A Pamphlet from Don Stuart, Preserve Our Nation, LLC
Pamphlet #31 - 3/15/2010
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Part 1
Economic Aggregate Supply and Aggregate Demand
Why Obama's Stimulus Would Never Work!
"Shovel Ready" Projects don't Stimulate the Economy!
Do you know why Obama's Recovery Act as a stimulus is a failure? Could it be that the "Shovel-Ready" projects were the wrong place to put stimulus money?
Infrastructure projects sound like an good place to create jobs. But in reality it is a misplaced allocation of economic stimulus money. Just where do Infrastructure projects fit in the Gross Domestic Product (GDP)?
The GDP can be divided between Aggregate Supply and Aggregate Demand. The following chart reveals how the GDP can be evaluated from both perspectives. For reference, the following chart lists Aggregate Supply and Aggregate Demand categories, their percent of GDP and their 2008 GDP Dollars.
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There exist two views of the driving forces of the economy. On the Aggregate Supply side, Say's Law states that Supply drives Demand. This view is: "If you build it they will come." In other words, invest your money and build a company, then the masses will flock to your business to purchase your products. If not, then maybe the government could help create demand for your products.
On the Aggregate Demand side, Keynes's Law states that Demand drives Supply. This view is that if there is consumer demand, then someone will invest money and build a business to meet that demand.
On the Aggregate Supply side, government decides which products should be produced. Under socialism, government controls the production via laws and czars. Under communism, government owns the production and everyone works for the government. Government is unlimited and large.
On the Aggregate Demand side, individuals or businesses see opportunities in the market place where consumers are expressing a desire to have a product. They raise capital and build a business to meet that demand. Government's role is to referee the transactions and commerce in the market place. Government is limited and small as the Founders invisioned.
Liberals generally believe in the Aggregate Supply side (Say's Law) and in big government to carry out the tasks of controlling the economy. Conservatives generally believe in the Aggregate Demand side (Keynes's Law) and in small government leaving the "Invisible Hand" of the consumers to control the economy by picking products and allocating money for investments.
During this recession of 2008 and 2009, the GDP experienced a reduction of $700 Billion. Review Government Stimulus This $700 Billion occurred as a drop in the Aggregate Demand's Consumer spending. As shown in the table above, the Aggregate Demand Consumer spending is 70% of GDP. The appropriate means to end the recession is to rebuild this consumer spending by reversing the decline with $700 billion of government investment in the consumers. This is accomplished best by tax reduction on the consumers, thus providing more income to be directly spent on consumption.
For tax reduction to work, the consumer has to expect it to be long term and not a short fix like the $1200 sent to every family in 2009. "Expectations" are what drive the consumers both in the market place and in the investment market. As an example, President Kennedy's tax reduction in the 60s led to tremendous economic growth. It was the promise of tax reductions that consumers believed in that led to this growth. The actual tax reductions only became law after President Kennedy's death and enacted under President Johnson, several years after the promise.
In response to our current recession, Obama and the Liberals have selected the Aggregate Supply side to fight the recession. They selected the Aggregate Supply's Structure category. As seen from the above table, Structure categories only account for 10% of GDP. So on selecting Structure categories they have selected the smallest and least effective GDP categories for fighting the recession. In addition, Structure category projects take a long time to get started. But this was supposedly solved by only going after "Shovel Ready" projects. So how many of these "Shovel Ready" projects existed?
On examining the Structure categories, labor is a small portion of Structure projects. Think about building something and you will find that a majority of the money spent is on materials, not labor. How many time have you seen highway construction underway? There are a few people working with large pieces of machinery and lots of material such as concrete, dirt or asphalt. Most of the money allocated to the Structure category projects is being spent on materials and maybe expensive machinery. Labor on construction projects has been replaced with expensive machinery.
Only if the purchased materials and machinery are made in America will jobs be saved or created. How many small construction companies will be able to spend a large amount of money on machinery that may be needed only a year or two? How many companies will hire people to help supply materials for a year or two?
With unemployment so high, why select the least effective means to get the economy going? Even if you view the economy and GDP from the Aggregate Supply side, it doesn't make sense. Instead of choosing the Structure category from the Aggregate Supply side, it would be better to allocate money in the Services category which is 57% of GDP.
But why would President Obama and Liberals select the least effective Aggregate Supply category as the choice?
Answer: More government control over State and Local Governments who would be the ones to allocate the money for the infrastructure projects. Turning State and Local Governments to depend on the federal government is one of the Liberal's goals. To move the State and Local Government taxing power to the Federal Government level would be the ultimate achievement.
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