Friday, January 9, 2009

Doing Nothing

On the news page, I questioned why "doing something" is always considered better than nothing. That is most certainly not the case. There are plenty of policies (as in the case of the Great Depression) that would make the situation worse than doing nothing. In order to determine which actions would be appropriate, a proper assessment of the situation is required.

The main focus at this time is the rise in unemployment - currently at 7.2%. What this boils down to is that as a nation, we have a surplus of time on our hands. Time is a commodity like anything else - and when we have more of it, its inherent value is less - meaning that people (and groups of people) are willing to give up less in exchange for your time.

At the same time, we are (at least for now) experiencing deflation - meaning that the prices of goods and services are dropping.

In a nutshell while things aren't good (high unemployment isn't good by anyone's book), it's not awful, we have a situation where people are either short of cash (or afraid of being short in the near future - and thus unwilling to part with it), but at the same time, the cash they DO have will purchase more goods than it used to. If the government were to do nothing - and publicly announce that we were just going to grit our teeth and ride things out - things would over some period of time return to normal. Simply knowing what the playing field is going to look like under the next administration would allow individuals and businesses to start playing again.

Unfortunately, with trillion dollar stimuli rolling out every few months, along with continued calls to action, people are hesitant to produce and consume since the the rules could change several times a year. Eventually, we will come to the point where the federal government will no longer be able to meet is debt obligations. After all, raising taxes won't help if nobody has any income to tax. At this point, the only solution would be to crank up the printing presses.

By printing out more money, the treasury will have the cash to pay back their debts - but the price for the nation will be drastic inflation. With money in greater supply, the cash that you and I hold will be worth far less than it is today. So not only will many be without jobs, they will be without jobs, and be able to buy far less with the cash they still have.

What's worse than high unemployment? High unemployment coupled with inflation. Clearly doing nothing is better than this proposal. I'm often of the mindset echoed by Ronald Reagan in that the nine most terrifying words I can here are "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help'

All that said, there are a few policies that would address our current woes:

1) Minimum wage: As stated before, unemployment is a surplus of labor. If I am having trouble selling other goods like gasoline, produce, appliances, cars, etc, I lower my asking price until people are willing to purchase them. Why is do we never consider lowering the price of labor until people are willing to purchase it?

2) Labor laws: If the gas station owners in an area were to organize, set a minimum price at which they were permitted to sell their gas and kick out any who did not agree with my terms, they would be guilty of collusion and in violation of the law. However, why is the UAW permitted to be the only organization to sell labor to Detroit? This is nothing other than collusion backed by law.

3) Tax cuts in stead of credits: One of the announcements in Obama's proposed stimulus is $300 billion in tax "cuts". However, they are actually tax credits. It may seem like semantics, but there is a difference. A tax cut reduces the amount you are required to pay. Tax credits give federal money to the taxpayer whether or not they paid any taxes to begin with. By crediting individuals who haven't paid any taxes, the government is already spending money it does not have.

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