After reading Alan Blinder's op-ed How Washington Can Create Jobs in The Wall Street Journal, I decided to further reduce my annual giving contribution to my Alma Mater, at which Mr. Blinder is a Professor of Economics and Public Affairs. I'm getting tired of economists believing that government holds the proactive solutions to our economic problems. In my opinion, government does best by creating good regulatory frameworks that support sustainable business growth and then enforcing them. Mr. Blinder recommendation of further direct government intervention is not what I would consider good for sustainable business growth.
Of course, my reduction in contribution to my Alma Mater is entirely symbolic. I already reduced my annual contribution several years ago to what I consider a token amount. The next time I want to make a stronger statement, I can reduce my contribution in that year to only $1. Perhaps, I'll use the difference to invest in a business that will really create jobs :-)
For more on Reflections and Musings, check back every Saturday for a new segment.
This is not financial advice. Please consult a professional advisor.
Copyright © 2009 Achievement Catalyst, LLC
Saturday, December 05, 2009
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5 comments:
Do you dispute the fact that aggressive government action thus far has greatly reduced the severity of the economic downturn?
As a business executive, I can tell you that this time last year I was shaking in my boots and my company was focused on nothing but reducing our spending and trying to survive. A few short months later, as the government announced it's stimulus plans, we were looking for ways to get a piece of the action. We started engaging with more customers, spending money on travel and even... wait for it... hired a couple of people to help us address opportunities.
Are you really that skeptical? At least as far as my company is concerned, the government stimulus has been a huge success.
I tend to agree with Shadox.
In a better world, for example, GM would've been allowed to fail.
Saving GM actually penalizes the American car company that ran its business better - Ford.
Ford is still stronger than GM despite not getting its debts restructured and eliminated. But imagine how much stronger their position would be if GM's bloated carcass had been carted off as free enterprise capitalism would have it.
Realistically, however, the failure of GM undoubtedly would've furthered the downward economic spiral even more profoundly. As it is, Michigan's unemployment rate is at an incredible 15%. What would it be without GM?
My fear, however, is that the price paid to save the system has significantly reduced the future vitality of the system.
It seems that there's more than just the regular business cycle at work here. If every time we have a recession, we now have to add trillions of dollars to the national debt just to survive it, then each recovery will be weaker and shorter than the one before it.
Actions by the government in creating more jobs can be quite successful in keeping long term business based growth high.
On a very basic level, say we had a modern version of the WPA. This would give people jobs paid for with future money (in the form of government financing).
These people, although still earning very little, would be more able to pay their expenses. This leads to a decrease in default on mortgages along with other bills.
Additionally this puts more money into the hands of businesses now that these newly employed people can pay for modern day basics such as cell phone bills, transportation, etc.
This makes it so the companies worry less about how to deal with the giant consumption gap in the economy. And since dealing with this consumption gap generally means cutting back on expenses (the highest of which is labor), they fire fewer people.
According to economic analysis, a more direct effort on the part of the government to keep the employment rate high easily offsets any negatives in future payments (increase in taxes).
The view that business will grow slower due to government efforts just doesn't hold up with the numbers.
Thank you all for your thoughtful comments. I didn’t expect to get so many responses to this post:-)
@ Shadox,
While I agree government intervention was needed, I believe the $700 billion TARP and $787 billion Stimulus bill funds could have been used more effectively. In my opinion, a large proportion of the money was spent on political pork projects instead of high impact economic projects. For example, I believe TARP should have been used to buy trouble assets, as originally designed, which would have put a floor on the value of the assets. Also, I believe the Stimulus bill should have focused on providing credit to small businesses, instead of funding pet projects of state and local governments.
I believe the options I shared would have led to a faster economic recovery since businesses would have generated sustainable jobs. Instead, the short term government funded jobs will likely disappear after stimulus funding is gone.
@ Brad,
I too am impressed with Ford and unimpressed with GM and Chrysler. Because I disagree with how the GM and Chrysler bailouts were done, GM and Chrysler are will not be options when I consider buying our next car.
To me, the method of saving GM and Chrysler was a political decision versus an economic decision. For example, the government blatantly ignored bankruptcy laws by giving unions, who were neither shareholders nor creditors, a stake in the new GM that exceeded the rightful stake of bondholders.
I agree that an economic recovery delivered primarily by political decisions will be less resilient in the future than a recovery based primarily on business decisions.
@ Edwin,
I agree government created jobs help in the short term. However, most of the created jobs are probably not sustainable. Once the stimulus funds are gone, so are most of the jobs. Government created jobs may have made sense at the beginning of the crisis, but I think the focus should be on private sector job creation at this stage.
The whole point of government created jobs is to supply jobs for the short term (a few years). Those temporary, low paying jobs help support people who have no jobs at all, these people in turn are able to pay their bills and possibly even spend a little extra on top of that.
All of that spending goes back into the economy and allows companies to stop cutting costs due to the downturn. After a few years the economy is in much better shape so when those temporary jobs disappear, the economy is at a state where those people can now find real jobs.
I disagree that it only made sense at the beginning of the crisis because what really matters is the state of the economy. The economy (particularly the job market) is in very poor shape.
We have lost 8 million jobs since the beginning this recession. Last month we lost "only" 11,000 jobs. If we take into account population grown, to get to full employment in 5 years, the US has to add 127,000 jobs a month.
I grabbed this analysis from Paul Krugman at http://krugman.blogs.nytimes.com/2009/12/10/the-jobs-deficit/
You are totally right that the first stimulus was pretty bad, it was too small and it didn't put enough effort into purely job creation (politics yay!).
But even so, it did something and the cost of it was worth that something regardless of whether it was as efficient as it could be.
And the economy is still in a very poor position that a new stimulus would help immensely. Unfortunately that won't happen because it's politically impossible.
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