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Monday, February 2, 2009

Why Do People Think that the New Deal Worked?

It is with some sadness that I write this article. Irrelevant to this topic, I must acknowledge that I am an Arizona Cardinals fan and have been through many losing seasons. Our magical ride came to an end with 35 seconds left on the game clock on Super Bowl Sunday. It was the most exciting Super Bowl I have ever watched. It ended with me wanting to cry, and with my eight year old son Dominick actually crying as he sat on the couch in his Larry Fitzgerald jersey. It is cliche to say that we always have next year. But in Cardinal Nation, this is the first time we can hope for next year and actually believe it. After decades of being a loser, the Cardinals are now a force in the NFL.

As far as the economy goes, I am not convinced that there is hope for next year. I have heard so-called experts talk about a recovery in 2010, but they can never explain what will drive the economic growth. They just assume that what goes down will eventually go up. They fail to acknowledge that "what goes up" needs something to lift it.

Congress (at least the controlling party) and President Obama are selling a stimulus plan that uses a Keynesian philosophy of government spending to lift the economy. I have heard several politicians announce that this is their "best" opportunity to pass legislation since the Great Depression. What kind of legislation you ask? Legislation that spends money, and lots of it.

Certainly there are some worthy spending plans that the federal government can use to temporarily lift the economy and have long lasting benefits as well. Infrastructure spending that relates to energy independence and transportation are a good example as long we are smart about the choices of projects (e.g. don't just throw taxpayer money as something because it sounds green). When I read in the paper about the $900 billion stimulus package containing items that may be noble causes, but hardly qualify as "economic stimulus," I realize that very little has changed in our federal government. Does spending $335 million on programs to stop sexually transmitted diseases create jobs? Someone may argue that it does, and perhaps it does create a few, but tell me with a straight face that we'll get $335 million worth of jobs. How about an extra $50 million for that great economic engine, the National Endowment for the Arts? While there are some provisions that will actually create jobs, for example tax relief, much of it is simply a wish list by politicians for their pet projects or quid pro quo for their campaign supporters.

FDR is widely known as one of our greatest Presidents for leading the country through the Great Depression and World War II. The economic devastation of that era was much wider and deeper than what we are experiencing today (so far). He took drastic measures as soon as he took office in 1933 with colossal spending projects in the form of the New Deal to get Americans back to work. And it worked. Well, it worked temporarily. When he tried to pull back on some of the spending in 1937, the economy actually got worse than it was in 1932 before he started. New Deal spending relieved some of the symptoms of unemployment, but it did not solve the root of the problem. It took winning the largest war in world history to bring us out of the Depression.

It is worthwhile to note that the cost of this package well exceeds the entire cost of the Iraq war. Are we spending only to temporarily relieve symptoms as the New Deal did? What we need are businesses to invest in the economy. Business drives a market economy, so the government needs to give us a stimulus package that motivates people to invest in business, and business to invest in the market.

My recommendation to Congress and the President (it's kind of arrogant for me to think that they care about my recommendation) is to pare down this package dramatically to focus on projects that can have a true economic impact within the next 12 to 18 months. Energy independence and grid improvements, transportation infrastructure, and tax incentives are all subjects that will drive our rise from this economic funk. The consequences of wasting money on politician's pet projects are severe. Huge additions to an already out of control national debt limits what we can do in the future and will lead to inflation. Combined with a stagnate economy (stagflation), it will be an ugly situation for years to come. We need to care about what makes up $900 billion. Don't simply be satisfied that it is a big number and assume we need what they're giving us.

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