Pennsylvania Investment Observer

The Wrong Question

by Daniel J. Nestlerode

Congress has done what it can do. It allocated a lot of money to help solve the problems wrought by hurricane Katrina. However, allocating money is about all that Congress can do. While our politicians tell us that they feel our pain and sympathize with us, as well as move to spend more than sixty billion dollars, they can really do little else. They cannot manufacture cement, cut timber and produce other building products, the items needed to rebuild Louisiana, Mississippi and Alabama. They cannot create skilled carpenters and builders to assemble the building products into homes and businesses. The bottom line is that politicians adopt disasters to show that they are important, useful and worth reelecting. Perhaps this is so and they are just doing their job.

Yet I hear many politicians and pundits asking a question that exacerbates the damage brought to us by Mother Nature: "How are we going to pay for this extra spending?" they ask. I say to them, this is the wrong question. Why do I say this? First the question presumes that the federal government operates under the same financial rules that constrain individuals. Because the government prints money, borrows money, can spend more money than it takes in and establishes the value of the currency, it lives under a different set of rules to which individuals are accustom. So the notion that we have to somehow offset the new spending with matching cuts or tax rate increases is erroneous. Federal finances just don't work that way. Secondly, and perhaps more importantly, much of the spending to rebuild infrastructure can be done not with federal dollars, but with tax exempt state and local bond issues. I suspect that some of these issues might be somehow guaranteed by the federal government, but the borrowing and repayment will occur at the state and local levels of government. Finally, we have to keep in mind that tax rates can stimulate and repress private economic activity. The Bush tax rate cuts revived our economy, increased employment and increased tax revenues. We cannot create more federal tax revenues by raising tax rates. Indeed, what we need to do is cut rates again to further spur economic activity so that the Katrina recovery dollars are more easily handled by an expanding economy.

Politically, the me-or-you camp, the either-or camp, doesn't understand that this situation can be a win-win for everyone. Yet to opportunity lies in front of us to set up to the plate and create more wealth in the private sector of the economy. It is also in government's camp to end restrictions on Canadian timber and Mexican cement to ease the supply shortages that Katrina will exacerbate. But that is another story.

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