Tuesday, November 18, 2008

Henry Paulson to Supply-Side Economics: Drop Dead

Because of the recent financial crisis, I've been paying attention a little but more to business/economic news. This is an interesting article perhaps spending isn't always the way to jumpstart an economy. That is making good for people to buy thus jobs for people making these goods for people to buy. Or people who will be the go-between for the producers and the consumers.

Article from RealClearMarkets:
All of which brings us to Treasury Secretary Henry Paulson’s announcement last week that the latest version of Treasury’s $700 billion Troubled Asset Relief Program will focus on the consumer. In an administration that has sought to deify the presidency of Ronald Reagan and the supply-side revolution that he was often associated with, Paulson’s latest move speaks to an administration that either never understood supply-side theory, or understood it but views it as unworthy of emulation. With regard to Paulson, we’re all Keynesians now, and supply-side economics can drop dead.

Paulson’s reasons for “aiding” the consumer have to do with his view that consumer finance “is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt.” As such, his plan according to a Wall Street Journal account is to use TARP money to “increase the availability of student loans, auto loans and credit cards.” Adam Smith is doubtless spinning in his grave.

Indeed, if we try to forget for a moment that the proliferation of federally-backed student loans has necessitated more student loan money for driving up education costs, Paulson’s newest attempt to “fix” the economy is surely inimical to our economic health. In times of economic distress, when capital is in short supply, the last thing an economy needs is for more capital to be consumed as opposed to being supplied to future entrepreneurs.

Indeed, in times of economic weakness the best economic “stimulant” absent a stabilized dollar or tax cuts is paradoxically the very consumer pullback that Paulson and his minions are trying to avoid. That is so because when individuals choose to save rather than consume, their capital, far from vanishing, funds the growth of job-creating business concepts. To the extent that Paulson’s activities foist more credit on an already tapped consumer, there will be even less capital available for tomorrow’s ideas. Recovery will be pushed back even further.
I liked how this piece started out with stories about rich people in Britain driving around in expensive luxury cars. They spend like crazy, but they didn't invest. Everyday people should know a car, no matter how expensive isn't much of an investment. These individuals didn't invest in any budding new enterprises, unfortunately.

Still the economy rests on the producer as long as they have an incentive to produce. Also stated in this article is that focusing the economy on consumption could become problematic if there is little attention paid to saving. So then the rest of the article looks at Treasury Secretary Paulson's action and argues that he's only arguing the continuation of the policy of encouraging consumption.

Read the whole thing!

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