The Leaky Economy

It’s a pretty standard course of action these days that when the US economy gets in trouble, the government starts ladling out ‘stimulus’ money. This ‘stimulus’ (whether in the form of direct payments, tax breaks, or low interest rates) is supposed to jump-start the economy and create jobs. The idea is that creating demand for products (either from consumers or other businesses) will encourage companies to hire people to meet that demand. Increase demand, increase production, create jobs. Seems straightforward. Unfortunately, the borders of the US economy are porous.

That was not always the case. Between WWII and 1990, it took about eight months for the jobs lost in a recession to be recovered. Job recovery from the 1990 recession took 23 months. Job recovery from the 2001 recession took 36 months. We’re still waiting on the current recession.

The reason behind these ‘jobless recoveries,’ I think, is that in our globalized economy the demand created by stimulus spending no longer has to be met by workers in the US. The stimulus money basically leaks out of the US and stimulates economies all over the world. Imagine a colander in a sink. You keep pouring water into the colander, but it never gets full. Not until the entire sink is full enough of water to raise the level in the colander.

That is the situation we have when the government tries to ‘stimulate’ the US economy. The money pours out into the global economy as fast as they can pour it in. They’re not really stimulating the US economy; they’re stimulating the entire planet’s economy, which takes a lot longer and a whole lot more money.

And so we get ‘jobless’ recoveries. As the global economy grows, these recoveries are going to take even longer, unless we drastically re-think how we go about managing our financial crises.

There seems to be three different ways the problem could be approached. (Well, four if you count “Don’t do anything,” which is the likeliest course of action.)

The social safety net could be strengthened so that there isn’t as much urgency to stimulate the economy. The downside of this is that increasing unemployment payments, and extending low-cost health care to the unemployed, would be expensive. The upside it that it would probably be less expensive than what we’re doing now.

The stimulus could be made more direct, to focus it on the US economy. That would require more direct government involvement, not just writing checks to consumers and businesses and hoping they do the right thing with the money. The government would have to directly put people to work, require that companies create their new jobs here in the US, that sort of thing. The downside is that government job programs are generally inefficient, and any government involvement in the economy causes some people to begin bleating, “Socialism!” The upside is that it would keep some of the money in the US economy.

Finally, we could make the borders of the US economy less porous. This would involve a small tariff, say about 5%; just enough to impose some friction on the money leaving the country. The downside is that it would annoy many of our foreign trade partners, who are used to having unfettered access to markets in the US, and many US companies which are used to being able to move parts of their operations overseas without restriction. The upside is that it would restore some of the competitive imbalance that US companies currently operate under, and keep many jobs here in the US.

I favor a mixed approach; strengthen the safety net for workers, and impose a small tariff on all imports. The tariff would go a long way towards paying for the safety net.

This would raise the cost of some goods, either directly in the case of imports, or indirectly in the case of companies having to maintain more expensive operations here in the States (as opposed to hiring people in China or Indonesia and importing their products), but with more jobs and money kept in the country people would be better able to afford the more expensive goods. NOT doing it will mean increased taxes to pay for all that stimulus money that is pouring out of our country, to benefit workers all around the world. We simply can’t afford that any longer (though that is exactly what the powers-that-be want to keep doing).

In either case we pay. This plan at least lets us pay each other.

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