A word from a real-world job cre­ator

The Washington Times Weekly - - Commentary -

As a job-cre­at­ing en­ter­preneur out here in the hin­ter­lands, I am amazed at the Key­ne­sian priests in Washington call­ing for more stim­u­lus fu­eled by debt.

“The Rev.” Paul Krug­man, “the Rev.” Robert Re­ich and their many co­horts ar­gue that the stim­u­lus was too small to off­set fall­ing ag­gre­gate de­mand and that the pre­scrip­tion for our lag­gard econ­omy is an­other, big­ger stim­u­lus.

Those who talk about Key­ne­sian eco­nomic the­ory think eco­nomic con­trac­tions are wors­ened and pro­longed be­cause con­sumers and busi­nesses hun­ker down in cau­tion, caus­ing ag­gre­gate de­mand to fall. We can all agree this has hap­pened.

Ac­cord­ing to the Key­ne­sians, the rem­edy for to­day’s eco­nomic prob­lem is for the fed­eral govern­ment, as the sin­gle big­gest ac­tor, to “prime the pump.” As govern­ment money starts to rip­ple through the econ­omy, con­sumers and busi­nesses will be en­cour­aged and cau­tiously re­spond with lim­ited in­creases of their own. Vroom! The eco­nomic en­gine steadily revs up in bil­lions of re­spon­sive steps un­til happy days are here again. This pump-prim­ing re­ac­tion is termed the “mul­ti­plier ef­fect.”

I think John May­nard Keynes would be hor­ri­fied at the slav­ish ad­her­ence to this sim­plis­tic strat­egy by so many pol­i­cy­mak­ers and eco­nomic thinkers, as his the­ory was much more com­plex.

This think­ing might be cor­rect un­der cir­cum­stances other than those in which we find our­selves.

If the ra­tio of our national debt to gross do­mes­tic prod­uct was low — say 25 per­cent — and the fed­eral govern­ment had run sur­pluses be­fore the down­turn, this col­lege fresh­man­level Key­ne­sian anal­y­sis would have great weight. Put an­other way, if Un­cle Sam were a rock- solid fi­nan­cial en­tity with low debt to value and he had ju­di­ciously used debt for cap­i­tal im­prove­ments that were ac­cre­tive in value, as the big­gest dog on the porch, a stim­u­lus might work.

But with a national debt of more than $14 tril­lion and un­funded, fu­ture “off the books” debt of So­cial Se­cu­rity and Medi­care com­bined at $104 tril­lion in present value, ac­cord­ing to the Dal­las Fed­eral Re­serve, Un­cle Sam ain’t the man he used to be.

This in turn makes Amer­i­can busi­nesses that are sit­ting on a pile of cash fo­cus on delever­ag­ing.

The Amer­i­can consumer is do­ing the same.

In fact, from where I sit, it ap­pears as though ev­ery­one ex­cept Un­cle Sam is work­ing like mad to strengthen his bal­ance sheets.

The le­git­i­mate fear across the coun­try is that Washington’s re­fusal to join our com­mon- sense pa­rade will re­sult in higher taxes, more reg­u­la­tions, more in­fla­tion and Ja­pane­ses­tyle stagfla­tion.

In other words, Washington’s at­tempts at stim­u­lus through spend­ing are hav­ing the op­po­site ef­fect.

Busi­nesses and con­sumers stay hun­kered down.

I know this is coun­ter­in­tu­itive to the col­lege-fresh­man Key­ne­sian anal­y­sis from above, but as a busi­ness owner, I can tell you an additional stim­u­lus would cre­ate more fear and fur­ther dampen de­mand in the pri­vate sec­tor.

Keynes was cor­rect in fo­cus­ing on ag­gre­gate de­mand as crit­i­cal, but the con­fi­dence con­text and po­ten­tial be­hav­ior re­sponses have to be con­sid­ered, and that re­quires real-world, Main Street knowl­edge — not just text­book the­ory. In this environment, if the fed­eral govern­ment an­nounced a real road map to fis­cal sound­ness, the im­pact would be truly stim­u­lat­ing.

If Amer­i­can busi­nesses and con­sumers saw that Washington was re­ally cut­ting, not just re­duc­ing fu­ture in­creases, there would be tremen­dous re­lief and an in­crease in con­fi­dence across the coun­try. Job cre­ators would sing “hal­lelu­jah”; they would get off their wal­lets, start hir­ing, and then you’d see that Key­ne­sian mul­ti­plier kick in.

Modern Key­ne­sians suf­fer from the mis­guided no­tion that govern­ment is the great en­gine that will re­store our econ­omy to pros­per­ity.

In fact, the great en­gine is a di­verse sys­tem of pri­vate cit­i­zens anx­ious to go to work to pro­vide for their fam­i­lies and build their busi­nesses.

Mike Whalen is the founder of Heart of Amer­ica Group, which owns and op­er­ates ho­tels and restau­rants. He is a mem­ber of the Job Cre­ators Al­liance and is pol­icy chair­man for the National Cen­ter for Pol­icy Anal­y­sis.

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