Jan 28 2009

A Useless Exercise In Government Economic Intervention

Published by at 10:31 am under All General Discussions

The economy is hurting because so many people lost so much wealth their consumption has slowed down incredibly. This slow down in consumption has caused a massive and expanding ripple effect. Now many industries are seeing their revenues slow down or dry up, which causes them to lay off people – and the cycle continues. The initial jolting loss of wealth can be laid at the feet of the Democrats and their reckless efforts to hoist homes on unprepared home owners. This mountain of bad loans, once it began to fall like a winter avalanche, tore through banks and consumers and investment packages, which caused the rippling we still feel today.

The massive retirement of the Baby Boombers, who are toning down their consumption as they step away from helping to drive the economy, also plays heavily into this maelstrom. Lowered consumption by them alone was going to be a challenge. As they started taking their retirement benefits without producing anything (like a ‘worker’ does in our economy) they become a drag on our economic engine, chewing up investment dollars, salaries, etc to cover their payments.

Into this historic economic storm steps the impotent Democrats and our young President, with fairy tale remedies that look like someone brought a plastic spoon to fight a modern war. The economy is driven by jobs – well paying jobs. These jobs generate the money we use to cover our debts, responsibilities and our basic needs (individually and as a country). We use what little is left over to indulge or invest. For too many years we have been addicted to the former and pretending it was the latter.

The pork projects and reckless schemes (like the Democrat housing market debacle) are prime examples of this over indulgence. Government can play a role, but it must be a minimal role and it cannot starve out the market by competing for the scarce resources which have become even more scarce recently. We need innovation and export. We need to be constantly on the front edge of business. We need new ideas and risk takers. We cannot be competitive while we spend our time and effort indulging ourselves with futilities.

America has been heading for this train wreck for a long time, but we kept putting off the day of reckoning to avoid the pain and taking it in manageable steps. No more, we must face reality.

So with all this in mind we can see how pathetically useless and impotent the current ‘stimulus package’ truly is. In fact even Democrat leaders know it is pathetic because Obama has already, in his second week, done what President do only in times of great need – he went to beg on Capitol Hill:

The rare trip by a president to Capitol Hill revealed the urgency in Congress and the White House over a cure for the souring economy. More than 70,000 layoffs were announced this week and fresh data showed unemployment last month rose in all states.

There are some good measures in the bill, things the Democrats let fester for years so they could score political points about all those ‘rich’ republicans, for instance:

The Obama administration indicated it would agree to a $69 billion Senate proposal to shield tens of millions of middle-income Americans from the so-called alternative minimum tax, a priority of Iowa Sen. Charles Grassley, the top-ranking Republican on the Senate Finance Committee.

Like too many these days who fear fractions, the ATM was made law using a hard coded dollar value, not some fraction of a consistently updated indicator (like average salary, etc). This was supposed to be a soak-the-rich scheme, but normal dollar inflation has made us all ‘rich’ relative when this liberal law was passed. It is about time and welcomed. But this won’t save the bill from failure.

The real problem is the stimulus it too little too late, and it is wasted on activities that cannot produce an immediate ‘stimulus’. Instead of being something like a defibrillator giving a life saving shock to a patient, the package seems more like some hair tonic thrown around to grow back thinning hair. Whatever it does will take years and will be hardly noticeable for the near term.

The problem is the reliance on infrastructure projects to revive the economy – it is pure snake oil:

The economic stimulus package proposed by Democratic House leaders totals $825 billion and includes three broad pieces: a $365.6 billion spending measure for such brick-and-mortar projects as highways and bridges; a $180 billion measure to boost jobless benefits and Medicaid, among other things; and a $275 billion tax-relief package, which includes a plan to give a $500 payroll tax holiday to all workers, a proposal from Mr. Obama’s presidential campaign.

The largest part of this farce is long term projects. All infrastructure projects takes years to get started and years to finish. Another problem with infrastructure projects is they cannot become too pervasive or they cripple our economy. You can only have so many road projects running at a time in any area – otherwise you stop mobility and people drive around the effected area – which in turn hurts local businesses. In addition, there are only so many people and machines to do this work. The country is not far from reaching capacity on road work and has plenty of large infrastructure projects on going and in the works. Who wants endless ‘Big Digs‘ screwing up their region for years?

This fiasco is the epitome of political delusion. These people have been swigging their own PR bath water too long. They have used inflated and exaggerated reasoning to pass these measures in the past to the point they now believe their BS! It is amazing to watch the DC establishment come out and really believe they can right this economy with this plan. 

And what is this feel good money for jobless claims and Medicare about? It is an admission they really cannot do anything to help people by creating jobs to replace those that disappeared in the market collapse of last year. The only element of the bill which has the potential to increase consumer consumption, and therefore create jobs, is the tax breaks. But $500 hand outs is not going to help much when having a $45,000 a year job makes raising a family very tough in most regions of the country.

I feel for the people hurting right now, but this farce of a bill is a sick joke. Look at the funding profile over the next few years and realize what little there will be is mostly coming NEXT YEAR!

You can get more detail on the phasing and elements from the CBO report – but the harsh fact is there is not going to be any near term help from this bill. The only element which could kick in quickly is the $500 ‘tax holiday’ gimmick. This is what CBO had to say about the speed with which the money would flow:

The budgetary impact of the bill stems primarily from three types of transactions: [1] Direct payments to individuals (such as unemployment benefits), [2] reductions in federal taxes, and [3] purchases of goods and services (either by the federal government directly or indirectly via grants to states and local governments). CBO estimates that impacts from the first two categories of transactions would occur fairly rapidly. In the third category, CBO estimates slower rates of spending than historical full-year spending rates in 2009 for a number of reasons:

  • The bill’s enactment would likely occur nearly half way through the fiscal year.
  • Previous experience suggest that agencies have difficulty rapidly expanding existing programs while maintaining current services; the funding in H.R. 1 for some programs is substantially greater than the usual annual funding for those activities.
  • Spending can be delayed by necessary lags for planning, soliciting bids, entering contracts, and conducting regulatory or environmental reviews.
  • Agencies face additional challenges in spending funds for new programs quickly because of the time necessary to develop procedures and criteria, issue regulations, and review plans and proposals before money can be distributed.

Frequently in the past, in all types of federal programs, a noticeable lag has occurred between sharp increases in funding and resulting increases in outlays. Based on such experiences, CBO expects that federal agencies, states, and other recipients of funding would find it difficult to properly manage and oversee a rapid expansion of existing programs so as to spend added funds quickly as they expend their normal resources. The seasonal nature of some spending also affects the speed at which activities can be conducted; for example, major school repairs are generally scheduled during the summer to avoid disrupting classes.

The fact is very little of what they call “Direct Spending” can be started for real this year, or even next year. While the government can budget money, they need to go through the procurement process for new work efforts, something woefully underestimated in the CBO analysis. What this means is the amount of spending this fiscal year (through September) that is not “Direct Spending” is a paltry $29B. In an economy that runs over $10T a year that is like adding $29 to $10,000 and hoping it makes a big difference.

Government has been the problem here. It needs to role back it reckless economic schemes and stop indulging itself to the point of becoming a bloated cancer. It needs to release the private sector from the shackles of government regulations and trust the American people and their economic instincts to raise us out of this mess. We have allowed egomaniacal fools in DC to play god with our country for too long. They need to step back and let us do what we do best – produce wealth.

Update: Reader Crosspatch wrote an extensive and excellent comment on this very topic yesterday – worth a read.

11 responses so far

11 Responses to “A Useless Exercise In Government Economic Intervention”

  1. lurker9876 says:

    We are turning into another Sweden with the minimum of a 60 percent tax rate for all.

    There is a petition at Americans for Prosperity to strongly object to the stimulus plan.

    In the meantime, Obama has told Russia that our missile defense projects for the Czechs and the Poles have been scraped without notification to the Czechs and Poles AND the employees working on these projects. Talk about not following the 60-day notice law, if this law applies.

    In no time, we have quickly become a paper tiger, weakened Israel, Czechs, Poles, and Europe, and our enemies safe to attack us.

    Each and every Republican should vote against the stimulus plan. They should have voted against the SCHIP plan. And take the heat from the media for being cold-hearted and all. They need to take the spine and spunk.

  2. dhunter says:

    Good analysis AJ, but I fear it is too late. The American people have elected the fox to guard the hen house. Reid, Pelosi, Rangle, Frank, Dodd, and Obama all complicit in the downfall of the economy have been re-elected.
    Do to a weak, ineffectual republican party and party leadership, now we will all pay the price for the folly and ineptitude of the Dems and their enablers.
    Only a wholesale house cleaning, term limits and newly elected citizen legislators with real world experience can save the day from the died in the wool, go along to get a long, inside the beltway, career politicians.
    Alas, the one chance we had on either ticket was demonized as a stupid, uneducated hick from the most rural of rural areas of our country, not at all as enlightened as the elites with their Ivy League degrees and big city mental acuity.
    We will soon regret the day we allowed Sarah to be destroyed by the powers that be and her pathetic handlers within the pathetic McCain campaign.
    Its’ always darkest before the dawn and darkness has only just begun. The pain we will all soon feel for the electoral folly and republican party ineptidute awaits to be seen.
    Batten the hatches, lock up your cash and guns and get ready for an excursion into socialism and all its destruction.
    I fear we will all become Detroits, Chicago’s, New Orleans or any other cesspool city you can think of where the Democrat Party has been in charge for any period of time.

  3. WWS says:

    The “plan” is to have the Fed print our way out of this situation, but no one really believes that we can print our way out of this – not even those at the top. (Anyone who doubts that we are planning on creating trillions of dollars out of thin air answer “where is the money to do this coming from?” Like magic out of nowhere, that’s where.

    All the politicians and talking heads *say* it is going to work (even though they know it won’t) because they are trying to create “confidence” and they think they have to say that, but they don’t believe it. Besides, for the traders on Wall Street, the ideal move would a repeat of december – a great big rise thay can play with call options, followed by another fast fall they can play with put options. They win both ways, and the country gets doubly screwed over. That’s the only viable profit model left for Wall Street these days. Even the most bullish analysts are now saying that the “infrastructure” plays are no
    longer “buys” since the runup in their prices has happened and most of the promised money isn’t going to actually show up until 2010.

    The proposed stimuluseless bill has things in it such as a free $300 check for everyone on social security. How can this possibly help unemployment, or foreclosures, or any of the 100 other real problems? It can’t, and there is not even a serious argument to be made that it can. It’s just a transparent grab bag to throw money at an indentifiable voting group in hope that they’ll remember the largesse in the 2010 elections.
    What investor can honestly have any confidence when this kinds of nonsense is being planned?

    Another factor is that the UK is falling apart financially much faster than anticipated. They are on the verge of full bank nationalization of their banking system not because they want to, but because there will be no other choice. (Just like Iceland) They have been following similar policies to the ones Obama is proposing – the parallel is too obvious to miss. Not to mention that a British financial collapse drags us down regardless of our economic policies simply because of the close ties between London and New York. I’ve anticipated a collapse in the Chinese economy (not far away now); the surprise may be that the UK goes down first.

    Over the last 6 months we have already done too much with no results. That’s heresy to the government advocates who believe you can never do too much, but look at the Fed’s interest rate policies – by radically dropping rates
    as close to zero as they can, they have effectively used up all their ammunition and shown that there is little more then can do. Lowering interest rates to zero was supposed to be the financial A-Bomb, Wall Street was giddy when it happened. Now it’s happened and instead of an a-bomb, it was just a big stink bomb with no effect at all. Same goes for TARP – can anyone see what it’s done so far? Disappeared like a pebble in a mud puddle. (I know, lined a bunch of bank directors pockets, but to the public the money has just vanished to no effect) Again, back to the British example – they also have been shoveling billions of pounds into the money pit and it’s all disapeared with no effect. What worries me most, in fact, is the mood of despair that will settle in once the public decides that nothing can be done. That may take a decade to break, or more.

    The biggest problem is the rapidly rising unemployment rate. Each month takes a bigger bite out of the employment pool and makes every other problem worse. We lost 75,000 jobs in a single day last week. Now Obama’s biggest problem is not mortgages but unemployment, and each day that goes by without recognizing that makes the situation worse. He can’t fix the economy without fixing mortgages, he can’t fix mortgages without fixing unemployment, and he has no clue how to do that. The announcement that he will create 3 million jobs out of thin air and wishful thinking is downright scary – to use one of your phrases, he wants those 3 million jobs the way a 5 year old wants a pony, and with no more idea how to get it. What’s more, the commercial real estate crash is now looming on the horizon, and more and more people see it coming. Mainstream publications are starting to cover the coming defaults. Or is the government supposed to kick in ANOTHER trillion on top of everything else to save the commercial real estate brokers? Because that’s what that problem will take.

    Larry Summers was on a show last night and was quoted as saying that taxes, of course, will have to go back up – the Bush tax cuts will have to be repealed. Now, whatever one thinks of the rightness or wrongness of those cuts originally is completely beside the point – the point today is that raising
    taxes in the teeth of a depression is one of the most destructive things that can be done to an economy. FDR himself proved this in 1936 – 1937. Everyone believes that Pelosi and Reed will race to do this, and as soon as they do that should spark a race to the downside in the equities markets. The only reason this hasn’t happened yet is that Obama hasn’t supported this publicly and many still hold out hope that he won’t support it. I don’t believe he has the nerve to stand up to his own party leaders.

    This may lead to the biggest sourse of instability of all, and that is a potential loss of confidence in Obama. I know, almost everyone will tell me this is impossible – but we have become a notoriously fickle people. Remember when Bush had 70%+ approval ratings? As the situation goes south and nothing changes, the country’s mood can change on a dime. Most demagogues meet that kind of situation by trying to find a scapegoat, but I wonder if Obama is actually ruthless (or smart) enough to try that. I suspect, since he will never have been in a position like this ever before, he will have no clue what to do. If we as a people do lose confidence in Obama, then we will see a real crash in every market, and it will be swift and brutal – Dow 4000 at least, maybe lower.

    Wise policies could avoid this. I see nothing but a drunken Washington orgy with hundreds of billions of dollars floating away on the wind.

    Not only is this not going to work, it *Can’t* work – there is no reasonable argument to be made that it will work. It is insane, and this country is falling into a mass insanity.

    At some point we are all going to wake up with a hell of a hangover. If there’s hope, it is that maybe someday our children might claw their way back to the standard of living we’ve just lost. But it may not happen that soon.

    People think we’ve gone through a great fall – have no doubt, the real fall hasn’t even begun yet.

  4. Wayne at Jeremiah Films says:

    I have linked to your post with a quotation as a resource article for BlogWatch • Is the bailout failing

  5. Terrye says:

    I think it was necessary to react to the collapsing financial markets. A capitalist economy can not function without capitol, but once that market has been stabilized it is best to allow the economy to find its own way out of this.

    I can see some tax relief and perhaps a holiday of sorts on useless time consuming and expensive regulations that slow down business.

  6. BarbaraS says:

    The democrats are responsible for the failure of the economy. They enacted the CRA and Clinton tinkered with it even more. They forced banks to lend to people who could not afford the houses they bought. Anyone who buys an ARM mortgage is remarkably stupid and the sellers are crooks who take advantage of the remarkably stupid. The government then guaranteed these mortgages with Fannie Mae and Freddie Mac. Then they refused to oversee the GSEs when Bush and others asked. They were too busy greasing the fists of their buddies and collecting campaign donations. The banks put these mortgages for sale and investors bought them. There is no sense blaming Wall Street for this mess. That is the name of Wall Street’s game making money. But before the GSEs failed, just in time for the election, the democrats were going to go home having done nothing and admitting they didn’t know what to do, the dems talked down the economy, saying we were in a recession when we were’t. Yes, the dems are responsible all along the line. Blaming Bush is their usual obfuscation to turn the blame away from themselves.

    They are still talking down the economy. To give you an example: my sister and her family who are quite well off decided this year not gove presents to each other, only to the children. Spending is what will bring us out of this slump and a lot of people have this attitude. That is why Christmas sales were so slow. After 9/11 Bush told everyone to spend and we got out of that slump that could have destroyed our economy and he imposed tax cuts to help us spend. The dems don’t want to do this. They, as usual, want to raise taxes and tell us not to spend.

    Sometimes I wonder if this was the plan the dems implemented on purpose to win the election and it got away from them. Goodness knows why the elctorate voted them in when not only did they cause this mess but they admitted they didn’t know how to fix it.

    As far as this stimulus goes. Many of the items are the wish list of the dems: such as giving billions to ACORN and SHIPP, millions to endowment of the arts. The truth of the matter is that the dems are beholden or have friends with too many people and will never close down any wasteful committees and such. And about this $500 not being collected for SS. SS is already in trouble. Talong this money out of the equations will make it fail that much sooner.

    AJ is right in a prior post. It is like watching 3-year olds play with a scalpel.

  7. crosspatch says:

    Look at this graph of the US money supply since 1910. I think before we go tossing more fuel into the fire, we give the fuel we have already thrown in a chance to “catch”. Another trillion dollars dumped in might sow the seeds for hyper inflation.

  8. crosspatch says:

    I would say this article at Bloomberg is a must read.

    Jan. 27 (Bloomberg) — Seventeen months after seizing up at the onset of the credit crisis, the $1.69 trillion commercial paper market may be the first to cut its reliance on federal bailout programs.

    About $245 billion of 90-day commercial paper that companies sold to the Federal Reserve starting in October will mature this week and next, central bank data show. As much as $50 billion to $70 billion of the debt may be rolled over and bought by investors, according to Barclays Capital in New York.

    At current yields, selling commercial paper to the Fed may cost a typical borrower almost three percentage points more than market rates, indicating most companies are able to find non- government buyers for their debt.

    It looks like the credit markets might be in the process of righting themselves and I am seeing other indications of bottom formation in other markets, too.

    The government getting too silly with “stimulus” might be the last thing we need right now and could actually make a bad situation even worse. My advice (as if it was asked for) is “steady as she goes” and hold additional liquidity in case the future shows a return to worsening conditions. While things are recovering, it is best not to overheat that recovery lest the wave break from unsustainable spiking. You want reasonable growth but not too fast and indications aren’t looking too bad at the moment that the markets are starting to remove themselves from the government teat.

  9. [...] and nothing in this bill will start flowing in any meaningful manner for over a year. Even the CBO admitted as much when it scored the House version of this [...]

  10. [...] The third category is the largest element – it is the programs that are supposed to lift the economy. They won’t kick in for a year or more, probably much more than a year (read more from a previous post). [...]

  11. [...] when they passed and exaggerated the liberal stimulus bill. It was doomed for certain failure, a fact I noted in January before it was finally signed into law: Into this historic economic storm steps the impotent [...]