Learning from the First Stimulus

Learning from the First Stimulus

Washington and hamilton

by John F. Di Leo

Our new president says that we need to spend our way out of the current recession – that, contrary to Republican opinion, the most important thing isn’t the contents of the stimulus package, but the price tag: the higher, the better. Mr. Obama maintains “Of course it’s a spending bill. What else is a stimulus plan?”
I beg to differ. A stimulus plan may involve government spending, if government spending is what’s really needed at the time (which it rarely is). But that’s not the definition anyway. An effective government stimulus plan is one that stimulates private sector economic growth.
If government spending were the solution, this past decade of riotous federal and state budgets would already have given us an economic boom. Obviously, idiotic government overspending is not the cure this time, if ever.
In fact, government spending is only the solution when government underspending precipitated the crisis. No serious critic can make that case today. By Mr. Obama’s definition, every budget for the past several years has been a stimulus plan, and look where it’s got us.
Back to the Beginning…
Let’s look back to the first stimulus package in U.S. history. In the 1770s and 1780s, our thirteen rebellious former colonies, now states, were in sorry shape. Our currency was useless (“not worth a continental” was the common man’s nickname for anything worthless), businesses were broken, even farmers were starving. The depression was not only severe, it seemed unending; many thought the fledgling nation was on the brink of collapse. Even financial wizards Robert and Gouverneur Morris were out of options…
…until Messrs. Washington, Hamilton and Madison led the call for the Philadelphia Convention, which replaced the Articles of the Confederation with a new Constitution empowering the federal government to do its part – and only its part – to solve the problem. In the new administration, Mr. Hamilton served as the first Treasury Secretary and set our nation on the right path.
How? Not by spending money confiscated from individuals and businesses (direct taxing by the federal government wasn’t even permitted in those happy days), but by putting the nation on the track to paying back its unpaid past spending.
Mr. Hamilton federalized all remaining war debts that remained unpaid even five years after the peace with England. These weren’t new obligations, but existing ones, incurred by both the federal government and the states; the first step of his stimulus was honoring these debts – exactly the opposite of the current left-wingers’ proposal to pile more fresh debt on an already overburdened nation.   The left likes to claim that Hamiltonian policy is to maintain a national debt.  Dead wrong.    Hamiltonian policy was to put America on a path to paying off debt, gradually, to establish national creditworthiness, not to create new debt.
Yes, Mr. Hamilton also established a national bank, because it was necessary at the time to give the private sector a currency that would hold its value. And the new Constitution standardized import duties up and down the coast, removing the business-crippling nature of interstate duties and correspondingly unpredictable costs of commerce.
  • Now, that was a stimulus package! It didn’t spend new dollars on new projects at all; it paid back prior debts.
  • It didn’t further wreck a teetering credit market; it established a stable one.
  • And it didn’t set new and higher taxes: it imposed stability and predictability on the tax climate, so that import/export businesses could plan ahead with confidence.
There are many ways to look at the great advances of 1787-95… as compromises between agricultural and manufacturing interests, as confidence builders for the U.S. Dollar, as the establishment of international financial respect. But the most important was the imposition of order on the government’s part of the national economy. A dollar was a dollar, a federal military pension was guaranteed; tax rates were stable and low.
The private part of the national economy was still up to the private sector, and that was all we needed. Cobblers didn’t need government contracts to make shoes; farmers didn’t need government contracts to raise wheat. They would do that on their own, and they did.
Could we do the same today? Of course we could. The government caused this mess, and to fix the government’s errors would be easy.
  • Relieve federal mark-to-market rules, to restore housing values and repair the reparable parts of bank balance sheets.
  • Privatize the federal monsters – Fannie Mae and Freddie Mac – and split them into dozens of smaller, manageable entities, to reduce the damage that any single monster bank can do when troubled in the future.
  • Privatize the FDIC. About half of America’s credit unions have private insurance; why not allow banks the same freedom? Mandate some basic coverage, as we do with auto insurance, and leave the provision and the details to the free market (with the beating our insurance industry has taken recently, this infusion of new business would be a blessing to all).
  • Cut taxes now. But not just any taxes: the ones that do the most damage. Further individual tax rate cuts won’t directly help workers who’ve lost their jobs to foreign shores. We must cut our effectivecorporate income tax rate – for big and small business alike – from today’s crippling 34% to the 11% of our most visionary and successful foreign neighbors. And capital gains tax rates should drop to 5% or 10% at most, to draw people back into the market.
  • Most importantly: make these good changes permanent. Spending programs merit sunset dates, tax rate cuts don’t. One of the greatest errors of the Bush II administration was to allow its last round of tax cuts to be temporary.  A business deciding whether to build a factory in the USA or in China isn’t going to be swayed by a pathetic little $3000/person one-time hiring credit or even a tax rate cut that expires in three years. A new factory is meant to be in business for the next forty years; businessmen plan long-term, not short-term.Tax policy must be permanent to have a stimulative effect.
And best of all, much like the original stimulus of the Washington Administration, so long ago, this package wouldn’t cost a penny of new spending. Not only would it work – something the Democratic bill won’t do – it would save us a trillion-plus by simply enacting it instead of theirs.
Senators Durbin and Burris: Call your office.
Copyright 2009 John F. Di Leo
John F. Di Leo is a Chicago-based Customs broker and corporate trainer.  A recovering politician for over ten years now, he is a former Republican county chairman of Milwaukee, Wisconsin.

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