Monday, December 14, 2009


 I was going to title this post; Stimulus Follies, since that's what the dog and pony show we call politics in the U.S.A. has devolved in to. But this way I get to use a nice metaphoric image to help make my point.

The conservatives among us declare, with great huffing and puffing, that the first stimulus was bad and any further Federal stimulus plans will be worse. "Government can't create wealth," they puff, "only the private sector can create wealth," they huff, and, of course the tag line...wait for it..."we must cut taxes!" All very tiring and, for want of a better term, wrong.

Okay, not Econ. 101 wrong. More like real world wrong. This argument, that governments can't create wealth, is, it seems to me, based upon a single transaction view of the economy. The problem with that view is that real economies consist of multiple transactions. Let me explain.

In the single transaction model the government, with money from the stimulus package, let's say orders signs to be put up on road projects funded by the self same stimulus. (I've addressed this before here, so I'm not going to repeat that post. Go look if you're curious.) That's it. No wealth was created, just moved around. Taxes collected from John Doe (actually lots of John Does) are redistributed to Acme Sign Co. End of transaction. No wealth created here. Move along, nothing to see. Oh, and since this is a single transaction Acme can't count on additional orders later, so it sure wouldn't do to hire any more workers. Stimulus plan failure at it's worst.

In the real world model, those redistributed tax dollars do something else. They spread out. The sign companies vendors get some. The workers and truck drivers and paint makers all get some and then they spend it on gas or Christmas presents or whatever. And each of those transactions are TAXABLE EVENTS! Yep, the money that John Doe paid in taxes, that was then redistributed by the evil socialist government, is now being paid in taxes by all of the people and companies on down the chain. And we are to believe that none of that earning and spending and tax paying created any real wealth anywhere down the line. Really?

Let's say that I see an opportunity to start a business making nuts and bolts just like the ones used to hang road signs. The conservative position is that, since I invested in the business, even if I use borrowed money, real wealth creation occurs when I do business. That is, when I buy materials and do something to those materials so that I can sell a product, that creates wealth. But in the big scheme of things, do I, my workers, my vendors or my customers care that the original dollars for sign bolts came from the government? I can start my business because the government is spending, not in spite of it.

Look at the mother of all government stimulus actions; WWII. The Federal government went way into debt to buy guns and tanks and planes and bombs and all of the other things from the atom bombs to socks needed to fight a two front war. In the process many new and never before thought of companies were created. Huge fortunes were made and the post war economy has resulted in the the incredible technological world we now live in. Trust me, the war and its spending created lots of wealth, in every sense of the term.

Lets try a thought experiment. You've been stranded in the desert by a car break down. After a very hot dry day without water you come upon an old hand pump next to an abandoned farm house. Standing next to the pump is a (closed) quart jar of water. What do you do? It seems to me that the conservative position on wealth creation offers a clue. If we view the pump as the government and the jar of water as tax dollars, the conservative response would be to drink the damn water. Since the pump (government) can never really create water (wealth) the only logical thing to do is drink the water and move on, hoping that more water will be found tomorrow.

A better approach might be to use the water in the jar to prime the pump. For those too young or too urban to understand the reference, it goes like this. Old fashioned hand water pumps had very sloppy tolerances. The parts didn't fit tight to each other. If they did you probably couldn't pump water by hand. Anyway, the water would drain past the pump piston, made of a material that would swell when wet so as to create a suction, the piston would dry out and the pump would stop pumping. It was pretty common to leave a jar or can of water near the pump so that the next time water was needed one could pour water into the pump housing, wetting the piston so that it sealed the tube creating a suction and allowing the water to be raised from below. This is called priming the pump.

In our current predicament the conservative would have us believe that since the pump itself can never create water we should drink away. But I think it's clear that even if stimulus moneys create no wealth at first, subsequent transactions do create real wealth. The government just needs to prime the pump.   

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