More on the Stimulus Package

In the last post, my major point was that relying on tax cuts as economic stimulus will not necessarily work as fast or as efficiently has temporary direct government spending. Supply side economics does work, but it works within the parameters of the economic system available to investors. Investors, for the most part, do not select investments based on patriotic motivation or a conscious desire to create jobs; they select investments based on the rate of return the investments promises to yield.

During the Bush Years, job creation was largely in four principal areas: housing construction, financial services, government, and self-employment (the oft touted "small businessperson").
The increase in government jobs was driven largely by 9/11 and the War on Terror. I'll skip self-employment for the moment, which deserves more time and thought, although I suspect that a more in-depth look would show much of "self-employment" simply masks unemployment figures and the loss of manufacturing jobs.

Investment stimulus did have an impact on the housing construction and financial services industries, as well as collateral investment opportunities (e.g. the growth in municipal bonds may have well been stimulated indirectly through the housing boom in that communities needed expanded municipal services for new housing development). Further, it is doubtful that the housing industry itself would have attracted significant investment capital without the high rates of return, which were in turn based on highly risky loan practices (NINJA loans, adjustable rate mortgages, loose credit, etc.). Much of the housing boom was both a financial and political scam.

For additional tax cuts to contribute to a meaningful rebuilding of the American economy (not the global economy), I believe, there are prerequisites to be accomplished first. We must ensure ourselves that the additional disposal income will result in the creation of productive American jobs - i.e. identify sound national investment opportunities (e.g. new energy technology; infrastructure improvement; etc.). We must also overhaul the financial system and return to a sane regulatory and oversight environment. This may not be as difficult as it may sound. I suspect the U.S. economy "as is" is far too heavily dependent on foreign investment and that these investors, if not our elected representatives in Washington, will insist on the these or similar steps.

In sum, supply siders who still insist that tax cuts are the only way out of our present economic dilemma are something like the Catholic Church still insisting the Earth was the center of the Universe after Copernicus.

That said, the House Democratic stimulus package is not encouraging and holds only slightly better prospects for success than a Republic package based on tax cuts.

This "may" be corrected in the Senate (but don't count on it). The polarization of American politics is more evident in the House than the Senate. Gerrymandering has largely placed individual House members beyond bi-partisanship and doing what is good for the "national interest." The Senate is also polarized, but their polarization is driven more by ideology.
More on this and where the House package, in my opinion, fails in the next post.