An E-mail Exchange On Economic Stimulus

My friend Paul Sawyer sent me the following e-mail this afternoon:

I love how this headline frames the parameters of debate. From CNN: "The Stimulus Package: How Fast Will It Work?"

That's fucking rich. Not only will Obama's Hail Mary not work, it will almost certainly make things worse.

I responded:

It's a mistake to lump the whole stimulus package together.

Tax cuts and/or rebates for low to middle-income Americans combined with increased government spending that can be rolled out over the next 6 to 12 months have the potential to boost consumer demand and help the economy from getting stuck in a vicious cycle of contraction. Also, investment in energy efficiency, alternative power, carefully targeted transportation infrastructure, and broadband Internet deployment will definitely have substantial long-term benefits.

But none of this really addresses the fundamental problem, which is that the US populace and government have been living beyond our means for quite some time. Only serious belt-tightening can help with that. And that's a dirty secret no one wants to admit.

Sawyer:

Totally agree, but the "serious belt-tightening" you advocate and the "vicious cycle of contraction" you hope to avoid are one and the same. We need to embrace this contraction, not put it off. Yes, it will painful, but it's unfortunately very necessary. Contrary to popular delusion, the problem isn't that we have too little credit, but that we've had too much. The idea that we can spend our way out of this mess is wholly nonsensical. That's more of the problem. Yes, having new roads and a new energy grid would be nice, and sure, we'll save some bank being more energy-efficient, but pouring slabs of concrete or outfitting cities with rail does absolutely nothing to increase our productive capacity. Not to mention the idea that government can create jobs out of thin air is absurd. It has no means of creating wealth; all it can do is redistribute/redirect the wealth created by the private sector. "Creating" these jobs is useless, because the only benefit they can possibly provide is the boosting of consumer spending. They do nothing to up our productive capacity. (Unlike, say, factories, new roads/infrastructure do nothing to generate real wealth after their completion; they just sit there).

Our economy is just waking up from a night spent drinking (read: consuming) itself retarded on cheap drinks (read: easy credit). In order to treat the hangover/headache, the political class is demanding that we crack open some more beers. Sure, this will alleviate our pain in the short term, but it will make our inevitable hangover (day of reckoning) that much worse.

Of course, I failed to ask the most obvious question of all: Where is all this money going to come from?

Dirty secret: The American Economy is fake. It's (literally) a very complex, very convoluted Ponzi Scheme. Its totally dependent on foreign creditors to keep it going, just as pyramid schemes rely on new investors to perpetuate the scam. What's going to happen when we run out of suckers i.e. when the world finally realized we have no ability (hell, not even an intention) of paying them back? The house of cards will collapse. We're already seeing the beginning of this.

A skilled fiction writer couldn't have concocted a more timely and fitting metaphor than the Madofff scandal.

Me:

There's an important distinction between a necessary decrease in consumption and a vicious cycle of contraction. We have to be careful in cutting back on consumption that we don't also unnecessarily cut back on production. Ideally, to move forward positively, we should cut consumption while boosting production. Intelligent investment in public goods such as better infrastructure does in fact increase our productive potential. More efficient communication, transportation, and energy production/distribution will lay the groundwork for private-sector job creation. Think of it like setting up trellis in a vegetable garden. For lots of reasons, the private sector cannot effectively setup some of the basic services it needs to succeed. So although it's true that the government doesn't actually generate wealth, it is essential in laying the groundwork for the private sector to do exactly that. The primary argument in favor of increasing such infrastructure spending now is to have the government act as a spender of last resort and provide temporary jobs. Of course the only way things will get better in the long-term is through an expansion in private sector production.

There's some truth to what you're saying, but don't forget that it's very much in interests of the Chinese, Japanese, Saudis, etc. to work out a smooth landing after a controlled descent as opposed to a crash for the US economy. If we crash, our creditors lose their shirts, too.

This Schiff article is good but seems to miss that point to some extent.

Really, what we need to to is sit down with our biggest foreign creditors and work out a payment plan. It's in our collective interest to do so.

Sawyer:

If it's the government (allegedly) boosting production, then it's simply impossible to not simultaneously boost consumption. That's because, as already stated, the government has no means of creating wealth on its own. Debt-based consumption is debt-based consumption, whether it's done by Joe Dumbass on his credit card or Joe Government doing it by borrowing from foreign creditors. The only difference is the latter is larger in scope and less efficient.

I agree that it's in the best interest of both us and our foreign creditors to work out a payment plan. I would love to be a fly on a wall during those negotiations and relish the absurdity. I mean, we are beyond fucking broke. "Okay, by 2075, we promise to have five percent of our debt paid off. Deal?" Besides, whatever infeasible payment plan we sign on to is largely immaterial--the point is, no one in their right mind is going to continue to piss away their money on a country that fritters away every last dime on hocus pocus bailouts and "stimulus packages" and borrow-and-spend consumerism. At this point, our creditors' only concern should be cutting their losses.

*sigh*

This aired this morning:

I hear nothing to object to.

Me:

That's not quite right. The government can be involved with building infrastructure that the private sector couldn't build on its own. And that infrastructure in turn can allow the private sector to become more productive by giving businesses access to more efficient communications, energy, and transportation services. Denying that is denying history. Just look at how the railroads, highways, power grid, and Internet were all built. The government was deeply involved in each case.

And you know what? Regardless of whether we're destined to suffer serious inflation (even possibly to the extent of a complete collapse of the dollar's value), it's a good idea to upgrade key infrastructure now. If we don't go broke, the new infrastructure (if it's built in a reasonably intelligent way) will help facilitate increased economic growth later on that will bring about a recovery. And if we do go broke, at least we'll have good infrastructure to use during the period of time we can't afford to build any more--and it will still help with the eventual recovery. Finally, in either case, we get the twin benefits of keeping more Americans working and spending by paying them to build this infrastructure along with giving the public at large the impression that something is being done to fix our problems.

In truth, I'm highly skeptical that the stimulus plan is going to work. However, there's pretty much no politically feasible way to stop it from being implemented in some form. So shouldn't we put more energy into directing the funds toward good infrastructure projects and away from wasteful entitlements and pork?

Also, I'm not even suggesting that the Chinese, Japanese, etc. will ever get all their money back. But they're better off accepting that and taking some fraction of it over time than simply flooding the world market with American currency and seeing their remaining reserves become worthless. An American depression would almost certainly cause major depressions in our creditor nations as well. And--especially in China--that could have disastrous political consequences for the current power structure.

Update:

Sawyer:

I never denied that government can or has build infrastructure, or even that it can undertake projects impossible to the private sector. I merely pointed out that it lacks the wealth to so on its own. The dollars must either be A) Taken from the private sector via taxes, B) Borrowed from foreign creditors, or C) Printed out of thin air. All three options entail hidden costs and unintended (or intended, if you're a conspiracy nut) consequences. The fact that costs are dispersed (and therefore hidden), doesn't mean they don't exist. It just makes it easier for the political class to sell it to the public.

What you're arguing is that government--through foresight and careful planning--can pool resources into projects that will yield a rate-of-return greater than any private initiative could. Even if I believed central planning to this insane degree could work (I don't), there's little in the soon-to-be $1 trillion "stimulus" package that puts my mind at ease. When you're pissing away that much dough, the burden of proof is damn high, and it falls comically short.

These infrastructure projects (more to the point: spending money we don't have) is exactly what will PRECIPITATE the inflationary holocaust. Again, the government doesn't have the means to produced real wealth; all it has is a printing press. It's silly to assume our foreign creditors will continue to foot the bill, and so appears that the Fed is poised to print the dollar into oblivion.

The idea that the World's Consumer Plantation (America) has been the engine of Asia's economy is a favorite fantasy among Americans. The fact is, Asians have had to sacrifice their standard of living by propping up bovine, over-consuming US of A. The world economy is heading for the shitter, no doubt about it, but Asia will be better off allowing us to die. Their growing consumer base (one backed by production, not credit) will, in time, more than make up for the fake consumption they will have lost in America.

Also, Dean, who has been cc'd on all of Sawyer and my e-mails, has responded:

First of all, I agree we have to cut down on our dependence on credit. It doesn't really matter; for at least a decade, credit will be tight enough to tamp down demand.

You can't look at the economy like there's a fixed amount of wealth out there. Infrastructure investments, obtained by borrowing against future taxes to foreign countries, can definitely be worth it and have been for the past century at least. The idea is not to look at debt in real terms (no jokes, Paul) but in relation to our GDP. If you can borrow and grow the GDP faster than the debt increases, you've lowered your debt by borrowing. Of course this doesn't always work, but this isn't some sort of hose job by some monolithic scape-goat plotters.

The principle generator of wealth in the country is the idea that lending money towards productive ends creates wealth itself. Borrowing to consume (or to buy things that generally decrease in value and don't add to your productivity) has been the problem and still is.

I hate to say it, but thank god the congressional republicans are standing their ground, because this stimulus can't be a shopping list, I hope they can flag more things like that contraceptive bullshit.

p.s.: I'm less versed on inflation, but this seems to suggest that we've always had inflation up the ass, more so when we didn't have paper money. Also, go over the budget sometime, there's never a revenue source called "printed" it's all accounted in taxes or debt.

So: A) why have they been lending to us so much? and B) what would they have to gain from their (albeit, current) biggest buyer's downfall?

I guess my estimation is that banks, even though they got bailed out, will still never come close to the credit orgy that preceded all this shit. Even if they're flush with cash, they'll think of Bear Stearns or WaMu and will be much much much more stringent on what can be spent with a loan. There's also likely to be increased regulation on what percent of any type of financial institution's debt can be securitized, likely necessitating credit card companies to tie themselves to banks or become them themselves. If this happens, the belt-tightening will thankfully happen itself.

So, I think pumping credit back into the system is necessary to allow for productive loans and self-interest will force that credit to not go to consumption. Some people are pissed that the government money already received by banks hasn't translated into credit. While it needs to eventually, this is a good sign, I think.

Sawyer:

To be honest, I have no idea why they've been lending us so much. Foolishness--or at least lack of foresight--is the only thing I could think of. (Maybe groupthink?) I think the question is rather moot. The point is, they're going to stop at some point, and I think sooner rather than later.

Me:

Philosophically, I'm inclined to agree with Sawyer. But pragmatically, I think Dean has the right idea. As I've said multiple times, there will be a stimulus package. As long as that's the case, the money might as well go toward the most useful projects possible.

Final thoughts for the day: First, I've blogged about this WSJ editorial in favor of a stimulus focused on building a smart power grid and a faster Internet previously. It's an excellent read. Second, my support for investment in energy efficiency as well as renewable electricity generation has more to do with my concerns about climate change than a desire to stimulate the economy. But, once again, as long as we're tossing money at something, it might as well get tossed at a good cause. (Yes, Paul, I'm aware you're skeptical that human-caused climate change is a serious threat, but I recommend reading the Climate Progress blog for a while and checking out the source material it links to. It's succeeded in scaring the shit out of me.)