So what is the difference

The stimulus package becomes law today when President Obama signs it. There is nothing we can do to stop it. It is time though to analyze the differences between the two camps of this subject. I have pontificated at length that I believe the private sector is the best way to stimulate the economy. The Democrats seem to believe that the government is the best. We need to understand the differences if we are to make informed decisions.

Government based stimulus has never worked, not even one time. We have been taught that the New Deal brought us out of the Great Depression, but all economic metrics show depression as late as 1939. That was seven years after FDR's election. His own Treasury Secretary Henry Morgenthau Jr. stated frankly that the programs did not produce growth nor reduce unemployment. We added tremendous debt to boot.

Vice President Biden (it hurts me to use those words in a sentence) in supporting this bill said we need to get money into the economy and fast. This is why it was necessary to get this done and signed. If we left money in the economy that would otherwise be sent to government that would also get money into the economy. If we made tax increases that are slated to happen next year not happen that would also add money into the economy albeit not until next year (remember up to 70% of the current stimulus will not be spent until 2010 and 2011 so that is not a problem in this example either). What that would do is add stability to investors and employers. Markets do not like uncertainty. President Obama promised to let the tax cuts of 2003 expire but has recently said he would not raise taxes until the economy improves. That is a good thing, but adds to the uncertainty. Any tax increase at this point would have disastrous effects.

Now if we left money in the economy, for example by cutting the Corporate tax rate to say 18% from 32%. This would leave a great deal of money in the economy that would otherwise be sent to Washington. So here is the question to ponder: Leaving money in the economy or taking money from one group to give to another, what is the difference and why does President Obama favor the direct payments over the reduction of rates? My judgement is that he believes that he and his advisers know better how to use your money than you do. I reject that belief. Let us do a thought experiment. Let's say that the reduction in corporate tax rate all went to the 'wrong uses' in his opinion. Let us say every fat cat in the country used that money to buy yachts, private planes, swimming pools, redecorated their offices etc. What would be the net effect? Airplane companies would need more factory workers, boat builders would need to supply the increased demand for boats, and would need more workers, decorators would be in demand, pool cleaners would be in demand (rich people don't clean their own pools after all), and pool installers would also be in demand. Of all the jobs I mentioned not one of them is a 'rich person job'. We of course know that is not what would happen if corporate tax rates were reduced. We would be more competitive in the capital markets. Companies would be much more willing to invest in our markets, because the risk reward ratio would be increased. There is an old adage that customers pay corporate taxes not corporations. That means that the corporation no matter how large of small has to pass that along in its price. Increase the tax and either prices have to go up or costs have to go down. Guess what the first cost to be cut is? Go to the head of the class if you said labor. You reduce labor costs by laying people off.

I again ask what is the difference? The truth is if they left money in the economy, they do not get to pick the winners and losers in this exercise. They don't trust you to pick winners and losers. That doesn't sound like freedom to me. It also doesn't sound like hope to me. If they left money in the economy teachers unions don't necessarily win, union construction workers don't necessarily win, community organizers don't win, University Presidents don't win unless you and I choose that they do. That won't do for the demand economy fans like President Obama. I say we can do better than them. We won't get to find out for at least four years. What a shame!