January 20, 2003
We Need a Stimulus Plan, Not Another Tax Break
The latest employment numbers show that the U.S. lost over 101,000 jobs in December, and the November number was raised from 40,000 to 88,000. Kmart just announced another 300 store closings with about 20,000 layoffs, and so it goes...
189,000 jobs lost in the last two months, with tens of thousands soon to come. And it doesn't seem to be getting any better.
The "economic stimulus plan" presented by Bush is wrongheaded, simplistic, naive, moronic, and doomed to failure. It is not a stimulus plan -- it is a tax plan, and a faulty tax plan at that. It is fitting that he proposed it in Chicago, home of the discredited supply-siders, and the only good thing about it is that it has little chance of passing as proposed.
The central feature of this "stimulus" is the tax cuts, particularly the elimination of taxes on dividends. This represents a direct loss to the treasury and there is no guarantee of any return in terms of increased economic activity. Supply side economics in the age of Reagan is credited by some to have been responsible for a boom, however short-lived it may have been. In truth, recent analysis has shown that the boomlet was largely due to major reorganizations that businesses had been going through during the late '70s. The change in many business models, that "mean and lean" you've heard about, bore fruit during the '80s. The primary effect of Reaganomics was federal deficits, not private growth.
The argument for tax cuts on capital gains, dividends, etc., is that it will encourage industry to spend, and ultimately increase jobs and economic activity. In truth, money tends to go where it finds the best return, and businesses will invest in equipment and employment only when they think they will have markets in which to sell things, not just because they have a little more money to buy things with. Often as not, a little more money is spent on the corporate jet, and not on hiring production people. We are not now in a capital crunch, and there is plenty of money around for investment. The opportunities for productive investment are what is missing.
Quite a bit of the little extra cash that individuals may actually see from tax cuts will go to buy imported goods at Wal-Mart and help the Chinese, but do very little here at home except increase our trade deficit. Thanks to our excessive imports and the high dollar, our current account deficit is running about $500 billion already. Some of the extra cash paying down credit card bills or keeping the phone turned on won't help things much either, nor will a couple of extra Happy Meals a week.
Probably the worst long-range effect of this idiocy is that it is could cost as much as $925 billion over its lifetime to inject perhaps $100 billion into the economy. The $925 billion is an estimated total of increased interest on the national debt and reduced tax receipts. This is not fiscal responsibility.
There are many complex factors that are contributing to the present economic situation. It is doubtful that anyone fully understands them, and I won't pretend to. I'll pass on the effects of corporate growth goals, Japanese deflation, what's happening with housing starts in the face of potential mortgage defaults and how all this relates to paint sales and the price of soybeans in Nebraska. I shall spare you talk of indifference curves or marginal rates of anything here.
Henry Ford said he wanted to pay his people well because he wanted them to be able to afford to buy the cars they built. This, in a nutshell, is the crux of the problem. If we are to continue to have a vibrant economy, we must have a population who will spend money. And has money to spend. Much can be said about how this money is to be spent, but the point is simply that if the population is not spending, business will not invest in production, and the economy will wind down into a deflationary spiral.
Wages are not currently rising in real terms, but basic costs, such as housing and transportation, are. Just about everyone in the US needs a roof and wheels before they do anything else. Many people foolishly buy more house and car than they actually need, but many others, possibly more, are forced into spending more than they should be able to afford for house and car. (The cost of housing has outpaced inflation by over 30% for the past seven years, and is a bubble that could soon burst, causing other massive problems). This, of course, reduces their disposable income. Also reducing available cash are many new "necessities," like Internet access, that were not even available only a few years ago. The usual crush of new toys and planned obsolescence continues to sap money, but keeps the economy moving. Sort of. Standard measures of the cost of living don't fully take into account the use of, or lack of, substitutions in the "market baskets" they use, so the full ramifications of our present economic state are difficult to assess. How many are getting by through credit and leveraging the increased values of their homes is also difficult to count. It does appear, though, that people are spending less. Much less.
Giving people tax breaks is not much different than just writing them checks. It puts a little money in their pockets, but increases the government's debt load, as it does not reduce expenses or generate much new tax revenue. That's why tax break are called "tax expenditures" by economists.
So, how do we put more money into pockets without just firing up the printing presses? How do we reduce unemployment and underemployment?
Obviously, the only way to ensure employment is to have work available. To give people $3,000 to look for nonexistent jobs, as Bush proposes, is as silly and nonproductive as tax breaks. We need jobs, and genuine incentives to create them. Schemes like the earned income credit, unemployment insurance, and other ways to throw cash at the economy are useful in the short term, and certainly appreciated by the recipients, but do nothing to solve the underlying problems.
There are many theories of labor floating around out there, from Marxian to laissez-faire. Most of them sound very interesting, but none really work in the real world. In the real world, someone desires something to be done and has the means to pay for it -- that's really all there is to it.
Any business looks for some profit out of its employees. There are productivity scales in use, but the idea is that an employee is worth a bit more to the business than the wages paid. As enlightened as a major corporation or small corner shop may feel, no matter how much money they have, they will not be expected to hire unless they see profit in it. They may choose to hire for many other reasons -- undirected research, charitable work, etc., but cannot be depended upon to unless the hirings increase the value of the enterprise. They can, however, almost always be depended upon to lay off as business deteriorates or new efficiencies and strategies make some workers redundant.
The various federal and local tax and labor codes are complex enough that everyone has them in the back of their minds, but few, if any, think of them exclusively when making business decisions. Eliminating the complexity there would certainly help, but is not probable any time in the near future. Likewise, the export of many jobs overseas is a trend that no one sees any reasonable way of slowing.
While the private sector, and medium-sized businesses in particular, is the primary engine of job growth, when it falls down on the job the job ultimately falls to the government. Unfortunately, our governments, federal and local, have become largely mechanisms for cash transfers, not of production.
For a government, "production" here means public works, services, and infrastructure that the private sector has little incentive to provide. In the past, such things as roads and passenger trains were often built by private entities for access and profit. As they became unprofitable, they were passed on to the public sector. No private entity would consider building a major dam, or taking over the Intracoastal Waterway at this point. Nor would any private entity be interested in restoring wetlands or cleaning superfund sites without being paid for it. Oddly enough, many of these public services and utilities are being divested back to the private sector under the guise of "privatization." Selling the water works to private companies, contracting out police, prison, cleaning, maintenance, motor vehicle services, etc. are some of the things that have been done in order to save money or get a quick cash infusion into the public coffers. This may occasionally make sense, but more often means simply that highly paid public employees are being replaced by poorly paid private ones.
I would suggest that this rush to depend more and more on the private sector to handle things is a bit wrongheaded, and that the public sector get even more involved. The government is ideally positioned to spend money where private capital is hard to find or there is no immediate profit goal but there is some other benefit. This is a role that it has always had, and should be expanded, not contracted. There are many prescriptions for our economic health, and many of them are unworkable at the moment. There are, however, a few things that can be done, should we wish to. Political opposition would be fierce from some quarters, but, it has a chance. It is, unfortunately, up to us to commit some time and money to counter the influences in Washington.
Transfer payments and entitlements, such as unemployment, welfare schemes, etc., should be maintained, perhaps expanded, as they are an immediate need in many cases. It's not easy to balance short-term need with malingering and poverty pimps sucking the system dry, but the alternative is really starvation and homelessness, which has a much greater cost.
Talk about education is all well and good, but the benefits are far in the future. Summer jobs programs can be expanded, giving some employment in the present, and Head Start and other programs that assist the young in preparing for the workforce should be in the forefront. Along with this, the Family Services departments in many cities and states are being thrown to the wolves and have little proper funding and support. Day care, midnight basketball, children's health, and other programs to keep families together and working must be supported.
Regulation has become a dirty word, but in many cases it encourages innovation. The recent decision to roll back some Clean Air Act provisions not only gives us on the East Coast dirtier air, but kills off all of those jobs designing and installing equipment to clean stack emissions. Continuing a steady stream of incremental environmental and safety regulations would not seriously affect existing industries, and would encourage whole new industries to emerge. This has happened in the past, and should continue, with the accompanying social and economic benefits.
Labor laws should be fully enforced, and the minimum wage increased. The minimum wage currently has little actual effect in many areas, but it is a powerful symbol that the country is behind a living wage. Sweatshop, wage-and-hour laws, plant closing notices, plant safety and compensation laws... There has been little interest in effective enforcement of workers rights, pay, and safety laws, and the laws can be expanded and enforcement stepped up, reducing workplace turnover and lost pay. The hatred of labor unions in many places is misplaced, and some support for organizing workers for better pay and conditions should be coming from Washington. Unfortunately, the Labor Department, which was formed to assist workers, is now spending much of its time screwing them.
Public works should be expanded. We are constantly complaining about pork barrel projects, and they will always be a problem, but we have travesties like Edison's laboratory falling apart for lack of funds. (We have, however, found $3.8 billion to "lend" to Poland to buy F-16's while we couldn't find $150,000 to fix the leaky roof on Edison's lab.) We have Superfund sites that are not being cleaned because they are held up in litigation and funding isn't maintained. We have crackpot ideas like putting a golf course on Ellis Island because the government won't pay to keep up the museum. We need to ensure that there is a constant supply of fresh water. There is a vast amount that needs to be done to clean and fix this place up. Expanding such things as the NEA has a huge multiplier in communities where the arts actually generate money. Did we forget that the old WPA and CCC actually did a lot of good?
Public research should be expanded. AT&T, IBM and DuPont aren't picking up the ball like they used to, and there is much to be learned. Pure research leads to new technologies and new industries. Public investment in this research also leads to public ownership of the technologies, without them being held for ransom in the Patent Office.
Small business is usually defined as having under 500 employees and/or under $5 million in gross revenues. There are 22 million of these businesses, and they are responsible for over half of the non-farm GDP and up to three quarters of job growth. These are the businesses that must be supported, particularly the ones on the lowest end of the scale that have potential to expand. The "really small" businesses have the greatest potential to grow and become serious generators of jobs and activity.
Business incubators should be expanded. Growth is primarily in the small business sector, but this is the sector that has the least access to capital and expertise. It should be easier for small business to gain access to capital, competition for government contracts, national sales networks, newer technology, and exports.
We must make it clear by our support of organizations, our personal support of politicians (and businesses) who think sensibly, and constant communication with those people in office who claim to work for us that worker rights and safety, a clean environment, corporate profitability, and full employment are not competing interests, but are all intimately entwined and can work together for economic growth and improving quality of life.
· · · · · ·
William Funke is a former insurance manager who now works part-time to subsidize his real interests in life: writing, photography and woodworking. A trained economist, he lives in Elizabeth, New Jersey.
Do you wish to share your opinion? We invite your comments. E-mail the Editor. Please include your full name, address and phone number. If we publish your opinion we will only include your name, city, state, and country.
Please, feel free to insert a link to this article on your Web site or to disseminate its URL on your favorite lists, quoting the first paragraph or providing a summary. However, please DO NOT steal, scavenge or repost this work without the expressed written authorization of Swans. This material is copyrighted, © William Funke 2003. All rights reserved.
This Week's Internal Links
Parallel And Linked Genocides: Iraq And Palestine - by Edward S. Herman
A World Full Of Choking Pretzels - by Gilles d'Aymery
Typology Of Ignorance - by Milo Clark
Demonstration - by Michael Stowell
The Magical Mystery Tour - by Michael Stowell
National Sanctity Of Human Life Day: A Letter to the President - by Jan Baughman
Dividends From A Patriotic Investment - by Philip Greenspan
The Birds - Poem by Alma Hromic
to all those lost 2/13/91 4:30 a.m. - Poem by John Bart Gerald with Drawing by Julie Maas
Future History - by Milo Clark
Letters to the Editor