Monday, February 16, 2009

Stimulus Plan - An Overview

The administration claims that we might not recover at all if a trillion dollar (w/ interest) package is not passed. World market psychology responds always in the extreme, especially to scare tactics, making the president’s habit of talking down the economy a reckless one. If the credit crisis had not been addressed promptly then indeed we would have experienced a melt down, something we warned about early on. This - the real sector - is something different altogether. Consider that during the 1973-1975 and 1980-1982 periods the unemployment rate almost doubled (4.6-9.0 percent, 5.6-10.8 percent, respectively). Reagan inherited a jobless rate above 10% for goodness sake; we are at 7.6%.

There are many ways listed by us and other observers to spark this economy - cut the payroll tax, cut the corp tax, suspend the cap gains & dividend tax, expand our trade agreements, etc. Substantial tax cuts have obviously worked before (Kennedy - Johnson / Reagan). Yet we are perhaps stuck with the administration’s response. Roughly a third of that are "tax cuts". Most tax cuts aimed at individuals are will not benefit a single taxpayer until their taxes are filed in 2010 -- if there is any benefit at all. Other than a tax credit of $7,500 for families buying a plug-in hybrid vehicle, there is little that is clear, straightforward tax benefit, either for corporate or individual.

That leaves spending. Roughly 25% of this $ is targeted to be spent in fiscal 09, another 45% in 2010. You kidding me? Then 30% in 2011 or later, when even the more pessimistic forecasters expect the economy to be in full recovery.

OK, let’s look at implementation. Take the Energy Department. It will play a key role in the plan. The bill could pump as much as $170 billion into projects such as highways, Internet broadband and public-housing repairs. Of that some $40 billion will go to the Energy dept. The agency would be under the gun to swiftly hand out money to projects for example to modernize the electric grid, build electric cars and make homes and buildings more energy efficient. Yet the Energy dept has had limited experience pulling off big projects. Most of the department's $25 billion budget goes toward maintaining the nation's nuclear stockpile, cleaning up former weapons plants, and doing basic research. "The DOE is going to have to dramatically change how it does business if it hopes to push all this money out the door," says Karen Harbert, a former senior Energy Department official who now directs the U.S. Chamber of Commerce's lobbying efforts on energy issues. "They are going to need more people, more oversight and more freedom to waive regulations." And last month, the Government Accountability Office cited the agency's "inadequate management and oversight of its contractors" when it put the department on its list of agencies at "high risk" for waste, fraud, abuse and mismanagement.

Sound promising? Yet sadly, there are still those who believe that the gov’t can spend more efficiently than private sector. This leads us to the final section of this sketch: Even if implemented, will it work? There is no evidence that it will. It didn't work in Japan in the 1990s as we all know - 10 stimulus packages implemented over an eight year period failed to prevent the "lost decade".

It didn’t work in the US in the 30's. Henry Morgenthau, FDR’s Sect of the Treasury, testifying before the House Ways and Means Committee in May 1939: "We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot."

And our view is that it won’t work now. The Congressional Budget Office concludes that the cost of servicing the bill's nearly trillion-dollar debt will shrink the economy within a decade. Harvard economist Robert Barro, candidate for the 03 Nobel, calls the legislation "probably the worst bill that has been put forward since the 1930s." "I mean it's wasting a tremendous amount of money," he said in an interview with the Atlantic. "I don't think it will expand the economy. . . . I think it's garbage." Agreed.

Most disturbing however are the implications this legislation holds for future generations. We will take that up over the near term.


Robert Craven

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