Thursday, January 29, 2009

The 'appearance' of economic growth

This morning on NewsTalk 1370 WSPD, a caller had a question for Rep. Bob Latta who was scheduled to call in to discuss his no vote on the stimulus bill.

The caller wanted to know why Latta would vote no on the bill when there was a sod company in his district that might have benefited by one of the provisions in the bill - to spend $20 million on sod for the National Mall.

Latta explained that the bill as a whole was bad and wouldn't do what was promised - but there's an even better answer that demonstrates the reason why conservatives don't support government spending as 'economic development.' However, given time constraints, Latta probably wouldn't have been able to give it.

Suppose, for instance, that the local sod company decided to go through all the headaches and red tape of doing business with the federal government and then actually got part of the contract for supplying the sod. The owner would have a single large order paid for with tax dollars.

Now, those tax dollars have to come from somewhere, so either the government borrows the money (increasing our debt and subtracting dollars from future projects in order to meet the interest payments) or it taxes us more in order to raise the funds. It could also print up more bills, leading to inflation.

Regardless, the government 'takes' (in one form or another) the money from us. That means that none of us have the funds to replace our own sod. The local company has the single order which probably won't be duplicated. Potential customers in this area are left with less funds so they won't be ordering from him. Government - in spending this way - creates the appearance of economic growth, but no growth has actually occurred.

Now, if the government gave every taxpayer (not every citizen, but everyone who actually pays taxes) a reduction in their tax rates, every taxpayer would have more money. Those taxpayers would then either spend it, invest it or save it. If they spend it, they generate the activity that leads to economic growth, creating a demand for products and services. If they invest it, it provides the equity and funds for companies to do capital projects, like upgrading equipment or facilities. Again, that generates the activity that then leads to economic growth. If they save it, the bank they use has higher assets and can loan more.

And the local sod company would have many potential clients with more disposable income to provide a long-term customer base for their own growth.

And all of this would happen without government spending a dime - all government would have done is change a policy.

So which is the best way to 'stimulate' the economy?

I'd say the tax cuts, but then we're dealing with a Speaker of the House who believes that food stamp handouts "bring a bigger return than the tax cuts." No wonder the stimulus bill passed.

Of course, I'm reminded of the quote from President Ronald Reagan who said:

"The trouble with our liberal friends is not that they're ignorant: It's just that they know so much that isn't so."

3 comments:

Mad Jack said...

This is a fairly good explanation, but there are a few things I believe are not being explained quite correctly. For instance:

From Maggie Thurber: Regardless, the government 'takes' (in one form or another) the money from us. That means that none of us have the funds to replace our own sod. The local company has the single order which probably won't be duplicated. Potential customers in this area are left with less funds so they won't be ordering from him. Government - in spending this way - creates the appearance of economic growth, but no growth has actually occurred.

It's true the government takes money from us, but our sod may not need replacing, either now or ever. Moreover, the money is not just taken from potential customers who live within the commercial region of the sod vendor. Money is taken from everyone, potential customer or not. The additional amount taken from potential customers is so small that the potential customers are not affected and continue to order sod. The real danger lies in the single large order which will not be repeated.

Consider that the sod company's business has fallen off, so employees have been fired and capital has been reduced (equipment and such). The large order must be filled, which means a large investment in capital and hiring employees, both of which cost money. Since the large order won't be repeated any equipment purchased will fall to disuse and employees will be fired (again). A bigger danger comes in the form of opportunity cost. The sod company is able to fill the large order at the cost of not filling many smaller orders, which they would otherwise be likely to get again. Thus, the customer base falls and the sod company is likely to end up in worse shape than before. Finally, if a cost accountant analyzes the project he is likely to find that the project will lose money for these reasons. Try to explain that to someone in marketing looking at a huge pile of government money. Wal-Mart has helped to bankrupt companies using this method. Not that Sam strong armed anyone – all he did was wave a huge wad of cash in front of them. After that, no one even bothered to read the contract.

From Maggie Thurber: Now, if the government gave every taxpayer (not every citizen, but everyone who actually pays taxes) a reduction in their tax rates, every taxpayer would have more money. Those taxpayers would then either spend it, invest it or save it. If they spend it, they generate the activity that leads to economic growth, creating a demand for products and services. If they invest it, it provides the equity and funds for companies to do capital projects, like upgrading equipment or facilities. Again, that generates the activity that then leads to economic growth. If they save it, the bank they use has higher assets and can loan more.

Ha! Ah-Ha! Excelsior!

Now, why didn't King George II think of that? Do you suppose The Anointed One will think of it? I'm being facetious, which is a five dollar word that means I'm pulling your chain. I believe that both men have thought of this scenario and taken a hasty belt of their favorite pain killer before rolling over and falling into a troubled sleep. Here's why.

The government is like any other organism in that it must either grow or shrink. Since growth is akin to life and survival, growth is preferred. To grow, our monster needs food (tax money) and control of its environment (law and law enforcement). The right of the individual to grow as an individual and to control their own life is in direct opposition to the growth of government. Why allow the parts to control their own destiny when those parts may decide that government has grown large enough and must be trimmed back? Think of this in terms of your neighbor's hedge which has grown from a neatly trimmed four foot ornamental property demarcation offering the illusion of privacy to a twelve foot high, six foot thick mass of impenetrable brambles that have long since obliterated your rose garden and now are beginning to encroach on your pool. A new neighborhood ordinance makes hedge trimming an offense punishable by twenty-five years to life at hard labor. Worse, the other neighbors think the hedge is a marvelous idea and wouldn't dream of being without it. Who would protect them from the Canadians, if not for the hedge?

The government also believes that it is smarter, wiser, cleverer and more astute than the average chili slurping Caliban who busts his hump five days a week just to make it to the bell on Friday. Even though this position could be successfully argued without naming names, it still isn't the real reason control is being slowly wrested from the individual. It's uncontrolled growth brought on by greed.

Each United States President in turn could have reversed this trend, if only for four years. None have. Not "That Damn Truman" as my old pater used to refer to him, not I Like Ike, not JFK or LBJ, not Tricky Dick, not What's His Name, not the Peanut Man, not Ronnie, not King George I, not Slick Willie, and darn certain sure not King George II. I don't think The Annointed One will be any different at all.

Maggie Thurber said...

Mad Jack - you're correct, but I was trying to keep it simple...

Hooda Thunkit said...

Maggie,

Until we have people representing us who understand and follow the Constitution, we are doomed.

Doomed to pay the ever increasing debt, but more importantly the compounding interest that overspending your income brings.

We need people who will dedicate themselves to:

Systematically pay down the debt

Cut the budget to (as we need to do locally) stay within the Constitutional mandates

And, when the debt is paid off, cut taxes to the levels needed to pay only for the Constitutionally mandated functions.

(P.S., Yes, I still believe in the tooth fairy and Santa Claus too.)

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