Why the Stimulus Will Fail

Failure is not success. In the context of a Federal government stimulus program, success means there are more wage earners earning more than they did before the stimulus. Success is *not* simply a rise in GDP/GNP; we had that during the Bush years, and we find ourselves in a bit of a mess, since the most of that growth went to a small fraction of the population. It can be argued, and I certainly would, that the Bush approach to economics is a cause of the current mess, although the approach was not original with him; he didn't have one original thought.

The reason failure is more likely than success derives from the structure of the American economy. That structure *is* attributable to the Bush/Right Wing policies since 1981. Yes, 1981 was Reagan not a Bush; the policies of the capitalist coddling Right Wing finally made it back to the White House after the long years in the wilderness following Hoover. Reagan revivified the shibboleth that your neighbor (not you, of course) was a lazy leech on society, and if we just brought him to heel, the country would be so much better off. Let's start with the air traffic controllers; they're really greedy and worthless. Labor takes too much of the GDP, we'll see to changing that; not you of course, just your lazy neighbor.

Today, it is any unionized worker. In desperate times, eviler enemies. The fact that few workers are in unions is swept under the carpet; it is an inconvenient truth. It is not a coincidence that median income has, at best, stayed flat since 2000. Some quote data that it has fallen in the period. That's been the goal all along. Not a mess, a success.

A review of economic history reveals that depressions/severe recessions/panics have been preceded by gross income shifts of this type, increasing inequality, and magnitude seen under Republicanism now.

How does a stimulus program increase demand for those goods and services still capable of manufacture by Americans? That is the question being avoided by all.

In order for a stimulus program to be successful, there must be a way for the Federal government to buy goods and services which are American in creation, and which constitute a significant fraction of those not employed when the program begins. It is an American stimulus program, not a global stimulus program. In 1939, those who were unemployed had been working in manufacturing in American factories making goods for American consumers. It was not difficult, once the decisions were made, for the Federal government to buy goods from those factories (some needing to shift from automobiles to tanks, for example), thus re-employing workers. The goods needed for WWII were capable of manufacture in those factories by those workers. After all, there wasn't much left of European or Asian manufacturing anyway and what there was wasn't going to be sold to us; it was a state of explicit trade isolationism, a fact ignored by professional commentators when discussing stimulus programs then and now. Except for the millions killed in the War, it worked out well from an economic recovery point of view.

In 2009, who are the unemployed? Not, by and large, workers in factories that will make goods for American consumers. The deindustrialization of the economy, in progress since the 1970's, makes any stimulus program a low probability gamble. Will the stimulus program re-employ the leeches in the financial services industry that sent us over the edge in the first place? It is important to realize that this sector of the economy had grown to a very large proportion; possibly unprecedented. Even if the Federal government chose to reward them with new employment, what is it that the Federal government could buy from the sector? Variable annuities? Would those who are re-employed as a result of the stimulus program spend their newly increased incomes in the financial services sector, thus re-employing all those folks? Would that be rational?

They'll most likely buy 'stuff', physical goods that they can hold in their hands. Just as they always have. Only, Americans make a decreasing fraction of those physical goods. If the auto makers cease to exist, how will those factories be re-opened to re-employ those workers? If what constitutes American economic activity is not tied to our soil (or Homeland as some like to say now), then stimulus programs will just reward capital that continues to move off shore. Services industries are unfettered by national boundaries.

Without domestic consumption and production, the multiplier effect of economic stimulus decreases, since the incomes don't circulate as domestic spending, they leak off shore. China is experiencing that now; what they've built, with American capital's help, is an economy that is not self-sustaining, since Chinese workers can't buy Chinese production. That is the generally ignored dark underbelly of trade zealotry: trade is beneficial only for those with sufficient incomes who can afford the lower cost imported goods. If you couldn't afford the domestic product, but still can't afford the lower cost import, you've gained nothing from trade. If trade benefits only the few, is it proper for this outcome to be supported and driven by public policy? Is that a democratic society, or a fascist one?

In the China/US bargain, most Americans and most Chinese lose. Americans lose jobs and manufacturing infrastructure on the front end, Chinese lose jobs and incomes on the back end.

There is also a strategic implication. Can a superpower really be such if it has no manufacturing core? If it is dependent on foreign manufacturing, it is not a power, much less a super one. If, as I believe, our only military power is solely the capability to incinerate the planet (we haven't done well in conventional warfare since 1945), and we have no strategic manufacturing; how are we super? Who should fear us? Do we become Switzerland, or Uruguay in the 1960's (they deindustrialized into a financial economy and it didn't work out so well for them, at all).

Yes, there is still some manufacturing done in the United States, but if the companies close down (as they are), not just slow down or close some factories, then by what mechanism can the unemployed be re-employed? Will the Federal government re-open factories as government operations?

Henry Ford was vilified for increasing the wages of his hourly workers above those paid by other car manufacturers. His reasoning was not altruistic (Ford thought highly of the Nazis, at least early on). He stated that he would sell more cars if his workers could afford them. He determined that it was in his interest to spread the wealth around. This truth is still widely ignored by Right Wing professional commentators, and, I would wager, the likes of John Thain.

Yet, simple observation yields the answer which few will speak: American capitalists are winning the war over American labor (Warren Buffett made a trenchent comment about that, and he didn't defend his own kind); in a few short years (1981 to present) the top 1% of households take 21% of income. In a few more years, this country will be little different from India or any banana republic, if not already. The clarion cry from the Right Wing is that labor (unionized, that is) is just too expensive, and "we" can't afford to keep them in health insurance. The problem is all those whining working folk. Can't they just eat cake? Or just have the decency to die young?

A common canard is that education will pull us out of the problem. We must invest in education. Mr. Obama uses it with some frequency. We just need to be better educated, and we will be higher earners, over all. But this advice is contradicted by what is easily observed: just as capital fled New England in the 19th century for the more comforting South, so capital is fleeing now to Asia and Eastern Europe; anywhere that labor is more easily exploited. Not only low skill, low wage manual labor jobs as happened in the 19th and 20th centuries, but also an increasing number of jobs requiring high skills, education, and training.

In India (I know a lot of Indians) for example, that higher education is largely government funded, thus allowing workers to earn lower wages, in American dollars (in addition to the effect of exchange rate gaming) to finance a "middle class" lifestyle. Or to put more pointedly, if one is offered two alternatives, same wage of course, either spend one's day out in the fields of muck or in an air conditioned office, which would you take? In such a circumstance, the reward for education is not what Americans have come to understand; it is rather closer to the bone, not more income just less misery. The irony lies in American corporations exploiting the fruit of socialized education. I doubt any CEO notices.

How can a Federal stimulus program with the intent of employing American workers making goods and services for American consumers succeed when American capitalists are fleeing to autocratic regimes? This is the root of the problem, which must be addressed if success can be achieved. The Chamber of Commerce had a fit with the Buy American clause, as if this were Un-American. And they were treated with respect by corporate media.

When I was an undergraduate, I recall being puzzled by the notion of Comparative Advantage, discussed in any Econ. 101 course. I didn't believe it. Simply put, the assertion is that some economies have "natural" superiority in the production of certain goods and services versus other economies. The source of this superiority is the ethereal ability to combine the gross inputs of land, labor, and capital more efficiently in some areas of production. Or so the argument goes. I never bought it, but never had the opportunity to be a policy maker and discuss it. The reason I never bought it is that there is an unspoken assumption: that all three inputs are immobile. Even in the 19th century when David Ricardo was creating this notion, capital was not immobile. And it certainly isn't now. Some professional commentators are now openly disagreeing, and have redefined the term, "absolute advantage" to recognize that capital has and will migrate to governments which allow maximum labor exploitation. How can a stimulus program succeed when capitalists have an interest in making it fail? Rush is not alone.

Finally, the ultimate point: Mr. Obama exercised a Freudian slip when he used the phrase "spread it around". He was accused by the Right Wing professional commentators of running, not to be president, but "redistributer in chief". Guess what, that's what has to happen to get us out of this mess. The real issue is that the Right Wing likes to see labor devalued; they don't see the current situation as a mess, but a return to the way the world should be.

Income, as all else in human activity, is relative. If I have $100 and you have $10 today, then if tomorrow I still have $100 and you have $5, I'm now twice as rich. A middle class economy (where that middle class does have most of the income) is necessary to a democracy. For some years, this country has been transforming itself to autocracy. We are a constitutional republic, despite what the common phrase is. Economies with a few haves and mostly have-nots are always fascist. They need repressive governments to keep the legions of poor from killing the few rich. That was true in the 18th century, and it is true today. It can happen here. It will happen if income is not "spread around".