Why a Different Kind of Stimulus Plan
may be much more effective as a tool for creating new jobs!
by
Thomas Schinkel
April 13, 2009
Part One of this series of articles about America’s New Deal with Capitalism estimated the size of the hit that the economy had taken as a result of converging forces in the realm of financial globalization. The article concluded that for 2008 alone, it would be in the range of $9 trillion. Now, don’t get me wrong, $9 trillion is a lot of money but it does not throw the entire country into bankruptcy. Yet, it is a big number and it did get the attention of the disproportionately hit middle class!
The second part of this series articulated a remedy to the crisis, in essence suggesting that the government should stop bailing out banks that are supposedly too big to fail, and intervene instead by making direct (once in a lifetime), interest-free loans to those families that had gotten into trouble.
The program would have a rigorous repayment schedule and participants would automatically agree to a higher tax bracket. This way all parties would maintain a stake in the positive outcome of such a program. In other words, no bailouts, but a solid agreement between tens of thousands, maybe even hundreds of thousands of families and their government to prevent an avalanche of problems in credit, real estate and job markets that could throw the entire system into disarray.
All along the position was that this is not just a single crisis; it is a series of embedded crises that are interconnected. It is the aggregate result of long term failures in the realm of industrial, fiscal, monetary and foreign policy fueled by a strategy of exceedingly aggressive deregulation, a strategy fed by theories and mantras that would cause our forefathers to turn over in their graves.
The third part of this series takes a closer look at the present situation and it articulates some suggestions for beginning to fix our capitalist system, one step at a time.
Globalization 2009: A Witch’s Brew of Contradictions
Taking a candid look at our present day state of affairs in the realm of Globalization, one cannot escape the conclusion that the Global Economy A.D. 2009 is a Witch’s Brew of Contradictions. This witch’s brew consists of the following ingredients:
- Fiat Currencies: Ever since President Nixon nixed the gold standard, we have had a global system of Fiat currencies, IOU’s with nothing to back it up;
- Free Trade: We are continuing to preach and pursue that sacred cow of Free Trade among nations without any regard to the severe structural imbalances that have emerged among the largest;
- Interest Rates: We pursue artificially low interest rates to stimulate consumption sectors of an economy without regard to its ability to absorb such growth and pay for it with money that results from productivity improvements;
- Guns and Butter: We are embracing Guns AND Butter economics without any mechanisms in place whatsoever to fund either, except for drawing checks on future generations’ ability to pay down debt;
- Off-shoring: In business, for more than ten years now, we have pursued a mantra of Value-Chain Management that embraces off-shoring of domestic manufacturing activities as a quick, short-term way to achieve lower costs. While the overall economy has grown and grown, predominantly through consumption and expansion of the services sector, capital expenditures in surplus value creating activities have been sidelined from the economic equation.
Exhibit One shows capital expenditures, payroll and value added for the manufacturing sector from 1977 to 2006. These values are presented as a Pct of GDP.
And we know from previous research, that our services economy lacks the international prowess to earn sufficient foreign currency to feed our appetite for imported goods.
Nobody in America, or Europe, or among the leading international institutions such as the World Bank, the OECD or the WTO, seems to have a coherent fix on these contradictions with any level of forward vision at all. Everyone is fighting for the status quo, for protecting their turf, and defending mantras, theories and strategies that were appropriate for yesteryear.
Let me give you an example. The whole world know that America has a huge structural trade deficit and that there is no way we can continue this way without a severe price to pay. During the discussions about the Stimulus Program, the idea came up to say that all this money should be earmarked for products made in America.
This way we would kill two birds with one stone. The ink was not dry on the Program, or the international howling started. The Representative of the European Commission in Washington actually appeared on TV, uttering stern warnings that this was against WTO rules, and that this entire talking about “Buy American” had to stopped. “OK my friend, but how are we going to fix the U.S. trade imbalance that threatens to undermine not only our own economy, but that of the rest of the world? Will you, and the Chinese, and the Japanese and everyone else, continue to lend us our own money to keep the racket going?” Of course, there was no answer to this question.
Through the prism of an independent business adviser such as me, our present world increasingly comes to resemble that of a volcano, rapidly amassing huge amounts of negative energy. For those of you who are not inclined to think in terms of what this means, the following pictures may help stimulate the imagination:
Keeping with that analogy, here are some very short-term developments that may further increase the pressure on this not so imaginary economic volcano:
- Final year-end reports on mutual funds’ performance will be published shortly – the public will not be pleased;
- Batches of commercial (real estate) loans are ready to implode on bankers’ books (this may be the very reason why bankers are not lending. They want to hang on to the tax-payer funded reserves they got during the bailout to weather yet another storm they see on the horizon);
- Automotive sales continue to slump, with at least one major bankruptcy looming, taking down with it an entire infrastructure of suppliers;
- Real estate markets continue to slump, taking another hit of 5-10% before hitting bottom by the end of 2009;
- Unemployment continues to rise and may soon exceed 9.5%;
- Banks continue to tighten credit standards on even their best customers, despite having received billions in Federal aid;
- Major manufacturers tighten credit on marginal players in their distribution channels, setting off a silent contraction throughout the economy.
As the pressure builds up inside that volcano, a release can take place in one of two ways. One way is an organic, uncontrolled explosion that sets off the entire system. If the wrong medication is administered, or the right medication is administered to the wrong group in society, or at the wrong time, like in “too little too late”, or nothing is done at all, the volcano will go off, unleashing centrifugal forces that will make minced meat of the entire political, financial, industrial, trade, social, military and cultural infrastructure that emerged after the Fall of the Berlin Wall in 1989.
If this happens all bets are off. But there is some good news as well, that gets drowned out in the pervasive psychology of fear that permeates from the media:
- The Chinese Stimulus Plan is already showing signs that it is working, creating a new wave of demand for imports from all corners of the world;
- The American Stimulus Plan is getting into action very shortly; <li>U.S. Real estate markets that have shown the steepest decline are indicating that bargain hunters are returning to the market;
- The U.S. Savings Rate is shooting straight up into territory it has not seen in a long while; there is every reason to support the assumption that it will hit 10% of GDP by 2010.
So rather than join the herd of people who believe that the roof is caving in, I would like to develop a different scenario, one that is characterized by “a series of mini-explosions”, and economic earthquakes that each carry their own costs and benefits. In my next article we will discuss this at length.
For now, I want to conclude with comments on the actions taken by government during the last six months.
The Bailout Program of October 2008
In October of last year we had the Bailout Bill, to the tune of $800 billion. It is now clear that this program was and is an example of crass self-preservation, keeping the failing banking giants on their feet. An opportunity missed? And here is my question. For example, instead of propping up the top-tier banks with large amounts of taxpayer provided cash, the government could also have said: To prevent these problems from happening in the first place, we are going to break up the banking system into smaller, separate and distinct components. While it would definitely be “out-of-the-box”, such a way of thinking would have been nothing special. Years ago, the government broke up AT&T, the (very well functioning) telephone monopoly. Also, for years the government has been toying with the idea of breaking up Microsoft. So why not break up the top-tier banks? The Charter of the Federal Reserve Bank, stipulates that its commitment is to the preservation and protection of the top-tier of the American Financial Services Industry. Not to be irreverent or anything, but it is nothing but a cartel that – since its inception in 1913 – has managed to maintain a “very cozy relationship” with officialdom. When you see Ben Bernanke on TV, lest you get the idea he is looking out for you, remember he is on the payroll of the cartel, and his mandate is to look out for the best interests of the top-tier banks. With the help of taxpayer dollars, a break-up has not even been considered. Mission Accomplished, at least for now. From a banker’s perspective, 2008 must have been a year of Great Accomplishment.
The Stimulus Program of February 2009
Short on the heels of the largest economic rescue in the history of America, now comes the Stimulus Program, again to the tune of $800 billion. That number seems to take on magic connotations. Taking a close look at the component that includes specific cash disbursements in that program (the other component being “tax cuts”), one cannot help but notice that these disbursements are largely being poured into the veins of the entire Federal, State and Local Bureaucratic Infrastructure. In other words, one cannot help but get the impression that here too there is an element of institutional self-preservation at work. Short-term, my sense is that the program may have a mildly positive effect, as it will create and preserve jobs throughout the economy. But what about the Long-Term? Much money will be spent on fixing the old infrastructure, an infrastructure that created wealth during the 1960’s, 1970’s and 1980’s.
What I am missing in this entire conversation about the economy and the society it is supposed to support is the whole question of New Surplus Value Creation. What about Innovations in the private sector in general and in industry in particular? Where is the next Microsoft? Where is the next aviation industry? Where are the next high paying jobs? Where are the next waves of productivity enhancing investments? Waves of new start-ups? New job creation? We have tried hyper-deregulation. We now know, and perhaps should have known all along, that did not work. How about stimulating venture capitalism across a borad swath of sectors of re-industrialization? My own sense is that we need a third leg under the stool of programs to stimulate the economy, and perhaps it should be called:
The Innovation Program of September 2009.
Such a program would have at least four components. One component would allocate large amounts of money to venture capital endeavors of all kinds. Fixing the electricity grid is great but it takes ten to twenty years to produce results. Another component would be addressing all the bottle necks that have formed in our society that stand in the way of breakthrough technologies not just in esoteric industries like bio-tech but mundane ones like aviation, agriculture, distribution, transportation, conversion of shopping malls into business incubation centers. It would also include very attractive prizes for innovations and breakthroughs in 80-100 different areas of industrial endeavor. And it would completely revamp the way federal taxes are collected, no longer based on old ideas supporting old infrastructures but based on the knowledge we have today about the economy, society and the environment. For example, it would include a Value Added Tax Structure that included the services sector, and it would include a much heavier tax on fuel consumption than what we have today. These new companies, the new innovations, the numerous trials and errors of entrepreneurs, some will fail, some will survive, but some will be extremely successful, creating the productivity improvements we saw during the mid 1990’s when a whole family of companies descended upon the community of small and medium size businesses offering inexpensive new productivity tools that pushed them from survival to prosperity.
My point is this: If you can find $800 billion to come to the rescue of a small group of very big banks, you can also find $800 billion to provide funding for thousands, nay, hundreds of thousands of new small companies and start-ups throughout all corners of society.
One thing is clear and that is that we are on the brink of tinkering with an entirely new form of capitalism. The difference between the old form and the new form of capitalism would have to be that the micro capitalists (main street) get protected from the predatory practices of the hyper-capitalists (i.e. eight of nine very large banks and quasi-banks) that seem to have unrestrained access to tax dollars provided by the rest of society.
What is the bottom-line of my argument? Stop throwing GOOD money against BAD! Instead of using another $800 billion to bail out a small band of big-time shadow bankers at the top of our capitalist pyramid, invest all that money at the bottom of the pyramid, thereby creating a culture of renewal and revitalization from the bottom up. Not through consumption but through the creation of New economic Value!
Thomas Schinkel
