Bailouts and Stimuli and Deficits – Oh My…

During the Presidential campaign that seemed like a lifetime ago, then Democratic candidate and now President-Elect Barack Obama made a promise, largely in the debates, that to counter the extreme budget shortfall that was bound to arise from the bloated wall street bailouts, he would:

And when I’m president, I will go line by line to make sure that we are not spending money unwisely.

And also:

I want to go line by line through every item in the federal budget and eliminate programs that don’t work and make sure that those that do work, work better and cheaper.

 And from the third debate:

 Now, what I’ve done throughout this campaign is to propose a net spending cut. I haven’t made a promise about…

Absolutely. So let me get to that. What I want to emphasize, though, is that I have been a strong proponent of pay-as- you-go. Every dollar that I’ve proposed, I’ve proposed an additional cut so that it matches.

We need to eliminate a whole host of programs that don’t work. And I want to go through the federal budget line by line, page by page, programs that don’t work, we should cut. Programs that we need, we should make them work better.

 But now the President-Elect is telling a different story:

“The consensus is this: We have to do whatever it takes to get this economy moving again — we’re going to have to spend money now to stimulate the economy. … [W]e shouldn’t worry about the deficit next year or even the year after; that short term, the most important thing is that we avoid a deepening recession”.

Far from being at issue is the President-Elect’s propensity towards saying one thing and doing another. One can easily make the claim that at the time he proposed utilizing pay-go and a Carteresque line-by-line budget analysis, the nation was unaware of the recession we were facing. This is easily argued, considering that by the time the third and final debate rolled around, the stock market had already sunk to its lowest, home prices had been in decline for almost a year if not more, and there were a slew of other economic indicators that we were receding.


The problem at issue here is the fact that President-Elect Obama wishes to tell us that deficits are unimportant in the short term, because we need to fight the recession. It is thinking taken straight from the New Deal, which history tells us was probably more disastrous for the economy than anything else, since the heavy government burden only served to deepen the effect on business owners. And now, right in the vein of FDR, soon to be President Obama wants to push forth bailouts and stimulus packages in the hopes of giving the economy a shot in the arm.


But aside from inflating the deficit, there is a problem with bailouts and stimuli: they don’t work!


A bailout, by its very nature, does nothing but put money into the pockets of unprofitable businesses by taking money from businesses and people who are. Government does not create capital. It only redirects it. So by running up a huge deficit to support failing industries in the short term, the government does nothing more than take from the successful in the long term by increasing their tax burden and handcuffing their ability to direct their capital how they see fit.


Stimulus packages offer the same dilemma. We saw the $300 billion stimulus during the summer, which failed to bolster the economy. The problem with the stimulus was that by paying money to 100% of tax filers now, regardless of tax liability, the government guaranteed that in the future, the 60% of workers who actually pay taxes will be left to foot the bill. The next stimulus package, which will also rank in the hundreds of billions, will do the same, but with goals that are far vaguer. Obama wants to use the proposed stimulus as part of a green jobs program, where workers performs tasks such as making homes more energy efficient.


But the details are lacking. Jobs such as siding a house are skilled labor. Certainly he doesn’t expect that layabouts happen to know how to install siding, windows or furnaces? Who will these people work for? If they work for the government, that is a frightening concept, as the government can set their pay wherever it chooses. If they’re put to work on government offices, there will be no competition, and costs will skyrocket. Businesses will suffer from the lack of work. This bill will then be passed on to the taxpayer. And if the army of green workers is put to task on private buildings, they will either be too expensive to be affordable or, if their salaries are coming from taxpayers, will be so cheap to make private businesses not competitive. Either way, there will be a great loss of private capital due to suffering businesses and higher tax burdens.


The best thing the President-Elect could do to fix the recession is forget bailouts and stimuli. He should work on lowering the deficit and taxes to allow businesses and individuals to have more money now and in the future. It seems that the best option would be to do nothing. No meddling. Put a spending freeze into effect. Let the economy correct itself. But when presented with the idea of a spending freeze, Obama said:

The problem with a spending freeze is you’re using a hatchet where you need a scalpel.


The real problem is that since being elected President, Obama has completely left the operating room.