With the economy in a free-fall and a bottom still months if not years away, Washington has taken on a public debate about fiscal stimulus. And like most Washington debates, it’s being crushed by dead ideologies, false assumptions, and old-fashioned pork barreling.
The stimulus debate seems to falling along two primary lines of argument, both utterly predictable and useless:
(1) Spending vs. tax cuts. Falling into their stereotypes, the Democratic leadership wants to spend, and the Republican leadership wants to cut taxes. The former will have a direct impact on demand, the latter a greater relief to wage-earners. But to call the modern Republicans supply-siders is giving them too much credit. They just think it’s both politically popular and economically beneficial to reduce taxes. Most of them couldn’t draw a Laffer curve if you spotted them a cocktail napkin, a Uniball, and both axes.
(2) “Stimulative” spending vs. pork. This choice is about as false as you can get. All spending, if it’s spent in America and primarily on domestic labor (as opposed to imported goods) is stimulative. It doesn’t matter whether it sounds useful (freeway maintenance, subway construction) or frivolous (the National Endowment for the Arts). In the short term, spending is spending.
If anything, spending on arts — which would presumably pay people to teach and create art, and thus help develop the young creatives on whom real long-term economic growth depends — would be highly stimulative, both short and long term. Conversely, building another bridge to nowhere would require importing tons of materials from overseas, or igniting a disastrous trade war by requiring the projects to Buy American. And long-term, projects like exurban freeways hurt our domestic economy.
But really, both of these above debates are ridiculous, because such is the premise of “stimulus” — that the a shrinking economy can grow again (or shrink more slowly) by encouraging people to buy more stuff.
That’s a 20th-century economic model — dig minerals out of the earth in country A, ship it country B for processing and manufacturing, and then ship it again to the USA for retailing and consumption. Country B gets paid in US dollars, which they then use to buy American assets, which the Americans then rent back from country B. (Warren Buffett calls this phenomenon “a sharecropper’s society.”) Meanwhile, in America, lenders lend to other lenders, who lend endlessly to consumers, who can keep borrowing to pay off past debts. But the global housing bubble brought debt to its breaking point, and defaults are still working their way up the debt stream.
What we’re witnessing now isn’t just the downswing of the business cycle; it’s a reckoning of our debt dependency. And it will result in the restructuring of our industries, whether we like it or not. Big Auto is probably terminal. Many retailers are definitely terminal. Many banks have already died.
Or as Umair Haque puts it so brilliantly: “20th century capitalism is eating itself… Today’s leaders are plugging dikes, bailing out industries and banks as they fail. Yet, what negative global growth suggests is that the problem is of a different order: that we have reached the boundaries of a kind of growth.”
True. Our economy as a whole is restructuring, becoming something else by necessity. So what should the purposes of a “stimulus” bill be?
(1) Expedite America to the next economic model. This means a model that reduces our dependence on oil and other minerals, restores sanity to borrowing, and gets our trade closer to balance. It means a model where we spend more on investments like renewable energy, sustainable food, general research, shared transportation, and education, and where our growth comes from doing things smarter instead of just making more. Because “more” is becoming less of a viable option.
(2) Support Americans through the transition. The new global economy requires that millions of workers move from 20th-century jobs to 21st-century ones. People will still need to grow food, sew clothes, fix machines, and lay pavement, but not in the same places or manners they once did. The upheavals that will result from this transition are massive and obvious — think America during and after WWII — and people need help to make it through this shift.
We need to get serious about this as a nation. The current spending/tax cut bill contains some elements (like home weatherization) that address both these points.
But America’s borrow-from-abroad-to-buy-from-abroad economy isn’t just down in the dumps. It’s doomed. Any bill that focuses on consumer spending for its own sake is only prolonging the inevitable, and extending the pain for the worse.
