by Lawrence Wilson, MD

WHAT’S WRONG WITH ECONOMIC “STIMULUS PACKAGES”?

by Dr. Lawrence Wilson

All information in this article is for educational purposes only. It is not for the diagnosis, treatment, prescription or cure of any disease or health condition.

The latest Obama stimulus package is hailed by many pundits as a great move for our nation. I want to offer another view for the sake of balance. This view is shared by many economists, and others who have studied history and economics for many years. Some of the problems listed below occur with private sector projects as well. However, they are far more severe when politicians inject themselves into the private economy. Here are some of them.

FEATURES OF ALL GOVERNMENT STIMULUS PLANS

Regardless of the society, the times, or the political party that is in charge, here are features of government spending bills that create serious problems for modern capitalist nations:

1. Changing the role of government from a “referee” role to a “nanny” role. This is perhaps the most insidious and deadly consequence of government stimulus packages of every type.

In capitalist societies, government mainly plays the role of referee, keeping the playing field level for businesses of all kinds and letting the marketplace decide whose products and services are needed, how much is needed, the forms of the products and services, and which providers will win out over the others.

This is the essence of the free market economy. It has a rhythm and stability about it that is marvelous in its simplicity and its effectiveness in providing for the needs of the people, no matter how strange they may seem. By this I mean if the people want rock n roll music, for example, they get it, even if it seems unacceptable to some.

Markets also have a quality of openness and transparency about them that tends to keep everyone somewhat honest. As a result, fraud is controlled and society moves ahead very fast when the rules are respected, the regulators do their jobs and the courts enforce the simple criminal and civil laws against negligence, fraud, misrepresentation, breach of contract and other simple legal tenets.

Bureaucratic rule tends to be the opposite. It is done behind closed doors and it favors some well-connected groups over others. It does not tend to respect the needs or wants of the people, though it claims to do so, and it is extremely destabilizing because things change overnight at times. This is what has occurred in America in the past two or three weeks by suddenly injecting almost $1 trillion into the economy, but only in selected places determined by politicians and lobbyists.

This is not only destabilizing. It creates a new role of the government that is terrible for the independence, strength and maturity of the people it is supposed to serve. This is variously called “big brother”, “big mother”, “the welfare state” or the “nanny state”. Government becomes the provider, the overseer, the parent and more.

There can be no privacy because the nanny needs to know all about us. Hoards of busybody bureaucrats collect personal information and tell use how to live, eat, and more. Paying all these bureaucrats is a monstrous cost that does little for the nation.

When the Soviet Union and Eastern European communist regimes fell in 1989, undoing the nanny state was and still is a huge problem. The people of these nations were simply unfamiliar with caring for themselves. Eastern Europe had only been under socialism for 40 years or so, so they are faring best. Russia still cannot dig out of 75 or so years of communist rule. Many there call for a return of the nanny state because they have become so dependent upon it and do not know how to make their way as independent citizens.

2. Arbitrary nature of the spending. Government spending bills are usually written by a small committee of politicians, with the help of hundreds or thousands of lobbyists who are paid by their industry or group to push their agendas, not those of the nation.

As a result, the spending bills may have little to do with the needs of the nation as a whole. In many cases, political considerations are, in fact, harmful to the nation. For example, bailing out a failing company such as General Motors makes them less competitive, not moreso, and just delays the time when they cannot continue to compete in the world market. This serves no one except a relatively few workers in the short term.

Government spending also tends to be more arbitrary because they are spending other people’s money. The Congressmen, bureaucrats and lobbyists are simply less careful than you or I, or a private company would be when spending our own funds.

In contrast, private corporate spending is market-driven. This means that it is in response to the behavior of millions of consumers who vote with their money every day on what products and services they perceive as most needed for them. This type of investment is far more grounded in reality. For this reason, it tends to be much better for the nation as a whole.

3. Short-term thinking. Politicians and many lobbyists think short-term. How can I get elected, the politicians think? The lobbyist must earn his salary this year or be fired. However, this is almost always bad for the nation. The nation is not up for re-election in a few years and must be placed on a firm foundation for the future to benefit the people within it.

Short-term thinking can occur in the private sector as well, but occurs much less often because companies must invest in manufacturing facilities, personnel and other matters in which one must think longer term – 20 years, or even 50 years ahead.

4. Inflationary. All government spending is inflationary unless it is completely balanced by higher government revenues such as taxes.

Inflation is the most destructive force in a society if it gets out of hand. Inflation is a hidden tax on everyone, but it is regressive, meaning it is hardest on those who can least afford it, the poor people. The rich own houses and other tangible goods that rise in value with inflation, whereas the poor do not. The rich have investments that can help offset inflation, while the poor do not. Inflation is a terrible price to pay for a short-term government stimulus to the economy.

Anyone who thinks inflation is not a problem in America should view an old movie, as I did recently, when a salary of $10/week was a decent wage.

5. Creating large debts for the future generations. All government spending, if not balanced by tax income, places large debts on future generations and saddles the nation with interest payments that have no benefit whatsoever to the nation. Eventually these interest payments will destroy a nation, just as they destroy individuals who go into debt.

6. Creating make work jobs rather than value-creating jobs. All government programs, because they do not respond to market forces, tend to create jobs, as they are intended. However, they are often not jobs that truly add value to the nation’s economy.

For example, Mr. Obama’s stimulus plan sets aside billions for new desks, new computers and even new light bulbs for government workers. These will create some jobs, but will the jobs actually create wealth? Most will not. Instead they are called “make-work” jobs that a politician or lobbyist likes. This is important for a society because people must be employed doing something worthwhile, or the nation suffers. It is not okay, for example, to have millions of people working at jobs that don’t produce wealth. This leads to a much poorer nation and was the situation in Communist Russia, for example, in which the government guaranteed people a job.

Once again, capitalism is good at figuring out which jobs are needed and which are not. Politicians are terrible at making this decision because they do not respond to market demands, but think they know better what the country needs.

LESSONS FROM THE PAST

Lest anyone think any of these problems are new, here is a quote from a Roman historian written over 2000 years ago during the decline of the Roman Republic into an empire. Cicero wrote in 55 BC:

“The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled... People must again learn to work, instead of living on public assistance.”

However, we have learned little from history. The last major bailouts took place during the Depression of 1929. In May 1939, with double-digit unemployment persisting for eight years, Henry Morganthau, Treasury Secretary under Franklin Roosevelt, wrote:

“We have tried spending money… We are spending more than we have ever spent before and it does not work…We have never made good on our promises… I say after eight years of this administration we have just as much unemployment as when we started … and an enormous debt to boot.”

THE EFFECTS OF SUCH PROGRAMS

PROBLEM #1. DESTRUCTION TO THE MORALS OF THE PEOPLE. This may sound philosophical, but it is actually a very practical consideration. The values of the people determine a nation’s future more than any other single thing. Here is how the values become twisted by government bailout programs:

Rewarding failure. They teach that if your business is failing, don’t fix it. Instead, pay a lobbyist to bribe the government for a handout.

Rewarding kissing up to the government instead of hard work and independence. They teach that to succeed in America you must kiss up to the government and get a handout, rather than work hard, do well in school and other lessons that most parents try to teach their children.

Bribery and political maneuvering pay, not honesty. This is related to the paragraph above. In addition, any intelligent person can see that this stimulus plan contains political payoffs to Mr. Obama’s friends such as billions of dollars for ACORN and other Democrat party groups.

Also, the bill helps the Democrat party stay in power in the future. This is pure corruption and again, teaches the wrong value system.

The type of work one does is not important as long as it is a job. Bureaucratic jobs that are created by government stimulus programs provide some money, but not much else. Many are just paper-shuffling jobs in the capital cities. They are dull, tedious, unfulfilling jobs and many bureaucrats know they are not doing valuable work, which depresses and sickens them.

The government cannot be trusted. Some, of course, are delighted with the stimulus bill, especially those that get millions or billions in handouts. But the rest are left out.

These include all the hardworking people who sacrifice to pay their mortgage on time and pay all their bills and don’t need a handout. It also includes most Republicans, who were totally excluded from the process, though the president promised “a new tone in Washington”.

It also includes all the small business people who cannot afford a Washington lobbyist to plead their cause. It also includes the people who hold views different from the Obama administration, who were excluded because their projects and work is held to be not worth supporting with the government bailout.

This breeds anger, resentment, fear and longing to overthrow the government, none of which are helpful for anyone in the world today.

PROBLEM #2. GOVERNMENT STIMULUS PROGRAMS ARE WASTEFUL, EVEN IF THEY WORK.

This occurs due to the political nature of the stimulus plans. This causes a tremendous misallocation of funds, fraud, huge administrative waste of money, high enforcement costs for everyone, both the government and the recipients and other costs that are more subtle to identify such as the waste of talent and brains of the people. Let us discuss just a few of these.

A) Misallocation of funds. Money should be spent on things of definite value. Otherwise it is wasted, along with time, personnel, materials and more. Nations that waste their resources eventually fail completely. It is no different than individuals who waste their money, time and effort on less worthwhile endeavors. A ltitle is okay, usually, but a lot will ruin anyone or any business.

How should our nation decide what is of value? With a government stimulus, a small committee of Congressmen and their friends, the lobbyists, tend to decide who and what needs money.

With a capitalist system the people, through the marketplace, make the big decisions. Millions or even billions of consumers worldwide choose each day which products and services they feel are most important, based on their real needs and wants.

It is true that businesses decide which products to offer. However, they base the decision on which ones will likely sell best and are most worth investing their time, energy and money. Ultimately, however, the people decide, because in capitalism businesses cannot force the people to use their products. The only exception is if government passes a law forcing people to use the product, such as requiring car insurance if you drive a car.

B) Administrative Waste. Most people estimate that government-run projects cost twice as much as privately run projects, whether they be in health care, welfare, education, mail delivery, or anything else.

A large reason is “red tape”. Government projects always come with a large set of rules. This is due in part to its political nature and in part to prevent massive fraud. The government demands a lot of paperwork, reviews and reports, many of which are a waste of money, time and personnel salaries. In addition, new armies of bureaucrats must be hired to receive and process all the new paperwork, and this is another large expense.

C) Fraud is always worse in public sector projects. This is well known by economists. People and companies doing business with the government are not using their own money, so they are not as careful. A little cheating (or even a lot) just doesn’t seem like a big deal.

Also, oversight is usually lax because bureaucrats in Washington are far away in most instances and more interested in keeping their jobs than in arresting people. They, too, are often on the take and corruption is a big cause of fraud in government. Also, rules are complex and those who can fake the reports and reviews can often easily “work the system” to their advantage.

Also, the wheels of government justice move so slowly the person can be long gone by the time the laws catches up with him. This is very different from a private job where one can be fired on the spot. Often, government employees cannot be fired according to union rules that too often control these jobs.

As an example, according to the government’s own accounting, fraud in Medicare accounts for 7.5% of its cost. This runs into billions of dollars.

D) Enforcement costs. Other wastes that are far worse in government projects include those that go with enforcing bureaucratic rules. This includes legal costs of tracking down and prosecuting cheaters, jail and other punishment costs associated with apprehending and confining crooks, and paying all the judges, bailiffs and others in the criminal justice system.

E) Union costs. Another waste in many people’s minds is that government contracts usually are checked by unions who must approve the terms. This can cost the taxpayers millions more in various union benefits, even paying for union’s organizing and lobbying costs.

F) Delays and changes in projects. Businessmen everywhere know that “time is money”. Government projects, due to their bureaucratic nature, tend to waste more time than private projects. Also, changes occur due to politics, an added factor that private sector projects have to contend with also, but less so. Delays mean that equipment and people are idle, materials degrade and must be discarded at times, and for many reasons delays are the enemy of progress and efficiency.

PROBLEM #3. MICROMANAGEMENT, or THE NANNY STATE EATS INTO THE PEOPLE’S SOULS

Everyone knows this problem firsthand, as it occurs in the private sector to a degree, and in homes and in all relationships to a small extent.

It is about having someone over you telling you what to do all the time. No one likes it and it is quite harmful at times for mature adults. It makes them angry and resentful and often rebellious.

The “nanny state” is very costly to pay all the regulators, very cumbersome, very annoying, very wasteful of money and talent and very stupid, ultimately.

PROBLEM #4. DESTABILIZING THE NATION AND THE ENTIRE WORLD ECONOMY

This happens in many ways, most of which have been mentioned. They include destroying the basic morals of society, wasting money, fraud and dishonesty that always occur, inflation, the growth of government debt, the arbitrary and often random nature of the stimulus bill, and destabilizing the capital markets with huge, random infusions of government cash.

The latter is sometimes called “Industrial Policy”. It means the government favors certain industries and certain companies over others. Lenin was famous for it in his Five Year Plans for the Soviet Union, Hitler did it, Mussolini called it fascism, and Japan and other nations do it as well.

It is destabilizing to all businessmen and usually does not work well because the government simply is not smart enough to know which industries and which companies will provide the best products and services for the people. Also, favored industries and companies become lax and sloppy because they are not forced to compete in the marketplace on the same footing as the others. The American auto industry is such an example.

PROBLEM $5. LACK OF EFFECTIVENESS

History is full of examples that government stimulus packages do not work well. This was the case during the Depression of 1929, it was the case in Japan and in post-World War I Germany, and has occurred many times in the past. Those who do not learn history tend to repeat it until things get so bad they finally learn. America has obviously not learned, at least her leaders have not.

Will it create jobs? Of course. However, the damage done to the private sector, to the people’s moral fiber and to the trust of the people in their nation and their leaders more than cancels out all the millions of mostly make-work jobs it will create.

Stimulus sounds good and makes the Congress and the people think they are doing some good when they are not doing much good at all. Franklin Roosevelt’s New Deal programs, according to his own advisors, just prolonged the Great Depression.

PROBLEM #6. LIMITED, CONSTITUTIONAL GOVERNMENT IN PERIL

Here I wish to be a little partisan. I suggest that the Democrats have very little regard for limited constitutional government. I say this because Mr. Obama announced during his campaign that he would appoint judges who oppose the limits set by the constitution on government power. He said this at the church debate early in the campaign.

In this area, the Republicans are far better than the Democrats. Mr. Bush appointed fine judges – Judges Roberts and Alito. These men understand limitation of government power better than most and its importance. I hope this will curtail some of the stimulus spending, which clearly increases the reach of the federal government into all of our lives, our healthcare and many other areas. The members of the House of Representatives were given 12 hours to read a 1000+ page bill, an impossibility for all but the most accomplished speed readers.

PROBLEM #7. GOING AGAINST THE WAVE OF THE FUTURE

Capitalism is the system of economics that is winning in the world. This is the reason the Union of Soviet Socialist Republics (USSR) fell and why China, though communist-ruled, is doing better. It is why India is growing, but Pakistan is not. India embraces capitalism, while Pakistan, a Muslim nation, does not embrace the ideals of capitalism and has many internal political problems as well.

Capitalism is not perfect, but it provides the most wealth for the people and teaches them good values as well, without needing huge government bureaucracies as are needed in command economies.

Mr. Obama and his administration clearly do not like business and capitalism. They believe they can make over the evil USA into a socialist nation and succeed. If they do this, which they can to a degree because they control the Congress, the USA will be left behind. The more capitalist nations will gain in power and economic strength while we lag because of a bloated government, unions in control and the other features of a communist state.

CONCLUSION

For all these reasons, government bailouts and stimulus packages are a very dangerous route for our nation to follow. I hope someone in power can understand even a few of these reasons and I hope their love of the country takes precedence over their love of money, power or influence.

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