06.16.2011 0

The Time Is Now To Kick The Stimulus Habit

By Bill Wilson – Everyone tends to pull a punch now and again, even here at Americans for Limited Government.  Things go unsaid, but sometimes they must be said.  Today is one of those days.

The beauty of a recent piece by Euro Pacific Capital CEO Peter Schiff, “End Game,” is that it pulls no punches.  In it, Schiff says everything that needs to be said to the American people about the current state of affairs, and not a moment too soon.

At a time when the economy is limping along, unemployment remains high, housing continues to slump, and growth remains weak, the question many are now asking is why? Why, after pumping more than $2 trillion of fiscal and monetary “stimulus” into the economy, are we not producing enough jobs to even keep up with population growth?

Schiff has some answers.  He compares “stimulus” to a drug addiction, and like any addiction, “Each time the government successively stimulates with printed money or deficit spending, ever larger doses are needed to achieve the same result.” Schiff rightly points out that the latest crash came after “the economy had been on the receiving end of years of over stimulus,” which it had not been weaned off of.

He notes that “the size and scope of the ‘recovery’ of the past two years was weaker than would have been expected in a typical business cycle recovery without any stimulus whatsoever. Indeed our current recovery is the weakest on record, despite the biggest jolt of government stimulus ever administered.”

Predictably, proponents of “stimulus” maintain that not enough has yet been spent.  New York Times Paul Krugman never thought the 2009 fiscal “stimulus” would be enough.  At least he’s consistent, but it underscores Schiff’s point of how larger and larger doses of “stimulus” are necessitated by the crash following the previous binge.

And with the economy already sputtering before QE2 has even ended, Fed head Ben Bernanke is in tight spot, says Schiff.  “He either follows through on his loudly trumpeted plans to end quantitative easing this summer, or abandon those plans in favor of more stimulus. Both choices are unappealing,” writes Schiff.

Ending QE2 may not be politically palatable given the current weak state of the economy, and the further weakening that will undoubtedly result should it end.  On the other hand, the temporary jolt from a QE3 may not be long lasting.  Writes Schiff, “to believe that the next dose will do the trick borders on sheer insanity.”

Instead, Schiff boldly proposes a new direction for “real restructuring”.  One that might save the economy from another collapse, and perhaps the nation from a catastrophic default: “Real estate prices must fall further, and many financial institutions holding bad mortgages must fail. This means investors, creditors, and depositors will lose money.”

Tough medicine, but medicine that if we had taken in 2008 may have saved taxpayers trillions of dollars in bailouts and failed “stimulus”.

Schiff also looks to the high domestic unemployment rate: “Labor and capital must be re-allocated away from services into goods production. That means jobs must be lost in government, retail sales, finance, health care, and education; and jobs must be created in technology, manufacturing, textiles, mining, energy, and agriculture. This guarantees major short-term pain.”

Doing so will not be easy.  The cost of doing business here is higher than the rest of the world, with one of the highest corporate tax rates in the world of advanced economies, second only to Japan.  To raise capital for new businesses is cost-prohibitive considering filing, legal, auditing, and accounting costs mandated by state blue sky laws and SEC requirements.  Established businesses, on the other hand, have a perverse incentive to shift operations overseas.

The weak dollar also adds to producer prices, and costs jobs.  Schiff calls for foreign governments to end their support of the currency, which he says would weaken it, causing interest rates and prices to rise.  Presumably, however, this would be more medicine — it would incentivize the nation getting its fiscal house in order.

Once set in motion, these changes, Schiff warns, will result in either the Fed being the only holder of dollar-denominated debt, or hiking interest rates to strengthen the dollar and sop up the “stimulus” and prior monetary expansions.  “Both scenarios are catastrophic, but the latter at least offers the possibility of redemption,” he notes.

It won’t be pretty, but it’s best for the nation to kick the spending habit now — before the “stimulus” crack kills us and there is no possibility for redemption.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

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