“LET’S SPEND IT, LEND IT, SEND IT ROLLING ALONG!” PART II

8/19/10

On today’s edition of the Noon Business Hour on WBBM Newsradio 78 in Chicago, economist Irwin Kellner proposed that the government distribute $3,000 gift cards to every household in the country in order to stimulate spending. This money could not be saved or used to pay down a mortgage or credit card debt; it would have to be spent. Dr. Kellner is not alone in making this suggestion. Many normally clear thinking people consider this a good idea. The first name that comes to mind for me is Bruce Williams, one of the great, and original, radio talk show hosts who time, unfortunately, seems to have passed by, probably because he talks sense about topics that matter and eschews the current trend toward throwing read meat to the yahoos and calling the resulting cacophony “intelligent talk.” But I digress. Mr. Williams suggested a Kellneresque scheme (or perhaps Dr. Kellner proposed a Williamsesque scheme) over a year ago.

Such a proposal is both philosophical and economic nonsense for a number of reasons. First, anyone who has even a modicum of respect for limiting the role of government should find the idea of the government handing out money willy-nilly, making dependents, to one extent or another, of all of us beyond repugnant. Some might argue that we have to dispense with philosophical niceties when the defecatory product is hitting the wind propulsion device. This argument amounts to something like “Forget philosophy, forget history, do something expedient!” Such a sentiment is not unfamiliar to the students of history, and the results of giving in to such an impulse have not been stellar. Vietnam, taking us off the gold standard, and crossing the Yalu River come immediately to mind, but one does not have to look very hard for the disastrous consequences of indulging expediency.

Second, even though in the short run a resurgence of spending might give our economy a shot in the arm, that shot will be the economic equivalent of a shot of heroin for an addict going through withdrawal. As I have said countless time on this blog and elsewhere, our problem as a nation is not that we spend too little but that we save too little and spend too much. Promoting the notion that using a government handout to pay down debt or start an investment portfolio is somehow nefarious and deleterious and to be avoided at all costs is to deny this obvious economic reality, or to acknowledge it and say, once again, that we will deal with it in the future. We have to learn to save; to have the government come in and tell us that what we need to do is reacquaint ourselves with some very dyspeptic habits that, at best, lie dormant for a time, and get out there and start excreting money we don’t have is beyond folly. If it takes a prolongation of this recession to teach us the lessons of thrift, we’ll be better off in the long run; if we don’t learn to save again our nation is finished as an economic going concern.

Third, Dr. Kellner says that people might use the free money to, among other things, go to the doctor or make a down payment on a car. Yeah, they might. But they are at least as likely to go out and make a big ticket electronic purchase or buy some other things made overseas, probably in China but maybe somewhere in Southeast Asia. While this would have some ancillary benefits for the U.S. economy, primarily through stimulating activity among retailers, most of the benefit will be felt overseas. Further, since we won’t raise taxes or otherwise cut spending to finance this downpour of dollars, we will have to borrow the money, mostly, if current patterns hold, from overseas.

So what will have been accomplished? The government will borrow money from, say, China and give it to us. We will use it to buy Chinese products. So the Chinese lend us money, we send it back to them, and we thus owe the Chinese (or somebody) even more money than when this reshuffle started. This sounds like a wonderful solution to a problem that has its origins in too much debt and (probably, but not as directly) too little manufacturing and other meaningful economic activity in this country.

Remember when the first half of the Bush/Obama administration tried this when the recession was just starting, only they did it with tax rebates rather than debit cards. The program failed miserably at everything but adding to the deficit. One does not have to wonder why.