ideas on stimulating…
Pat: Transfer $$$ from the military to education
Mark: Not sure
Chris: Get the government out of the “stimulating” business
Brad: More government-funded infrastructure projects at home (essentially the Obama plan)
Scott: Let capitalism work by government’s allowing failed businesses to actually fail
Thanks for contributing, all. Any other ideas out there?
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A couple brief interjections:
Re: (Jeff) Who is John Gault? – YES!! Right on, brother Block! I’ve been recommending “Atlas” to anyone who will listen.
Re: Getting the govt out of the way of the economy – Just an observation I made, as an aside. We met some friends for dinner at a Cici’s Pizza buffet last week. The food was decent, the kids loved it, and I loved paying only $3.99 for an all-you-can eat pizza buffet. After dinner, as my pepperoni-induced coma began to set in, I looked around and noticed how busy the place was. Every table was taken, pizzas were flying out of the oven, and the cash register was getting a workout. The place was hopping! The Circuit City’s of the world have gone belly-up, but Cici’s is doing a TREMENDOUS business.
So too are places like Aldi’s grocery stores, Southwest Airlines, Hyundai automobiles, and on-line banks like Emigrant and ING. These businesses have clued in to the core needs of their customers and they’ve eliminated peripheral services that don’t add sufficient consumer value. They’ve taken innovative steps to reduce costs – simplified selection/menu/routes, limited staffing, “quarter deposit” shopping carts, bag-your-own groceries, etc – and they use those cost savings to be able to price their goods way below the competition. And people are eating it up! Business is absolutely booming for those companies, they’re quickly expanding, and they’re doing it all without a dime of “stimulus” money from Uncle Sam. Consumers have “voted” with their money and they’ve chosen to support companies like these.
If left alone and given the freedom to do so, other smart companies will see how consumers are “voting” and will make similar innovations to bring their own offerings more in line with what customers want. Profit is the motive, but the end result for the consumer is that they get more of what they want and less of what they don’t. As consumers’ needs & wants change again (as they always do), the smart companies will continue to innovate and adapt. The companies that aren’t meeting consumers’ demands will die off and make more room for those companies that are keyed in to what customers want.
What’s wrong with leaving a system like that alone to do its thing? Why do we have to take BILLIONS of tax-payer dollars, for which we don’t get a “vote”, to prop up businesses that have made poor choices and/or are out of touch with what customers really want? We’re putting our nation deeper into debt and stealing potential business from those companies that are actually clued in to what customers are asking for.
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A couple of pro-govt thoughs, although I agree with alot of what you are saying Chris.
Were any other diners disabled or retired? They may be eating with govt. money.
Did you feel safe you would not get salmonella, etc.? Govt. regulation and standards behind the scene.
Did you fear you would get kicked out when you stated how hungry you were? The court system has your back.
My argument is that capitalism works great when you have powerful regulatory bodies that make sure everyone is playing by the rules and that the greater good is being looked out for.
I agree with Eliot Spitzer – If these companies are too big to fail we should either nationalize them or break them up until they aren’t too big to fail.
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I think we’re largely on the same page, Brad. I am in no way arguing for a policy of anarchy. The government has certain critical roles that should be their sole domain. Your examples of the court system and the department of health are two very good examples of those roles. But those systems were both in place and working just fine before Bush/Obama/Congress decided to spend more than a TRILLION additional taxpayer dollars in economic bail-out/stimulus. We’ve gone WAY beyond what I would consider essential, core government services.
You bring up an excellent point about companies that are “too big to fail”. I’ve heard this mantra used as a justification for monies given to AIG, the big-three auto makers, Citibank, and others. I even found myself in a “too big to fail” debate this weekend during a kid’s birthday party (and I wondered why my wife suddenly was nowhere to be found – quietly pretending she didn’t know me) 🙂
I honestly don’t know quite how to feel about the whole “too big to fail” argument. My gut reaction is to still favor free market principles over any notion of “too big to fail”. But honestly, I’m not sure just how bad a blow it would be to our economy if one of these monsters had to close their doors. I’m pretty sure it would be a good thing on a long-term time horizon. As I indicated before, it would create opportunities for better run, more “in touch” companies. But I don’t have a real gage for just how bad it would be in the short-term. Any thoughts (from Brad or anyone in the group) on what the specific consequences of letting certain enormous companies fail would be? What would really happen if a company like AIG were allowed to go into bankruptcy?
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The most plausable outcome to me **DISCLAIMER – I AM NOT AN ECONOMIST** is something similar to the “lost decade” in Japan. We have a long period of no growth, relatively high unemployment, stagnation. But I believe we could hold off the deflationary pressures without a depression.
When we dig our way out of this we are no richer – overall – and we may or may not be the lone global superpower.
As I have said before, I am pretty torn on this. I don’t like it, but have been sucking it up because people I highly respect have said it is necessary. Although Eliot Spitzer and Paul Krugman have both been pointing out some large problems that definitely need investigation. Specifically, what AIG is doing with the bailout money and the whole “cash for trash” that they are now going with.
As an aside, many of my hard core conservative friends down here are suprised that Liberals are capitalists as well. Although we highly value social safety nets and civil liberties we are not socialists…they have their own party 🙂
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Some good points, Brad. If we were to let the financial elephants fail, I don’t think it’s outside the realm of possibility that we could suffer through a “lost decade” similar to Japan. But honestly, I’m not sufficiently hard-core in my economic studies to have a strong gut feel on which way things would swing, so beats me. I will say, however, that if the likely outcome is a “lost decade” type scenario, then I certainly would support measures to TEMPORARILY cushion such a blow and to speed recovery. If the government absolutely must stimulate the economy (of which I’m still not convinced), such interventions should adhere to the following, in my opinion:
1. Measures must be TEMPORARY. No long-term control of private sector business by the government. Uncle Sam now has an 80% equity share in AIG, for example. Once stability returns to the financial sector, I would hope to see the government selling off its equity and using the proceeds to help repay part of the money it “borrowed” from taxpayers to bail AIG out. In my experience, however, the government is very slow to relinquish power so I’m extremely skeptical about Uncle Sam restoring control of “bailed out” companies. They’ve created a new, permanent government position for “car czar”, for crying out loud. For that reason, I’m hesitant to allow them control in the first place.
2. Any money used to bail out companies should be considered a loan, to be repaid by the company over a defined repayment schedule.
3. Bailed out companies should be given the freedom to restructure their business as necessary to right the ship. This includes the freedom to renegotiate labor contracts, supplier contracts, retirement benefits, etc. Take the handcuffs off and use market conditions to determine fair values.
4. Money allocated under the heading “stimulus” must actually be shown, by sound economic forecast modeling, to be economically stimulating. Condoms for Eskimos and other such BS programs should not be passed off as “economic stimulus” (wrong kind of stimulus… :)) Give the president the line-item veto, if necessary, and hold him accountable for every legislative word he signs into law.
5. Companies accepting bailout money must have a clearly defined, legally binding plan for how the money will be spent. A single individual in the government must be given the power and the accountability (read: if he fails, he’s fired) to see that the money is used in the specified manner. This two-faced BS we’re seeing with the executive branch promising “we know how AIG will spend this bailout money” and then turning around two weeks later to say “we didn’t know anything about the contracts for the $200+ million bonuses” can’t stand.
If tax-payer-funded stimulus programs met these 5 conditions, I think it would be considerably more effective and more acceptable than what we’re seeing now. That said, I think it’s a major pipe-dream to expect that our bloated, inept, corrupt government could ever adhere to such restrictions. I still maintain that the side-effects of the government’s current “medicine” are more dangerous than the economic afflictions that are troubling our economy.
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1. For examples of government giving away power look at th FDIC. When a bank fails and they take over, the government is in control for less than 1 year. This is the power Geitner is requesting, and I was honestly shocked that they didn’t have this ability.
2. agreed
3. This is what bankruptcy is for. The airlines do this every couple of years. If you want the govt. to bail you out without going through bankruptcy I do not have a problem with the govt. having input into your turnaround. I agree this makes govt. bailout less attractive, but that is part of the point.
4. Define stimulus. Every time a dollar changes hands it stimulates the economy. If the govt. is paying for condoms that is doing more to stimulate the economy that a tax cut. (Every dollar in tax cuts puts ~ $0.80 in the economy, every $ spent contributes at a minimum $1). I am not defending this particular item, just saying this would be a tough metric to define.
5. What if a company need to deviate from this plan…seems to contradict item 3. This omnipotent govt. official seems to clash with you point in item 1 about govt. control.
I agree the govt. involvement in this is a gamble and is not being conducted in the best manner. However, I am sure everyone reading this (yes, all 3 of us) would strongly disagree with what the best plan is. Same problem in Washington, so I am actually impressed they are doing anything.
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I’m totally enjoying this conversation. Good stuff here, gang.
A couple additional points (for all 3 of us to consider…):
Re: Point #3/Bankruptcy – I absolutely agree with you that bankruptcy accomplishes this “removal of handcuffs” goal. That’s why I’m largely in favor of LETTING these troubled companies fail and file for bankruptcy. Doing so gives them the freedom to restructure and hopefully come back stronger, more competitive. However, these bailouts are keeping companies out of bankruptcy and therefore the handcuffs stay on. Thus, bailed out companies may not be able to restructure as easily as a bankrupt company. To make the bailouts more effective, I’m proposing giving the companies that receive bailout funds the same restructuring/renegotiating capability that they would have enjoyed had they filed for bankruptcy protection.
Re: Point #4 – I agree that defining a model/metric to predict stimulative power would be difficult if not impossible. I also agree that everytime a dollar changes hands it represents economic activity. However, when measuring the effectiveness of “stimulus” spending or tax cuts, you have to consider more than just the initial transaction. Yes, you can spend $1 of taxpayer money on a birth control program which will stimulate the economy with that initial transaction (and also with fractional remainders of that $1 as it travels down the supply chain). However, you’re spending that $1 on credit with the taxpayers. That $1 is going to come due at some point, with interest, and will be taken away from the taxpayers at a later date in the form of higher taxes. Couple that with the inflationary pressure being created by all this government spending and the ultra-low interest rates and you’re looking at a SERIOUS decrease in consumer spending power in the longterm. Does that $1 spent really help our economy in the longterm?
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I agree this is a great conversation. You have some really good points.
My problems with your reply to point 3. The companies wanted a bailout because the executives wanted to keep their fat paychecks – my opinion. I totally disagree that we should give a company the same opportunities they would have in bankruptcy. At least in bankruptcy the people that caused the problem usually don’t get JACK. At least I hope that is the way it works.
Point 4 reply – I completely agree with you. However, it seems we are currently experiencing deflationary pressure, so I am not too concerned with exerting inflationary pressure right now. I see the problem you are talking about, but think that right now the benefits outway the costs.
To gove some perspective, I think this is the first time in almost 30 years that the above statement is true (At heart I am a deficit hawk so it is hard for me to go along with this). I would love to return taxes to Reagan era levels and cut 20% off of defense spending which would put us in a huge surplus position to pay down our debt.
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Re: Renogiating capability – I agree that giving bankruptcy leverage without a declaration of bankruptcy is far from ideal. But is it a worse evil than making large infusions of taxpayer money without fixing the underlying problems? THAT would be a huge mistake, in my opinion. If you’re not going to give them the tools to fix the problems, then better to let the companies restructure under bankruptcy than using taxpayer money to merely perpetuate inefficient companies.
It will be interesting to watch the GM/Chrysler vs. Washington showdown this week to see how it plays out. I’m encouraged to see Obama taking a hard line with GM & Chrysler, but I think it’s a bit of a diversionary tactic to force GM’s chairman out. If GM can’t address its labor relations woes, the company is dead in the water. Guess we’ll have to wait and see.
Re: Reagan era taxes – A big “amen” to that, brother Brad. I would be all for tax cuts similar to what Regan did with the 1986 tax act, but government spending would also have to be curtailed if you ever wanted to get to a surplus position to pay down our debt. That’s a pretty tall order in light of the “out of control teenager with daddy’s credit card” – spending coming out of Washington these past 6 months or so.
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Re:Re: negotiating – What do you think the underlying problem is? My issue is all of the deregulation that let these people gamble w/ my retirement money.
I agree on the auto companies. If GM / Chrysler can’t get costs down they are sunk. The labor costs are not the problem, they are similar to the competition. The problem is legacy costs – healthcare, pension., etc. It has always appeared to me that having the government put the burden of healthcare and retirement on the companies hinders capitalist competition. Maybe socialized healthcare is a pro-capitalist arguement?
Re:Re: Reagan era taxes – You misunderstood my longing for “Reagan era” taxes. You may have forgotten that Reagan enacted a tax increase after his cut when he saw the projected deficits. My longing is for the top tax bracket to return to 50% as it was during most of Reagan’s term (82-86). It went from 91% (1963) down to 70% (1980), then Reagan ended up around 31% (1990). Bush jr. eventually hacked it down to 35% (from 39.6%) using tricks like expiration dates, etc. to hide how much this cost the country. Now Obama is being crucified for allowing these “temporary” rates to expire and go back to 39%. My personal feeling is that 50% on everything above $250,000 is a patriotic duty. Let’s face it, the rich are never going to defend the country in battle – even when we had the draft (RE: Bush, George W.) The least they can do for the country they love is pay a fair tax rate.
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Oh, I didn’t misunderstand you, Brad. I was just hopelessly optimistic that you had suddenly embraced the principles of low taxes & limited government. 🙂
I won’t debate you on the merits of a progressive tax system as a) I don’t think we’ll ever see eye-to-eye and b) it most likely would lead us on a tangent away from the “stimulating the economy” topic. However, I would like to ask you to eleborate on your comment regarding: “these people gambling w/ my retirement money”. Who exactly are “these people”? Did they fall short on some sort of responsibility that they had to you? How exactly have you been wronged here, my friend? I know most retirement portfolios have taken it on the chin lately (certainly mine has), but you make it sound like fund managers have been illegally tossing your nest egg on the craps tables in Vegas. If you had something invested with Madoff, then I definitely understand the sentiment. Otherwise, please elaborate.
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I agree on progressive tax – not the topic at hand.
What I feel is that they (Finance Sector) have been divesting themselves of responsibility and incentivizing short term gain and lying about true risk. I didn’t say what they were doing was illigal, but in a more regulated environment it probably (hopefully) would have been. Look at the difference in banks after the great depression. Nobody worried about banks until some (Savings and Loans) weaselled their way out of regulations.
Do you think it is OK to:
Make subprime morgages and sell them as AAA securities? A lot of people were involved in this and none of them had responsibility – except the people who owned the securities. Reasonable regulation makes people responsible for their actions and limits the amount of risk they can take to what they can cover.
You are right on the level of responsibility my portfolio managers had to me, which is why the social experiment of capital invested retirement accounts may prove to be a bust in the long run. Too many greedy bastards can get their fingers on our retirement money without the general population – or most of the government – knowing what is going on. It may be that a government run pension system would prove more reliable – like postal workers have.
(And what I mean by greedy bastards are people whose bonuses are tied to quarterly performance, but accept no responsibility for loss)
I am curious for your thoughts on what responsibility your fund manager has to you. And if you feel this is the best retirement planning system. Although this is admittedly pretty far off topic.
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Do I think it’s OK to make subprime mortgages and sell them as AAA securities? Absolutely not! Quite to the contrary, I’m pretty much anti-subprime in general. Personally, I support very stringent requirements for making mortgage loans based on the recipient’s past history of repayment, general credit worthiness, and his/her projected future ability to repay the money. Such requirements should be independent of irrelevant factors such as gender, race, whether the home is in an “economically depressed area”, whether the person is “economically disadvantaged”, etc. Make it purely a numbers game and get politics OUT of loan qualification requirements. Home ownership is not a God-given right.
If lending institutions want to take on additional known risk by lending to individuals who don’t meet those strict financial criteria, then a) the institutions should have the right to charge higher fees/interest rates to compensate for the risk and b) those loans should be CLEARLY categorized differently so they don’t get bundled with less risky loans in the securitization process.
As for your other thoughts regarding fund managers and private vs. govt-run pensions, I have a couple comments:
You asked for my opinion on my fund managers’ responsibilities to me. In my opinion, my fund managers have two primary obligations to me:
1). Invest my money according to the strategy outlined in the fund’s prospectus. If the strategy changes, the new strategy must be detailed in the updated prospectus. It is MY responsibility to actually read the prospectus every year.
2) Report the performance of the fund quarterly and compare it to the benchmarks established in the prospectus. The fund should be audited by an independent third party to verify the integrity of those numbers. It is MY responsibility to review those performance figures and make sure I’m still satisfied with how my money is being invested.
Really, that’s about it for fund manager responsibilities in my world. If my managers are doing those two things honestly and transparently, then they’re meeting their obligations to me. I don’t feel that any of the managers who invest my retirement money have let me down in either regard. Of course, my investment strategy relies much more on passive management (index funds = less management involvement = less overhead cost eating into my profits).
Do you feel that fund managers have responsibilities to you outside these two areas? How, specifically, have the managers of your personal funds failed to meet those responsibilities?
As to your point about socializing retirement accounts, I couldn’t disagree more, Brad. You think the postal workers pension plan is an example of a well-run retirement plan? Didn’t the postmaster general just come out a few weeks ago and announce that the postal system will be completely out of money THIS YEAR? How exactly is THAT a model that we should embrace? And what about THE government-run retirement system, Social Security? The whole thing is just one big Ponzi scheme (i.e. Today’s “investors” contributions are being paid as returns to current retirees). If such an investment strategy were executed in the private sector, it would be completely illegal. Does the name Bernard Madoff ring a bell?
The government has domain expertise in a few key areas: national defense, immigration, police, international negotiation with other sovereigns, the court system, etc. Those responsibilities should always be the domain of our government. Outside of those limited responsibilities, however, the government should defer to the expertise of those in the private sector.
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I will agree with you as to a fund managers requirements. However, If those are the only requirements I cannot understand why anyone would be paid more than $100K / yr for this menial service.
I also agree with you on much higher regulation in the financial sector. This needs to protect the borrower (usury laws) and those invested in the lending company. I think we can both agree that politicians and lobbyists for the finance industry have contributed largely to this problem.
I am aware that the post office is going to need major change as they are largely obsolete in this age. However, that is no reflection on the execution of their pension plan.
I completely agree that Social Security is similar to a “ponzi sceme”, but I would like you to argue on the merits of the system.
1. Gives elderly a minimum lifestyle – no dogfood for dinner.
2. Provides a guaranteed income (based on contributions) – don’t lose all of your wealth with a bad day on the market.
3. You don’t have to know the day you are going to die to optimize you cashflow.
You say the government has expertise in certain areas. I would argue that Social Security and Medicare are included in this. These programs are run far more efficiently, humanely and cost-effectively than any comparable program in the private sector.
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I agree with you on some of the merits of the system. Yes, it gives the elderly a minimum lifestyle so they can avoid the Purina. Yes, it provides a revenue stream that won’t be wiped out by a drop in stock prices. Those things are true. But here’s the problem: it’s not sustainable.
Social Security, just like a private sector Ponzi scheme, takes the contributions from today’s workers to pay the benefits of former workers. It takes several worker’s contributions to pay the benefits of just one retiree. So for a scheme like this to be sustainable, the population of people working must continue growing proportionately larger to keep up with the number of people retiring. But that’s not what’s happening to the US population. We have a HUGE glut of workers (the boomers) getting ready to retire in the next decade. The number of workers still making contributions won’t be sufficient to continue paying benefits at the same level to all those retirees. And unless the system is completely overhauled, there won’t be ANY money left by the time you or I retire, Brad. So we’ll have paid all that money in and not see a dime of it back. So does that mean you and I should be stuck eating the Purina dinner?
That’s just the nature of a Ponzi scheme. They’re great for the early investors, but they just can not be sustained. Those investors who got in early with Madoff made an absolute KILLING in their returns, which is why more and more people gave him money to “invest”. And that’s why he was able to pull it off for so long. But ultimately, his scheme got so big that it crumbled and completely fell apart. So too, will Social Security and all other Ponzi schemes fail. They just can’t last.
On a completely different note, since today is Good Friday, here’s wishing you, Brad, and anyone else reading this long discussion (wishful thinking) a happy and blessed Easter.
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I don’t see why the whole system has to completely overhauled. You said it yourself that the benefits cannot continue at the same level.
This is the simplest of engineering problem…flow in = flow out.
You can reduce flow out by:
1. raising retirement age
2. lowering payments (lowering the rate they increase)
You can increase flow in by:
1. increasing social security taxes
2. increasing the cap limit on s.s contributions
3. increasing working population (immigration or romantic movie night)
Hope all had a happy Easter.
I have seen projections that show insolvency around 2040, but I have seen how very, very minor tweaks in the factors above make s.s. sustainable.
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