Borrowing Trillions More Offers No Guarantees for Recovery (Commentary by Andrew Jensen)

While no one knows for certain what 2009 will bring, here’s a safe prediction:

Paul Krugman will still have more Nobel Prizes for economics than I.

That said, at least we know for certain he didn’t win for assertions like this one in his Jan. 11 New York Times column upbraiding President Barack Obama for actually including tax cuts in his stimulus proposal.

“Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more,” Krugman wrote. “And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?”

What job has ever been created out of an unemployment check?

Krugman’s solution is to keep business taxes high to fund unemployment benefits, but wouldn’t it make more sense to lower tax burdens for businesses so they could hire the unemployed?

Same goes for Medicaid. What makes more sense: Establishing a new, annual $100 billion subsidy as Krugman suggests, or removing the barriers to purchasing insurance that drive costs up from a lack of competition?

There are at least 25 property and casualty insurance companies operating in Arkansas, yet only six health insurance companies. Why not give pools of small businesses the same exemption from interstate barriers to purchasing coverage enjoyed by large multi-state corporations? That costs nothing.

In the end, the biggest flaw with Krugman’s arguments for multi-trillion dollar stimulus is that it assumes the U.S. can simply go on borrowing and printing money ad infinitum. We haven’t even addressed the $101 trillion in unfunded liabilities for Social Security and Medicare.

True, borrowing costs remain low for the U.S. Treasury now as investors worldwide seek the safe harbor of our debt, but they will not settle for a 2 percent return on 10-year bonds for long.

Once they start demanding greater returns, interest rates for all borrowers will go up even as a new one or two or four trillion dollars float through the world economy and cause precisely the kind of runaway inflation we saw last summer that hurts the poor the most through higher food and energy costs.

Inflation, unemployment, high interest rates and higher taxes are inevitable under Krugman’s plan.

Nothing he suggests makes any of these Four Horsemen of the Economic Apocalypse less likely to ride.

Printing another trillion or two every fiscal year for the foreseeable future not only devalues every dollar you have in your pocket or in the bank — now and in the future — it also devalues the portfolio of debt already held by our biggest lender, China.

No one can believe it will stand by idly while our profligacy craters the value of its foreign reserves.

China is already pulling back from its massive purchases of U.S. debt, instructing its banks to make more loans locally instead.

The main enemy of the economy right now is uncertainty. The $700 billion TARP bill was sold as one kind of plan and executed as another, which may be why the market has dropped 22 percent since it was enacted. Citigroup received $45 billion and still posted a loss of $8.3 billion in the fourth quarter while we’ve just learned supposedly strong Bank of America received a second secret share of TARP money in December.

Further, nobody knows if spending $825 billion over two years will fix anything. Passage of a massive stimulus bill may give Congress a chance for the kind of disgusting backslapping photo op it enjoyed after passing TARP, but how much can really be expected of the “stimulus” when the only tangible benefit to Americans is a one-time rebate check?

If Obama really wanted to inspire confidence in American markets, he’d announce immediate plans to reduce corporate income tax rates, reduce the marginal rates for the 25 percent middle class bracket and suspend capital gains taxes for at least two years.

Every company large or small in America would become more profitable overnight, and a suspension of capital gains taxes would surely invite investment in equity markets at their current bargain basement prices from those dying to get out of low-yield Treasuries.

Americans would also no doubt feel more confident about their future knowing they can count on taking home a larger share of their earned wages.

Obama would surely hear the howls of his allies on the left like Krugman who trust the power of government over power of the people, but I suspect a safe prediction for the market reaction would be quite different than what we saw on Inauguration Day.

(Andrew Jensen is an associate editor of the Business Journal. He may be reached at [email protected].)