Stimulus is always a reallocation of capital from the left hand to pay the right hand. The fundamental question is whether the government is better at allocating capital than private enterprise. I believe that sometimes they are, specifically in the following scenarios:
- when there are high barriers to entry in an industry
- where the regulatory structure gives an unfair advantage to a small group of companies
- and where public services are required that private industry is unwilling or unable to participate, such as mail and Internet services to hard to reach rural areas, public school education, police forces, fire stations, and broad based health care safety nets.
- Example of stimulus and public services where I am in favor of government investment is road construction, increasing access to the Internet everywhere at 100Mbps or higher, public transportation, and renewable energy investments. These all represent INVESTMENTS that are good for our country long term.
Where government should stay out of interfering is in choosing to bailout specific companies who are on the verge of failing due to their own mismanagement and poor risk/reward decisions. If they feel they must interfere, because of a systemic risk of Too Big Too Fail, then their actions should be exclusively focused on winding down the TBTF institution and selling off the pieces, as well as creating new laws and regulations to ensure that doesn't happen again.
Large scale stimulus like the trillions spent on bank bailouts and zero percent interest rates that only benefit the Primary Dealer banks and hedge funds, in other words the 1%, are examples where the government is doing the country a disservice. These are most certainly stimulative in the short run, but the are long run very destructive to our economy. They have created the mother of moral hazards and have put us on a course to European style government socialism. They may make us feel safer, no doubt, but it will have a direct consequence of slowing the long term growth rates in this country to European or Japanese like rates. |
