Rebalancing & Focused, Essential Reinvestment Is NOT the Same as “Stimulus”

The Moral Side of Money Creation and Economic Agility

There is reason that the Tea Party line of thinking has won lot of mindshare. People of most thought dispositions are incensed at the very mention of “Stimulus” and Government. “Stimulus” is a word that has come to mean, in its practical translation in view of how the two “stimuli” through the Presidencies of GW and Barack Obama panned out, throwing money (via Monetary and Fiscal windows) at inefficient, wasteful and rotting private Organizations that deserve to die to clear the way of the youthful, lean and agile ones. The GW “Stimulus” was a mere tax refund, while a substantial part of the one passed in Barack Obama’s time was a combination of tax cuts and pork spending.

But the fact remains that there is a shortfall in the access and delivery of Public Education (both School and University) and Infrastructure (crumbling roads and bridges). So are the people saying that it not be bridged? This author doubts that, but there is indeed also a clear, austere message in what the people are buying in the Tea Party brew.

Except for the most fervent Tea Partiers, the backlash from the people in general is not a simplistic rejection of Governmental Deficit; rather it is a reprimand for saving the doing-well-for-themselves, well entrenched, the finally stumbling, undeservinglings with doles, while increasing the Public Deficit, even as not been able to help the unemployed enough into getting back to work - although that was the presumed justification behind doing all the....yuk- "Stimulus". Big Finance was saved, perhaps it was the need of the hour, but the saved entities were not rightsized and failed managements not fired, as was rightly done to Detroit. Team Obama's highlighting of making money on its Detroit maneuver (and saving jobs in the process) will get traction, but not on making money on TARP funding to save BigFin. In fact, this author doubts if the public even cares that much whether USG made money on Detroit -- because there were elements of fairness in dealing with the Auto companies, their managements, employees, shareholders and creditors. They all took losses for their inefficiency, bad judgments and profligacy, while jobs and the larger economy around Auto companies were smartly saved.

In contrast, the Wall Street masters got away with mere public censure and some job losses among the relatively lower ranking staff. And TARP was not the only way in which Wall Street was saved. The ultra low interest rate paradigm and the QEs (the latter’s possible strategic use in controlling the Trade deficit aside) have also played a big role in saving the BigFin (perhaps even more than TARP) - and this rescue has come at the cost of retirees that keep their money in fixed income accounts. There is no account of this (effective) transfer from the retirees to the parasitic financial sector. The saving grace is that the Financial Resolution mechanism is now in place so that similar bailouts will hopefully not repeat in future.

With the bursting of the Home Equity and Housing bubble, the American (as well as the World, but we stick to the US in this piece) Economy is out of balance. Healthcare, Home Rentals, Home Prices et al need to correct to reality and the income levels that are running in the economy. To that extent, the contemporary ethos is with the Tea Party, and at this point Only the Tea Party is reflecting it. What’s the point of having a Private Sector if the Government has to do THIS:

“(Cisco) The giant networking company warned that sales will miss forecasts because of a dramatic drop in orders from austerity crazed European governments and U.S. states forced to balance revenue starved budgets. Simply put, when governments order technology products they are creating private sector jobs.”

How different is the above system from the erstwhile USSR? The basic beef is that Corporations (= their CEOs and their (mis-)Managements) and Finance Companies are getting fat on Govt doles, while they stifle emerging competition, ideas, and potential large scale employment in challenger upstarts (as they succeed and grow) where Executive payouts are modest. Timely demise of the fat cats and birth of lean dogs is good for a country’s economic health, competitiveness, viability and net employment growth. Else, the fat cats in babycared Organizations suck lion’s share of the dole money in the form of their bloated pay and perks, and there are forever calls for one vague “Stimulus” after another – these end up translating to more money to them first, and then just some trickles down to hire a few more hands. In such a scenario, the Bang for the buck on Public Deficit is just not there, and no one’s buying this stinking waste any more, except a few 80,000 feet zoom out view Economists!

But not most of us buy the rest of the Tea Party agenda either - which stands for no regulation, no taxes, no investment into public goods: rotting roads, bridges and schools, no public support of the fallen to survive with minimal human dignity while they search for work or bring up a new business.

The need is for taxing the flab in private sector and individuals (with progressive taxation, removal of loopholes and undesirable deductions and kid-glove treatments such as Capital Gains, carried interest, calculation of “net” incomes in one-man-professional “corporations”, taxing of sustained retained earnings with Companies that are not being invested in production, and so on) and also cutting it in the public sector. These savings and collections need to fund investments in Education and Infrastructure to create and rejuvenate the paraphernalia that begets robust economic activity, innovation and ambition, something to bequeath to the next generation rather than reinflated property bubbles and further decayed zombie Corporate Organizations. To the extent savings and collections are inadequate, deficit (or putting off the recoup of previous deficits) can then be resorted. A Govt has the free hand to create as much money as the Economy requires, but there is a moral side to money creation and in whose hands the new money is introduced, else money loses all meaning for the people – and that’s an economy closer. In a distillation apparatus, you introduce heat (money) at the bottom and collect steam (taxes) from the top.

In this approach (that steers clear of wonton “Stimulus”) the rebalancing and reinvestment will not eradicate unemployment by themselves, but lay a robust foundation for renewed private sector JOBFUL growth, not fat cat bloat and jobless (stockmarket) “recovery”.

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