Economic Stimulation

Economic stimulation projects do not always work, but often they do. The problem is that policies that work, but still be morally wrong. Bad policies can have good outcomes. When assessing any economic proposal, the most important issue to assess is its morality. Policies that are morally flawed may have short term benefits, but in the long term they will lead to further harm.

There are lots of things wrong in the US economy.

• Households have taken on too much debt.
• House prices have been pushed too high.
• Too many houses have been built in many places
• Many business have been poorly run (eg GM, Chrysler, AIG)
• Banks made too many loans to too many people that could not afford them.
• Banks have been too highly leveraged.
• Bankers have depleted capital by creaming off large profits and bonuses.
• Some banks have lost all their inadequate capital.
• The banking system is seriously flawed (see Bank Loans and Deposits).
• The Fed over stimulated the economy after the tech wreck in 2000.
• The Fed over inflated during the IT boom.
• The Fed exacerbated the housing boom.
• Households consumed more they could afford.
• Businesses have produced stuff that no one wants.
• Rating companies under- estimated the value risk of default on some assets.
• Banks and investment funds brought asset backed securities and collateralised debt obligations that were not back by solid assets.

Many of these actions were immoral. Most involved foolishness and folly, arising from arrogance and hubris. Government stimulation can cover the symptoms of these problems, but does not deal with the underlying moral issues. The only solution to these problems is a good does of repentance followed by and change in actions and behaviour.

Stimulating a stressed and distorted economy is like drinking whiskey to cure a hangover. It may bring temporary relief, but it does not deal with the short-term foolishness and long-term immorality.

The quantitative easing recently adopted by the Fed operates in the same way as criminal counterfeiting of currency. The difference is that the initial benefit under quantitative easing the initial benefit goes to businesses, whereas under counterfeiting the initial benefit goes to the crooks. Otherwise, the two methods are morally equivalent.

Stimulation Projects

“Stimulate the Economy” is the mantra of modern governments and economists. They see thousands of people unemployed and think that getting them working would increase production, making everyone better off. An endless range of programmes are developed for building roads, painting schools and storing medical records on computer files.

These stimulation projects have several problems.

1. The people who are unemployed often do not have the skills needed by the stimulation projects. Creating jobs for road builders is pointless if the unemployed are burger flippers.
2. Some labourers will be needed for many stimulation projects, but the success of the project will depend on managers and skilled staff that are not available among the unemployed. Competing for these may create problems for other viable businesses.
3. Stimulation projects need capital equipment as well as labour. If the government purchases the capital equipment needed, other more efficient users of that capital might be squeezed out.
4. Stimulation projects tend to channel resources to the more inefficient operations. The most efficient businesses are two busy to be worried about chasing after government projects. The ones that have the time to scream for government aid will generally be the more efficient businesses. Government stimulation projects often prop up the weaker parts of the economy.