Economic stimulus

The discussion for and against the ‘new’ economic stimulus package is heating up in a somewhat disturbing pattern that does not bode well for the concerted, cooperative efforts that will be needed to overcome the crisis. The positions are exaggerated and simplified to the degree of caricature, yet not conducive to merriment but rather increasing divisiveness: shrill accusations by supporters, that opponents ignore the plight of those affected, thereby making things worse by delaying action, countered by the other side with wild statements about the measures to be preparations for the wholesale deliverance of the country to socialism, being full of pork, doing nothing to solve the problem in the long run, etc.

Trying to sort out some of the issues, I have a few questions.

Is anybody fundamentally against the notion that there is a problem and that something needs to be done about it?

Is anybody opposed to the notion that there is a need for quick action? But that whatever action is taken, the remedy will have to be sustainable in the long term?

I don’t perceive that there is much disagreement there. So the contentious issues are about specifics. Some of these, about which I think there are legitimate questions, are :

1. Are the funds of the package going to the ‘right’ people and groups?
(‘Right’ as in ensuring the desired effect, as well as: group ‘deserving’ or ‘undeserving’ — e.g. because they may be the ones ‘responsible’ for the problem)

2. Will the funds be used for the appropriate activities, projects, programs?
(Other versions of this question will ask: Is there too much ‘pork’ in the package? And who will benefit versus who will suffer?)

3. Can and will the proper use of funds be effectively monitored?

4. Will the proposed measures ‘gain traction’ fast enough to prevent serious
damage until they do?

5. What are the expectations about how those funds
(which must be borrowed) can and will be repaid?
By whom? Over what period of time? At what cost?
Are those expectations reliable? realistic?

6. Will the package, and the programs to be funded with it, result in effective long term recovery? Or just in short term ‘band-aid’ fixes that

7. Are there viable alternatives to the proposed measures? What are they?
And are they being discussed? Considered? scrutinized?

It is interesting to note that so much of the ‘discussion’ is being conducted in rather simplifying and therefore divisive terms, and drawing from historical events that may be considered not entirely applicable to the current situation. The argument about the expected effectiveness, for example, uses almost exclusively material form the 1930’s depression, with one side claiming that the ‘New Deal’ programs kept the country afloat, saved the lives of millions, and produced infrastructure that remained useful for many years, while the other contends that the taxation necessitated by the government spending unnecessarily prolonged the crisis. This is usually combined with the simplistic ‘small government’, individual freedom and personal responsibility versus ‘big (bad) government and its ‘tax-and spend’ proclivities, welfare mothers and dependence (i.e. loss of freedom) on government handouts slogans. It can be argued, with ample recent evidence, that the reality of the current situation in many ways represents an effective inversion of many of these notions. So there is a legitimate need for in-depth scrutiny of these questions.

There are some serious questions that have not been raised, to my knowledge, much less received any in-depth discussion (I don’t count the screams about ‘turning the country over to socialism’ which has been ‘proven to fail everywhere esp. in the demise of the USSR, nor on the other side, the gleeful or anxious cries about the imminent ‘demise of capitalism’ as evidenced by its failure to solve the world’s problems since the collapse of socialism, and its recent crisis, as serious discussion). These are questions about the underlying structural reasons and mechanisms for the failures of both, that should be examined, remedied, or replaced with something better.

8. One of these issues is the effect of power in large systems. It applies to both forms of socio-political governance as well as large ‘private enterprise’ entities. It is ironic that defenders of US capitalism boast of the US being able to send folks to the moon but don’t seem to credit Americans with being able to develop a viable government. Some respectable efforts have been made to control and limit the unconstrained abuse of power in ‘democratic’ forms of government (term limits, checks and balances between several branches of government), which arguably are in need of improvement. The possibility that temptations to abuse of power also can occur in private enterprise, especially when these grow to near monopoly and global dimensions, has not been effectively discussed, except with sanctimonious deference to the power of shareholders and the ‘invisible hand’ of the markets as the only needed controls, on one side, and denigrations of ‘big corporations’ pointing to the evidence of the white collar Enron-style crime on the other. Which are dismissed by the defenders of capitalism as just the misdeeds of a few ‘bad apples’ which are justly being prosecuted — “see, they are serving jail time…” And therefore do not need consideration of structural change.

(I have discussed the relationship between freedom and power elsewhere, the temptation to realize freedom made possible by power (empowerment) consisting precisely in the ability to break or bend the rules: am I truly ‘free’ if I have to abide by the rules?)

9. Another fundamental question that also is not part of the current discussion is the role of growth in the economy. It is almost as impossible to even raise the question as it is to question motherhood and apple pie: the unquestioned mantra of governmental economics from the smallest municipalities to international trade and finance. It is manifested in the phenomenon of compound interest, and the associated expectation of profit and return on investment at all levels of economic activity. The concept, in its basic form as taught in the schools, is hard to argue with — the various warnings and prohibitions in religions throughout history notwithstanding. Did they know something we have forgotten? Might there be some good reasons for rethinking the way we deal with this?

One reason might be the indiscriminate application of growth-oriented policy (and growth-based criteria for economic decisions) to areas that are meaningfully capable of growth, and to resources that cannot grow, alike. The fact that some resources are limited by nature — land, shorelines, fresh water, even the fish in the ocean — but are treated just like phenomena that can more easily accommodate indefinite growth (might even those have some limits?) will result in imbalances in the economic system, to say the very least.

Another reason, I submit, might be the fact that the way growth and compound interest operate in the economic system will inevitably result in systemic shift in income and wealth distribution over time — regardless or even in conflict with the actual merit, productivity, innovation and hard work. It is no secret that small investment — the savings accounts of the low-income worker — will earn interest at very low rates in the banking systems of most countries today. Even if one were to invest $1000,- and $100,000 at the same interest rate, the ratio of the resulting fortunes after ten or twenty years will be quite disproprotionate. But in reality, the higher the deposits, the higher the earnings rate. So without any controls and assuming equal ‘merit’ of depositors, the one starting with the higher deposit will gain an ever-increasing advantage over the small investor.

To then suggest that e.g. taxes diminishing this handicap amount to ‘socialistic redistribution of wealth and the undisciplined, lazy masses just sponging off the rich’ is sounding a bit disingenuous. To attack institutions of ‘insurance’ such as Social Security or National health insurance ideas as concepts violating the American values of rugged individualism and individual responsibility is no less than adding insult to injury: the idea of insurance is based on the very responsible insight that accidents, illness, other calamities can strike anybody without regard to merit, and that we might reduce the painfulness for anyone hit by such might be lessened by our setting aside small funds that collectively can help out those who have suffered an event. Is this denial of individual responsibility, or the very embodiment of responsible stewardship of our families’ future well-being? By comparison, the notion that there should now be private enterprise agencies who should compete with one another in making profits from this — in effect, making profits from our misfortunes and our efforts to remedy them, this is supposed to be an American virtue and value? And the callousness of my home insurance to whom I have paid insurance premiums for decades, with which they have built gleaming office buildings and paid great CEO benefits and bonuses and parachutes, to suddenly cancel my insurance because they are no longer insuring properties in Florida – that is not just tolerated but praised as responsible business policy — so I should buy their stock for my retirement?

10. There is, finally an aspect to the interest / profit / growth conundrum that arguably has contributed more to the current crisis e.g. in the housing market than the alleged irresponsibility of homeowners buying more home than they can afford, of the few dishonest and even criminal ‘bad apples’ in the mortgage industry. It is the ‘pyramid’ effect of the financing system. Consider the building and financing of a house. Even before it is built, every contractor and subcontractor is taking out loans with their banks, to be able to buy the materials and equipment for their businesses, hire workers, etc. The general contractor, developer or owner takes out a construction loan to pay the contractors as the work is being completed. This means that even before the house is built, the bank will earn its interest — at a slightly higher than usual interest rate since the collateral is ‘just a hole in the ground’. In fact it has already, in, say, a year of construction period, earned, say 10 or 12% of the cost of the house. Then it finances the mortgage proper, with points and fees etc. And starts collecting interest on the owner’s loan. Another 5 or 6% a year. Of course, this may be too much trouble, so it ‘sells’ the mortgage to another company, a mortgage finance entity. The bank wouldn’t do this unless it could make some profit on that, would it? so that gets added to the ‘value’ of the thing it sells to the next higher entity. Which wouldn’t buy it unless they too could make a profit on it: one, by not having to go through the work involved with the initiation of the mortgage that your local bank had to do, but mostly because the mortgage is either so long-term that is expects to get safe income for a long time — income whose ‘present value’ is higher than what it paid for it — or because the mortgage is on whose interest rate can be jacked up in a year or two. If the sale and the expected profit have added another percentage for the bank and some more for the mortgage company, this will be charged as interest to the homeowner. But the owner’s income has not changed at the same rate in the meantime; he can’t pay the new mortgage payment. Fine, we’ll force him to sell the house. Only now so many people have gotten into the same fix that there aren’t enough folks around to buy the house at the price that now should cover all the profits added to it through the trades, plus of course the realtor’s 6% fee for finding a new buyer and organizing the sale. This means that someone is going to take a hit here: prices are forced down, the profit expectations are not met: bailout time. Who is getting blamed? The irresponsible homeowner, the bankers who sold those mortgages to people who couldn’t pay (how could they have foreseen that they would be laid off by their own bank in order to cover its losses?).

The blame game here is missing the point that the expectation of profit at every level was such an intrinsic part of the system that everybody involved had to buy into it. It wasn’t just the few bad apples: at every level, the economic agent had to comply with the requirement that a quarterly profit had to be demonstrated. Otherwise, the company would lose its standing on Wall street, lose its ability to borrow money cheap enough to finance more such deals. The pressure to divest themselves of questionable instruments, leading to the invention of ‘derivatives’ in which nobody could even begin to assess the true value of the basic commodity it represented, became ever greater. One did not have to be a dishonest banker to succumb to it — it was everyday practice, everybody had to play the game — anymore than every defaulting homeowner is an irresponsible bum.

I do not see in the proposed stimulus package nor in the discussion surrounding it much of an attempt to identify much less develop remedies for these intrinsic flaws in the system. I would love to be proven wrong on this; I am afraid that without such fundamental rethinking and corrections, we are just going to see more trouble of the same kind ahead.

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