Friday, August 17, 2012

The Failure of Stimulus, Lack of Consumer Demand

Both Obama and Romney have been promising, if elected, to create jobs. Neither of them should be making this type of promise for it will be doomed to failure. This is particularly disingenuous for Romney since the Republican Party claims to want government out of the private sector.

The video below is a CNBC interview with Henry Blodget (Businss Insider CEO) Mr.Blodget essentially repeats what I have been advocating, that stimulus efforts are failing because we are in an economic  "hangover period" and that the consumer is not buying.  I have previously expounded on this issue in several earlier posts.

As a quick summary Mr. Blodget; for the economy to grow you need three things. Entrepreneurs to create jobs, a good product, and customers. What is lacking, for economic growth, are the customers.

As an aside, what is "missing" (in the good sense) from Mr. Blodget's thesis is the use of tax policy to manipulate the economy.  Again, one of my themes has been that economic policy and tax policy need a "divorce".  The purpose of tax policy is to raise revenue to pay for government programs not to play games with the economy.  As such, the budget needs to be balanced, even if it means making difficult decisions. To borrow from Alexis de Tocqueville: "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

Saturday, August 11, 2012

The Hidden Failure of Stimulus

The Washington Post ran an opinion piece "Five myths about Obama’s stimulus" by Michael Grunwald.  Since my response is a bit wordy, I will repeat the much shorter to the point response of Steve Hanna fist: "The stimulus was like trying to run your fireplace with newspaper. Burns for a few minutes then needs more newspaper. The only lasting thing from it is debt.Below is my response to that article.
"It's a bit more complicated than what Mr. Grunwald suggests. Concerning point 1, the stimulus and job creation. Well blame Bush created stimulus. That created jobs, the economy to initially exploded then crashed. Essentially, we have the drug addict analogy, so why would more stimulus work?

Yes, stimulus can be used for public works projects and I won't dispute that. But the What I will say, is that under blame Bush the US over-consumed. Let me repeat that, we over-consumed. People will only consume so-much. We are in a hangover period. Flooding the market with "free" money has not stimulated the economy because the consumer is NOT buying and the private sector has no need to produce more.

Next Mr. Grunwald ignores the whole issue of stimulus as deficit spending that ads to the National debt. In theory that has to be paid back. Paying it back will mean the need to direct future tax revenues to debt reduction. That will "slow" future economic growth. Essentially artificially stimulating growth now cannibalizes from future growth. Blame Bush essentially proved that.

Finally, there is even the very fundamental question of: "Can economic growth even be stimulated?". Unfortunately, this is an election year and any answer other than "yes" is immediately vilified. I don't have an answer, exactly. A lot depends on demographics - a young growing population tends to buy more than an old "established" population. One can look to Europe and Japan as being examples were the lack of economic growth is not because of "bad" economics (as Romney claims) but simple demographics. Neither Obama nor Romney should make any promises claiming the ability to promote economic growth. The demographics may be well against them. This is a "myth" that Mr. Grunwald failed to delve into."
 As an additional question; some point to the number of jobs created by the stimulus to document its success. But lets take a look at Solyndra, which is one of several failed companies. When it received it's government backed loans, it did create jobs. But it then declared bankruptcy. These jobs have now become "lost".  Have these jobs been subtracted from the supposed success of stimulating the economy? Or are these jobs still being carried forward to disingenuously support the concept that the stimulus program is working?