Lecture – Why the Stimulus Plan Will Fail (and a Better Alternative)

On October 15, 2009, I gave a lecture at Moravian College in Bethlehem on the horrendous economics of the stimulus plan, and why free market solutions will work far better.  An MP3 is not yet available, but a PDF is here.  The video playing prior to the lecture is below.  This is only the latest in a series of economic lectures, including on the financial crisis.  If you are interested in having me speak with your group, feel free to contact the campaign from the TowneForCongress.com home page.  11/2 Update – Thanks to Kristian Cantens, the audio of the lecture (35 mins) plus the Q&A session (also 35 mins) is available on the below right or at YouTube.

First, I want to reassure everyone this talk will not be a campaign speech; its based on an economics article that I wrote in January 2009, before the stimulus plan was passed and before my candidacy – although I am from Nazareth, which by the way, was the original settlement the Moravians founded when they arrived from their failed colony in South Carolina [correction: Georgia, thanks BD] – at the time I was living in Shanghai.

Regardless, these days when one looks at the economy, you must clearly also factor in the interventions by government. So much so, it is a wonder that the field has not yet been renamed “governomics.”

One quick note before beginning is for the purposes of this talk I will be speaking at times AS IF the dollar were a stable currency. Although I recently checked my Lehigh University transcript and saw I passed with an “A” for freshman econ, up until 2 years ago, I believed that dollars were somehow linked to gold. This is not true. The truth is that the excessive money-printing by the Federal Reserve has caused the dollar to lose over 96% of its purchasing power since 1933 when FDR confiscated everyone’s gold, which at that time was used as currency. Up until 1964, all the dimes, quarters, and halves were 90% silver by mass. Today that 10-cent dime can be exchanged for about $1.25 at a jewelers or coin shop. With the gold price at all-time highs of $1050/oz. recently, I want to point out that is NOT the case that gold is gaining in purchasing power, it is simply that the devaluation of the dollar is making itself known in the marketplace.

I will make three key points as to why the stimulus plan will fail and then will suggest a simpler plan that will not end in failure and should actually improve the economic situation. The first reason why the central economic planners will fail is because they are too focused on full employment rather than full production. The second reason is that the American economy, or any economy, is far too complex for any central planning group. The third reason is that proposal of more stimulus spending is exactly what got us into this mess in the first place. I even submit to you that the central planners have no idea how to even produce a pencil; in fact none of us do. Let me explain.

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The Rallying Cry is “Full Production!” not “Full Employment!”

Last year I traveled to the mountainous and rain-forested Xishuangbanna region on the Chinese-Burma border. In one motley collection of huts far, far away from the nearest (dirt) road, the villagers I met lived in a subsistence economy, as close to a tribe of hunters and gatherers you can probably find on this planet. While they are literally dirt poor (but still managed to live happier lives than many city-folk, in my estimation), one fact I noticed is that they have zero unemployment. That’s right! Zero! Everyone has a job and is fully engaged, mainly in providing a food supply.

In fact, even in modern economies, I argue that full employment is exceptionally easy. All you have to do is use inferior capital equipment, build in plenty of inefficient bureaucracy or other forms of busy work. I will revert to China, where I have lived for over three years, once more. Half of the population still farms their own private plots of land, but if they were capable of trying American-style, highly mechanized farming over much larger plots of land, much higher yields would be realized from far less effort. There would also be, temporarily, much higher unemployment. In fact in China, part of the reason these people still live serf-like lives is because their central planners cannot figure out quite what to do with them all.

As Austrian economist Henry Hazlitt, who was also a columnist for the NY Times for many years, points out in his chapter “The Fetish of Full Employment” in Economics in One Lesson:

“The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. It is for this reason that men began putting burdens on the backs of mules instead of on their own; that they went on to invent the wheel and the wagon, the railroad and the motor truck… “Translated into national terms, this first principle means that our real objective is to maximize production. In doing this, full employment — that is, the absence of involuntary idleness becomes a necessary by-product. But production is the end, employment merely the means. We cannot continuously have the fullest production without full employment. But we can very easily have full employment without full production… “The real question is not whether there will he 50,000,000 or 60,000,000 jobs in America in 1950, but how much shall we produce, and what, in consequence, will be our standard of living?“

On that note, let’s now look at the stimulus plan. In his January 10 speech on the economy, President Obama notably focuses on just what Hazlitt warns to avoid, “creating jobs,” not optimization of our economic production. In fact, the sole mention of production is reserved for alternative energies, which are great, but the trouble there lies in that the central planners, not a free market, will decide which technologies to pursue or not pursue. President Obama sums up the talk with:

Therefore our central economic planners must take “immediate and dramatic action.” Now, notice that by “reviving the economy,” he really means to create jobs. In the Romer/Bernstein paper Obama references, they claim 3.3 to 4.0 million jobs will be created by Q4 2010, or two full years later.

Here are the results for PA as of October 14, 2009.  As can be seen in the PDF, out of the $2 Billion allocated to Pennsylvania, only $3.2 million, or 0.15% has been allotted to the Lehigh Valley, and $0 is reported spent.

Also, notice that while the Pennsylvania area is very sparsely populated with the green project dots, see the area that is most ‘stimulated’ with dots?  It should be of no surprise that this area is around Washington, DC!!

Now, I could spend another talk demonstrating that voodoo BLS employment statistics and GDP math are complete hot air, but let us just take note of part of Romer’s report (page 9/14) where these central planners have lovingly estimated the job growth in each sector from the funds they plan to distribute to the nearest thousand. How do these Keynesian economists know what our economy should look like in two years?  That Industry A should be favored over Industry B?  I assure you, they do not have a clue.  As I will shortly demonstrate, they do not even know how to make a pencil.

In the nation’s planned economy, what is the #1 priority? Per change.gov (here) the bold title is “IMMEDIATE ACTION TO CREATE GOOD JOBS IN AMERICA.”  This is followed by #2, relief for struggling families, with which I sympathize, although some of this aid will be made necessary by the unavoidable ineptitude of the central planners.

Next on the list is #3, “direct, immediate assistance for homeowners, not a bailout for irresponsible mortgage lenders.” Now, these homeowners did make a conscious decision to sign a mortgage, and will benefit at the cost of taxpayers who do not own a home (a classic divide-and-conquer strategy), although this might be less objectionable than giving money to banks and auto companies. Also, the central planners will need to decide which mortgage lenders are “responsible” and “irresponsible” or “partly responsible.” However, so far, not a word about Full Production!

This is reserved for #4, “a rapid, aggressive response to our financial crisis, using all the tools we have.” In other words, “we are going to try like crazy to spend our way out of this.” In the subsection entitled “Manufacturing and Green Jobs,” we finally see that the government simply plans to create a hodgepodge of different funds, staffed by bureaucrats, who will dispense funding at their whims to successful applicants. A bonanza for Big Government, and corporate corruption, but a disaster for the free market and the full production it could provide. Three of the five bullets are devoted to clean technology and environmental jobs which will “create 5 million new green jobs.”  3, 4, 5, 6 million jobs, whatever!  All these central planners need is cash and they can churn out good, well-paying jobs better than any private company ever could!  It is that easy!  Right?

Well, just for curiosity, let’s take a look at the price tag of $787 billion, which to be fair is really $1.1 Trillion once you factor in the interest on the debt. Now, strangely, in their January 2009 report, Romers and Bernstein forgot to provide a price tag, probably since they could not estimate the amount of pork Congress needed to pass it!  Romer/Bernstein prophesize 3.675 million jobs in 2 years, plus or minus a cool half million. That works out to $214,150 per job created. Now of course, the intent is to use some of these funds to buy capital, namely manufacturing equipment and raw material supplies, but if we do a little math, we could just cut a $80,000 check to about 10 million unemployed, who with a frugal lifestyle could survive on for over a couple years, which is roughly when our all-knowing central planners Romer/Bernstein (p 5/14) foretell this depression will end.

However, make no mistake. By focusing this Keynesian stimulus plan on creating jobs, in all reality most of the $787 billion will be wasted on paying for the government officials to disburse the bailout (hey more non-producing jobs!), corporate corruption, and incredible inefficiencies. In reality, I wrote in January 2009, the plan will likely create and sustain higher levels of unemployment than right now, just like FDR’s New Deal did. Well, let’s look and compare where we are with the Great Depression in October 2009.

Now let’s look at today.  The government per BLS.gov use the figure of 9.8%, 9.9% in the papers today (the U-3 rate) like it is some kind of going out of business sale, but in fact a better representation of the unemployment rate is the U-6 figure, which is around 16%.  However, even this number is falsified by practices such as dropping out discouraged workers after they have unsuccessfully been unemployed for X months.

Therefore the estimates from ShadowStats.com are probably more accurate, which is at a whopping, but more realistic, 21% unemployment. Likely a better representation of the unemployment rate lies between the BLS U-6 and ShadowStats number.

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The Complexity of Economies: Obama’s Planners Don’t Even Know How to Make a Pencil

Few essays since Hazlitt’s work have more beautifully expressed the intricacies of economies than Leonard Read’s short essay “I, Pencil” which I encourage you to read. In this essay, Read takes a simple object, a pencil, and tracks its production from start to end and you may be surprised to find that thousands upon thousands or people are involved in the entire commercial process. Here is an excerpt:

“My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink! “The logs are shipped to a mill in California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems? “The cedar logs are cut into small, pencil length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires?… Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill’s power! Don’t overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation.”

So on with the all of the other parts, the pencil factory, the distribution to stores, et cetera. The same could be done with modern devices like plasma TVs or computers, or even just a birthday cake or dinner entree. The main point of “I, Pencil” is that yes, planning must be done, but economic planning is best done in the millions of individual, free transactions done for the mutual benefit of both parties, not done by central planners like Paulson, Summers, Geithner, Rubin, Romers, Bernstein, Bair, and Bernanke who really have no idea how to make a pencil, or anything else for that matter.

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The Game of “Spenda”

Now we move on to Spending. What if one studies how we arrived at our current situation? The answer is tied to massive government spending over the Bush years, but even as far back as WWII, resulting in our massive $12 Trillion national debt. The answer is tied to the massive amounts of new dollars created from thin air, then spent, by the Federal Reserve. We have really been engaged in a game of “Spenda,” which this comedian turned into a satirical game based on the tottering tower game of Jenga.

Why all this spending? It is because our government, central bankers, and almost all modern-day economists still subscribe to the benefits of government spending to ease downturns, which follows the teachings of John Maynard Keynes. However, this strategy is unsustainable and is only a stalling tactic for governments to employ; it falls apart when the currency implodes. When the dollar dies, so does our entire economy.

My message is playing “Spenda” this time will likely not work; in fact, even if it does, this only means that the next downturn will be downright disastrous. Those who have studied the Austrian Theory of the Trade Cycle on boom-bust cycles are already aware that all depressions and recessions in America in the last hundred years were all brought on by inflationary (usually war) spending, then resolved by government spending, and each aftermath has pushed the dollar closer and closer to its demise. Of course, the lovely truth about boom-bust cycles is that they would not exist with sound money and a free market.

So, in summary, economic central planning will not work as the focus is on job creation, not maximizing economic output. Furthermore, the plan will not work since the chosen, unelected central planners cannot possibly imitate the billions of mutually beneficial trades that occur naturally in a vibrant free-market economy. This was the great lesson learned from the monumental failure of communist Russia. Lastly, Keynesian deficit and stimulus spending only postpones the inevitable Misesian “crack-up boom” of the currency.

Now for the tougher part of this talk. What WILL work? What could we do differently?

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IDEA #1: Eliminate the 2008 Federal Income Tax.

Let me explain go into some detail, although please see my Income Tax plank on my website for more details on the math. If you check the 2008 White House budget, you will find that total planned government outlays were $2.9 Trillion, and $1.2 Trillion in federal income taxes was collected. (pg26/342). Total receipts were $2.5 Trillion, so the planned deficit was $0.4 Trillion, which was the highest ever.

In this slide, we have the multi-billion dollar annual deficits from WhiteHouse.gov going into the future from the TARP bailout nonsense and the stimulus plan. Also, if we recall that the total size of the bailouts is now close to $8 Trillion, a $1.2 Trillion income tax refund begins to look fairly “cheap.”

After all, the TARP Banker Bailout will cost over $1 Trillion with the interest, and the Stimulus Plan’s estimated total cost is $1.1 Trillion.  Why not declare a tax holiday for at least 1 or 2 years?

2008 Receipts (pg35/342

$0.35 Trillion from corporate income taxes

$1.2 Trillion from federal income taxes

$0.9 Trillion in Social Security, Medicaid, Medicare, etc.

Total $2.5 Trillion

Now, what if government would do the unprecedented, and instead of spending $787 Billion we do not have, decide to not collect income taxes due?

• Each individual will then naturally make the best decisions for themselves, whether it is to save, pay down debts, or spend on desired goods and services, which would create more jobs.

• There is no administrative cost to pay government to administer the stimulus plan.

• There is no need for the government to spend most roughly $15 billion in IRS spending and tax preparer fees, although rebate checks for the amounts currently withheld would need to be mailed. (source)

• Many of the IRS’s 92,000 employees and many tax preparers can be fired. While this would add to the total amount of unemployed, their jobs are NOT AT ALL economically productive, so our total production will not suffer. In fact, when they return to work, our overall production will be boosted.

IDEA #2: SLASH GOVERNMENT SPENDING

In the President’s January 10 speech, he said:

“We’ll create nearly half a million jobs by investing in clean energy by committing to double the production of alternative energy in the next three years, and by modernizing more than 75% of federal buildings and improving the energy efficiency of two million American homes.”

Well, I am not nearly so arrogant to believe that I could decide how best to produce alternative energy, and I have already explained why it would be best for Obama to not even try. However, when he says we can modernize the heating, cooling, and powering of “75% of federal buildings,” I think instead, how about we CLOSE DOWN 75% of federal buildings. Why, in the depths of a possibly monster depression, would we want to spend money on our ultimately completely unproductive departments of Labor, Agriculture, Homeland Security, Energy, Education, CIA, IRS, etc.? Why not slash all congressional and departmental staff budgets by 50%? Yes, there would need to be a temporary support of these people, but just think of the fantastic increases in our production with a larger, unbridled workforce!

IDEA #3: SLASH MILITARY SPENDING. END THE MILITARY EMPIRE.

Does it not strike anyone else as extremely silly to be fighting wars on foreign soils while the American people struggle to support their families? The United States of America spends over $1 Trillion annually to maintain our overseas military empire with over 700 bases in 150 countries. The wars in Iraq and Afghanistan are both lost causes, and do not forget that the Iraq War was initiated by Bush under false pretenses. Bring home the 55,000 troops in Germany, the ~40,000 in South Korea, the ~40,000 in Japan! Declare WWII as OVER. Declare the silly War of Terror as OVER.

Some veterans will be need of assistance due to PTSD, war wounds, etc. and must be treated properly, in my opinion no matter how expensive, since this is owed by the American people. All troops based abroad could be returned to bases within the USA. This would result in a consumer spending boost around the bases’ local areas. Any unnecessary soldiers could be returned to the private sector. This reduces the tax burden on the taxpayer to finance an army in the field, and will result in a net increase in economic output when the new citizen finds employment.

IDEA #4: UNDISGUISED AID TO INDIVIDUALS FAMILIES WHO NEED IT.

I wish to be more specific and frank. Our politicians have committed to, and to a large extent, We the People currently desire, and will need, a social safety net. Although I am an enemy of the Welfare State, I am socially liberal and do not see any excuse as to why our fellow Americans should not have food or shelter if this depression becomes quite severe. However, make no mistake; the ultimate goal should be to phase the Welfare State out, which could be done over a longer time-frame with the phase-outs of the bankrupt Social Security plan (with $17 trillion in unfunded liabilities) and Medicare plan (with $85 trillion in unfunded liabilities).

In light of the impending baby boomer wave of retirees, the government will need to do this anyways since, unless you are living in a fantasy world, the Madoff-Ponzi scheme that is the Social Security, Medicare, and Medicaid system is going to collapse in the next decade, or will die with the dollar’s demise. The Social Security promise has already been made, however, and we as Americans should do our best to honor it, although for many this will simply NOT be the comfortable retirement they may have dreamed their government would provide. The best benefit we can give to our younger generation is to give them the option to opt out of this future yoke.

Let there be no mistake. There needs to be a future focus on ENDING the Welfare State situation. We the People can do this with the above, but most critically we need the below.

IDEA #5: ABOLISH THE FEDERAL RESERVE SYSTEM AND REFORM THE MONETARY SYSTEM

If we have learned nothing else in the past century and past several months, it is that our central bankers planning our monetary policy have a horrendous track record. There is no better example of central economic planning error upon grievous error than in the track records of former FED Chairman Alan Greenspan and the contemporary Ben Bernanke. Fiat Federal Reserve Notes can be replaced by fiat United States Notes issued from the US Treasury on a 1:1 basis immediately, and our country and our world will be much the better for it.

America has forgotten what money truly is. Actually, this is the true reason for the current financial and economic crises, the wild growth of OTC derivatives would simply not have been possible with Honest Money. The Founding Fathers explicitly stated in Article 1, Section 10 of the Constitution, which is still law, that only gold and silver coins may be used as lawful money. The dollar, in fact, is defined as a specific mass of silver, and this definition has never been amended. At the very least, our monetary system must be debated in a national forum.

IDEA #6: REFORM THE FINANCIAL SYSTEM.

Besides bringing transparency to the OTC “dark” derivatives market which I have written about, I would like to refer everyone to the past recommendations of Michael Lewis and David Einhorn in the New York Times also the Dr. James Quinn, a professor at Wharton Business School which will be linked on my website tomorrow as I find it hard to argue with their practical advice.

Source List

This lecture was based on the first link below.

• Towne, Jake. January 2009. “Why Obama’s Stimulus Plan Will Fail… and a Better Alternative.”

• Bastiat, Frederic. 1848. The Law.
• Hazlitt, Henry. 1946. Economics in One Lesson.
• Lewis, Michael and David Einhorn.  Jan 2009.   “The End of the Financial System As We Know It” and ” How to Repair A Broken Financial World.” NY Times articles with solid advice on how to correct the financial system.
• Obama, Barack. 10 January 2009 Speech.
• Quinn, James.  2009. “Unintended Consequences – 2009 & Beyond“
• Read, Leonard E. 1958. I, Pencil. Famous short essay on economic intricacies.
• Romer, Christina and Jared Bernstein.  2009. The Job Impact of the American Recovery and Reinvestment Plan.
• Rothbard, Murray. 1990. What Has the Government Done with Our Money?
• Towne, Jake. 2009. “America’s Military Empire.”
• Towne, Jake. 2008. “Bernanke’s Great Lie – The “Gold Standard”and the Great Depression.”
• Towne, Jake. 2009. “Federal Reserve Plank.”
• Towne, Jake. 2009. “Income Tax Plank.”
• Towne, Jake. 2008. “The Money Matrix – What the Heck Are Derivatives?”
• Towne, Jake. 2009. “The Money Matrix – Bring Light to Dark Derivatives”
• White House Budget. FY2009.  (FY2010 here.)

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Jake Towne is running for U.S. Congress in Pennsylvania’s 15th District in the 2010 election as a citizen unaffiliated with any political parties. Jake also writes at www.LibertyMaven.com andwww.CampaignForLiberty.com. A novel campaign website where you can comment on articles and start discussions is available at TowneForCongress.com.  [Reach the Author Here!]

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We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings of this article to your blog or anywhere else in order to promote the Restoration of our Republic.

Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.

Tu ne cede malis sed contra audentior ito. Do not give in to evil but proceed ever more boldly against it.

Jake Towne – Lecture at Moravian College on Stimulus Plans (Oct 2009)