Open Letter to the President

I see that our Internet savvy President only accepts missives of 500 characters or less. My current thoughts won't fit inside 500 words, let alone 500 characters. However, my need to scratch this itch is strong enough that I will make an open letter to the President the initial post on a brand new blog.

Dear President Obama,

I realize that what I’m doing is tantamount to throwing a drop of water into the ocean. The probability that you will actually see this, or even hear some of these ideas, is vanishingly small. However, as a citizen of the Republic, I feel and will heed the need to try.

I've been looking at some of the numbers associated with the so-called American Recovery and Reinvestment Act of 2009. I see where the House Committee on Appropriations summary on the bill exclaims breathlessly that, “The economy is in a crisis not seen since the Great Depression. Credit is frozen, consumer purchasing power is in decline, in the last four months the country has lost 2 million jobs and we are expected to lose another 3 to 5 million in the next year.” This makes it sound pretty serious and one would expect that the bill would be very carefully targeted to get money into the economy as quickly as possible. Instead as I look over the line items I am struck by the inability of Congress to distinguish between lard and coffee—and a lot of the “coffee” looks like it will take a fair number of years to brew!

Are you and the Congress about to make the same mistakes that Hoover and FDR made? The history I learned in school taught me that big government and its associated big spending successfully brought us out of the Great Depression. Of late I hear more nuanced notes and even opposing themes, e.g. government meddling by both the Hoover and the Roosevelt administrations actually deepened and lengthened the Depression, and the Keynesian spending that both administrations attempted was too little, too late even though it could have worked.

Its not often that both FDR and Hoover are criticized in the same breath, so let me add a historical note at this point. FDR campaigned against Hoover's big government and once in office proceeded to run with it—as Rexford Guy Tugwell, an advisor to FDR and later as Assistant Secretary of Agriculture under FDR, said, “When it was all over, I once made a list of New Deal ventures begun during Hoover's years as secretary of commerce and then as president… The New Deal owed much to what he had begun.”

Unfortunately for us today, generally speaking, economists are mistakenly regarded as scientific brahmins of the first order rather than as the blind men feeling up the economic elephant that they actually are. As a result, there are credible arguments on all sides of just about any substantive economic issue. Keynesianism appears to be the touchstone on which the American Recovery and Reinvestment Bill of 2009 is written which implies that the effective money supply has essentially collapsed, in this case most likely due to a risk and fear induced decline in the velocity of money. Only history will tell us for sure, but assuming that this is the correct course on which to set our helm, it is pretty obvious that we are set to make at least one of the mistakes that Hoover and FDR made, i.e. the money will come too late.

If the idea really is to get money into the economy as fast as possible, I think that Congress should get a failing grade! A recent Congressional Budget Office study that found that LESS THAN HALF of the money that will actually generate jobs (for roads, school construction, and other infrastructure projects) is likely to be spent within the next TWO years! In fact, across the entire bill, they estimate that the last $63 billion wouldn't be spent until sometime between 2013 and 2019!

Last time around we bailed out the banks so that they could give their employees bonuses—for participating in failure! And what was left over after the bonuses, the banks decided to sit on rather than get it into the economy! Just what we needed, welfare for poor, impoverished bankers!

According to the Christian Science Monitor about one-quarter of this new $800 billion plus recovery package would be devoted to activities crucial to governors, mayors, and local school boards—making them among the plan’s biggest beneficiaries. This time we're going to try bailing out mayors and governors. And just what makes us think that they can do any better than our illustrious bankers at getting money moving through the economy quickly—the tooth fairy? Is this change—bailing out more fat cats—even if they are political fat cats? How is this not following in the footsteps of the Bush administration?

If we are going to leap into deficit spending like there is no tomorrow, we might as well do it in such a manner that it will make a difference. Give the money to the people, not in a single lump that will encourage hoarding or foolish splurging, but in a monthly flow that will last for a predictable period of time. Predictability is important to markets. Without it, evaluating risk becomes a roll of the dice which tends to freeze markets up. With a reasonable degree of predictability market decisions become calculated risks which markets can thrive on.

There are about 140 million taxpayers in the United States. That means that the economic engine of the United States has 140 million cylinders; better that we dump fuel (read money) directly into the cylinders rather than doing the economic equivalent of giving the fuel to selected oil companies (read banks, governments and big businesses) so that they can take their cut before it gets thru the distribution system and finally to the cylinders where it will be burned (spent)—in some cases 10 years later—and 99% of the time with far less effect.

Bankers do not create wealth; they manage it and attempt to manipulate it, but they are not credible creators of it. Government does not create wealth; it takes it from one group and gives it to another—sometimes for good reasons and sometimes for bad reasons—but it does not create wealth. Business is often said to be a creator of wealth, but it is not; it is only a manager and a director of the efficient creation of wealth. Only individuals who work (usually for businesses) create wealth. If you want the wealth that individuals create to move among those individuals and create a viable economy, they need money to lubricate the efficient flow of goods and services from creators to consumers. The quickest way to get that money into an economy is to put it directly into the hands of those who both create and consume wealth—the taxpayers. An economy can, and has, run without bankers, bureaucrats and businessmen, but an economy has never run without producers and consumers. Who better to give money to than to those who are indispensable to the very existence of an economy? Not only is it efficient, it is fair!

Let us not repeat history! Let us do something truly new for a change! If you divide $800 billion by 140 million, you get a little less than $6,000. That means that every taxpayer filing jointly could get $500 per month for a year and every taxpayer filing singly could get $250 per month for that year. Since about 28% of all households make $25,000 per year and average two persons per household, it is reasonable to assume that virtually all of that stimulus (about $225 billion) will be spent into the economy almost immediately. That's already better than the current package of lard is expected to do! Another 27% of households make up to $50,000 per year and average 2.5 persons per household, it is reasonable to assume that half of their stimulus package (about $108 billion)will be spent into the economy immediately and the other half will be saved for a rainy day. Of the 45% of households making more than $50,000, let us be pessimistic and assume that the entire $360 billion remaining will be invested in banks, bonds and stocks where it will support capital investment in business and strengthen the economy.

Using this approach, in one year's time we have injected $333 billion dollars directly into the retail economy and another $467 billion into the capital markets without bailing out “starving” bankers and corporate CEOs.

Five hundred dollars a month is not a large sum, but for low income families or for economically naive families the abrupt termination of this kind of a monthly stipend could generate something of a “cold turkey” shock to some of them. An even better approach would be to provide these full monthly stipends for only six months and then taper the sum received to zero over the following twelve months. That maximizes predictability for both taxpayers and the markets which is exactly one type of tranquilizer that skittish markets need in order to maintain their health.

As it stands, the American Recovery and Reinvestment Bill of 2009 is about as effective as trying to rehydrate an unconscious man dying of thirst in a blazing desert by dumping him into a pool of water so he can soak up the water he needs through his skin. In contrast, giving that money directly to taxpayers is equivalent to giving an IV to rehydrate our dying desert traveler. If we are going to go $800 billion further into hock, let's use it in a manner that will make a real difference instead of marching down the same old well trodden path to failure! People are far less patient today than they were in the thirties. All the pork in the world may not keep the Democrats in power in 2010 IF the Keynesian prescription is correct BUT the medicine arrives too late.