What Does the Stimulus Stimulate?
In my experience, manufacturing is a significant job source. Consequently, any stimulus program should seek to assist manufacturing. How can this be done, and will the current plan do it?
Our global economy is challenging for many manufacturers due to constraints placed on them by the government. A good start might be for the government to get out of the way. A previous editorial (April 2008) discussed one of these constraints – our 39.3% corporate income-tax rate. Next to Japan, this is the highest corporate tax rate in the world. Let’s give our manufacturers a break, and cut this tax.
Other governmental regulations, such as environmental laws, further constrain manufacturers in a down economy. President Obama added insult to injury in his first week in office with the signing of an executive order.
We have previously debated that Buy American seems to make sense. If we look to history, however, we see that this type of restriction does not serve us well. The Smoot-Hawley Tariff Act signed in 1930 is one such example. When drafted and enacted, overall unemployment was around 8-10%. Three years later, it peaked at 25%. As the graph shows, non-farm unemployment was even higher.
Spending our way out of a crisis has also not proven to be very effective when we examine history. The figure shows that federal spending during the depression never drove unemployment below 20%. More recently, Japan passed 10 “stimulus” bills over eight years in response to a 1990 recession, and their economy remained stagnant.
Larger than the combined total cost of the wars in Iraq and Afghanistan to date, the stimulus bill just approved by the Senate (which may be law by now) will create new debt of approximately $10,000 for each American family. It’s important to remember that the government has no money of its own. They simply take it from one place (our pockets) and spend it in another. How does this help manufacturing?
Is Obama’s calculation flawed? The stimulus bill is being sold to the public based on a calculation by Obama’s economic advisors, who acknowledge their assumptions may be flawed. They assert that GDP increases proportionately to government spending, which then results in a defined number of jobs. Certainly, the creation of one million new jobs equates to a 1% growth in GDP, but it cannot be said that a 1% growth in GDP due to a governmental infusion of capital will equate to one million new jobs.
Investment (of everyone) in the economy is the second thing that will stimulate growth and create new jobs. Unfortunately, adding to our debt ratio (see last month’s Federal Triangle) will have the effect of increasing our interest rates. Clearly, if interest rates rise, it will not result in new investment by individuals or corporations/manufacturers. Economic analysts can show that an increase in our debt-to-GDP ratio of 1% will increase long-term interest rates by 0.03-0.05%. In total, this new “stimulus” plan will result in an interest-rate increase of approximately 1%, which will only serve to weaken the economy.
Extending the 2001 and 2003 tax cuts along with reducing tax rates for individuals, corporations (mentioned above) and small businesses will increase employment, increase family income, shorten the recession and speed economic recovery.
We mentioned the infrastructure idea in our November editorial before we even knew who would be elected as president. I should note, however, that less than $5 billion of the $30 billion allocated for highway infrastructure in the stimulus bill will be spent within the next two years. Since engineers believe that $1.6 trillion is needed to get the complete job done, this seems like too little and too late to provide the jobs needed now.
The final thing to consider is the constraint to manufacturing that could be imposed by our government as they tug on the strings attached to the bailout money – a quid pro quo of sorts.
It’s interesting that as I write, the nonpartisan CBO just reported “Obama stimulus harmful over long haul.” To make this plan look like it isn’t upside down, I’m afraid we will need to stand on our heads. How is that good for manufacturing? IH