Romney's Stimulus Plan

I detailed some shortcomings of Obama's economic plan last week. Now let's talk about what should be done instead. Mitt Romney wrote a column last week, detailing his prescription for our economy, and most of it is pretty agreeable. The basic difference between Obama and Romney on the economy boils down to government spending vs. tax cuts (Keynesian vs. supply side economics).

Romney cites empirical research that indicates that a $1 increase in government spending (i.e. a stimulus check) will increase GDP by between $1 and $1.40. $1 in tax cuts, on the other hand, increases GDP by $3. This is a major blow to the Keynesian model.

Why do tax multipliers exceed spending multipliers? Here's the basic idea: tax cuts give people more money to spend, which stimulates demand (the essence of Keynesian prescriptions) but unlike increased government spending (which increases demand in the same way), lower taxes encourage investment, which generates jobs and more production. For example, let's say Obama lowered payroll taxes, effectively lowering the cost of employing people. Using our basic supply/demand curve, we know that lower labor costs will increase demand for labor. Workers will take home more of their pay, which they will spend, driving up demand for goods and services, and companies will hire more people.

Romney agrees that infrastructure projects should be a high priority, but notes that the economic benefits of these projects are no where near immediate because these projects take a while to complete. Romney warns against excessive regulation and the Employee Free Choice Act that would "virtually impose unions on small business by eliminating the right of workers to vote by secret ballot in the workplace. This 'card check' payback for the AFL-CIO’s support of the Democrats would devastate business formation and employment".

Romney does support government spending on "basic research" for technologies that will make us more energy dependent. I maintain my basic argument on this subject: while the impact on global warming is debatable and energy independence would be great, this government spending is not likely to help the economy in the long term and definitely won't help in the short term.

All choices in government require trade-offs:

There is a danger that new spending and deficits will lead to runaway inflation, flight from the dollar, and another economic crisis. It is essential, therefore, that Congress and the president commit to reform entitlement spending as soon as the economy recovers. With the footing of our long term economy at risk, with entitlements already reaching 60 percent of federal spending and with baby boomers nearing retirement, this can be delayed no longer.

Unfortunately, elections have consequences and Obama is likely to choose ideology over sound economics.

More Expensive Energy

President elect Obama's plan for the economy seems to center on two tactics: a huge ($1 trillion) stimulus package and "investment" in new energy sources and more fuel efficient technology. Neither encourages production and both are extremely inefficient uses of our tax dollars.

A big stimulus check, which will only go to low and middle-income Americans, is intended to stimulate demand for goods and services - "priming the pump", if you will. Classic Keynesian economics. Unfortunately, there are easily foreseeable problems with this plan. Economists favoring this approach are counting on a huge multiplier effect: you spend your check to buy x, the guy who sold you x uses the profits to buy y, and so on. The increased demand for goods and services caused by the stimulus is supposed to encourage more production of goods and services to meet this demand. However, in these economics times, low and middle-income people will likely save the money or use it to pay down debt instead of running to Best Buy. Saving and paying down debt eliminates the multiplier effect, does nothing to stimulate the economy and increases the national debt.

The trillion dollars has to come from somewhere and it is likely to come from higher taxes on people making too much to get a stimulus check in the first place and from higher corporate taxes. Aside from the injustice of this income redistribution, higher taxes on the most productive workers and corporations discourages production and job growth. Tax cuts also get more spending money in people's pockets, but have the added benefit of encouraging production and job growth.

Obama plans for huge spending increases on alternative fuels and green technology. He claims that these green jobs will boost the economy. Absolutely wrong headed. We can argue about the wisdom of spending billions on policies that will have zero effect on the climate another time. If Obama's green policies are about global warming, then he should sell them as such, but don't tell me they are good for the economy. Markets are very good at finding the best price for energy. For our cars, you can't beat gasoline. However, our government pays huge subsidies to add ethanol to the mix. Subsidies for alternative energy increase the amount we as a country pay for energy. Every extra dollar we spend on energy is a dollar we can't spend on education, health care, or a hat, a big ol' hat with a bill that goes buuuup (sorry, but this blog has been movie reference deficient of late).

Investing in green jobs is simply taking the tax payers' money and spending it on things they wouldn't choose to spend their own money on. Green jobs do nothing to add to the production or standard of living of the American people. Paying a researcher $100k a year to find new ways to increase our energy costs does not help the economy. It's little different (from an economic perspective) from paying someone to dig ditches and then fill them in again. Sure, you created a job, but you had to take money from other people to do it and you gave them nothing back in return.

Obamanomics is Coming

Faced with challenging economic times, Obama's remedies all discourage work, investment, and job growth when we need more of all three. Another stimulus check? This is nothing more than redistribution of wealth and the recipients are likely to just stick the money in their bank account. Longer unemployment benefits may or may not be necessary, but any benefit should be weighed against the cost: the unemployed will wait longer before finding a new job. Taking away workers' right to a secret ballot on the decision to form a union will hurt job growth and is fundamentally unjust. Raising capital gains taxes and corporate taxes dissuades investors from creating jobs in this country and will send capital overseas. I'm sure China and India won't mind.

Obama named Michigan Gov. Jennifer Granholm to his economic advisory team. Maybe she can share her policy secrets for Michigan's booming economy with the rest of the nation. As Phil Gramm and Mike Solon note in the Wall Street Journal, states still have some freedom in their own economic policies. The effectiveness of state policies will be evident in movement of people into the state, increased per-capita income and employment growth.

A study that ranked states according to these three factors found that from 1996-2006, Texas, Florida and Arizona were the three most successful states. The three worst were Illinois, Ohio and Michigan. A third of all new jobs created during this ten year period came from Texas (1.7 million), Florida (1.4 millions) and Arizona (.6 million). Illinois gained only 122k, Ohio lost 63k and Michigan lost 318k jobs and the citizens of these states saw their real income increase by just 58% of the national average.

Economic policies matter. The successful states have lower taxes, lower government spending and they are right-to-work states (employees are not forced to join or contribute to unions). The least successful states promote all powerful unions and have a higher minimum wage, yet their workers make far less.

Obama promises to bring the economic policies of Illinois, Ohio and Michigan to the nation.

Unemployment and the Minimum Wage

Unemployment spiked up .5% to 5.5% for May. However, unemployment compensation claims are still near historical lows. So if people aren't losing their jobs, how does unemployment spike? The answer is that people who weren't looking for jobs in April but began looking in May are having a hard time finding a job. That would be high school seniors, dropouts, and college kids looking for summer work, in other words, low skilled workers.

As you might recall, our benevolent Democratic legislature increased the minimum wage from $5.15/hr. to $7.25, legislation that went into effect this year. However, not all businesses can afford to take on new workers at the higher wage. Higher wages mean higher prices, which drives down demand for products and services, and as a result, the demand for labor. Some people make more, but many others get no job at all. Despite their good intentions, the Democrats have actually screwed over low-skilled workers. Common sense should tell us minimum wage increases are certain to hurt employment. Otherwise, why stop at $7.25? Why not a minimum wage of $50 an hour? Wouldn't that help low-skilled workers?

Free market economists have warned for years that increasing the minimum wage causes higher unemployment among low skilled workers. Consider Milton Friedman's arguments from his classic book Capitalism and Freedom:

Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. It is clearly not in the interest of employers to do so. The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be. Insofar as the low wage rates are a sign of poverty, the people who are rendered unemployed are precisely those who can least afford to give up the income they had been recieving, small as it may appear to the people voting for the minimum wage.

The people who are helped are visible... The people who are hurt are anonymous and their problem is not clearly connected to its cause.