The ink is barely dry on the first $152 billion stimulus package passed in February of this year. But, as the Gipper would say, "There you go again."Today we heard the cacophony from Congress to pass a second stimulus package. After all, why not parlay the huge success of the first one? House Speaker Nancy Pelosi has proposed that the second stimulus package should total another $150 billion. This new package however, as suggested by Congress, should concentrate on the creation of government jobs and infrastructure spending. The idea has received support from none other than Federal Reserve Chairman Ben Bernanke. His take on the plan, "Such actions might be particularly effective at promoting economic growth and job creation." Today, in his testimony before the House Budget Committee, he said that any stimulus package proposed would need to be "significant" and that steps may be needed that will increase annual deficits.
Congressman Paul Ryan (R) Wisconsin has shown a little bit of sanity by indicating that this new plan is "bloated" and warned that the annual deficit may already be approaching $1 trillion in fiscal 2009. But listening to the Q&A session with Bernanke, it appears most in congress want to increase deficit spending. Many of the elected representatives want the government to spend that money on infrastructure projects. Of course Ronald Reagan would have hoped that the one thing we learned from his tenure is that government is the problem, not the solution.
Unfortunately, there are few who are questioning whether or not the Federal government should be creating jobs in the first place. When jobs are created by a central planning authority, imbalances occur in the economy. Those jobs created by decree may not fulfill an intrinsic economic need and thus may not be economically viable or sustainable. For instance, let's suppose the government in Washington decides that it is worthwhile to expand and refurbish an airport in Phoenix Arizona. Their argument is that it will create jobs and would improve the state's infrastructure. However, only those local entrepreneurs and taxpayers with extensive knowledge of the Phoenix area know if such an improvement is needed. Only they are most likely to accurately run the numbers to determine if such a project is worth the investment of their own capital. When Federal government money is used, no individual is investing their own capital directly in the project. In that case, the motivation to have the endeavor make money is diminished greatly and yields more to politics than economics. Hence, government sponsored job creation tends to supply jobs that are unprofitable and do not add to economic growth.
Even worse is the case when government takes on debt for the goal of expanding employment. In that case not only is the country's capital misallocated but the future solvency of the budget becomes jeopardized. And since many of these government sponsored jobs do not make money, they often require additional debt be raised to sustain their existence. While it is true that much of our country's infrastructure needs to be rebuilt, the decision to spend money should be done on a state and local level and must also be done in a fiscally responsible manner.
In a very sad sense, there appears to be no true ceiling to the debt ceiling. Congress raised the debt ceiling to $10.6 trillion in July 2008 and is currently proposing an additional $700 billion increase. We must hope that government quickly realizes it cannot continue to spend money on stimulus plans that are not subject to market forces and that drive us further into debt. Sooner or later congress will have to pay attention to its runaway expenditures. But if a trillion dollar annual deficit doesn't do it I don't know what will. In the meantime, it looks as if increasing debt and spending more money are their main concern.
Michael Pento is a Senior Market Strategist with Delta Global Advisors and a contributor to greenfaucet.com