What Do You Think?

Scenario

To understand the economic environment we live in, it is useful to imagine the case of a physician trying to treat an ill patient. The patient presents herself in terrible shape; the physician has never treated a condition with symptoms quite like hers before; and the causes of the ailments are unclear. The doctor remembers reading about a similar case in medical school — and, trying to recall as much of his training as possible, he endeavors to come up with a theory as to why the patient is sick and to determine what will make her better.

In an ideal world, the doctor would run a controlled experiment: He would assemble 100 patients with similar symptoms, but the doctor does not have 100 patients — he has only one. So, based on his assessment of what is causing the patient's troubles, and the most likely remedy, he takes a risk and administers the medicine.

The patient, however, returns a few weeks later; this time, her symptoms are worse. What, then, should the doctor conclude? He might decide that he gave the patient the wrong medicine. Or he might determine that the patient was even sicker than he originally thought, and thus that the medicine should be administered at an even higher dosage. What do you think?

Stimulus Spending

President Obama is now faced with this scenario. Change approaches or go for a higher dosage? It looks like he is going higher by advocating that the unemployment rate would have been "15%" if not for his package or that "we staved of another depression." He is making the push for more stimulus in the form of jobless benefits and bailing out municipalities. In regard to the ill patient, the Administration is saying that the dose itself was not big enough. VP Biden admitted to it in this video. However, we should not just focus on "The Stimulus," but I should also remind you that we have had no less than 4 stimulus packages in the past 2 years:

1. 152 Billion -- Jan 2008. Unemployment Rate 4.9%
   
2. 61 Billion----Sept. 2008. "Stimulus for Main Street." 6% rate
3. 862 Billion---Feb. 2009. Supposed to keep rate below 8%
4. 30+ Billion--Nov. 2009. Programs like Home Credit. Rate 10.2%
   
5. Other measures bring the total to 1.085 Trillion on Stimulus Spending > Iraq War and Afghanistan War combined.
   

To be fair, a couple of these measures had bipartisan support as well as President Bush's signature, so both parties are at fault here. But, over 1 trillion was spent and unemployment still reached 10%. Germany only spent 100 Billion in stimulus money when we did, and they are entering into a v-shaped recovery and less unemployment. The debate today hinges on the ability for Americans to choose which type of economics you want to believe in.

The Question

President Obama and the Democrats subscribe to the Keynesian theory that during periods of high unemployment and slow growth there is a decrease in aggregate demand, which can be replaced by government spending. Here is the question:

• If aggregate demand in the economy is weak and the problem, then why are profits so strong?
  

Fortune 500 companies have over 1.8 Trillion in cash reserves. This is well above the high mark in the past 30 years and above their cash flow needs. Harley Davidson, to take one example, saw its profits quadruple in its last report, and it is a company that is very much dependent upon American buyers. Other firms, from Pepsi to Mattel to Ameritrade, have seen very strong profits of late. Analysts have remarked that, in terms of profits, this is one of the strongest recoveries we’ve seen in a good long while.

Profitable businesses are the most sure way of creating jobs for the long-term compared to temporary government stimulus jobs. I would rather have a job working for a Harley factory than depend on a iffy stimulus proposal like: the purchase of a polar icebreaking ship ($87 million) or new subsidies for beekeepers and fish-farmers ($150 million).

Every dollar misspent by the government is one less dollar to be spent in the private sector or saved to provide sureness to the banking system. I could spend the next 24 hours trying to talk about multipliers and what the economic models say about government spending per dollar to GDP, but I will just leave it at that.

The Real Reason: Uncertainty

The profits for businesses are there for a v-shaped recovery, so why is it not happening? Uncertainty created by government bills and intervention is the answer. Whether it is the coming Health Care Bill, Financial Regulatory Bill, Bush Tax Cuts expiring, Cap and Trade, or just anti-business rhetoric, businesses would rather stay put than risk hiring. I am going to end my post here with a comment I read about why there are no jobs right now:

• I am a building designer, used to have employees and wanted to grow my firm to about 8 people. No longer. I will be more likely semi-retired by choice from this point on because:

  Cost of Employees way up: Workman's Comp, Unemployment insurance, Health Care is up by nearly $ 8 per hour over 3 years. Health care alone now costs $4 an hour if they are young, over $5 per hour if over 50.

  Business Regulation - every purchase over $ 600 needs a 1099 form, meaning I have to get the address and the tax ID of the power company, the insurance company, Office Depot, etc. I will be going from 4 1099's to over 100.

  Health Care - I will now have to track where my employees go in the event of HazMat exposure. Did the government office they measured in for a few days contain lead or asbestos. Duh - yes, but it is supposedly safe for government employees why not mine.

  Security - I must have lots more records on my employees keyed to their SS#, but if somehow I lose my laptop I am a crook.

  I could go on and on, but my reward is:

  My marginal tax rate jumps in 2011, about 30% more than before.

  the FICA income limit keeps rising, that is 15% of net for the self employed on the marginal increase.

  It is obvious that there will be a lot more taxes coming. So my risk is way up, but the government now TAKES over half of any marginal increase. I would rather fish.

I say we change doses. What do you think?

Blake

(Thanks to the National Review, Greg Mankiw, and other articles for inspiration).