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.
A government, drunk on deficits and spending, promising to be prudent tomorrow, will be viewed with the same credibility as an alcoholic announcing a plan to go on one last bender this weekend and then be sober. Skepticism is the order of the day.
Professor Blinder chastises the Republicans for inconsistency in urging simultaneously that unemployment insurance not be extended further – which would decrease the deficit -- and that the Bush tax cuts be made permanent – which would increase the deficit.
Yet between these two disparate policies, there is a common thread. Both policies would increase the incentives to work, save, and invest. Unemployment insurance works as a 100 percent marginal tax on getting a job. Its existence and frequent public extensions communicates to people that Uncle Sam will bail you out in hard times so savings aren’t crucial.
Lower marginal tax rates not only make work more financially rewarding but also make investing more profitable. They also communicate – in a tangible way – that society values those who work, save, and produce and wants to encourage them to keep doing so.
In short, the Republican position, even if sometimes incoherently defended, sketches out the rough confines of a society where people are expected and encouraged to take care of themselves and their families, while being given the opportunity to do so, as the government leaves people with most of their money.
In contrast the positions of the Democrats to give out more unemployment insurance and raise taxes is laying out the confines of a different kind of society, in which the government takes care of everyone and taxes away the wealth, and, in doing so, the freedom that would allow people to take care of themselves.
Professor Blinder relies on econometric models for some of his article. Yet those models are not sensitive enough to ferret out what happens to a society when people start believing that entrepreneurialism and savings aren’t valued. The models don’t adjust quickly enough to reflect what happens when people start thinking the government will take care of things.
At one point toward the end of his article, Professor Blinder downplays conservative concerns over the disincentive to work that unemployment insurance creates: “As the unemployment rate rises, the disincentives that worry conservatives become less important because there are fewer jobs to find…” In this line, we see a true conflict of visions about the way the world works. Professor Blinder sees some fixed number of jobs out there and too many people fighting for them.
He thinks that businesses don’t hire more because there is not enough demand for their products. Yet this is an impoverished view of the motivations of entrepreneurs. In my own small business, not one of our products was launched with any known demand, but we believed in our products, and ourselves, and thought we would create the demand. This is not atypical.
When Sam Walton created his first supercenter, nobody in America was clamoring for this, and then it became the most successful retail format in the country. How many years of losses did Amazon.com absorb before demand caught up to the idea? There are no neighborhoods gathering petitions because they lack a pizza place or a great diner or a Chinese take-out – yet they open every day, mostly on the belief of entrepreneurs in themselves and the willingness of friends and family to back a worthy entrepreneur.
The comeuppance of the Democratic positions that Professor Blinder undertakes to defend is that the government, by taking more in taxes and divvying it up as it sees fit among the populace, reduces the sphere of economic activity from which entrepreneurs can draw sustenance. And that will both make society poorer and less free.
Jim Prevor is the founder and CEO of Phoenix Media Network, Inc., a business-to-business media company specializing in the food industry.