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November 28, 2008

EXPANDING ON A THEME - A DIET, NOT SURGERY

Responding to this article by NRO's Jonah Goldberg:

Hi JG, longtime NR and NRO reader, owner of LF, rare commenter.

I'm an executive-level manager of a medium-sized private business, with customers in manufacturing (including auto), airline, petrochemical, military and food processing industries in North America and Europe. We work in the "lean enterpise" sector of supply chain management systems. I'm a devotee' of Thomas Sowell and Julian Simon.

You write:

But rather than blow money on a lavish reenactment of the New Deal, or continue bailing out undeserving corporations, why not really think outside the box? Rep. Louie Gohmert (R., Texas) suggests an across-the-board reprieve on paying 2008 income taxes. This would leave an extra $1.2 trillion in the hands of Americans, who are the best stewards of their own money. Nobel Prize-winning economist Robert Mundell proposes a one-year moratorium on corporate income taxes in order to stimulate investment, job creation and the like. That wouldn’t be as popular, for understandable reasons.

The details can be negotiated, but this sort of approach would certainly create more jobs and spur more consumer demand than paying for a lot of asphalt. It would buy a lot more prosperity than any corporate bailout. Politically, it could buy Obama and Congress a year to formulate a serious tax-reform proposal. And — here’s the amazing part — it would be much cheaper than what we’ve spent already.

These are loopholes by any other name, and still well inside the box. Real stimulation requires permanent changes, so that individuals and corporations can make long-term plans, and investors can fund those plans with some confidence. These alternate "stimulus" solutions, Reganesque and politically savvy though they sound, merely delay the inevitable final reckoning.


Like the Reid-Pelosi-Bush "stimulus" plan this spring, or the various corporate loopholes already out there, these gimmick changes would quickly get priced into short term cash flows, added to the national debt, and then vanish, with no real effect.  Actually, the snap-back effect of individuals and corporations cramming earnings into their "free" year and delaying losses so they could apply them to the following year's taxes, would be similar to what just happened with the housing bubble. In a word, ugly.

If we knew we were not going to pay personal income taxes next year, we'd arrange our costs and earnings to ensure that the corporation made $0, thereby paying no tax at all. Also, we would still hire, build, price and manage based on sales and margins, just like we do now, regardless of tax policy. Personally I'd take my earnings in tax-free cash and put them in a mattress until I knew which way the wind was going to shift on the long term treatment of income, then invest appropriately from there. Why pay down debt with cash if the government might still bail you out?

Your ideas are similar to the 1,001 emails I've received with variations on the "give the bailout money to the people" plans. It's flat-out inflation through debt and devaluation. Zimbabwe comes to America.

An example: Over the last 4-5 years, carmakers goosed up sales with 0% financing and "employee" pricing (stimulus plans). Coupled with easy cash from refinancing on inflated home equity, people bought more cars than they needed. So now there are more cars out in the market than people need, and the long term trend line suggests that the market will need 18-24 months to absorb the "bought up" excess. No amount of stimulus or pricing will change that, only delay or extend the reckoning.

Stimulus plans (of any stripe) are like throwing Cosmo a milk bone. (NB: Cosmo is Goldberg's beloved dog, who occupies the same space in his family as Brian Griffin does in his).  It disappears down his gullet, and he looks right back up for another one, acting all cute and loving because that's what got him his last one. The more you give him, the more he expects. Doesn't really matter when you give them, or from what hand, or how many. Milk bones come from Jonah. Fine and natural for the human-to-dog interface, disastrous for human-to-government.

Don't train the market and taxpayers to wait for the government to signal what to do. This is what happens with the Fed watchers, who wait in silent prayer for signals of rate changes leading up to each meeting. We want to tamp down the amplitude of the business cycle wavelength, not couple it to the Pavlovian quirks of hedge funders and day traders

That's why we want to concentrate on permanent tax cuts, caps on government size and spending, and limits to government power. Neither bailing-out Citicorp nor forgiving taxes does that. Stimulus plans of any kind raise false hopes of better days ahead, and rather than buying time, worsen the problem, further eroding whatever small amount of credibility the government has left.

What we really need is policy - clear, fixed, grounded in reality, dependable over the long haul. Stop changing rates. Set the money supply based on core business activity, and let the fat melt out of the system naturally.

Will Obama do this? Nope. He brought in the same plastic surgeons who were in charge before, except now they are recommending liposuction and tummy tucks instead of boob and nose jobs. What we need are dietitians and nutritionists. We need Jack LaLanne, not Julian McMahon. We need a diet, not surgery. It took years to get here, and we need to tell people to plan for years to get out. I hope Volker remembers that from the 80's, and doesn't let Obama use him as a beard for building a Borg.

Just my $.02, not adjusted for inflation. Hope I get to see you speak sometime - Southern California is not often on your trail.

Best, JBD.

Posted by: JBD at 05:22 PM | No Comments | Add Comment
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