Its the economy, stupid

I see that the president is proposing another "tax cut to stimulate the economy." As I have said before, this economy has had all the stimulus can take, it is time to maybe trim it a bit, like maybe an unemployment of 4?, and an overall rosy view of the future by people.

Tax cuts will not stimulate the economy. Neither will spending increases. Both simply represent forms of economic stupidity that taken hold in various circles in this country. The only way to stimulate the economy is to balance the budget. That is, increase taxes so that the revenue will pay for the programs proposed.

A few days ago I went to a meeting intended to encourage home businesses. There was a couple of organizations there who were sponsored in part or whole by the Small Business Administration. In both cases, the message was the same: Due to the "hard economic times" banks, and the SBA, will not lend money for new businesses unless the business is a sure thing, and you can prove that you don't need a loan.

This is a direct result of the presidents tax cuts via the large budget deficits. That is, the president cuts taxes to stimulate the economy. It really makes little difference (it does some, but not much) whether the tax cut is for the rich or the poor. In either case, the government suddenly decides it needs to borrow money. Therefore, Banks no longer need to loan money to start new businesses because they can now make more money by loaning it to the Federal Government. In fact, they have to. The Federal Government has to come up with the money, so the interest rate they pay will rise to whatever it has to to get that money - the money that would be going to establishing new businesses, that is, "stimulating the economy". The net result is that the money is still coming out of the economy, just as it would if taxes had not been lowered, only now the government has to pay interest on that money, so we end up paying for the program 2, 3, 4, and even hundreds of times in the form of interest on the debt. (An interesting homework problem: During the depression in, say, 1935, the president used deficit spending to "spur the economy." Since this money has never been repaid, how many times have we paid for that bit on largess?)

Nor can we say that deficit spending will stimulate the economy. The same scenario that I have presented above would apply. Not approximately, exactly. That is, the government decides it will give some class of people some money. It makes no difference whether the class of people are the rich, or the poor, or minorities, or people with green eyes. The money will have to come from someplace, so the deficit will go up. The result is that loans will be hard to get because banks will make more money loaning it to the federal government than they will by loaning it to people, and the loan will be more secure. In fact, they will have to, since the Federal Government need to get the money, and the interest rate paid for that money will simply rise to whatever rate it has to to get banks to take the money from small business loans, home loans, or what have you to give to the Federal Governement. The exact amount of these loans will be whatever it takes to exactly offset the "stimulus" that was desired.

That is the reason that the economy did so well when Clinton was president. He came closer than any recent president to balancing the budget. The banks, now not being able to soak up their extra money by loaning it to the Federal Government were forced to loan it to people and businesses. The economy flurished.

You want to really stimulate the economy, pay off a bit of the debt. It really doesn't make any difference how you do it, just pay it off. Increase taxes to pay it off, or decrease spending to pay it off, either way the economy will stimulated beyond belief.

Note: there may have been some time long ago when deficit spending stimulated the economy. The reason was not the deficit spending, but rather because the bonds were bought by foreign entities. That is, the deficit spending may stimulate the economy if the Japanese, or Europeans are willing to fork money over to the United States. Of course, we end up paying for that many times over, and the buying country can kiss its economy goodbye, but the United States economy will be stimulated.

Similarly, we can go steal the Iraqi oil, and sell it. Stolen money has the advantage in that it doesn't need to be paid back, as any thief will tell you. In this case, the cost of the theft is quite high, however. I'm sure that if we had given each Iraqi $5000, it would have been cheaper, and they would have been happy to sell their oil to the United States.

One of the adages of the financial industry is that they tend to lead the curve. That is, the Federal Reserve decides to lower interest rates, the banks know that it will happen, so they have already lowered theirs, and by the time the Fed loweres the rate, nothing happens because it has already had the affect. Similarly, during the closing days of the Clinton adminstration the economy slowed slightly. The reason is that anyone looking at the election could see that either George Bush or Al Gore was going to win. George Bush had promised to destroy the economy by lowering taxes under the doublespeak guise of stimulating the economy. Similarly, Al Gore would have taken the second approach, and "spent the surplus." In either case the deficit would go up so that banks could get more money loaning it to Uncle Sam than Joe Blow. Therefore, in preparation for the coming feast, the Banks cut credit so that they would have ready cash when the spit hit the fan. The economy started to sour.

Of course, George Bush used this as an excuse to cut taxes in his doublespeak. The result is that the promised recession hit, and deepened. And, of course, the deeper it is the more G.W. called for tax cuts. More stimulus, never mind that it has never worked, and is not working now. More Stimulus, or as some people (such as myself) would say, get a bigger anchor.

And, of course, if George Bush is reelected you can expect additional tax cuts that don't work, and if a Democrat is you can expect deficit spending programs (they will probably bring up the "New Deal" which didn't bring us out of the depression in the thirties, and probably won't now. Another anchor.) That won't help either.

And the strange part is that it is so obvious that all this is not needed. We are spending the resources now. People on the government dole (rich or poor) are taking that money and spending it. The resources are there now to support these people. The government is financing a bloated military. The resources are being used now, the people who would otherwise be generating goods and services for the marketplace, the steel, and other metals used to built the bombs and bombers, these are all from current resources, not future resources. You can borrow money, and pay it back in 10 years. You cannot borrow time, or steel. (I suppose one can borrow steel - we allow the infrastructure of the United States to deteriorate, therefore steel is not used to fix this up, it will be later. Of course, bridges collapse, and people die, but that is of no concern to the government.) The government is paying for innumerable "public servants," and the resources they want and use are being used now.

The big question is how will it end. Will it end in the collapse of the United States for ignoring the truth, as happened with the Soviet Union, or will the public come to their senses soon enough to stop this major hemorrage in the American Psyche. Unfortunately, history tends to indicate that it will be the former, people have never been willing to examine their pet beliefs to see if they are, in fact, true.

And, of course, people tell us that we are at war, and therefore should not question the president. Or, as Hitler would have put it, we are to give the president dictitorial power as long as he can find a country to attack. England sided with the United States this time, so it might be a while before it is Englands turn, but I wouldn't want to be the French.