How are our elected leaders doing? Too early to tell. The economic environment’s complexity will take time to convey the results. But in looking for the answers, my evaluation criteria are becoming clearer. Good stimulus activity has a futuristic effect. Taxable profits can be generated into the future when capital is employed in productive ways. However, poorly employed capital allows waste and inefficiency to persist. Telling the two situations apart requires a macroeconomic spending refresher.
In an economy capital exists in two forms, those natural resources provided by the earth, and unspent money (the medium of exchange for the economy). In providing stimulus the government is borrowing money from its citizens, and people outside the country, to deploy it in ways that allow a profit to be earned, and promising to pay the money back. Hence, we as citizens must take the stimulus and earn profits that allows us to pay back the loans with interest. For me this test, at its core, separates creating resources, which generate incremental profits from those that replace, waste or destroy profits. Spending on highway maintenance, needs to be done, but is not stimulus. Creating highways, or replacing existing infrastructure with works that make new activities possible, is stimulus. Admittedly, the distinction can be fine when we are projecting future use. We need time to reveal the distinctions.
Education spending that directly or indirectly contributes to improved learning by the population is an excellent use of stimulus activity. However, the long time needed to identify resulting benefits can be difficult to measure. But little debate challenges the education’s goodness. Our debates center on either who should pay for education, or which knowledge should be taught.
Conversely, tax cuts are a trickier subject for me. First, fewer taxes clearly makes more money available to put into productive use—Generally a good thing. However, fewer wage taxes, must turn into lower wage expense requirements for additional profits to be generated. News organizations like to use the term productivity gains for this phenomenon. Nonetheless lower taxes that result in spending on some goods and service can be wasteful. When goods or services are not replaced by the previous owners—An indication of excessive supply—the future profits can be counted on by the expenditure. A bad result. A typical result when wage earners receive unexpected disposable income.
So what are “goods or services” in excessive supply. Well a bridge to nowhere is excess supply. Build a bridge no one uses, and you have zero future profits from the bridge—Excess supply. Building a new bomb in peace time—Excessive supply. Because the bomb merely sits idle and generates no future profits then it is wasteful. War can be an economic stimulant for the winning country, but not the losing. Losing countries do not receive an economic boost. Future profit, in the sense of war, comes from access to new resources. You lose, no additional access. No economic gain. No future profits.
Where we are headed with the economic stimulus to be signed next week, I’m not sure. Already we know that the legislature went beyond stimulus and entered into debt spending commitments. But one political party calling out the other on this flaw is a matter of perspective. When I heard John McCain call this stimulus bill generational robbery, I laughed, until I remembered the Bush Administration’s debt run up. How anyone can definitively call either debt load up appropriate is perplexing. We need time to tell our fortune. But in the meantime, the economy needs each of us to earn a profit at something. Earning profits, not spending is the engine that drives an economy. I wish reporters would at least get this correct.