Commentary

Stop Digging! – A Criticism of Economic Stimulus

Over the past two decades, the U.S. has shifted from a nation of producers and savers to one of shoppers and spendthrifts. Now, our collective recklessness is plunging our economy into its darkest period since the Great Depression. It’s time for politicians to create policies that promote fiscal responsibility as opposed to ones that encourage the assumption of more debt. This means ending the obsession with the restoration of credit and the resuscitation of dying industries, and instead shifting resources toward repairing what we already have – including everything from shoddy loans to poorly built cars and homes.

The unfolding economic calamity is panicking the political set and Washington is trying to breath new life into a dying, completely unsustainable system. With flailing hands and eyes focused on the polls, they have cobbled together massive financial bailouts of the banking and auto industries, and last week passed an enormous economic stimulus package – all designed to jump-start the economy. Americans do not need to consume; they need to save. Inefficient industries need to be allowed to die. Banks need to attract depositors and heal their balance sheets and the last thing they need to do is expand their loan books as the economy sheds jobs.

Let us start with the consumer. Over the past few years, during the inflation of the housing bubble, millions of Americans piled on debt to fill over-valued homes with non-essential goods, and their leisure time with expensive, yet non-vital services. Yet Washington seems determined to encourage Americans to borrow more so they can cram more stuff into those white elephant homes. The capitol’s insulated denizens have a completely unhealthy obsession with bank lending and credit creation. It is both irrational and destructive to encourage the same reckless behavior that caused this mess in order to solve it.

The auto and homebuilding industries that gobbled at the credit boom’s trough must be allowed to starve now, if that is their natural destiny. Before you conclude that I am utterly bereft of compassion, please hear me out. There was a glut in both auto and home construction – we do not need to resume peak production. Furthermore, the cars made by domestic producers were poorly built and inefficient and so were many of the homes thrown together during the giddy, delusional days of the housing bubble. Instead of building more low quality cars and homes, the focus should be on fixing what is already owned, and creating new units of higher quality at lower volumes. New businesses, better suited to address relevant demands, could hire the workers released by dying auto and homebuilders to fulfill these needs.

The American economy experienced a prolonged period of false prosperity. Over the past several years, with incomes stagnant people borrowed to maintain and in many cases improve, their standard of living. It is not useful to pin the blame for this on one segment of the population or another. What is essential is to admit that America’s private and public sectors have lived well beyond their means for far too long. The economy has to contract after such a reckless orgy of debt-fueled spending. Politicians should make sure their constituents’ basic needs are met, and devise meaningful solutions that will meet the challenges America faces in the years ahead. Borrowing more money to preserve terminally ill businesses on life support and encouraging unhealthy ones to engage in the same unhealthy practices only prolongs the day of reckoning.

As for the banks, they need time to heal. Think of them as addicts; led astray from their true purpose by the intoxicating effects of the easy money raked in peddling loans to unqualified borrowers during the credit boom. Bad banks should be nationalized, and naughty bankers should be fitted for pinstriped penitentiary jumpsuits. But, America needs a healthy banking system in order to channel savings into investment. Almost everyone wants to see bankers pay for their destructive ways, but there is little value damning the entire industry to ruin in the pursuit of mob justice. This means banks need deposits from the American public which is just fine because people need to save, not spend.

Restoring fiscal health to banks and to consumers will take time – the key is to ignore the panic and doom emanating from Washington DC. (Ironically, it is coming loudest from those who still have high-paying jobs with excellent health and pension benefits.) We can’t dig our way out of this hole by piling on debt to fund past mistakes. Instead, let’s build a pile of savings that will eventually elevate us to the point where we see daylight again.

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