21 January 2009

Obama #2: Stimulus Package

The Objectivist
President Obama and the Stimulus Package
Dunkirk-Fredonia Observer
January 19, 2009

In the weeks leading up to his inauguration, President Obama pushed the $825 billion House spending plan. By the time Congress sends it to him, this package could well reach $1 trillion. His argument is that the plan is necessary to jump start the economy by increasing demand for goods and services. Obama claims that it contains $275 billion in tax cuts. However, because a significant portion of this goes to people who do not pay income taxes and politically favored businesses, much of this is just more government spending. For example, the plan gives tax cuts to many of the roughly 40% of Americans who were in families that paid no income taxes. Giving money to people who don’t pay income taxes is welfare, not a tax cut.

The stimulus package provides a Christmas tree of goodies to politically correct causes. This includes gifts to the environmental, education, and law-enforcement special-interest groups. For example, the bill includes $20 billion for renewable energy and energy conservation. It also includes $141 billion in grants to states and localities for education spending. It also includes $4 billion for state and local law enforcement. One cringes at how this will encourage wasting even more money and lives on drug prohibition. There is also massive new welfare spending. This includes $43 billion to extend unemployment benefits, $20 billion to increase food stamps, and $9 billion for various welfare programs including, get this, $1 billion for community-action agencies.

It is not clear why we should think that this plan will work. First, it is hard to see how in theory it will work. The money to be spent must come from somewhere and there are only two sources: taxes and loans. If the money is taken from taxes, then the assets are simply transferred from one group of citizens (taxpayers) to another (government beneficiaries). This is unlikely to generate economic growth because taxpayers (in a free market) spend money more efficiently than does the government. If the money is taken via loans, then in the future this money will be taken from taxpayers. This will work only if the additional economic gain is greater than the losses that will occur because taxpayers have less money later on and because interest must be paid to get the loans. Again, this is unlikely.

Second, it is hard to see what historical evidence supports such a plan. The recent bailouts show no signs of working. This might be because of the short period since they were implemented, but at the very least they as yet provide no signs of helping. The federal government has already implemented several stimulus programs, none of which has improved the economy. On February 13, 2008, the federal government authorized a $168 billion stimulus package that consisted of a $300-$600 rebate per person. On March 24, 2008, the federal government set aside $30 billion to allow one investment bank to acquire another (JP Morgan bought Bear Stearns). On October 3, 2008, the government authorized $700 billion for the massive Troubled Assets Relief Program (TARP) that was supposed to be used to buy loans from banks. These loans have declined in value due to the dropping real estate prices. Instead, the government spent the money to own part of the troubled banks. Other money was spent to bail out GM and Chrysler. On November 25, 2008, the government also authorized $600 billion and spent around $20 billion shoring up the assets of Fannie Mae and Freddie Mac, two government-sponsored mortgage-purchasing companies that owns or guarantees about half of the mortgages in the U.S. Between the rebate-stimulus package (February 13, 2008) and now, the stock market has dropped roughly 37% (using the S&P 500 Index).

Historically, there is no evidence that these plans work. Following the November 1929 crash of the stock market, Presidents Hoover and Roosevelt instituted massive new government-spending programs. Yet, as economist Thomas Sowell points out, for nearly three consecutive years from February 1932 to January 1935, the monthly unemployment rate never fell below 20%. In that last month, it fell to 19.3%. The Great Depression provides no evidence that government spending will jump start the economy or reduce unemployment. Columnist Michelle Malkin points out that in contrast to the disastrous Hoover and Roosevelt presidencies, no recession since World War II has lasted more than two years. In addition, other countries (for example, Japan) have tried this type of plan with piddling results.

Even if there were some evidence that this plan would work, it depends on the money being spent on useful projects rather than ones that favor the politically powerful. For example, there are over 35,000 lobbyists in Washington, D.C. who have and will spend billions of dollars in political contributions. These special interests and pork-barrel spending will divert large amounts of this money away from infrastructure and other less wasteful programs.

Even if we assume that the plan would not be diverted by special interests and politicians, the increase in the debt make it likely that the plan’s costs will outweigh its benefits. Under President Bush, the federal debt exploded. It went from $5.6 to an estimated $9.7 trillion. This is higher than any year since 1960. This is about 68% of the total economic output this year from all sectors of the economy. Because the current 2009 deficit is projected to be $1.2 trillion before the .8 trillion stimulus package is added on, the government will tack on another $2 trillion onto the debt next year (increasing it by 21%). In the future, this massive debt will be a millstone around neck of the U.S. economy. Congress and Presidents Bush and Obama are dumping their problems on future generations.

Obama’s support for the stimulus plan indicates that like George W. Bush, he will govern from the left and damage the economy. What a mess.


The Objectivist said...

Note that even if one believes in Keynesianism, the likely diversion of the funds to politically wasteful causes will diminish its effectiveness. Consider the bridge to nowhere, Big Dig, and costs overrun at the Capital center.

The Objectivist said...

Where are the Republicans these days? Have they given up their opposition to massive government growth?

Clearly, McCain and the rest of liberal Republicans have left the battle of ideas.

brian said...

at this point, we actually have shown some improvements on the credit markets. the best way to track this is by looking at the TED spread. What we should be concerned with here is the difference in interest rates between a 3 month treasury bill and a 3 month loan between banks. after lehman brothers failed, the TED spread spiked to a new high (spiking at 4.63% in october). now, we have the spread under control again, above 1 but not anywhere near where it was.

see the following bloomberg chart:


consider also that the consumer price index has been falling. we are staring a deflationary spiral right in the face. and we've run out of conventional monetary policy measures (you can't go lower than 0).

we have two options at this point:
1) fiscal policy.
2) absurd monetary policy like changing the reserve requirement.

the empirical question of how the bailouts are spent is an entirely different question from whether there should be bailouts.