Funding the Stimulus

There's been a suggestion that the stimulus package is funded by the folks at the top of the socioeconomic pyramid. The chart is based on the apparent assumption that the existing distribution of income tax rates across the population of U.S. households will be used to fund the stimulus in the year it is spent. A little thought is in order.

Since income taxes are taxes on "income" one needs to make sure stimulus efforts and their associated burdens don't impair those who would pay these taxes -- which will be presumably paid from future earnings -- or the thing is a bust.

On the other hand, my understanding is that Obama expects years of trillion-plus-dollar federal budget deficits, which means funding by borrowing the money (or printing it) instead of charging it to present-day taxpayers. (The assumption that the stimulus would cause an increase atop existing taxes would, in fact, change all the tax rates of everyone in the chart in the first link.) This essentially means the present-day taxpayer households in the chart don't pay the expenses of the stimulus. The stimulus is funded by some future sucker-taxpayer who will face it plus accumulated interest. And it'll be paid back years in the future, during which time more annual deficit will be mounting. The value of the dollar might be rather different by the time this $850B or so comes due.

This thing -- the stimulus package -- is a gamble on the capacity of Americans to make lemonade from lemons while the sun is shining on the hay fields, or something of the sort. There's no specific plan to create taxable profits to fund the stimulus package, there's just a plan to create economic activity in the expectation that Americans will find ways to create long chains of people earning income in the process. Assuming the funds are spent on things involving labor, design, research, and local fabrication, there's a high probability that the funds will indeed circulate in the local economy, leading to numerous serial points of (taxable) profit. To the extent we spend funds on imported raw materials (e.g., fuels) or imported finished goods (vehicles, televisions), we lose the chance of multiple local serial profiteers.

The key seems to be encouragement of spending on things that are hard to outsource. Toward that end, local construction and energy development infrastructure (and associated engineering, architecture, construction, and other service expenses) seem a pretty good bet.

The interesting thing about long chains of serial profiteers is that they don't get smaller and smaller. The little earners, who profit little, spend most of their small incomes on things like food, shelter, and utilities -- recycling the funds back toward the top of the pyramid and enabling the support of more downstream profit-makers. Dividend recipients, new-added employees, capital gains earners, re-employed home remodelers -- all will benefit from these little guys' expenses and will in turn spend the money again.

The question is how long we can keep the expenditures local before they disappear from the taxable pot to Venezuela, China, and other places we'd rather not fund.

This isn't a one-line calculation, and it doesn't fall neatly into a small table. The impact of a trillion-dollar stimulus package is a complex web of calculations that depend in part on the capacity of Americans to satisfy the demands of Americans. Domestic energy production is an example of a way to invest for the future in the capability of Americans to satisfy the demands of Americans, and to create more domestic benefit from each domestic dollar spent.

The whole thing may not be a work of genius, but it's certainly not the laughable folly some urge. At base, it's a bet on the long-term ability of Americans to make money, and that's a bet with some astute investors' money behind it.