Why The Economy Will Be Worse in 2010

Why The Economy Will Be Worse in 2010

We've already spent an insane amount of money trying to bail out the financial services industry under George "I had to destroy the free market to save it" Bush. Now President Obama is proposing to spend even more money on a stimulus package that is breathtaking large--over $800 billion. Lots of people--including more than a few Democrats in Congress--are beginning to get very, very nervous about it. Why?

1. For all the talk about "shovel ready" infrastructure projects that this money will fund, nothing happens quickly. There is a lot of talk that by the time the agencies receive the money, RFQs are sent out, bids arrive, the inevitable lawsuits from the firms that didn't win the contracts, only a few tens of billions of dollars will be spent on these projects by the end of 2010--you know, when the mid-term elections will give voters a chance to punish the incumbents. If you really want to stimulate the economy in a hurry, the way to do it is a tax cut--either by reducing withholding for the remainder of this year, with big rebates, or perhaps long-term tax cuts.

There are some good reasons against each of these approaches. For example, a one time rebate is likely to be spent buying more consumer electronics from China--not a long-term economy restorative (well, at least for our economy). But there are some bad reasons as well, and these are more likely the real issue: you can't reward your friends. As this January 23, 2009 Washington Times article points out, there's a big overlap between those getting bailout money, and those spending money lobbying politicians:

Many of the large American companies that received billions of taxpayer bailout dollars by pleading that they didn't have enough money to lend to customers were, at the same time, spending millions of dollars dispatching lobbyists to influence the federal government.

A Washington Times review of lobbying disclosure reports found that 18 of the top 20 recipients of federal bailout money spent a combined $12.2 million lobbying the White House, the Treasury Department, Congress and federal agencies during the last quarter of 2008.

For instance, the government bought $3.4 billion in American Express Co. stock on Jan. 9 as part of an aid package. In the last quarter of 2008, the company spent more than $1 million on federal lobbying.

American Express spokeswoman Joanna Lambert said the company did not lobby for the bailout funds. At the same time, disclosure forms say, the company was lobbying the Federal Reserve, the Treasury and Congress, all active players in dispensing the multibillion-dollar rescue financing.

Several taxpayer groups assert that companies receiving federal assistance shouldn't be able to lobby the federal government at all, particularly on the Troubled Assets Relief Program (TARP), which is the formal name of the federal bailout plan.

"It's a definite conflict," said Pete Sepp, a spokesman for the National Taxpayers Union. "It's a disturbing sign that TARP recipients think there is still more loot left to get. If they're not slowing down their lobbying, taxpayers need to be worried."

2. I can't remember who wrote it, but many years I read a brilliantly argued essay about "The Bridge Not Built." The author was explaining that when the government taxes the population to build a bridge across a river, everyone can see the bridge: a tangible example of where the taxes went. But what if the government had not built that bridge, and (important point) left the money in the pockets of the taxpayers? Where would that money have been spent? It might have been spent by consumers buying goods that caused merchants to want a ferry service--or conceivably, even create enough demand for an entrepreneur to build a bridge across the river--perhaps even in the same spot. (And in the nineteenth century, there were a lot of such entrepreneurs, building bridges, because the government generally did not.)

The money for this stimulus package is coming from somewhere. It will mostly not come from us, now. It will be borrowed, and paid back in ten, twenty, or perhaps thirty years. But it will cause a reallocation of resources from what we as individuals consider important, to what members of Congress, and the lobbyists that actually do most of the stringpulling, consider important. While consumerism has a host of evils, and I have written about my concerns about how stupidly a lot of consumers spend their money, it is not clear to me that Congress and the lobbyists are any smarter. And as an editorial in the Orange County (Cal.) Register pointed out many years ago, "We could compare how Congress spends money to a drunken sailor. But that would be unfair. To the sailor. He is at least spending his own money."