A Labor-Day


By Jay B Gaskill, Attorney at Law

“The $787 billion stimulus package in 2009 wasn’t nearly big enough.”

This was a pull quote from a piece in Sunday’s San Francisco Chronicle’s Business Section by Andrew W Ross, “Mistakes on economy make Obama vulnerable.”

Mistakes on economy make Obama vulnerable

Andrew S. Ross

Updated 6:11 p.m., Saturday, September 1, 2012
LINK — http://www.sfgate.com/business/bottomline/article/Mistakes-on-economy-make-Obama-vulnerable-3833752.php#ixzz25L1Jt3p6

Consider this gem from the same piece:

“…Obama has offered lots of plans, including most recently his American Jobs Act, which analysts said could create 1.9 million jobs and add two points to the GDP. But, like most of Obama’s other plans, it was shot down by opponents determined, as Senate Minority Leader Mitch McConnell (R-Ky) openly admitted right after Obama was elected, to deny him a second term at whatever cost – including, it turned out, a near U.S. debt default. Would a more accommodating – some might say patriotic – opposition have helped the economy more? We’ll never know. A more robust, less accommodating response by Obama might at least have chipped holes in the “party of no” stonewall and given him more room to operate.”

“The party of no”?

[A]nalysts said [that Obama’s latest plan] could create 1.9 million jobs and add two points to the GDP???

I’ve struggled how to insert the missing elements in this flawed logic as simply as possible. I hereby invite you to join me in this exercise. {My email is below.} Try this as a start:

Politically allocated public moneys are supposed to be appropriated for “public purposes” (think constituency feeding here), which in the case of the failed $ .787 trillion consisted mostly of “shovel ready” projects to be done by local governments. Like the make-work WPA projects in the depth of the depression, these projects were not new, profit making business entities. They had the virtue of keeping some workers busy, but did not themselves spawn any new, money making projects.

These efforts are being promoted as “stimulus” measures. This sleight of hand works only because of two unchallenged assumptions, to wit: That the measures will stimulate “consumption” by “putting more money in the hands” of those who “have less” (while servicing one’s voting constituencies); and that increasing consumption (by hopefully increasing some consumer purchases) will stimulate American production and hiring.

The .787 trillion dollar, debt-financed “stimulus” expenditure was doomed to fail from the outset, and it was a failure in fact.  This was not because of the sum of money expended, but in spite of that sum.  In times when we have a critical mass of unemployed adults, including the much larger number of men and women who are underemployed or frightened of becoming unemployed, neither temporary public jobs nor a little bit more money in general circulation will overcome the general tendency to hold back spending in favor or debt repayment or saving.

More to the point: Any uptick in consumer confidence and in actual buying will have a very small effect on employment numbers in such a situation because, aside from our locally provided food, water and electricity, the additional purchases tend to support foreign producers, not American ones.

Visit Wal-Mart, any hardware store, appliance or electronic store.  Start looking for the “made in the USA tags.” I gave up after an hour.  Consumption-driven stimulus, to the extent that it works at all, does very little more than to stimulate our purchases of Chinese and other non-USA manufactured goods.

The days of consumer-driven stimulus are over.

But what about all our sales people, the Wal-Mart greeters, the advertising agencies, the pizza sales? For that matter, what about all the other “spin off” jobs from our consumption activities?

In the long term, we cannot survive as a “service industry” economy if we are just serving ourselves.

If you doubt this, consider this little thought experiment:

Assume a country (We’ll call it NoMaKeSoMuchNow), a prosperous principality in decline that makes no cars, almost no machinery and virtually no other tangible, fungible goods – except for food, water and electricity, all of which are locally made and locally consumed.

The government of NoMaKeSoMuchNow sends a one-time gift of 1,000 Chips (the local currency equivalent of a dollar) to each family.  Suddenly many families have some discretionary money to spend.  Of course, almost all of the new discretionary spending will go to foreign suppliers, who will want to be paid in currency that buys something they want. But NoMaKeSoMuchNow has very little to sell; and therefore its currency exchanges at 3,000 chips to the dollar.  The one time gift of 1,000 Chips to the good citizens of NoMaKeSoMuchNow ends up being worth 30 cents US.

Every iPhone in the USA is made in China.  The specifically US components of any smart phone consist mostly of the designs, the concepts, the original idea-contents – these are its intellectual property components.  This is our problem writ small.  Consider that all the movies, songs, video games, patented drugs and processes, and other intellectual property assets in the entire US inventory cannot by themselves support the rest of the economy. Nor can these innovations support their own respective industries if our intellectual property rights are not protected abroad.

The restoration of productive, profitable USA based businesses that sell real goods and valuable services to the USA and to the world at large is the indispensable key to our economic recovery.  Those as-yet-not-started businesses will be the engines on which continuing American prosperity is based.  Without them, our decline into some version of NoMaKeSoMuchNow is inevitable.

Our current political leaders-in-charge, the economic advisors who are in agreement with the cited Chronicle piece above, and the other apologists for consumption-driven recovery theory, all remain clueless about the essential difference between public, politically driven spending, and private, profit-seeking investments.

A general cultural hostility to economic success is toxic, because resentment for individual achievements inevitably poisons the well for the collection of private achievements on which public prosperity is ultimately based.

The genius of the private investment model, when conducted on a level legal and financial playing field that is sufficiently free of political meddling, is that enterprise-failure is contained mostly to the investors, while success is communicated to the larger economy via commercial stimulus.

In the government investment model, failure is subsidized by the entire economy via taxation and/or the consequences of public borrowing, while success (if it takes place) usually becomes part of a political feedback-reward relationship that tends to freeze out new competitors.

Yes, the foregoing was a simplification but not an oversimplification.

The early success of the early 2oth century Ford Motor Company benefitted the USA as a whole, but the failure of its horse and buggy and steam engine competitors did not hurt the USA as a whole. The recent bankruptcy of several federally subsidized solar power ventures has so far benefitted no one in real terms, and the considerable venture costs are being born by the country as a whole. The success of any single preferentially subsidized enterprise benefits that company at the expense of competitors without ever sufficiently compensating the public fisc that provided its original subsidy.  All too often, in the crony capitalism model, the investors that “play ball” with politicians are rewarded for reasons unconnected to the performance of their respective enterprises.

This is why politics and commerce mix as poorly (and with many of the same malign consequences) as do the institutions of church and state. The incentive of making a profit and the discipline of bearing a possible loss, together encourage wiser private investment decisions than those made by government bureaus.  Public, politically-driven ventures fail all of the time, but their architects, immune from malfeasance or malpractice lawsuits, just quietly change jobs.

Obama’s American Jobs Act was “shot down” by elected members of Congress (including conservatives, moderates and some thinking liberals) not because it was going to work, but because throwing good money after other good money to be ineffectually spent on an outmoded and discredited stimulus theory was going to fail…again.

The administration proposed to spend another .447 trillion dollars to fund some payroll taxes, pay for more local government programs, fund high speed wireless, and punish employers whose hiring practices discriminate against the long term unemployed.  Aside from the perverse result of that last provision (experts warned that it would delay any hiring), the entire American Jobs Act was another attempt to move money into the hands of people who were expected to spend it on consumption, without creating any lasting incentives to start new profit-making businesses in an uncertain economy.

Most Americans polled over the last 19 months want a “change of direction”.  Those of us who understand the new economic reality have an obligation to make clear what that that change really entails…manifestly not more of the same, but a sharp reversal of course back to the future – a robust business system based on risk and reward.


Copyright © 2012 by Jay B Gaskill, Attorney at Law

As always, forwards, links and quotations with attribution are welcome and encouraged.  For everything else, contact the author by email at < law@jaygaskill.com >.

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