Economists like big words. It makes them feel smart. But you have known about counter-cyclical economics since you were a child:
“Seven years of great abundance are coming throughout the land of Egypt, but seven years of famine will follow them. Then all the abundance in Egypt will be forgotten, and the famine will ravage the land. The abundance in the land will not be remembered, because the famine that follows it will be so severe.
“Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.” (Exodus 41:29-36)
The idea that government should use the increased tax money during good years to help the people during the bad is what economists call “counter-cyclical,” that is, it works to make business cycles less painful. That is a good thing.
The way politicians usually work, however, is that during good years, they want to believe that those years will never end. Not only don’t they save the tax money that comes in, they borrow money against future taxes. When the business cycle turns down, those politicians suddenly don’t have the money and they either have to make really painful cuts in government or transfer the pain to the people by raising taxes. Both hurt the economy and hurt people. This approach is called “pro-cyclical” because this makes business cycles worse.
Unfortunately, we have had Congresses and Legislatures that have taken the pro-cyclical approach and we are feeling the pain now.
There is another approach: one can borrow money during good times and borrow even more money during bad times. Economists call this “Stupid.”
This exactly what has happened however. The Federal Government has borrowed about $17,000 in your future taxes ($67,000 if you are a family of 4) over the last 3 years to stimulate the economy. A fair argument can be made that however stupid it was that we got into that situation, we needed to do something. Fair enough. However, if we were going to borrow that much money, it should have really been able to help the North Carolina economy—at least until we started trying to pay it back. When you borrow money on a credit card, at least you expect to get the value of what you spent it on.
So why didn’t it?
Obama helped bankers, not people. For all his claims about being “for the people,” Obama bailed out the banks so they wouldn’t go under when people defaulted, rather than helping people not to default. The result was that banks survived (and ultimately paid back the bailout), but 3,000,000 homes went into foreclosure in 2010.
Your money was not invested in North Carolina. 2.6% of the stimulus money was spent in North Carolina according to recovery.gov (the official site for the recording stimulus money) creating 5,788 jobs (against 439,000 unemployed in this state). North Carolina received about $580 per person compared to $22,823 per person for a Congressional District in California (CA-05) or $21,533 per person in Washington, DC. Not exactly equal.
Only a small percentage went to jobs. According to recovery.gov (the official government source for stimulus money spending), $217,771,973,710 has gone into the stimulus and it reports that 154,600 jobs have been created. That works out to $1.4 Million per job. Obviously, a very small part of that money went into wages. While this isn’t tracked so there isn’t an exact number, reading through many of the grants, it is clear that this money went into buying things—often electronics.
The money wasn’t spent fast enough. To be effective as a stimulus, money needs to be added to the economy at the right pace. Obama tried to imitate a FDR program, the CCC. But the CCC was started in the middle of the depression when people were already out of work. When Obama started the stimulus, he had the opportunity to stop people from losing their jobs in the first place.
It didn’t solve the real problem. The stimulus was about buying time to fix the problem. The problem was that American wages peaked in 1998. The problem was that middle class jobs were being sent to India. The problem was that Chinese currency manipulation was sucking the life out of American manufacturing, especially out of smaller craftsman manufacturing like was found in North Carolina. The problem was that debt was soaring at all levels of society, business, and government as everyone tried to make ends meet. International Monetary Fund economists started writing about the danger in 2004, but U.S. political economists continued to declare that the fundamentals were sound even during 2008 when the market was in free fall. Even today, many of them won’t admit that there was a problem.
Ok, but what do we do now? We can’t fix what was done.
Much of the fix has to happen at the Federal level and I am not running for Federal office. However, at that level they need to focus on fundamentals: they need to stop talking about a “strong dollar” philosophy and move to a “neutral dollar” to counter currency manipulation. They need to stop favoring futile big business interests ambitions to gain trade access in Asia and stop sacrificing American interests in jobs to get that access. They need to work on fair taxes to reduce the excess investment income that is creating investment bubbles like the dot-com bust and the mortgage fiasco. They need to regain control over big finance both from the perspective of ethics and responsibility and also reduce its drain on GDP. They need to evaluate tax systems that don’t double tax our exports so that American manufacturing becomes more competitive overseas.
What do we do in North Carolina?
We need to focus on fair markets. There is a myth that the free market system means a system that favors business over consumer and big business over small business, employer over employee. That is exactly the opposite of a free market. A free market, by definition, needs to be fair, balanced and neutral. There needs to be real penalties for cheating. The markets need to be open for new businesses. Businesses that play fair with their employees and customers need to be encouraged and not disadvantaged.
We need to focus on people. One of the definitions of economics is the science of organizing people’s labor and production. Often that part of economics is forgotten about in favor of the monetary aspects. That is unfortunate. Unemployed workers sitting idle with critical skills and knowledge deteriorating is a highly inefficient use of labor. Now is the time for CCC type programs that take unemployed workers and give them something useful to do to keep their skills up until they can find more productive work. Because of state budget issues, we need to do this within existing programs.
Government needs to focus on being efficient for business and user. “Government efficiency” is often measured by keeping down program cost. What this often translates to is transferring the cost and pain to the users of government services. It costs money for state agencies to be open more hours, to coordinate services better, to be less bureaucratic. “Big Government” can mean a government that is too intrusive and financially irresponsible. “Big Government” can also mean a government that is simply clumsy and difficult to work with. When these costs are transferred to businesses they fall proportionally smaller businesses and startups.
The state needs to provide infrastructure. Government cannot create a good economy. Government can help create and maintain an environment where business and employment can flourish. There are critical state services that business needs to have in place: roads, schools, courts, law enforcement, and a score of other government functions that allow business to function. North Carolina is blessed geographically and demographically but has struggled to take advantage of those assets.
And, yes, the state needs to build counter-cyclical economics for future cycles.