Obama’s Stimulus Plan Won’t Work
September 1, 2009
Explanation: Obama’s stimulus plan won’t work. But Socialism still filters in.
Government spending has an abysmal track record of stimulating the economy. However, these repeated failures have not stopped lawmakers from proposing and enacting a seemingly endless string of “stimulus” bills.
The U.S. economy has soared highest when the federal government was shrinking, and it has stagnated at times of government expansion. Mountains of academic studies show how government expansions reduce economic growth.
This post discusses critical angles that have not been widely reported, namely just how badly targeted this stimulus bill is. In the end, the analysis may be a bit dire, but logical and probable. It also exposes a provocative future of the structural changes of our country.
Tax incentives have a higher multiplier than government spending. What is multiplier? It is the amount of new economic activity generated by $1 of stimulus determined by either tax cuts or spending increases. A lower multiplier is bad. A higher multiplier is good. Spending impacts die faster than tax cuts. Tax cuts impact growth and sustain themselves greater over a period of time.
Because the stimulus package focuses on spending and not tax relief the long-term stimulus multiplier will be much lower; resulting in a limited long-term impact on the economy. Since spending from the stimulus bill starts late, the economy will hit bottom before significant spending even starts. The bill is also targeted to certain sectors of the economy in a misguided fashion.
The Stimulus Focuses on Wrong Sectors
So, what sectors does it claim to stimulate? Forty seven percent (47%) targets sectors that are still growing today. Health care is still growing and does not need a stimulus. In fact, given the hardships of the economy health care is the fastest growing sector: Services, including health care, are hovering near an all time high and guess what? With a shortage of workers; it takes years to train new workers; and in general, workers cannot migrate from other industries easily into health care, this part of the stimulus package will not create many new jobs and will make existing workers busier which drives up health care wages and creates shortages which will drive-up health care cost.
Education is still growing also. Education spending isn’t necessarily bad. George Bush doubled education spending in 8-years, rightly or wrongly. To note, we spend five times as much as global competitors and US students still lag behind. Spending has increased 800% but test scores have not changed one percent. So, education does not need stimulus either. So, why double-down on failed policy?
Teachers and educators rarely get laid off. Moreover, teacher unions require degrees in education and it is very difficult to transfer workers into education from other industries. Meaning, that this part of the stimulus package will not create many new jobs; does nothing to attract GOOD teachers so it won’t improve educational outcomes or improve better schools or create new jobs.
Energy is growing also. Energy projects are not necessarily bad. But energy does not need stimulus either. This stimulus is designed to help other sectors too such as; non residential structures; but they are maxed out in capacity. Government does not need any stimulus either with roughly 110,000 new jobs recently and state and local budgets that are maxed out as well. Hence, 12% of the stimulus bill targets sectors that are near maximum capacity. Heavy construction is near maximum capacity as well.
But the infrastructure part of the stimulus bill may have an impact but it over-stimulates only a small part of the overall economy. A two percent job loss (a fly) in a small part of the economy captures 20% of the stimulus (a hammer). Go figure? As mentioned, the non-residential sector has very little excess capacity as well. You can only fix so many broken bridges.
But thanks to an executive order imposed by Barry, projects will use more expensive union workers. The order states that government contractors should favorably consider “project labor agreements” (PLA) which carve out jobs for union workers. Union only PLA’s drive-up cost for American taxpayers – while unfairly discriminating against 84% of US construction workers who chose not to join labor unions.
So, heavy construction capacity will be immediately maxed out. Workers will be forced to join unions to get contracts which mean it unfairly favors political special interests. Cost will rise drastically due to shortage of workers, equipment and materials. Each project will cost 20% to 25% more than it should. What happens when you over stimulate growing sectors of the economy? You get inflation. And, the result? Health care cost will accelerate. Construction cost will skyrocket.
Only 3% of this stimulus targets sectors in serious decline. The RATS removed 80% of the housing stimulus. The Housing sector is no doubt the hardest hit sector. It does need a major stimulus. Residential construction is in a free fall with over 19% job loss and only 2% of stimulus. The Bill under-stimulates the weakest part of the economy.
Next the RATS removed 80% of the auto stimulus part. The auto stimulus became a separate spending bill with the total amount of funds allocated and promised to the auto industry now exceeding $110 billion. With 365,000 job losses no doubt auto sales needed a major stimulus. For the month of July, the unemployment rate in Detroit stood at a staggering 28.9%.
All big ticket durables are hurting too. Yet only 38% of the stimulus targets sectors that represent 70% of the economy. Not very stimulating. Soon though, you can also expect more increased spending as additional alternative ‘stimulus’ packages for targeted sectors such as the auto industry, transportation, state government and home mortgages make their way to Congress. While more spending will be disguised, higher taxes will not.
The bill ends up being the most exorbitant spending bill in history and has little to do with stimulating the economy. So, it bears repeating what was just written above in dollar value: some $282 billion of the package – just more than one-third of the total – goes to tax relief for lower-income Americans. Another $507 billion of the stimulus is set aside for spending, of which $160 billion is earmarked for direct aid to local and state governments. Another $80 billion is set aside for educational programs.
Thus, half the spending side of the stimulus, over $250 billion, goes to keep state and local governments from laying off teachers and other government employees – whose unions backed Obama and the Democrats – and to keep current government benefit programs going. So this third of the stimulus does not add new money to the economy – it keeps it parked right where it is.
The other half of the $507 billion in spending – another $250 billion – is for a potpourri of pork barrel programs, including infrastructure, energy, and healthcare. The money will be spent over the next five to 10 years – adding little to the economic “emergency.”
The Stimulus Focus is Misguided
And, what about that putrid $13 a week tax relief? Consider this: fuel cost have slightly fallen. Lower fuel prices has a 4.7 times impact than the Obama stimulus package. A driver at $2.50 per gallon using 750 gallons/driver/year equals $1875 per household and this has not helped. So to think that the stimulus packages tax-relief provision will help is wishful thinking. A $13 tax relief a week is not enough to change consumer behavior or increase consumer confidence. Tax Rebates do not Stimulate.
Nowhere is the government spending stimulus myth more widespread than in highway spending. Before the government can spend $1 billion hiring road builders and purchasing asphalt, it must first tax or borrow $1 billion from other sectors of the economy—which would then lose a similar number of jobs. In other words, highway spending merely transfers jobs and income from one part of the economy to another.
Furthermore, sending federal aid to states would not save taxpayers a dime because state taxpayers are also federal taxpayers. Increasing federal borrowing to keep state taxes from rising is like running up a Visa card balance to keep the Mastercard balance from rising. The overall costs do not change, only the address receiving the payment.
And, what about the “Buy America Provision?” It sounds good but it won’t feel good as countries embark on trade wars with us. It will kill growing exports. What might be even more painful of this stimulus bill are the entitlements that will be impossible to cut in the future. This “stimulus” bill amounts to nothing more than a RAT piggy bank for Barry and his administration to dole out, over the next five years, to political donors and constituencies to win congressional re-election in 2010 and for Barry’s re-election in 2012.
The true cost of the stimulus is $3.27 trillion and its long-term effect is a sad commentary in efficient governing. No wonder why the Democrats were working as fast as they could. They wanted to keep the people in the dark as they passed this travesty as quickly as possible. The spending goes to influential special interest groups and in 2 years the situation will be anything but temporary as Barry’s stimulus plan will amount to the largest one-year increase in government handouts in American history. It would essentially, unravel most of the 1996 reforms that led to a 65% reduction in welfare caseloads.
But the great game continues…Why did taxpayers, having already bailed out GM and Chrysler once, have to do so again with Cash for Clunkers? This taxpayer money simply enabled the dealers to avoid having to offer discounts off sticker prices and to extract higher profit-margins than they would have otherwise obtained on the qualifying new cars.
And the auto industry hardly deserved special treatment. The promotion stole largely from future sales with taxpayers subsidizing over half a million new car sales that would have occurred anyway. C4C disrupted the even flow of supply and demand too. And, get this; only roughly $145 million of $1.9 billion in claims have so far been refunded to dealers. Ironically, GM and Chrysler are using taxpayer bailout money to advance dealers the refund money.
The Stimulus Effect will be Limited
According to the Obama administration’s mid-session budget update, the federal government will have to borrow nearly 40 percent of its total expenditures in 2010.
The report, “Mid-Session Review, Budget of the U.S. Government, Fiscal Year 2010,” shows that 39.9 percent of all federal income will be borrowed, making borrowing the single largest share of revenue in 2010. The next largest component of federal revenue is the personal income tax, which accounts for only 27.3 percent of federal funds.
This is only slightly lower than in 2009, when the federal government borrowed 43.3 percent of the money it has spent so far. The 2009 fiscal year ends Aug. 31, 2009. The revised budget estimates mean that the government will be borrowing the second largest share of federal spending since World War II.
To note, a one percent increase in government spending as a percent of GDP (from, say, 30 to 31%) would raise the unemployment rate by approximately .36 of one percent (from, say, 9 to 9.36 percent).
Moreover, while the number of unemployed persons in July was roughly 15 million, in Detroit, the unemployment rate stood at a staggering 28.9%.
So what does all this mean? We are headed toward a double-dip recession just like Japan had. Nearly two decades before last years mortgage crisis, Japan weathered a real estate crisis that affected its economy for nearly a decade. So what can be learned from that crisis? Don’t spend your way out of the crisis. Japan ramped up spending on public work projects and it did little to ease the financial crunch. What is Barry trying to do? He is trying to spend his way out of it. History has a way of repeating itself.
The economy will most likely, as economist predict, have a slight natural recovery of its own over the next 6 months, much before the stimulus actually kicks in. This is simply a head-fake. Parts of the stimulus will be felt in 2010 as part of a false and jobless recovery. Another head fake. And, then expect inflation (or stagflation) to set in with an increase in money supply, increased interest rates, and increased mortgage rates with housing prices still extremely soft driving up higher the number of foreclosures.
Just as the limited stimulus begins to die out – the Bush tax cuts expire – just in time to choke the life off private investment.
Then with all the adjustable rate mortgages and option ARM’s and resets ready to explode so will mortgage payments setting off a Tsunami of new housing foreclosures. A whole new round of resets will occur in September, 2009 and 2010 respectively. Then it will get really interesting. Models cannot really predict what will happen next. Though we know this: It is mathematically impossible to end a credit recession with more debt.
But even objectively optimistic forecasting models at Yale University, not a right wing think tank, say the stimulus is a bad idea. It only shifts the growth and lowers Gross Domestic Product (GDP) at a net cost of $600 billion and the Congressional Budget Office (CBO) agrees. When was the last time you paid $6000 for a pay cut? You just did. Actually, your children did.
This is what happens when you ignore bipartisan ideas. And, vote to allow only 48 hours for public examination of a Bill. But the lobbyist had plenty of time to see the bill. They wrote it. Congress did not read the 1073 pages before voting on the bill. Yet, it took Barry 4 days to sign it. But expect a disguised second stimulus bill (buried in another named bill) along with middle-class tax increases.
Look for this mind-boggling spending orgy to continue while the RATS think they have either; enough political capital or manipulative messaging to get away with it. Health Care, Cap and Trade, Amnesty, Card Check, Fairness Doctrine and more burdensome regulation battles lie ahead. Obama is about to propose massive tax increases on small business income and private equity investments, only he will describe those increases as affecting only “the rich”. Only a fool would believe that vastly increasing the cost of capital and punishing investments would lead to wealth generation, much less economic recovery. But what is really going on?
What was this Stimulus Bill Really All About?
The overriding purpose of the Democrats’ socialist schemes is not to stimulate the economy; it never has been. The purpose is to facilitate a permanent Democrat electoral majority by creating two classes of voters: one, a highly-taxed minority who vote Republican and create all the wealth, the other a largely non-taxed majority who vote Democrat and receive the benefits redistributed by government from the first group.
Tax hikes will be announced in somber presidential addresses all dressed up with Orwellian rhetoric about patriotism, responsibility and sacrifice flanked by uber rich, insanely spendthrift Pelosi and Reid with the WH feeding the MSM snipes and slings at the “selfish” that resist. It will be in the guise of ‘all for the common good,’ as Turbo Timmy stated only recently on Meet the Press, launching the trial balloon, “we’ll do what we have to do.’
Yep, with spending increases in place, taxes will be raised next. Then, significantly, the Bush tax cuts will expire and will die a natural death; and then by taxing the “wealthy;” and then by calling for all Americans to “get some skin in the game;” and then by raising payroll taxes, we will well be on the road to serfdom.
The spending orgy will continue as Congress and Obama believe that the financial crisis and poor economy provides them with cover (with global warming waiting in the wings). You are witnessing a 30-year agenda packed into 2 years. Do the RATS think they have enough political capital to get away with it?
I also wonder if a lessening value of the Stock Market is a strategy of Barry? Remember the story about confiscation of 401Ks? The Government would give you the value of your 401K, retroactive to say, last August, in Treasury Bonds. That way they could assure control of ALL your retirement funds for their own use. One used to be able to make much more in the Market than the 3% or so that Treasury Bonds pay each year. That may not be the case from here on out.
But, what about the rumor of the federal government taking-over state pension funds? The Socialists in DC will make sure the market doesn’t recover, much to the detriment of our beloved country. Barry seeks structural change. And, any such attempts to restrict the free flow of capital will result in massive flight, resulting in worldwide economic chaos for some time to come. Do you suppose that is what the Barry Administration desires?
The “stimulus” bill has increased the federal role in, among other things, education — and gets the government’s nose fully in the tent of private medical decisions. The slab has been poured underneath what some want to become nationalized health care. Yes, that 1073 page bill that your congressperson didn’t read was the groundbreaking funding for nationalized health care. The American people will never knowingly adopt socialism. But under the name of ‘progressive’ liberalism they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened.
Massive capital flight from the country is inevitable and the flight from the stock market to gold is one manifestation of this. We will continue to see blatant and disguised attempts of new restrictions on freedom of movement and capital. Note the Justice Department’s attack on UBS and Swiss bank secrecy. The illegal immigration problem will most likely be fixed by the natural ramifications of Socialism as Barry moves toward legalizing illegal aliens.
Many believe that the socialists in Congress and the White House are spending beyond the country’s means purposely using the steps through the Cloward-Piven Strategy, a Saul Alinsky disciple. The Marxist’s plan is to first bankrupt America or cripple it, destroy its credit (we are embarking on losing our AAA credit rating) and whatever profitable industry is left. The Cloward-Piven strategy depends on surprise, confusion, demoralization and a feeling of disheartened dejection. Once society recovers from the initial shock, the backlash begins. (See Cloward-Piven Strategy)
Where is the GOP (Conservative) Leadership?
Since the Republicans in the house did not follow-up the Contract-with-America; since the Republicans blinked in 1995; since the Republicans backed-off term limits after 1994; since Republicans lost the Senate majority in 1986 election, there has been no conservative majority in Congress since 1996.
People who re-elect their Congressmen and Senators are to blame in both parties. You think a subset of the current crowd can implement a conservative or libertarian-type economic policy? The last 15 years have proven that those in power will adopt the tactics and politics of those who have managed to be in office and get re-elected numerous times. Reward those who can bring the pork home. No mention to those who vote to limit the size and reach of the federal government.
But, do our conservative policymakers understand all this? Or, is the GOP just deploying a series of covert signals to identify one another, much like gay men, CIA spies or the Mafioso. Since the press corps is so slavishly and supinely devoted to the Deity-elect to begin with, the challenge for the Republican Party becomes much more difficult.
Republicans have largely split into two camps in these early days of the Obama administration: those looking for any opening to assert their diminished authority, and those aspiring to help broker deals with a popular new president who has pledged a bipartisan approach to governing. Who in the conservative party though will rise to be activist legislators versus active obstructionist?
And, as 2010 approaches, the questions brewing include who will control the Census count? ACORN? The White House? When the battle for control over redistricting and census count come into play watch for an attempted overhaul of the immigration laws. Immigration reform equals path to citizenship. Barry’s idea of a path to citizenship is amnesty. Amnesty means a voting block that would sustain RAT government-control far into the future.
And, considering that this is probably the most explicit race-baiting campaign messaging administration that American politics has seen since the retirement of George Wallace, the challenge to mitigate achievements in census and immigration reform becomes that much more daunting. Are you listening Republican leaders?
Ok so, let’s do this. Since this was such a depressing read; lets leave it on a high-note. The liberal RATS will go down in history as giving us our first black president and I am afraid it will go down in history as a disaster. The conservatives, in turn, will respond with a fiscal conservative President, maybe even a woman, and Congress and it will revitalize this country along the lines of Ronald Reagan and go down in history as one of our finest moments. There. I feel better.
My tray table is stored and my seat is in the upright position….
(Statistical data points and excerpts extracted from Media Research Center, CNS_News, BattleStations, Reason magazine, New York Times, L. Brent Bozell, Dom Armentano, or Veronique de Rugy)