Problems With Fiscal Stimulus -The Private Sector
(This is the Third Segment in a Three Part Series)
Private Sector Jobs
The last and perhaps most significant example of the multiplier effect is related to business investment. Let’s hypothetically say that a corporation decides to build a factory in your community, and the useful life of the building is forty years. The total cost to build and equip this plant is $50 million. The company hires 1000 total workers at an average salary of $40,000 per year. The total annual payroll is therefore $40 million. This includes management and supervision, engineering, Information Technology, maintenance, purchasing, production planning, and skilled, and unskilled workers. If we multiply this number by 75%, we get an initial economic benefit of $30 million. But because of the multiplier effect, the total economic benefit is five times $30 million or $150 million. This is triple the original investment of $50 million! And not one dime of taxpayer money was used. In fact, in addition to providing $150 million of annual economic bang, the company also pays federal state and local taxes that result from this one facility. The best part is that instead of providing only a temporary employment boost, this one will last 40 years. Finally, every time there is a purchase of the products produced by the factory then economic activity again multiplies. If we multiply this example by thousands of similar investments, the economy is truly in a boom. And with this boom comes an upward pressure on wages, raising the standard of living for millions of workers. As explained earlier, a true private sector economic expansion would increase domestic and international trade, encouraging huge new investments, which would lower unemployment rates and increase revenues to the federal government.
In spite of all evidence to the contrary, Keynesian-based theories are still taught as gospel on college campuses and are used as the basis for most government policies. It has become accepted in American politics that if we are in a recession, then the President or the political party in power is to blame. Economists, journalists, commentators, and even Hollywood celebrities demand that if unemployment rates are unacceptably high, then the government better fix things and fast! Decades of political promises, lies, and economic nonsense has seriously confused the American people to the point of utter desperation.
What they don’t seem to realize is that recessions and expansions are a normal part of the business cycle, and that these business cycles are industry specific. For example, in the late 1970’s the energy and technology sectors as well as associated geographical regions like southern Texas and Silicon Valley were in an expansion. During the same period, however, Automotive was in a recession, which affected Michigan and other heavily industrialized states. In fact, so many workers were leaving Michigan for boom cities like Houston that a popular bumper sticker stated: “Will the last person leaving Michigan please turn off the lights?”
When calculating GDP, government statisticians combine all business sectors and geographic regions; and then totals them together. This means that at any given time the nation may officially be in a recession but specific industries (and specific regions of the country) may be experiencing an expansion, or vice versa. So even if you implemented a complicated policy mechanism to kick-start an artificial influx of industry-specific demand using taxpayer money, all that would be accomplished is a short-term reduction in the industry’s inventory levels; a short-term boost in industry-related employment and profits; a delay in the industry-related recession; and confusion in the true marketplace for the industry’s products. In actual practice, Congress and the President have used economic stimulus as nothing more than a political tool to reward supporters and hope for a temporarily improvement in the unemployment rate until the next election. In any case, as a result of decades of political interference the economy is weaker and more dysfunctional; and we the people are stuck with the debt.
In retrospect, Stagflation in the 1970’s; the demise of the Savings and Loans in the 1980’s, and the Banking/Real Estate meltdown of 2008–2011 were all symptoms of our federal debt crisis which will continue to plague us, and in fact worsen, until we can get a grip on both our federal budget and debt.
Epilogue -Keynes Dream
In 1930, Keynes wrote an essay titled: Economic Possibilities for our Grandchildren. Like Adam Smith and Karl Marx before him he was concerned with technological advances and the painful readjustments that would result from the replacement of labor with improvements in technology. Keynes, however, had an optimistic outlook for the future, believing that by the year 2030 standards of living would be vastly greater than in his time. He predicted that the standard workweek would shrink to only 15 hours per week and that we would, through improved technology, still be able to produce enough to live happy and fulfilled lives.
Today, our standard of living has definitely improved since 1930; however, the average workweek is not yet what he predicted. Only 8% of fulltime employees work less than 40 hours, 42% work 40 hours and 50% work over 40 hours per week. Corporate America implemented a plan different from what Keynes predicted. Rather than spreading productivity improvements over all of its existing employees and reducing their work hours accordingly, it instead reduced its work force (through layoffs and firings) to fit 40 hours for non-exempt employees (not exempt from the labor law requiring employers to pay overtime), and 40-plus hours for exempt employees — the company can force these employees to work unlimited hours without paying anything over their standard salaries. Thus, companies have taken all of the productivity gains as profit, which is what Marx would have predicted. Of course, it was the companies who invested in the technology, so shouldn’t their owners reap the benefits, not their employees? Hmmm, debatable.