1) "It worked for FDR, it can work now!"
In a word, no. It didn't work for FDR. Sure, GDP went up, but real production stayed about the same. In other words, in our hypothetical 100 man economy, we went from 80 men employed to 90 men employed, but we didn't see any increase in actual production, because the things built were commonly not things people wanted. In other words, the government didn't put people to work growing food; they put people to work doing make-work infrastructure projects of doubtful utility. In a world where nobody can afford to operate a car, the availability of nice, clean and majestic roads is of little utility. This means that the new 90 man workforce was trying to buy the same stuff from the other 80 men, leading to price inflation.
But, didn't the extra people working buy things in the economy and thus employ more people? Sure, they did. This prevented deflation in prices, which would have led to reduced costs and thus available funds to increase consumption and production. Let me repeat that: primarily, the stimulus stops the adjustment in prices that would 'mark to market' or price more correctly those things used in production as well as final goods, meaning that many inefficiencies still exist and the actual recovery takes much longer because there is less free cash for investment.
2) "We need the infrastructure, anyway!"
Sure we do. One of the few things that statists argue the government needs to be doing is infrastructure, roads, electricity, so on. All arguments as to whether that is better done privately aside, this is actually a mildly good argument. The problem is, of course, that 'infrastructure' is less than 30% of the 'stimulus' because, frankly, it is bad stimulus because it takes so long to get going. We can't just 'build a bridge'. First we have to employ an architect and some civil engineers to design the thing, which can take 18 months. Before that happens, we have to make all kinds of surveys and plans to know where to put the thing. We have to hire geologists and other kinds of professionals to make sure it won't sink. And then we hire a few men to build it. A modern bridge simply does not employ a lot of people in a hurry.
Some things we could do immediately. These include painting, inspection, pothole filling, trash pickup, road widening, so on. The problem is that almost all these projects require competent manpower, which we're short on. The work would have to either be completed at overtime by workers currently on payroll, which doesn't help much, or be done by new people, which is a recipe for disaster. As exhibit A, I give you the TSA workers who paw your person and property in airports.
As I have said over and over again (not necessarily on this blog) the best possible stimulus is a direct payment to every citizen in the US. Limit it to those who filed tax returns last year or simply blast it at the census roll, but whatever way you do it, do it immediately. A large cash payment would go towards spending in most cases, paying debt in most of what's left, and savings in a small percentage. A large enough check will even lead to home improvement.
3) "So, let's do that, it seems like a good idea..."
Ah, less excitement, but we're now thinking a bit. However, let's get on with the analysis of the problem. In the 30s, when the US crashed, it did so largely due to the collapse of the export business. These days we don't have an export business. Were everyone given a pile of money, most of what they bought would not originate in the US. That means that our stimulus will mostly help China et. al., not the beleaguered worker in America. The reason for this is pretty simple: they have the capacity and we have the money. That has been true for so long that changing it would require a sea-change of the exact same sort we're trying to prevent with this stimulus. So, as before, the cheapest place to get things would be elsewhere because they're hurting as bad or worse than we are and thus will underbid us.
4) "Um, ok, so we make a law that stimulus can't be spent on things made overseas..."
Now you're thinking again, but not far enough. This is protectionism in all its ugliness. Whenever a nation goes down this road, it invariably hurts its prospects. Let me explain.
There are two common types of protectionism: the embargo/tariff and the subsidy. People don't think of subsidies as protectionist, but they are. I'll deal with them separately, but first there is one consideration that is common to both. Simply put, the protectionism becomes an expected benefit. Every time you break down and help a given sector, that sector comes to expect the help, so you will be helping it again and again. Another common problem with protectionism is the specter of a trade war.
First, the embargo/tariff. Essentially, they are the same thing, as the embargo simply sets the price at whatever a smuggler wishes you to pay while a tariff increases the price by a certain fixed amount. This kind of tariff primarily hurts your own consumers and producers. If the thing being protected against is a factor of production, all the things produced from it cost more, meaning everyone in the economy now has to pay more so that a few can afford inefficient production and unwarranted wages. As I have discussed before, falling prices help everyone, but prices being held up inevitably only help a small part of the economy.
Second, the subsidy. Essentially, you take money from the economy at large and pay it to politically important industries. In some cases, such as Airbus, the number is as high as 30%. The French government prints a 30% rebate on every plane sold. This means that whatever that amount is is being added to everything else they sell. Let me explain.
In our hypothetical economy, we produce widgets and wangos. We subsidize widgets by 10% and sell wangos on the open market for whatever the market will bear. If we sell ten widgets at $10 each, we make $100, and pay $110 to the producers of widgets. Then we tax for $10 off of the sales of wangos. Suppose we sell 100 wangos at $1 each, for $100. Then, we tax the wango sales at 10% for $10, meaning wango producers get $90 or 90 cents a wango which is transferred to widgets. In order to remain wage competitive, you guessed it, the producers of wangos raise prices to $1.11 per wango because the 10% tax makes it 11 cents per wango if the price is only $1.10. That 11 cents initially appears to increase government income because the same number of wangos move initially. However, it does not last.
Now, a foreign concern is faced with the opportunity to purchase a widget from us at $10 when it costs us $11 to produce and to purchase a wango from us for $1.11 when it costs us $1.00 to produce a wango. Here the central problem arises. The foreigners will simply find another place to buy wangos, preferably somewhere they aren't taxing them. At the same time, they will buy widgets. This means the cost of the subsidy goes up at the same time that the taxes go down. However, since the expectation of the 10% subsidy still exists on widgets, the producers argue, successfully, that they can't continue to sell as many and thus employ as many people if they don't get the subsidy. Since this is now a large political lobby group, it is difficult to reduce the subsidy. At the same time, the internal production of wangos is literally drying up because, in this modern world, it has become cheaper to buy wangos abroad than purchase them locally.
So, for instance, we sell 15 widgets at $10 each and pay $165 to the widget producers, then go looking for the $15 in tax money from only 50 wango sales, which is now a 23% tax, meaning each wango now costs $1.30 on the open market, or wango producers are making less money. As you can see, this is actually a feedback loop, as the more and more the system distorts, the worse things get. This commonly happens in any redistributive attempt, as it will create a new price curve and preference function that always, always, always favors the cheaper product, all other things being equal. So, subsidized health care ends up with a high percentage of people getting their kids checked for the sniffles and thus the government having to cut funding for other, more important things, because there simply is no cost comparison and thus the majority wins.
As an aside, this is one of the more insidious problems with the VAT. Chinese companies pay no tax on their factors of production but, say, British companies do. That means that each interim production has a tax on it and is thus more expensive than its Chinese counterpart. In the end, the VAT will drive the local industry to adopt a model that does the most possible production overseas, thus driving jobs out.
So, to summarize: any useful stimulus will take too long and won't necessarily increase jobs or won't necessarily produce useful output. Any attempt to increase jobs is essentially an attempt to drive production and will end up driving production at the lowest cost competitor available, which is not the USA. Any attempt to stop that will provide ruination for other parts of industry that may be on the track to recovery.
So, what is a country to do? First, let the banks fail. I cannot stress this enough. If the banks do not fail, they will continue to be a valueless parasite with highly-paid dolts at their helms. If they are allowed to fail, we will end up with leaner, meaner banks with great hunger in their bellies who know the feeling of impending doom, which means they will manage our money a lot better.
Second, let the industries that need to fail, fail. Goodbye Chrysler. Maybe, goodbye GM. Possibly even Ford. These industries are locked in titanic struggles with their very own production systems, and the failure of just one will free up resources to keep the other two alive. It will also provide a lesson to the labor unions that fighting for wages over twice what the Japanese make is a good way to go out of business. Out of the ashes of these dead industries will come new industries that are streamlined and ready to produce economically.
Third, reduce restrictions on business, certainly those considered 'small', those employing, say, 100 people or less. These are the engines of your economic revival. The recovery does not start with GE. It starts with Joe the Plumber who decides to hire a young man who is down on his luck for a few dollars an hour to do scut work like heavy lifting. Then the young man has money to spend and Joe gets more work done. More importantly, the young man now has a career path.
Fourth, eliminate the minimum wage. I know that the morons running the monkey house insist that we need to do the opposite. However, an absolutely certain way to grapple families into public assistance is to remove their ability to produce any sort of income. A family would rather have some sort of income than no income, and the minimum wage often prevents that. Certainly, younger, less experienced workers are priced right out of the market.
Fifth, eliminate the income tax. Just do it. Both corporate and personal. Cut government spending drastically. Don't worry, the failure of the banks will get blamed for the catastrophic depression such an action would trigger. However, within a few short years, recovery will begin to happen, as the average person who is still employed will see a 20% pay raise immediately. Further, the average person would be able to take around a 17% pay cut and still stay even on income. This means that the person can make his payments and feed his kids on less money. Further, the people thrown out of government jobs (don't throw them out all at once, of course) would find jobs somewhere, as there is a demand for jobs as well as a supply. When they find a job, they add to the real economy by producing something someone actually wants. You'll see a serious increase in the actual economic base which will lead to real GDP growth.
And finally, and most importantly, support all civil liberties, the right to keep and bear arms (reduces the cost of security, meaning more money for other things, not to mention employs manufacturers of arms and ammunition), protect the right to property by enacting legislation prohibiting the doctrine that allows drug warriors to accuse property of a crime, which is in direct violation of the 4th amendment (increases people's confidence in their property), stop the drug war because it violates the right of a person to his own person, as well as the right to pursue happiness (also, will reduce crime and thus police costs) and, finally, protect financial freedom by removing restrictions on cash flow, prepaid cards, or any new payment method. This is 'free money' as opposed to 'hard money' or 'fiat money', the idea that money is something the market can generate without any regulation, and the de facto nature of money for a very long time prior to the invention of government regulated money, which has, mostly, been used to finance war. Go back to only accepting gold and silver in payment of debts due the federal government and only pay out gold and silver in payment for services rendered. This will force the government to become fiscally responsible or go broke in a few years and will protect the value of money in the hands of the average guy. It will also allow new, more efficient forms of money to arise which will reduce 'transaction costs' and thus increase the velocity of money and therefore the GDP.
I'm fond of saying that everything political or financial eventually boils back to economics and that any 'accounting irregularity', be it any redistributionist policy such as the progressive tax or welfare, or direct violations such as fraud and theft, lead to loss in the economy as a whole. Systematic accounting irregularities lead to systemic loss and we all get poorer as a cherished few get richer. I guess we have to ask ourselves if we really want to create a society where there are a few very rich and the rest of us barely making it, because that is the eventual result of every single experiment into socialism of any sort, even social democracy. The siren call is loud to the bourgeois guilt and certainly appeals to the downtrodden poor, but in the end, remember this maxim as if burned on your souls as you are out of work, starving and have lots of time on your hands: 'Communism can work until the food runs out.'
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