Lawrence Summers’ Stimulus Suggestions Mostly Make Sense

I’m not sure how often I’ve agreed with Lawrence Summers, if ever, but Monday he said something I gave a nod to, sort of. While I also believe (like Larry) that the government should not be putting the vulnerable near-term recovery at risk for measures to prevent medium to long-term strife, nor for the sake of preventing the next criminally concocted crisis, I disagree with the means Mr. Summers suggests to some degree. And while Larry and too many economists discount inflation, I see commodity prices feeding through to the American consumer today in a dangerous way. That said, I mostly concur with his argument.

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Lawrence Summers’ Stimulus Suggestions Mostly Make Sense

In a Financial Times piece, Larry Summers wrote that the government should extend and expand the payroll tax cut, and also apply it to employers. Paraphrasing with freedom, the renowned economist and Presidential-favorite financial guru said the U.S. should not be so hasty in its efforts to prevent the next crisis if it is at the cost of sustaining a still vulnerable recovery. That’s where I agree with Summers. Where we disagree to an extent is in the means toward stimulating the economy, but again, I only disagree slightly. That said, the means to stimulating the American economy best is the most important topic we can discuss today.

Larry says we should continue what we’ve been doing with regard to payroll tax cuts, which - oh by the way – have not really worked. Larry says they, combined with unemployment benefit extensions have prevented depression, and I agree as far as the extensions go. He says we should extend and expand payroll tax credits. I say, yes to this, but only to the poor and middle classes. That’s because what I see on the street is a little different than what Larry sees at Harvard. I see the wealthiest Americans getting a tax break, while welfare recipients get audited and told to pay back benefits due to “administrative error.” Also, folks with jobs aren’t the main problem here. They have continued working through the crisis and have continued saving and spending, and needless to say, avoiding foreclosure. However, their increased spending might help create jobs, and thus money is expected to beget money.

The reasoning behind the tax cut is the hope that the beneficiaries will drive the generation of more jobs via their successes and their spread of good cheer, but that just doesn’t perfectly cut it for me. There’s no guarantee that the corporations Larry wants to make richer will use that money to create jobs. In fact, the history of and the mandate of every corporation is to provide maximum return to shareholders. That does not always coincide with taking on risk through business expansion in a less than fertile economic environment. Instead, many and most corporations have hoarded cash, and lately they’ve started buying other firms. In the past, they were moving their manufacturing to China with their money, and who cares about the unionized American worker. We have those unions for very good reason and we will always need unions to ensure fair play.

FYI, the M&A activity we speak of doesn’t always translate into a busy labor force either. Rather, it often leads to the cutting of redundant workforce. Oh yes, when a big company buys a small one, it can take a solid business and scale it faster, and this could create jobs. But the immediate result of a merger is usually the synergistic economic value gained by downsizing redundancy. So my point is that by extending the payroll tax to employers, you’re not necessarily going to cure America’s ills. The truth is that recent “trickle down” economic aids have ended up in blockages.

If you extend tax breaks to small businesses only, well now you’re talking. This is where I would limit the breaks to corporations. The small businessman’s top goals are:

• Grow
• Expand Profitability
• Repay Debt

The small businessman will put money to its best use for both his business dreams and for America. So you can go ahead and give small businesses a tax break and encourage them to grow inside the U.S., but Exxon Mobil (NYSE: XOM) doesn’t need that extra hand down. Hey, there’s an idea, pay for it by calling back the subsidies that currently support the mega-rich energy companies.

Speaking of energy, we could go ahead and give alternative energy more lift and kill two birds with one stone. But Larry says that simply creating supply does not necessarily generate demand. It’s a good point again, but the global trend is clearly toward alternative energy, and so America has a chance to be at the forefront of another industrial revolution if it makes the right moves now, in my view. The next viable new energy infrastructure that takes hold should be at least as important as the carbon based industries, with less pain administered to our one and only earth.

And instead of mailing out $300 checks to every American, again including the uber-wealthy and the fully employed, our never-swift government might instead target efforts that can inspire the development and improve the competitiveness of important new industry. Instead of filling already full pockets, flood funds into alternative energy R&D; I mean drown the best ideas in it. Hey, it will cost less, and might actually provide a huge return.

But, even if we invent the next oil, we can’t make it work for us without demanding fair play from the Chinese. So we have to play hardball with China before we lose all leverage and find ourselves competing with a larger cheater who everyone does business with instead of us. Larry makes some supportive points here as well, mostly cheering the Obama Administration’s efforts to improve trade. I say also, where we need income, do the things necessary to increase tourism, and supplant softer domestic spending with foreign dough. And we must not lose one American business to foreign land due to over-regulation nor our greedy litigious nature.

Where Larry and I agree most is on the subject of misplaced austerity. Most of what the government is doing to prevent future bailouts and corruption makes sense. However, Larry and I agree that pushing forward infrastructure projects while the most severely hit industry, construction, endures the greatest degree of unemployment, makes little sense. We need to get construction workers back on the job collecting paychecks instead of unemployment checks. Infrastructure projects got us out of the Great Depression and would do us well today also. While states cannot fund them, we might need to expand funds under federal legislation. Finally, we need to prevent the layoffs of police, fireman and teachers. These are the blue collar civil servants who drive the wheels of the American economy. And, we need to find it within our hearts, to forgive Wall Street, to fix the MBS industry, to make it work again toward a more failsafe way of helping our brothers achieve the American dream. That will put the second hardest hit American industry, financial services, back on the road to recovery along with construction, and re-employ millions of Americans.

We do that, and we fill up the restaurants and stores and the hotels and airplanes, and the American way of life is renewed, though strengthened. It feels like a pipedream at this point, I admit, but these are the directions we need to be working toward. We need not be fighting a political battle within our own trenches (the debt ceiling and other issues), while taking on heavy fire from an enemy that is closing in (the deadline). Both Republicans and Democrats need to impose a superficial deadline well-ahead of August, and come to some resolution then, and lead not the credit rating agencies to their greatest blunder yet, downgrading America. There’s a lot to say, given the topic Larry’s written about, and it cannot be covered in one blog post nor article. Stay tuned…



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