Friday, March 13, 2009

How to actually stimulate the economy

As opposed to just wasting taxpayers money. The economy is sliding down the chute because of a lack of demand. Nobody is buying anything, and so the producers, transporters, and support industries are out of work. The lack of demand is due to petrified consumers. 70% of US GNP was consumer spending, clothes, cars, consumer electronics, appliances, houses, and luxury goods. Great depression II has frightened the consumers with loss of their jobs, destruction of their stock market holdings and wiping out of the value of their homes. Being rational, consumers are saving money for the rainy day they see coming. They aren't going to buy anything except groceries until they feel safe (or at least safer). Giving them handouts (like Bush did last year) or tax breaks, or more unemployment benefits, or medicaid, or student loans isn't going to make the consumer spend. The consumers are battening down the hatches and getting ready for Armageddon. Nor are they going to borrow any money, once having made the decision not to buy, obviously they don't need the loans. It's the fear of unemployment, not lack of consumer credit, that's killing demand.
To stimulate this desperate economy, we need to give money to institutions that will turn around and spend the money on something else. For instance, let's buy some tankers for the Air Force. Uncle gives Boeing money for the plane. Boeing has to spend the money on parts to make the plane. For instance half the cost of an aircraft is in the engines. So a billion goes to Boeing, Boeing sends half a billion to Pratt & Whitney, plus a lot more to all the other parts suppliers. The money is multiplied by about 1.75 as the prime contractor pays the first level sub contractor who pays the third level sub contractors. This is real stimulation. The companies HAVE to spend the government money, they have no choice.
So, stimulus happens when Uncle buys goods and services. And buys them this year, not five years from now. And this is the problem with the porkulus bill. Of the $787 billion, only 11% is spent this year, and only a quarter of it is buying goods and services. The vast majority goes for unemployment compensation, medicaid, student loans, hiring government workers, and other unproductive uses. The democrats used the fear of great depression II to fund all their favorite give aways for the next five years, rather than stimulate the economy.
What Obama ought to do is repeal the porkulus bill and do another one spending the money on planes for the Air Force, rockets for NASA, off shore oil exploration, high speed rights of way for Amtrak, nuclear power plants, ships for the Navy, airports for the airlines, and tanks for the Army. Then spend more on research into fusion power, genetic engineered bacteria that turn garbage into gasoline or crops that grow in dry sand, cellulosic ethanol, and a cure for cancer. Even if the research doesn't pay off for many years, the researchers will spend most of the money on equipment.
Right now we are in a tight corner. $750 billion for TARP and $787 billion for the ineffective porkulus has expended the credit of the US government. We can't raise much more by selling T-bills. We shot our wad, and wasted it.

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