Another Month, Another Doomed Economic Stimulus Program

According to an Associated Press article today, the political class is about to pass a $30 billion piece of legislation that is supposed to jump start the small business market and get the economy moving again. Components of the legislation include the following:

- Establish a $30 billion fund to help community banks lend to small businesses.

- Cut some taxes on both small and large businesses.

- Boost Small Business Administration loan programs by cutting loan program fees, raising loan guarantee limits and spending limits.

According to the article and common sense, this stimulus package will fail just as dramatically as the other ones that the political class has implemented:

1) According to the article, demand for credit and loans is down and many businesses are sitting on cash reserves, precluding them for needing to go out and get a loan. Thus, this money set aside could go unused and have no impact on the economy or unemployment.

2) According to Jade West, a lobbyist for the National Association of Wholesaler-Distributors: "It won't do any good. Business doesn't need credit - business needs customers. If they don't have a customer base because demand is down, they're not going to borrow because there is nothing for them to borrow for."

3) The Republicans' concern, and it may be a valid one, is that the banks may start to lend some of this taxpayer money to businesses with less than desirable credit worthiness, eventually sticking the taxpayer for the bill if these shaky small business loans go sour since the banks will not be at risk, the government in the name of taxpayers is taking the risk.

4) Congressman Lincoln Diaz-Balart said: " What we have today before us is junior TARP." And we all know that the original TARP was useless.

5) According to tax counsel Bill Rys of the National Federation of Independent Business: 'There's some OK stuff in it, but the impact's going to be minimal."

6) The small business tax cuts include tax breaks for restaurant owners and retailers who remodel their stores or build new ones. However, if unemployment stays so high, what good will better looking stores and restaurants be if no one has any money to spend in them? How do new paint jobs and new carpeting help grow the economy?

7) And, what good is a tax break for certain small businesses is if Obama has his way and does not renew the Bush tax cuts for those small business people making over $250,000 a year? Any savings they get from this mini-TARP are likely to be offset by higher income taxes.

8) Let's do some math. According to the trade association that supports community banks, there are about 20,000 community bank locations in the country. If you divide the $30 billion by the number of bank locations, each bank location will get about $1.5 million to loan out. If the average small business loan is $100,000, each bank location will only be involved in about fifteen loans, hardly enough to move the economy forward. And this assumes, that the small businesses around each community bank actually needs a loan (see the points above).

9) More math. There are about 14 million unemployed Americans workers today. If you divide the size of this stimulus program by the number of unemployed, we see that this program is the equivalent of spending about $2100 per unemployed American. Now, if spending $800 billion in the original stimulus program did not prevent unemployment from soaring to about 10% and 14 million people (about $57,000 per unemployed person), this program is highly unlikely to do anything but waste another $30 billion.

10) And finally, if this idea of a program is so good, why was not introduced sooner? It seems that this is the "Hail Mary pass" or the scraping the bottom of the economic idea barrel. Nothing else has worked, even programs that were considerably larger, so what makes anyone think that this johnny-come-lately program will do anything but waste $30 billion more of taxpayer wealth?

Obama and the political class do not get it. They keep trying to "push" the recovery through the economic system. They push out rebates for Cash For Clunkers and Cash For Appliances, they push out money for infrastructure jobs, they push out money for teachers' pay, etc. The problem with this push strategy is that everything is finite. Once the Cash For Clunkers rebate money is distributed, the incremental economic stimulus affect, if any, is gone. Once the infrastructure work is done and paid for, the incremental economic stimulus effect, if any, is over. These push tactics provide no lasting, positive changes to the economy or the players involved, as witnesses by our first hand negative experience over the past two years.

More of a pull strategy is needed, especially since all of Obama's push tactics have been failures. In this context, a pull strategy would provide, positive, long lasting, stable incentives for the economy. This means that tax rates for individuals and businesses and families would be as low as possible for as long as possible. Families and businesses could then plan around this stable tax environment and think longer term with certainty.

With certainty comes confidence and growth. The money that is in family and business pockets can now be confidently and efficiently spent to pull economic activity through the economic system based on the personal needs of each family and business, not the dictates of a central government. That is why the one year exemption for small business self employment taxes is so inane. Next year those expenses are back so why would anyone do any long term planning and spending for such a short term exemption?

In addition to a pull strategy, the political class needs to remove the tremendous amount of uncertainty they have introduced into the market and the economy, with uncertainty comes a hunkering down mentality that no amount of Clunker money, home mortgage relief money, or short term tax exemption money can overcome:

- By stretching out the debate on what Bush tax cuts will be extended, the political class has introduced uncertainty into the market and economy, resulting in depressed economic activity, since no one knows what the tax bite will be.

- By passing a mammoth and probably ineffective health care reform bill, the political class has introduced uncertainty into the market and economy, resulting in depressed economic activity, since no one know what the increased business and family tax and health costs will be, and there will increases.

- By proposing a mammoth and probably ineffective cap and trade energy program and legislation, the political class has introduced uncertainty into the market and economy, resulting in depressed economic activity, since no one knows what the increased energy costs will be for their business and family.

- By passing a health care law that requires any extraordinary amount of incremental business paperwork and bureaucracy, the political class has introduced uncertainty into the market and economy, resulting in depressed economic activity, since no business knows how much financial and human resources they will have to divert to fulfill the increased paperwork requirements of the law.

We have seen what push economic stimulus planning has done and what uncertainty has done to the economy: it has done nothing of any positive significance. Sky high deficit spending and sky high unemployment. It is time for a change and a move away from silly programs like this $30 billion waste. All it does is satisfy the egos of those in charge in Washington, it gives them a sense of accomplishment.

But, to use an old cliche, they have spent a lot of time and effort to line up the deck chairs on the Titanic while the ship continues on a disaster course. These programs are way too small to leverage the economy, it is like pushing on a string. Nothing usually happens. You need to get to where you are pulling on that string to leverage things and enable growth.

A number of simple steps would help move to any effective pull approach to fixing the economy, would remove uncertainty from the market, and reduce overall government spending to help pay down the national debt and offset lower family and business taxes:

- Step 1 - start a systematic reduction in the size fo the Federal government by reducing every government function by 10% a year for five years.

- Step 2 - keep ALL of the Bush tax cuts in place in order to help pull demand through the economic system.

- Step 3 increase government fraud and waste investigation resources in order to greatly reduce the self-admitted waste of $100 billion a year in government programs.

- Steps 4 - raise the retirement age and eliminate Social Security payments to Americans with more than $3 million in net worth in order to put Social Security on a solid financial footing and get this major government expenditure under control.

- Step 5 - implement an expert driven, not lobbyist and politician driven, strategic planning process for the development of a coherent, easy-to-understand and doable national energy program that would provide clear long term goals and tactics for national energy usage, removing the uncertainty and confusion of Obama's doomed cap and trade program.

- Step 6 - implement a comprehensive and expert driven, not lobbyist and politician driven, analysis and planning process to determine the root cause of rising health care costs and implement a coherent, understandable plan to address these causes, providing certainty in tactics and costs going forward. This, of course, would require the repeal of Obama Care.

- Step 7 - implement a process to return virtually all foreign deployed U.S. military personnel to significantly reduce our defense budget without sacrificing homeland security.

- Step 8 - prohibit the use of Federal taxpayer money on any program or project that does not materially affect a large number of citizens in at least five states.

These steps should not be this hard. We know what does not work, why do we have to have the same repackaged, doomed, non-leveraged, ineffective "push" ideas come around every month? The political class needs to learn from its mistakes and start doing something different, something innovative for a change. Its called leadership and unfortunately, it is in short supply in Washington these days.