LGM has a lot going on this year already - we’re about to have our annual meeting where we will announce some big changes for the upcoming year. But even with all our own activites going on, it is hard to ignore the economy. So indulge me for a moment.

Now I realize that the goal of this stimulus package is not to actually help individuals or firms, it is to help the macro economy. And that is specifically why the plan as it is outlined, is foolish, selfish, wasteful, and a missed opportunity.

Individual tax payers won’t be materially impacted by the monies we’re talking about. The poorest taxpayers will see enough to cover day care for a couple months. But after that, it’s back to the grind.

Middle class taxpayers will get enough to cover the house payment if they are married, or the SUV payment if they aren’t. Again - not much material impact. Same with the DINKS earning $150,000 - they’ll get some bucks that they’ll throw back into the economy, but only one time. It’s all just a one time shot.

Tax cuts won’t help the poor. But nor will extensions of unemployment and food stamps - those are just band-aids for legions of problems that no economics stimulus package can solve. But we could really make an impact among the middle class by permanently reducing the rate of the payroll tax. And we could even help the DINKS by reducing the capital gains tax - especially on real estate when everyone is trying to sell right now.

But what of business? Bush, Paulson, et. al., propose a multi-year extension of the “operating loss carry back.” Lost? I’m not - my first published paper was on the subject. So here’s the skinny: there is no economic justification, for any reason, for the operating loss carry back.

Here is how that works. Let’s say you are Morgan Stanley, or Bank of America, and you have just lost billions of dollars. What Bush proposes to let them do is this: carry back a portion of those losses to a year where they were profitable, write down those profits with the losses, and get a tax refund for that year, paid today. This is a huge, huge policy mistake for so many reasons.

1) It won’t work. If you are a company that has just lost 3 billion, and the Treasury sends you a check for $10,000,000 - that isn’t ten million new dollars for you to spend - it is an accounting excercise. You now have a smaller LOSS - that is it.

2) It puts government in the position of picking winners and losers, and insulates business leaders from market signals, allowing them to make stupid business decisions (ala our banks in the mortgage crisis that birthed the “need” for stimulus).

Now there is a corollary to the operating loss carry back called the operating loss carry forward. And there is economic justification for this. I bring this up this strategy for a couple reasons that will ultimately make themselves clear.

I mention it first because some readers may have heard of one or the other, and have them confused. The carry forward provision is not an applicable strategy in the case of the pending economic stimulus package, but it is warranted as a long-term growth strategy. The idea is this: if you are an entrepreneur with a business just starting out, it is likely that the first few years in business will show losses. So the last thing that any government wants to do is tax away all the profits of a new business the first year it is profitable. Hence, many governments allow you to carry losses forward and offset current profits so that fledgling businesses are not killed by taxation as soon as they begin to fly. Makes sense. But to recap - the operating loss carryback is never a justified strategy.

One more note on this item before I move along. Yesterday, some reporter from the Associated Press was bamboozled by a story in which a company supposedly used its tax rebate from an operating loss carryback, to stimulate production:

In April 2002, Owens-Illinois Inc., one of the biggest makers of glass containers, put that money (its operating loss carryback rebate) toward reopening a bottle-making plant in Brockway, Pa., that had been shuttered since late 2000, according to the company and the manufacturers’ group. The plant employed around 60 or 70 workers upon reopening but has since been expanded.

This is pure nonsense, as I have already explained. If you are losing money, this doesn’t make you profitable, it makes your losses smaller. AND if the re-opening of this plant were a good business decision, which it obviously was, then Owens-Illinois, a venerable institution with banking relationships commensurate with its stature, would have had no problem getting a plant financed - no government intervention required. And I would have been happy to support the plant by allowing it an operating loss carry forward.

(Note: the Idaho tax code provides for the operating loss carryback, and it sure hasn’t helped Micron remain competitive)

OK - enough on that.

So at the end of the day, what should we do to make sure that money gets in the hands of businesses that will spend it - will make people more free, create jobs, spur creativity and entrepreneurship? Here is a radical idea.

Bush’s stimulus plan will cost taxpayers - yes COST - $250 billion. We had to borrow the money from China to send all of us checks, you know. So what would $250 billion buy?

How about giving each of the States’ SBA offices some grant money to start new businesses. With $250 billion, we could give every state in the nation 50,000 grants of $100,000 each. Would that help any of you, my entrepreneurial friends? Idaho, do you have any interest in 50,000 new businesses? Every single penny of that money would be spent on rent, equipment, salaries, and consumables. If Bush gives this money to the banks, and builders, it won’t ever make it to the bottom line - it’s money wasted.

But think of the entrepreneurial possibilities if the government were really serious about all the things it claims to be serious about - entrepreneurship, capitalism , fostering self-reliance, etc.