Why the Stimulus Response Did Not Worked Properly
Author Thomas Friedman alleged in his international bestselling book, The World Is Flat: A Brief History of the Twenty-First Century, that a “flat world” has more valleys than it seems at first glance. The reality is that a vast majority of people have no direct connection to this global economy and are far from benefiting from the “flattening” of the world. In the last couple of centuries – thanks to a simulated balance of power among the top countries, the international gold standard and a self-regulatory market – humankind achieved a certain degree of prosperity and stability. But we are far from getting to a point where there is a guarantee for peace and well-being to a greater part of the general public in this world.
It has never before been so tricky to advertise (sell) the idea of free markets and democracy. And maybe it’s time to stop doing so. We should invest our time, money and efforts toward creating a superior economic system that benefits more people, instead of pouring money into old financial institutions with antiquated business models that clearly only work for a very few.
Politics aside, I believe the Obama administration realized the real economy was in serious trouble even before taking office. Some of their actions confirmed that. One thing I conclude they did not take into account, and should have, was the fact that crises do not destroy the tangible assets of an economy (factories, buildings and human capital). Society and companies or firms may deteriorate or go bankrupt, creating a serious shakedown of life as we know it. However, asset ownership is and always has been clear.
The original stimulus package was too small, unclear and could have been better executed. A mere $800 billion spent over 24 months in a $14 trillion annual economy is barely 3%, which is like trying to stop a car by spitting at it. The stimulus should have been at least 10% of our gross domestic product. The 3% GDP stimulus translated into job retention rather than job creation. The reality is that the wagon was stopped from falling over the cliff; nevertheless, we are still at the edge.
The U.S. economy needs to grow at around 3.5% to employ the almost 2 million new people that are added to the workforce each year. In order to recover the 9 million jobs lost and go back to a 4% unemployment rate, we need to grow 7-8% in the next five years. This is not going to happen, so we might start looking at 8% unemployment as a new baseline for the next decade and start investing in other areas that will, in time, provide for a smaller unemployment rate.
As I mentioned before, I do not believe governments are in the business of creating jobs. Sadly, private corporations are running at 50% of their production capacity and will not hire or invest in new equipment until they are near full capacity again. Even if that is reached, job growth usually lags economic growth by an average of 12 months.
One thing that could have had more impact was a mortgage rescue plan and more emphasis on giving states a better share of the stimulus. Remember that states rely heavily on property taxes and sales taxes – both in rapid decline due to unemployment and foreclosures.
The now famous “shovel-ready” programs and the energy-efficient home rebates where okay, but they were just a short-term solution. Almost nothing went into long-term infrastructure. China set up a trillion-dollar stimulus that in its best part helped build new infrastructure. This bill was passed in October 2008, a month after the crisis hit. The U.S. stimulus bill took until February 2009 to pass the House and spent another month or so in the Senate.
To whoever still thinks tax cuts and tax credits work, I have two words – They don’t! Small business will not use those tax benefits to hire more people; I explained that above. People will not spend that money, either; they will pay their debt. Cash for Clunkers worked for a month, and it just hampered future car sales.
It seems clear that a second stimulus is needed before 2011. Sadly, the political climate will not allow it, and in an election year all politicians are on “budget reduction mode”. Cap and trade could help collect some billions, but again, election year seems to be a synonym for not working in Capitol Hill. The truth is that until global consumption picks up, we will not see palpable changes. Only a sustainable demand in goods and services will create strong long-term employment.
A re-engineering of the financial systems is necessary before they need more bailing out – something in the line of a social-capitalism that restructures economies around the world.
