When an economist such as Alan S. Blinder, a professor at Princeton and former vice chairman of the Federal Reserve Board, writes on the relative merits of different forms of stimulus, as he did in an op-ed for the Wall Street Journal titled “Obama’s Fiscal Priorities Are Right,” isn’t it reasonable to expect more than cant?
…consider three different ways to add a dollar to the budget deficit: increase unemployment benefits by $1, give a $1 tax cut to someone earning $50,000 a year, or give a $1 tax cut to someone earning $5 million a year.
While the immediate impacts on the budget are identical, the near-term spending impacts are not. The unemployed worker struggling to make ends meet will likely spend the entire dollar right away. The $50,000 earner probably will spend the lion's share of it, saving just a bit — that's what most Americans do. But the $5,000,000 earner probably will save most of the new-found dollar.
The impacts on economy-wide demand will therefore be quite different. Paying more in unemployment benefits offers the most spending "bang" for the budgetary "buck." Extending the Bush tax cuts for the wealthy offers the least.
This point – that we need the money to be spent if it is to help boost our economy – seems perfectly logical, provided that one lives in a world where the customary savings method is to stuff one’s savings in a mattress or to store one’s coins in the counting house in the backyard.
In a world where savings are virtually immediately placed into financial instruments, the relevance of this insight is unclear. After all, those savings either go directly into businesses as equity or debt, or the funds go to support existing equity or debt markets, providing the umbrella under which new issues can be made, or the savings go into financial intermediaries, such as hedge funds or bank accounts, from which they are also placed into various investments or they go to buy government debt. In any case the money saved, winds up as money invested, which winds up as money spent. The issue is whether it will be spent on consumer goods or business purchases or government expenditures.
Even if the particular dollars saved as a result of a tax cut are held in a bank reserve or go into working capital at a company, they are typically invested and thus spent, plus the existence of these reserves is what frees up other dollars for investment activities.
Adequate investment is particularly important in an economic environment such as today, during which a primary restraint on hiring is a restricted availability of credit and investment.
There is nothing in this op-ed to indicate that the news has reached Princeton, but as a small businessman operating in the current business environment over the past two years, I’ve found that restraint on credit and investment has been the single most important restraint on our expansion.
Businesses have to maintain a margin of financial flexibility in case they hit hard times, experience business reversals, or have financing sources withdrawn. So when you are sitting in your office and you get hit every day by credit withdrawals – the tendency is to pull back. Suddenly the price of a temporary setback could be catastrophic. The whole dynamic of hiring and expanding changes: If an expansion works, one makes a little more money; if it doesn’t, there will be no investment or credit available to tide the business over to greater success in the future. So one better be ultra-cautious: One loses, as has been said, one’s “animal spirits.”
And those “spirits” will be unlikely to be revived by anything the government does to help the big banks or to make Small Business Administration loans more accessible or any other machination of the financial system.
The big source of investment capital for America’s small businesses is “friends and family” money and the willingness of entrepreneurs to defer gratification and borrow personally. This money does not come from the impoverished masses that, Professor Blinder says, rush out to spend their unemployment checks – it comes from people capable of that horrid bugaboo Professor Blinder so fears: People who can save and invest.
Like St. Augustine yearning for chastity – but not yet – Professor Blinder calls for “more stimulus in the short run with more budgetary restraint for the long run,” seemingly not realizing that the confidence of business will never be earned by making lots of promises that future leaders must keep.