Jobs Bill
President announced new jobs bill, this should be quite successful in transferring wealth and mediocre jobs from some poor people to others. Don't expect that jobs number to get better, but do expect some new roads. If the government wants to cut budgets elsewhere to build roads and cut taxes, i'm not going to say I don't support it, houston could use some transit improvement. However, to think this will actually "jump start" the economy or create jobs is a stretch.
To bettter understand this, I bring back the classic girl running a lemonade stand story.
Girl Running Lemonade Stand Story
On an island secluded from the rest of the world lived a small tribe of civilized individuals. Some people farmed (lemons, cocounuts, fishing, vegetables, pigs), some people built things (houses, tools, fishing poles, clothing), and a select few were elected as leaders to guide the tribe to organize and guide the tribe. The leaders created a currency from a special type of palm leaf which they just called palm notes to help facilitate trade. The leaders were quite responsible and only printed new palm notes to replace old ones that were worn and torn. They collected a 5% sales tax on all goods for their services (leadership, currency control, and law enforcement).
On the island there lived a girl who decided to start a lemonade stand. Her plan was to buy lemons at about 3 palm notes a piece, make lemonade, and sell it at 5 notes a piece. Business went well. In fact, business was booming, and other people on the island were inspired. Other tribespeople excited by the opportunity of business so they left their farm jobs, and took out loans to start fancy coconut stands, designer clothing stores, and fishing emporiums. A sense of excitement was in the air and the tribespeople spent a lot of their savings on awesome new stuff. However, after a binge of awesome times and spending, it turned out that people just couldn't afford to keep buying this new stuff. After all, they had dug into their savings to buy the stuff, and eventually their savings were depleted. On the business end of things, the profit margins for the fishing emporium, clothing store, and cocunut stand were slim. These businesses were bad business models to begin with, selling expensive products at slim profit margins. The real issue however was that all these businesspeople now found themselves jobless, and even though they could go back to farming, they would have to pay off their debts before buying more new things. This hurt businesses around the island, many clothing and tool makers went unemployed. The lemonade stand girl cut her lemonade prices from 5 palm notes to 4 palm notes to attract customers and stay in business. Now eventually the failed businessmen-turned farmers would have their debt repayed, at which point their consumption rate would return and the economy would be back at the level it was initially at.
Regardless, the leaders saw the state of the island and decided to act. They saw the struggles of business and took some of the money out of the law enforcement budget to subsidize local businesses like the lemonade stand. They gave the lemonade stand girl a fresh supply of 300 lemons to bolster her business. Now she made a larger profit margin than ever! selling for 4 palm notes and paying 0 for the lemons she was banking, and increased her consumption accordingly. However.....the law enforcement officers that took a paycut were obviously forced to decrease their consumption... thus the net effect on business was negated. The only way that the economy would have benefited from this stimulus is if the lemonade stand girl somehow used these lemons more efficiently than the law enforcement used their budget. This however is not the case... maybe if the girl took the additional 300 lemons and began loaning lemons to stands that had temporary shortages it would have caused some real growth. By both helping other stands that had shortages and making some extra interest this would made the lemonade stand business more efficient in a win win situation. Growth is a direct function of efficiency, 300 lemons worth of palm notes for a lemonade stand is exactly the same as 300 lemons worth of palm notes for law enforcement unless one party can utilize those notes more efficiently. The problem with this stimulus method is that the efficiency aspect is often overlooked in favor of a focus on short term economic boosts.
So assuming the girl found nothing groundbreaking to do with her lemons, they eventually ran out and the economy went back to square one with no real change. The government then decided that the "recovery is not as strong as expected" and proposed QE2, a second stimulus that would be much greater than before. This time they vowed to not cut the law enforcement budget. Instead they would just increase the money supply by printing a bunch of new palm notes to give to needy businesses. They also cut taxes to 1%!!! However, the leaders didnt decrease any of their budget, so the tax revenue shortfall had to be made up for by new printed palm notes. Obviously, the short term effects were quite nice and businesses all over were making more money than ever before. However, not everyone can become wealthier simultaneously without any increases in efficiency. The lemonade stands think "hey all my customers have a lot of money i can increase prices without much decrease in demand!". Then the lemon farmers think "hey these lemonade stands are making a killing I can increase my lemon prices!" This is price lag. In the end this type of inflationary stimulus doesn't much hurt the businesses and entrepreneurs: they have an increase in earnings for a while then prices rise and they are back to where they were, netting a slight gain from the transitory period of increased earnigns. It does however, hurt people with savings and wages in palm notes. If you work for a lemon producer and get payed a fixed number palm notes, the inflation process is quite painful as you will start paying more for goods but will make the same amount of money. That is why this type of inflation typically creates class animosity, poor get poorer, rich get richer ect. No wealth was actually created in this example, merely transfered from the poor to the rich in a roundabout sort of way.
Finally, with so many poor people and no real economic growth, QE2 is deamed "less effective than expected". The leaders then said "we need to stop printing money and help the poor!", so they set up a plan in which they stopped printing and increased the tax rate to 20%. The leaders got their 5% to keep a stable budget, and the other 15% would go into welfare programs for the poor. It's not hard to see that this plan resulted in a large flow of cash from the richest tax payers to the poor. So the rich end up still mildly rich and the poor end up not that poor, good right? This is a primary argument of socialism, but the downfall is again: efficiency. The welfare method of stimulus demotes production and efficiency in two ways: Rich are less motivated to make money because they will just have to pay more in taxes. Poor are less motivated to make money because they are already getting money from the rich. Its easy to see how this leads to a decrease in production and efficiency, which of course leeds to a less productive economy.
So the leaders have tried everything they can and nothing has worked, what can they do??? They can do nothing. These examples are meant to show that whatever intervention the government takes will not create any growth if it does not create greater efficiency or obtain value in raw materials, and since the leaders don't target efficiency and are poor candidates to achieve efficiency in the first place, intervention almost always fails. Private industries cope better with improving efficiency. Competition drives a constant need to be more innovative, the process occurs naturally.
Summation: Efficiency (efficient use of resources, new technology, innovative ideas) create growth, and there is nothing anyone can do to force growth without efficiency or obtaining new valuable raw materials.
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