Think iGovt.

What has been will be again, what has been done will be done again; there is nothing new under the sun. – Ecclesiastes 1:9

Change, in the form of drastic economic action, has come to America.  The kind of relief we have will determine America’s trajectory for years to come.  Our President-elect is setting the tone, as he presented his agenda at George Mason University last week.  It should be noted the Economics Department at GMU is a known stronghold of libertarian philosophy, and has ties to the Cato Institute – big ups to Cato!  (Sorry.)

It was there Obama said:   “I don’t believe it’s too late to change course, but it will be if we don’t take drastic action as soon as possible.  If nothing is done, this recession could linger for years.”  He then laid out the blueprint for his American Recovery and Reinvestment Program, with estimated costs of $775 billion.  Yesterday, Congress saw his $775 billion, and raised it to $825 billion.

Wow.  The goal for this legislation was “on the President’s desk by January 20;” the goal now seems to be President’s Day, February 16.  Everyone agrees something must be done, but what, and how much should it cost?  What we need is neither big government nor small government, but smart government.  Think iGovt.  Yes, I’m basing my argument on Apple’s success with the iPod and iPhone.  These devices are small, yet big enough to operate without being bulky.  They are complicated, with many moving parts, yet easy to handle with a simple user interface… and for “smart devices,” they have the lead in tech markets worldwide.  Give Apple $300 for an iPod, and you get an iPod.  Buy $300 of Apple’s stock, and see what happens.  “Intelligent government” should follow this model.

Moreover, iGovt purposely seeks common ground, often through a bit of triangulation, in order to get things done for the American people.  iGovt is also unafraid to let bad business fail.  Our federal government cannot be an endless safety net.  Former St. Louis Fed president William Poole echoed this sentiment earlier this week, saying, “What is discipline – where are the hard choices – when does the Fed say our resources are exhausted?”  He went on to say that our current situation at the Fed sounds eerily familiar to the Soviet Union during the Cold War era, where economies were inefficient because they had a soft-budget constraint.  If a firm got into trouble, the banking system would simply give them more money.

That’s no solution at all.  All the money we could physically print cannot inject confidence, the real capital that drives our market.  I usually disagree with Keynesian economics because it can hinder overall growth in the economy; intelligent government, however, considers every public dollar an investment, with the purpose of restoring confidence. 

Mr. Obama’s plan, at face value, supports non-partisan “smart solutions,” as he went on to say, “The American Recovery and Reinvestment Plan won’t just throw money at our problems – we’ll invest in what works. The true test of the policies we’ll pursue won’t be whether they’re Democratic or Republican ideas, but whether they create jobs, grow our economy, and put the American Dream within reach of the American people.”

la (R)esistance

Suddenly, Congressional Republicans, although small in number, have become extremely important at the negotiating table.  Conservatism naturally conflicts with government intervention; if done smartly, however, certain proposals could gain support from these members.  Interventions such as bailouts are nothing more than subsidies with strings attached; this chaps Republicans, sure, but most Republican resistance involves the impending tax burden that government spending inevitably thrusts upon future generations.  Senate Minority Leader Mitch McConnell’s opening remarks of the 111th Congress, January 6, included these words on the subject.  This is, officially, the Republican Party line:

“All of us agree that the economy needs help.  We’re concerned, and taxpayers are concerned.  But if we’re going to appropriate an unprecedented amount of money from the Treasury for this spending bill, it’s absolutely essential that we determine up front whether the spending is going to be wasteful or wise.

“Specifically, the American people should have at least a week to see what this enormous spending plan includes.  President Clinton proposed a $16 billion stimulus his first year in office.  Congress rejected it for being too expensive.  Now Democrats in Congress are proposing a stimulus that could cost taxpayers more than 50 times what President Clinton’s would have cost.

“This potentially $1 trillion bill would be one of the largest spending bills in U.S. history.  It would increase the deficit by half a trillion dollars overnight and deepen an already enormous national debt.  Before we agree to it, the American people need to see the details.  They need to be able to see for themselves whether this is money well spent.  And if lawmakers think that it is, then they need to make a convincing case to the people who are paying for it.” 

It seems to me the Minority Leader is open to intelligent government solutions, as long as the tax burden is approached smartly.  What guidelines would conservatives consider meet their iGovt criteria for taxation?  This isn’t a new question at all.  Two hundred years ago, Adam Smith, the chief advocate of the capitalist model, provided four distinct laws in his classic, The Wealth of Nations:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities… II. The tax which each individual is bound to pay ought to be certain, and not arbitrary.  The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person… III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay… IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the treasury of the state.

An approach using smart stimulus solutions would result in a smaller national public debt, and an easier tax burden at the conclusion of our crisis.  Prudence will render a quicker recovery, bipartisan support, and eventual private ownership of the market. 

Hurdles

When it comes to stimulus, what are the other drawbacks of “going big?”  Can there be too much intervention, i.e. too much money allocated to projects?  Yes; as there is not enough labor to meet the costs of the program, prices for goods and services will rise.  It’s called supply-and-demand.  We see how it works when subsidies inflate the price of certain goods in the market.

The American people support infrastructure spending.  The Obama stimulus package proposes spending three times more on infrastructure projects than is currently spent; where will this money go?  Do we have three times the resources available, ready to lay down gravel, build bridges, etc?  Obviously not, so the market will respond by driving the costs of these goods and services up. 

A federal bill of this size also lacks much needed oversight.  Even New York City mayor Michael Bloomberg agrees that this money would be better spent at the local level.  “You would not have a ‘bridge to nowhere’ if some local municipality had had to pay for it,” he says.  Therefore, prudent iGovt solutions require the growth of projects, as needed, instead of one massive bill.  The system currently used by Congress, that is, passing only mammoth Appropriations bills, prevents oversight and encourages earmarks.  This conflicts with iGovt. 

The problem is, states and cities want to be bailed out, too.  Considering that New York’s citizens give more to the federal government through withheld taxes than they get back, Bloomberg may have a point.

iGovt Solutions

There are viable measures that can be used as long term investments to draw down the federal budget.  For example, the Congressional Budget Office released a report this December on health care that could be a crucial part of our upcoming spending bill.  If the conversion of paper medical records to electronic records was made a requirement for Medicare, the program would cost money upfront, but could save $7 billion in the first five years, and $34 billion over ten years, by reducing medical errors and avoiding unncessary tests and procedures, saving lives in the process.  As 1 of every 6 Americans is uninsured, these offset costs could be used to lower health insurance premiums in the private sector.  Additional money (and time) could be saved if a Doctor could ”visit” and prsecribe medicine over the phone or computer.  These solutions are small enough to implement, with a range of positive outcomes in the health care sector.

One particularly promising proposal within Obama’s stimulus has caught my attention; the modernization (aka the “greening”) of 75% of our nation’s federal office buildings through the use of sustainable resources.  When government spends money on public Research, Development, Testing, and Evaluation (RDT&E), the private sector profits; think NASA.  Cheap solutions discovered by government often spill over into the private sector.

In the process, public and private jobs are created, and our government takes the leadership role in the new clean energy economy.  These buildings could have their monthly energy savings posted online for other companies and households to see.  This could be achieved from not much more than window sealings and Compact Fluorescent Lightbulbs.   Public industry could advance further with Compressed Natural Gas (CNG) company cars and pickups.  Norfolk Naval Station already does this.

The clean energy market is also very attractive to a new generation of Americans.  When it is time for government to retreat, there will be a newly created job market in the private sector, with trained personnel ready to answer the call.  General sustainability is at the core of iGovt, and given that we annually import $700 billion of foreign oil, an unsustainable rate, the energy sector seems like the best place to invest public money.

Divisions Over Bailouts

To be clear, I was opposed to the intial $700 billion bailout when it first passed Congress (see my post Boom Goes Bust).  Republicans, including John McCain, were strong-armed into voting for it, as the naysayers began to forecast impending doom if the measure failed.  In fact, House Republicans still get blamed by the likes of CNN, who last week claimed they “pushed the Dow Jones over the cliff to its biggest point loss ever with their surprise rejection of Henry Paulson’s $700 billion Wall Street bailout.”

Well.  It seems now those pesky House Republicans may have been right after all.  Former Maryland Lt. Gov. Michael Steele, head of GOPAC, says now, “The bailout was a bust.  It should never have happened.  Republicans should have had a little bit more you-know-what to withstand the pressure.  They didn’t and we’re paying for it.”  Surely, standing up against the bill would have set John McCain apart from the big spenders on the Left; it may have changed the election.  Instead, he was left with nothing to differentiate him from George W. Bush, Henry Paulson, or the Democrats, for that matter.

The Republicans got the message, though, when two months later we watched the bailout of the Big Three fail in Congress, only to see President Bush play the scapegoat by swooping in to save them (at least until January 20, right?)  Interesting in this mix-up was Bob Corker’s rise to importance in the Senate.

When it became obvious the House bailout bill would fail in the Senate, Senator Corker, a former businessman from Tennessee, unveiled his own proposal, which would have required viable actions from the Big Three in order to receive funds, but was inevitably dismissed when it lost support from the United Auto Workers (and their Democratic colleagues).  Sadly, politics got in the way; as a junior Senator, Democrats and the UAW denied Corker the chance to champion a feasible bill, Southern Republican Senators took the blame for not supporting the orginal bill, and our crisis continued. 

A bailout by the Executive Branch lacks the necessary oversight expected in any transaction between a lender and a borrower.  It is therefore the Legislative Branch’s duty to act.  While this draws criticism from the Right, something must be done.  Conservatives have to rediscover their role in the 111th Congress (I covered this in my last post, Our Current Crisis).

TARP Solutions

Public pressure is back on.  Senator Claire McCaskill of Missouri recently said in an interview she can’t go into a grocery store without getting bombarded by angry Missourians:  “People are shouting out their cars at me … ‘When are you going to write me a check?’”

Today, Congress approved the remaining $350 billion of the Troubled Asset Relief Program (TARP) funds for use in the Obama Administration.  This was expected; last week, House Financial Service Committee Chairman Barney Frank sent a memo to other lawmakers laying out his plans to place limits on any further use of the TARP.  Frank’s proposal gives Congress more control of the money, requests $40 billion alone for mortgage refinancing, and requires banks to report on how these funds are being used.  Frank also wants to require banks to lend.  Wait, I forget; wasn’t that one of the factors in our current crisis?

Additionally, the Democrats want to provide $275 billion in tax cuts, by all accounts a historically atypical move.  Like I said earlier this week, “Raising taxes discourages growth, and lowering taxes worsens our public debt.”  Republican resistance to the stimulus continues to mount, for obvious reasons.  There must be a better way.

Representative Louie Gohmert of Texas’ 1st District has proposed using the remaining funds for a two-month tax holiday for the American people, averaging to about $2000 per taxpayer.  Some leading conservatives such as Chairman of the 111th Congress’ Republican Conference, Mike Pence of Indiana, and former Speaker of the House Newt Gingrich, support the proposal, while some conservatives debunk his idea, citing a need for permanent tax relief. 

Conservatives also cite a ”wealth effect,” which says that citizens spend when times are good and save when times are bad.  This was certainly proven during the 2008 Economic Stimulus Package; polling showed that only 20% of the $152 billion was spent, while the rest was either saved or used to pay down debt.  It did not provide the proverbial “shot in the arm” of its intention.

I have sent letters to my Congressmen with a TARP proposal of my own, but haven’t heard anything back; you’ll find silence is usually their standard response.  I say, take the remaing TARP money and issue “government gift cards” to all taxpayers.  Citizens would be encouraged to use their current income as they wish to save and pay down debt; the roughly $2000 gift card, however, would expire in one month, ensuring it gets spent.  What’s left would be forfeited back to the Treasury.  The effects of such a measure would surely be felt in the market, with citizens, not government, choosing its winners and losers.

The “iGovt gift card” would look similar to an American Express gift card, would have your name on it, and your account number would simply be your Social Security Number.  This would effectively combine the Gohmert and Obama proposals without tinkering with the existing tax code.  It would also drop the bill of the Stimulus to about $500 billion, making it easier to pass.

How did FDR do it?

Well, hold on a second.  Despite all the acclaim, there is no definitive evidence the New Deal helped in pulling the US out of the Depression.  Members of the Civilian Conservation Corps were only paid a dollar a day and lived in camps; their incentive was simply to eat.  Rather, when the Japanese bombed Pearl Harbor, the nation found the incentive to fight and work hard, in order to strengthen – and save - our nation.

I believe this point in our history calls for energy solutions, which necessitates more American engineers, a population steadily lost to outsourcing.  Now is the time to seize the opportunity that is before us, instead of just throwing federal (or state) money into education, simply to create more bureaucratic, criteria-driven programs.  Money alone does not create incentives for students to choose Science, Technology, Engineering, or Math (STEM) degrees.

The most surefire way to create engineers is to give them a task to do in a field that is reliable.  For years, the business sector has been the easiest way to make money; I think it’s safe to say those days are over.  If there is bait on the other end of a college experience, students will respond.  I believe that bait is the budding new energy sector.  Public money in this case can either be an investment, or it can be wasted.  It’s our choice.

What is the Democrats’ response to Obama’s plan?   More of the same, old, tired solutions:  double subsidies for alternative energy production ($54 billion); extend unemployment benefits ($27 billion) and increase the weekly unemployment check (another $9 billion); subsidize Cobra health insurance for laid off workers ($30.3 billion); along with billions more in various pet projects.  This is the easy answer; none of this will create the demand needed to strengthen our economy.  What’s more, Republican dissent will only create further gridlock.

Jared Bernstein, a senior economist at the Economic Policy Institute, recently stated, “The 1930s recession became the Great Depression because policymakers didn’t take the necessary actions.  Nobody wants to make that mistake this time around.”  While we remember that dark side of our history, let’s look also to the words of President Lincoln, in 1862:  “The dogmas of the quiet past are inadequate to the stormy present.  The occasion is piled high with difficulty, and we must rise with the occasion.  As our case is new, so we must think anew, and act anew.  We must disenthrall ourselves, and then we shall save our country.”

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