A Not-So-Stimulating Post

When I got my first Palm Pilot many years ago, it had a little "Sim-city" game on it. The idea of the game is to build a city from scratch. The city's growth depends on factors such as amenities, infrastructure and taxation. I very quickly figured out how to game the system and was able to achieve whatever level of success I wished. The key was taxes. If I lowered taxes to some insanely low rate, tons of people moved into my city. I found that I could then hike taxes to some insanely high rate for short periods of time and collect A LOT of money while everyone moved away over the course of several weeks. By then I had enough capital to add features to my city and drop the tax rate once again, attracting even more new citizens than before, only to raise taxes all over again. The game became meaningless for me and I never played it again. 

In reality, citizens would probably not behave in the same manner as the simulation, but the lesson remains the same: there is an optimal balance between a fair tax rate and the public services rendered in return. That balance was boring in my game, as my city only grew at a slow and steady pace, which is what led me to the extreme taxation tactics.

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YourDictionary.com defines "stimulus" as "something that rouses or incites to action or increased action; incentive".

We've been inundated with stimulus-related news over the past several days and weeks. Considering only the recent $787 billion "stimulus" package that was signed into law this past week, if the tax burden were spread equally among all inhabitants of the United States, we would each be forking over about $2,600 to fund the cost. I have five people in my family, so that's $13,000. Of course, we all know that the burden will not be shared equally. In fact, many will not contribute anything whatsoever, yet those are some of the greatest beneficiaries of the new spending.

I say "spending" because that is how the bill (now the law) should have been termed. There is very little that is actually stimulating about it.

The Oregonian published a front-page graphic on Wednesday to highlight all of the "help" that we can expect from the new law. This is not a comprehensive list of the package.

• Tax breaks - $15 less taxes per week, or about $780/year
  
• Housing - An $8,000 tax credit for first-time home buyers
  
• Car - New car/truck buyers can deduct sales or excise taxes
  
• Energy - Up to a $1,500 tax credit for energy-efficient home upgrades
  
• Tuition - $2,500 in tax credits to offset qualifying higher ed. expenses
  
• Unemployment - Extended benefits

My assertion that "spending" as an appropriate description is supported by this explanation from the Associated Press:

At its core, the legislation is designed to ease the worst economic recession in generations, and combines hundreds of billions of dollars in new spending with tax cuts. Much of the money would go for victims of the recession in the form of food stamps, unemployment compensation and health care. There are funds, as well, for construction of highways and bridges.

//news.yahoo.com/s/ap/congress_stimulus - as of 2/6/09 6:10 PM

The emphasis is mine. Here comes my trademark rant:

First off, I am not calling into question the need for tax credits or social services or even unemployment benefits. That is not the issue at hand - which is exactly why those pieces should not have been included in a "stimulus" bill - they do not stimulate anything. They are spending programs - in fact, they are existing spending programs with existing funding methods. They do not belong in a stimulus bill. 

Suppose for a moment that the food stamp program were funded such that every single resident participated. Would that help grocers sell more food? Would it do anything at all to stimulate the economy?

Similarly, consider unemployment funding - paying people to not work, not produce, not contribute to GDP.

Every dollar that goes into any of these programs comes out of the pocket of the taxpayer. Take a dollar from me and give it to someone in the form of a food stamp. Almost. You still need to cover the administrative costs of the program. Take a dollar from me and give someone $0.85 worth of food stamps. That is not stimulating.

Next we have the housing, new car, energy and education pieces. I'm still making payments towards my student loan. I was able to claim some tax credits while I was going to school and I can still write off the student loan interest. Why should I now pay up to $2,500 MORE for someone to go to school and ultimately compete for my job? What happened to Pell grants and Stafford loans? Why does the bill incentivize people to go to school and remove themselves from the workforce? Will that artificially drive the unemployment rate down and become a feather in someone's cap?

If someone can afford to buy a house, the deal can be done - despite what you may have read about frozen credit markets. Why should I pay someone $8,000 to buy the vacant house next-door? Why should I subsidize my neighbor's new car purchase? or his new air conditioner or windows?

Show me a person that goes out and purchases a new home or car due to the new "stimulus" benefit attached to each and I will show you a fool. Taxpayers paying for their neighbors to have new stuff is not stimulating. Aside from that $15 injection/week of new disposable income from "millions of workers", it is a BIG stretch to call most parts of that shameful bill a "stimulus". 

Economic growth will come about through employment and productivity - not through welfare. When people work, they can afford to buy things like houses and cars and heat pumps. They can buy their own food and pay for their own textbooks.

$787 billion (remember, that is just one of the many "bailouts" thus far) could have been used to "rouse or incite" an unimaginable amount of real stimulus through lower taxes. I don't mind paying my fair share of taxes to live in this country. I'm talking about corporate taxation. Companies employ people. The stimulus could have been used to attract new business to the U.S., to encourage production increases, to employ more people.

Instead we've got anti-business solutions such as Sarbanes-Oxley and carbon credits. Can you really blame companies for outsourcing off-shore or moving their operations to more favorable environments?

If everyone worked for the government, it could not survive one month. For every dollar it pays out in a wage, it receives back just $0.15 from that employee's taxes (assumes 15% tax bracket). This is why government spending programs are not sustainable. This is why socialism always fails. The government must collect taxes from the private sector in order to survive. The larger the private sector, the more taxes there are for the government.

It's just like my Sim game.

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I don't really enjoy writing about this stuff. I'm just blowing off some steam after witnessing another huge decline in my retirement account this past week. 

The economy will eventually recover. There are a few signs already pointing in that direction. And when things do return to normal, you can bet certain people will be there to falsely accept the credit for said recovery. But the fact is, economic cycles are a natural occurrence. The government should never have interfered with the free markets. Now, instead of a pothole or two to navigate, we now have to cross Hell's Canyon on a questionable Indiana Jones-like rope bridge.