This is how I see it. Obama needs to "do something" to show his supporters that he's working to "fix the economy". But there are two separate issues: there's the show, and there's the fix. The show needs to satisfy: "I'm doing something that my supporters think will solve their problem", and the fix is solving the problem itself. But, what is the problem?
People are saying that the problem is that we need more jobs. Well, sort of. But who really wants a job? I don't. If I could keep my lifestyle without working (and not burdening others), well, that's fine with me. I'd spend more time pursuing my own interests. But, that's not realistic. In the real world most of our needs and wants are satisfied through labor, either our own or someone else's. We usually trade the products we are most efficient at producing for products that someone else is most efficient at producing so that both parties may work less and/or have more. Note that I'm ignoring services, but the same rationale applies.
But what happens when someone in society doesn't have anything to trade? When demand decreases for the product of their labor? Ideally, they develop a new skill that is more desirable in the current market. They may, alternatively, turn to crime. I very few idealistic individuals might lower their lifestyles or perish.
Someone may step in and provide for those who can not participate in the fair exchange of goods. If the producer does this (think charities) it is a noble act: they are willingly giving from their production to help someone they value. If the government does this by taxing (or borrowing with the promise to tax later) the producer against his/her will, it is institutionalized theft via coercion – even if the perpetrators believe this is the utilitarian optimum.
The situation becomes more complex when you add in a fiat currency, long term contracts, monopolies/cartels, and inflation/deflation. I'll just describe the current problem as I see it with few extra details: deflationary pressure with long term contracts, specifically the cost of labor and the housing market. Labor contracts may be considered somewhat long term, and mortgages are very long term. When there is deflationary pressure, a company cannot charge as much for their product, so they need to cut costs to stay in business. Usually, they can expect their raw materials to decrease in price, so they don't need to cut back on quality or quantity. However, their labor costs don't adjust because of the long term nature of the contracts (and this can be exacerbated via unionization). Ideally, they could ask employees to take a pay cut, and some companies are doing this. Usually, they just axe workers in accordance with the realities of cost/benefit. These workers will hopefully find new employment, likely at a lower wage because of the deflationary environment. Fixed mortgages, however, do not adjust to deflation, and we have seen that variable rate mortgages are, curiously, not helpful either. So people must sell their houses (sometimes at a loss), or go into foreclosure, because they're not able to make payments.
I have to address one more reality before I get to a solution: why we're experiencing deflation. I don't know for sure, but my understanding is that foreign countries (China especially) are holding dollars and charging interest by investing in treasuries, companies are saving to make sure they have enough cash on hand, and banks aren't lending much (while still collecting principle and interest on outstanding loans). You may notice a problem in there: interest payments without (explicit) money creation.
Hopefully I've identified the (current) problem at this point: deflation caused by interest (and savings), combined with long term contracts only honorable through a stable or inflating currency.
With these assumptions, a “stimulus package” looks promising. By increasing government spending you'll get money to the currently unemployed, address deflation, and maybe even produce things like roads and bridges and such. The problem is that the government will either tax or borrow for the money, and the unemployed are those that normal employers have already deemed as not producing sufficiently in their cost/benefit analysis. So you end up paying people more than they're worth to produce things that consumers probably don't need or want (because if people needed or wanted these things an entrepreneur would have already capitalized on it, or for the few projects that cannot be addressed through the market (roads, etc) the government should handle it as part of it's normal function and not overcompensate/overproduce during desperate times).
So what is a newly elected savior to do? To satisfy the “show” I think he must initiate some infrastructure projects. I don't think this is the government's proper place and I think in the long run it will cause more harm than good, but I don't see a way around it from his perspective. So something like a government prize for green, domestic energy production solutions and innovations, with low interest loans to start businesses for the winners might work. I can see T. Boone Picken's natural gas vehicles, and improved solar panels coming out of this, with the businesses making consumer products and eventually becoming viable enough to get off the government tit. He might even provide grant money for contestants.
The other thing he could do is go back to his employee tax credit idea. As I mentioned, a problem for businesses during deflationary periods is the cost of labor. A tax credit per employee would decrease the impetus for businesses to shed employees, and would keep employees working at something they're good at and for companies producing products that are in demand in the market. There are problems with this idea, but this post is already too long so I'll stop here.
The previous two actions would be mostly for show. What I think would work, but will probably not be implemented, is this: gradually issue every American and business counterfeited dollars in proportion to their net worth until deflationary pressures are countered (as measured by a basket of goods). This does not redistribute wealth (domestically) since we are dealing with fiat currency, and does not warp the market, but it does counteract the deflationary pressures I mentioned previously, namely interest. It also reduces the real cost of our foreign debt, and does not increase our numeric debt. Further, it will prompt foreigners to spend our currency, thereby adding inflationary pressure. If they spend dollars on US products and services, we will see legitimate job creation. I propose a .2% distribution ASAP, doubling the amount every month, and a reversal once domestic prices stabilize. Again, this post is getting long, and I don't want to justify this solution vs the tax rebate idea, or some other proposal, but I'd be happy to respond to comments.
Finally, I want to remind you that I'm a big fan of Ron Paul. I think my solution is the opposite of returning to a gold standard. I also think that a gold standard is impractical, especially given our debt levels, though it might be practical once prices stabilize and real foreign debt is reduced. I do think this action would open up a precedent that may be abused. Further, I don't think that this solution is strictly fair to those in the world who have trusted the US to honor our debt obligations. I do, however, think that this is the best solution to actually solve the problem.
I end with this: I'm an armchair economist, and my solution is the humble exercise of a passionate amateur. I do hope, though, that my analysis and thoughts contribute positively to the marketplace of ideas.
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