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Dear President Elect Obama...

About Jim Simpson
Mr. Simpson is an Economist, former OMB Budget Examiner.

Jim Simpson
Dear President Elect Obama...
January 14, 2009

I understand that our economy is in rough shape. The toxic combination of decades of excessive entitlement spending, regulatory redistribution, bailouts and risk guarantees created an American culture that discounts risk. The resulting financial crisis has brought with it a period of unprecedented uncertainty and a downturn which, though severe, is not, nor does it have to be as severe as you are predicting.


I understand you were born, raised and became thoroughly entrenched in Chicago politics. Indeed it is likely the main reason we are calling you "President Elect” today. I am probably tilting at windmills, but as you well know, "hope” springs eternal in the hearts of all men. With that in mind, please hear what I have to say.


For better or for worse, rightly or wrongly, the American people have given you and Congressional Democrats a rare opportunity to rule with little fear of challenge, either from Republican politicians or the public at large. You have the vast majority of the national, even international news media, enthusiastically, perhaps one could even say fanatically, on your side; so they will doubtless continue to regale your leadership, regardless of whether it leads to success or calamity.


So you really have little to fear from any outcome, at least in terms of what will be said about it in the media outlets that most people see. In such an atmosphere you are no doubt tempted to do what politicians do best: make sweeping rhetorical promises while using the opportunity to go on a massive spending spree – entrenching yourself and your cronies for mutual political benefit. This is unfortunately what many Congressional Democrats and some Republicans have in mind when you toss out numbers like a $1 trillion "stimulus” package. It also sounds like what you are preparing to do with your dire warnings of apocalypse. It may soften up the populace for what you want to do, but is adding to the uncertainty and fear in an already jittery market. Please knock it off!


You have said that "At this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe." Even assuming you and Congress have the best of motives, a "hopey” assumption if ever there was one; if you intend to stimulate the economy mainly through government spending your idea is already headed for failure.


Government, by definition, takes. It does not produce. Government expenditure is by definition a zero sum game. With your $1 trillion proposal, either the government transfers $1 trillion from the productive private sector through taxation, which in-and-of-itself would have a catastrophic recessionary impact, (hint: don’t expire the Bush tax cuts just yet) or the government borrows that amount, removing funds from the investment stream that would otherwise be available for productive enterprises in the private sector. Either way, you are robbing Peter to pay Paul. It’s great to try to shore up the losers, but what happens to the winners?


It is important here to distinguish also between borrowing to provide a tax cut and borrowing for added government spending. Tax cuts go instantly into the private economy where they are put to productive use, so while there is a drain on the savings/investment pool, at least the proceeds are returning to the private sector. Government deficit spending may provide benefit over time, but usually is largely wasted either on pork projects or misapplied to ill-conceived policy fads. Benefits, if any ever accrue, are realized much later. And for that questionable result, you create more bureaucracy which must be funded into the foreseeable future. Whatever the case, it never produces the immediate economic stimulus of a tax cut.


The private economy is an engine of growth. Companies produce goods and services that people want and need to sustain their lives and be more comfortable and secure. As businesses thrive, the profits accrued generate still more business, more income, more jobs, more prosperity. Even the communists understand that prosperity derives only from growth in real (inflation adjusted) incomes. That only comes with increased labor productivity – i.e. more output per worker. That only comes from companies finding newer and better ways to produce goods and services that are needed and wanted.


Now there are of course the externality arguments that the private market fails to properly provide for "public goods” such as national defense, education, health and so forth. It is a non-sequiter however, to assume that just because the private market fails to adequately provide for these goods that the government does better. In fact, with the exception of national defense, it could be argued that the government has made matters significantly worse. That is certainly true with regard to education and health. Government meddling in these areas is primarily responsible for the messes they are in today.


But that argument misses the point anyway, because your $1 trillion is supposed to be an economic stimulus package. We need economic stimulus now, not ten or twenty years from now, when, if ever, that kind of spending bears fruit. You cannot stimulate the economy by taking resources from its productive sector, the private market, and transferring it to others. It can’t do it! It is such a simple concept, it is deeply discouraging to find that it has to be explained to anyone, let alone someone charged with leading our nation! To add onto this various other social goals, like creating a false economy in "green jobs” only adds to the misallocation of resources, requiring permanently increased government spending at the expense of the productive economy. It is a prescription for calamitous disaster.


Your proposals for "doubling the production of alternative energy over three years, updating most federal buildings to improve energy efficiency, making medical records electronic, expanding broadband networks and updating schools and universities” are frankly idiotic. They sound just like the standard fare in any appropriation, easily turned into pork by Congressional appropriators. Whatever the case, none of these will fix the current economic crisis, which needs to be addressed NOW. Doubling the production of alternative energy will actually hurt the recovery. It will add, not reduce costs unless and until it can be produced more efficiently and even then will produce only a marginal benefit.


In fact, these proposals belie your assertion that the economy is in dire straits, because they will do nothing to fix it. Either that or you are so ruthlessly opportunistic that you would use this crisis as an opportunity to get away with spending proposals that wouldn’t fly otherwise.


And how do you intend to create "3 million new jobs”; with government spending? In saying that 80 percent of those 3 million jobs would be in the private sector, how do you intend to boost the private sector? Will it be with assistance to a real private sector, or will you create a government manufactured one, like your proposed "green jobs economy” which will indeed require "trillion-dollar deficits for years to come?” And does it mean the other 20 percent (600,000 jobs) would be government jobs? If so, then you are proposing to expand the federal non-defense workforce by over 20 percent. Are you aware of that? Such an action is NOT the answer.


But don’t believe me. You don’t have to. There is a glaring prior example to instruct you in results.


Some have called your plan the "New, New Deal,” recalling the nostalgia of FDR and his depression era New Deal. Please don’t do it to us! FDR’s New Deal insured that our economy remained in chaos from 1933 until World War II. In 1928 the unemployment rate was 3.2 percent. Following the stock market crash in 1929, the economy moved into recession. By 1932 it had fallen to 24 percent. Over the same period inflation adjusted GDP fell 25 percent. Most of this decline was the direct result of federal intervention initiated by President Hoover.


Contrary to popular belief, FDR simply expanded many of the programs Hoover had started (the same policies Roosevelt had lambasted on the campaign trail) and added more of his own. During this period, non-defense government spending more than doubled. Even counting huge government make work-programs, the unemployment rate still averaged 13 percent for the period. Furthermore, when those programs came to a close, the temporarily employed workers were no better off, having to transfer their government make-work experience into real, permanent, productive jobs. Fortunately for FDR, World War II came along and the U.S. military became the replacement employer, though one hopes it won’t take another world war to save us from your "recovery” program.


FDR’s Secretary of the Treasury, Henry Morganthau admitted the failure publicly:


We are spending more money than we have ever spent before, and it does not work. ... I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. ... I say after eight years of this administration we have just as much unemployment as when we started ... and an enormous debt, to boot.


FDR created a massive tangled web of other problems with his overbearing "solutions” - too many to be listed here, but such an outcome is guaranteed when politicians start throwing money around. And the mess increases exponentially when 535 Congressional politicians with self-serving vested interests get involved in the decision making, regardless the President’s motives. It gets even worse when state and local politics comes into play, as it inevitably does.


Don’t repeat history. Don’t make FDR’s mistakes all over again. His image may get boosts from misguided historians and flattering movies like Seabiscuit, but the Great Depression – a government creation in the first place – was a drag, and he made it worse.


If you want to spend that money, there is a much simpler method. It will provide a huge, immediate stimulus to the economy, will not require any kind of burdensome government bureaucracy to oversee its implementation, and is guaranteed to make the most economically efficient use of those dollars. Simply declare a tax holiday.


Texas Representative Louie Gohmert already has legislation proposed for the remaining $350 billion of the initial bailout money. If this is the unprecedented crisis you insist it is; tax relief should be the primary consideration. After all, it is the heavy load of federal, state and local taxes that forces families to take two jobs and work extra hours.


There have been mumblings that you are considering tax cuts of $300 billion, but if you really believe this economy needs a $1 trillion cash infusion, why not make it for the whole $1 trillion?


Given that federal receipts currently run about $2 trillion, a $1 trillion tax holiday would provide 6 months worth of 100 percent tax relief for every American taxpayer. It would mean immediate income of approximately $3,000 for every man, woman and child in the United States. Would it not be better to really help people NOW, instead of creating massive new government make work programs that will take years to implement, and likely become permanent whether they provide any temporary relief or not and create massive deficits "for years to come?”


I hope – there’s that word again - ardently, that you will take my message to heart and alter your plans accordingly. Perhaps we may after all see your campaign slogan "hope” put into constructive, positive action.


You do not have to. As I have said, your admirers in the press will likely congratulate you whatever you do. The ball is in your court. But this crisis requires a genuine solution. It requires real leadership, real greatness, not merely a continuation of empty campaign rhetoric, with typical Chicago-style backroom payoffs to political patrons. If you want to be truly great, then do what’s truly right. We will all love you for it. For a change your Party will have the right solution to an economic problem and Democrats will reap the political rewards of genuinely saving us from economic collapse. If not, the slogan that brought you to power will be lost in the certain wreck to follow as "just words… just speeches.”


Don’t do that to us, please.




Jim Simpson

Economist, former OMB Budget Examiner, and gravely concerned American
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