One of the economic terms you'll hear tossed about is how Keynesian economists look at GDP in terms of aggregate demand. The basic theory is that if you stimulate the economy through spending, demand will increase and therefore supply must increase. Keynes found himself looking at zero or negative GDP growth and that was a problem. Think of it this way, a society with lots of good things outdoors and everybody wants to stay indoors. Keynesian stimulus means spending money on improvements to, say baseball stadiums so more people will come outside and play baseball, and spend money on tickets.
In the context of the government stimulus we can talk about 800 billion or 2 trillion because we think that is the cost of the size of a package to jumpstart a whole America full of people who have parked their asses and are not coming out to play in the market. There's a big problem. The problem is not that these economists are completely off base, the problem is that aggregate demand is simplistic but real demand is not, and when you give things over to the federal government to decide exactly how to stimulate demand and jumpstart the economy, their biases and inefficiencies will of necessity cause troubling dislocations.
This is why I say that a greater proportion of the stimulus should be in the form of a tax break, and in particular a payroll tax holiday and a sales tax holiday (leave state and local taxes alone). It is the most equitable form of stimulus because it reaches everybody who is a wage-earner today, immediately.
Notice that whatever the cost of the stimulus, taxpayers are going to evenly take up the burden. That will be shared as equitably as payroll taxes now.
Let's look at what looks to be an egregious but will likely be a typical example of such a dislocation, using the terminology already gaining political favor as we speak. The consensus is that infrastructure projects will be the sort that will have the appropriate 'multipliers' to jumpstart the economy, where x money in will result in 1.5x (say) of economic activity. Yay. Now we know that Caterpillar just laid of 20,000 employees last week. How long do you think those people will be unemployed before the political process of stimulus reaches an infrastructure project meeting the right criteria so that they can be hired again? What if you are in the medical information systems business? The government priority is on making health care work. If you are laid off today, how long will it be before the government hires you back?
Now think about your business, and the amount of money you get by doing business with the government. What if you were in some politically unpopular business, say like coal mining or tobacco farming or insurance? Let's say your business is not targeted for stimulus and you get laid off because of the softness in the industry. How long do you think you will be out of work?
And you know what the argument is that is being made against tax cuts? Well, people will just save their money. You mean like for a rainy day when we lose our non-stimulus sector jobs? You're damned right we'll save our money, and if and when we get dislocated and laid off because the government decided to see some other stupid company like GM as more important than my company, then the gross inequality of the stimulus package will become perfectly obvious.
What happens then? Lobbying. Incredibly fierce and intense lobbying for stimulus from every industry, every region, every sector of the economy. Some will get, some will not get. How do you think that's going to play out?
Across the board payroll tax holiday gets to everybody immediately. Equitably. Across the board sales tax holiday makes all goods and services cheaper immediately. Our GDP is 64-70% consumer spending. The overwhelming majority of us take our paycheck to the supermarket and the mall and that's what we do. The big ticket items we put on credit, but guess what, there is no credit. So the only place where real stimulus can be immediately made is in those things we all need every day. Don't believe me? McDonalds profits are up 7%. UP.
Bailouts are selective. Stimulus legislation is selective. Only across the board payroll and sales tax holidays are equitable.
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