America's New Stimulus Package: Looks Good, But Is It Enough? 20 comments
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by Dirk van Dijk
The stimulus package is likely to help companies like Emerson Electric (EMR), General Electric (GE), Jacobs Engineering (JEC), Chicago Bridge & Iron (CBI) and Caterpillar (CAT).
We now have a rough outline of what the economic stimulus package will look at. The total size is set at $825 billion. In general I like the plan, with the exception of the tax loss carry backs, but I wonder if it will be enough to dig us out of this gigantic economic hole we are in.
Parts of it seem like an air bag in a car, the vehicle might still be a wreck, but at least the passengers will walk away with only minor injuries. Much of the spending would make sense even if we were not in a recession.
Here are the key components, along with my thoughts on each (or at least
most) of them.
Tax Cuts - $275 Billion:
Cutting payroll taxes by $500 per individual and $1,000 per family. Not the best bang for the buck, since much of it may be used to pay down debt or otherwise be saved. However, it seems like a good idea in any case.
Restoring the balance sheet of the household sector, particularly of the lower and middle parts of the income spectrum would be a very good thing for the economy in the long run. In their role as taxpayers, individuals would be taking on debt at about 3% or less, and in their role as consumers might be paying down debt with rates as high as 18% if they pay down credit cards. Nice interest rate arbitrage there.
The package also includes tax loss carry backs of 5 years instead of the usual two for corporations. This looks like a total waste of money to me. The biggest beneficiaries would be banks and homebuilders.
We are doing a lot already to help the banks, and honestly the economy needs to see most of the big homebuilders go out of business so excess inventories can be worked off. Accelerated depreciation or greater expensing of capital assets would be a better way to aid businesses and stimulate the economy. To my mind, this is the weakest part of the whole package.
Aid to States - $119 Billion:
The biggest part of this is to help states pay for Medicaid at $87 billion. There is also $25 billion targeted to help maintain public safety and other critical services, and $7 billion directly targeted to help keep law enforcement going.
States are generally prohibited by their constitutions from running deficits (although they have been able to find ways around that in the past) and have seen two of their biggest revenue sources dry up, sales taxes and property taxes. Without aid they would have to dramatically cut back on services, laying off many state workers and adding to the unemployment roles.
In some states like California, the projected deficits are so deep that the hole could not be filled even by cutting more than 75% of employees. I'm not sure how safe the remaining prison guards would feel if three out of four of their co-workers were laid off.
The $119 figure is not enough to fill the hole, and states will still have to make cuts, but at least they can be a bit more selective about it.
Education - $117 Billion:
This includes $41 billion to local school districts, targeted at low income areas or those that have heavy loads of special education students. An additional $39 billion will go to other school districts as well as public universities.
School districts are generally dependent on property tax revenues and have been very hard hit by the downturn in the housing market. This will prevent masses of school teachers from being laid off.
Some of this money will also go into construction projects. There is also $15 billion to states for meeting some key performance measures, although I have not seen what those measures are, and also $22 billion aimed at higher education, including increasing Pell Grants.
While many will argue that local public schools are not always the most efficient places, allowing our schools to be hard hit by the economic downturn is not a recipe for long-term economic health. Also, it's not like that 13 year old can just come back and take the seventh grade over again when the economy improves.
Aid to Those Hit Hardest - $106 Billion:
This includes $43 billion for extended unemployment benefits, $39 billion to help those laid off keep their COBRA health benefits, $20 billion to increase food stamps and $4 billion to increase some social security benefits.
These sorts of expenditures are among the ones with the most "bang for the buck" in terms of stimulating the economy. People who are really on the ropes financially are likely to spend the money quickly, which will increase the number of jobs in the economy.
Most econometric studies have found that these sorts of expenditures result in more than $1.50 of economic activity for every $1.00 spent. This is in addition to the obvious humanitarian benefits.
Infrastructure - $90 Billion:
Including $30 billion for Roads and Bridges, $31 billion to upgrade federal buildings (especially to make them more energy efficient), $19 billion for water and environmental projects and $10 billion for public transit.
This sort of spending does double-duty. It stimulates the economy now and it leaves lasting economic assets. The problem is it often takes too long to get the projects up and running to help immediately.
However, this economic downturn is likely to last a long time. I think those hoping for a second-half recovery this year are fooling themselves.
Our infrastructure is badly decayed, and this sort of expenditure would be justified even if the economy were just fine and dandy. In some cases, the return on this sort of investment comes from what doesn't happen. Think about what the ROI of a few hundred million spent in 2002 or 2003 upgrading the levies in New Orleans would have been, even if it never showed up in any economic report.
I am disappointed that there is not more spending in this area.
Energy - $54 Billion:
This includes $32 billion to rebuild and modernize the electrical grid, which is vital if we are going to move in the direction of alternative energy like wind and solar.
There is lots of potential for building wind farms in North Dakota, but not that much need for all that electricity in North Dakota -- it needs to get to the Twin Cities and Chicago. Lots of potential for solar in Arizona, but the electricity needs to get to L.A.
In addition, a smart grid would make blackouts less common, and would lessen the need to build new baseline power plants and allow the existing plants to run closer to full capacity all the time.
The rest of the energy investments ($22 Billion) would go to weatherize and insulate public housing. Conservation is generally among the cheapest sources of "new" energy production.
Science - $16 Billion:
$10 billion to fund more scientific research and upgrade research facilities. The return on such investments long term is by its nature uncertain, but often huge. In the meantime, it does stimulate the economy just like any other building project would.
There is also $6 billion set aside to provide broadband internet services to rural areas, sort of like a 21st-century version of FDR's rural electrification efforts.
Other - $48 Billion:
Not really specified, so I don't have anything to add here.
Overall, my biggest question is: "Is it enough?" This economy is falling into a very deep hole, with both the consumer and business investment slowing very sharply.
World trade is in the process of collapsing, so it is unrealistic to expect an export boom to fill the gap. Yes, imports are falling, but it appears to be more a case of falling consumer demand rather than lots of import substitution.
Government stimulus spending is really the only way to try and stabilize the economy. The spending is over two years, so $412.5 billion per year. That works out to be about 2.5% of GDP.
The economy is most likely going to be running at least 8% below its potential. As big as the numbers sound, this program is only likely to cushion the blow and slow the decline, not result in a fully healthy economy.
However, there do appear to be some clear potential winners here (or at least relative to what they would be going through without this package). The energy projects would be very good for electrical firms like Emerson Electric (EMR) and General Electric (GE), and the Infrastructure projects will help engineering and construction firms like Jacobs Engineering (JEC) and Chicago Bridge & Iron (CBI) along with heavy equipment firms like Caterpillar (CAT).
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This article has 20 comments:
Just because oil is cheap, does not mean we will not run out.
About the infrastructure spending;
They are putting money in energy efficient government buildings?
Whats that going to help the US citizen? Thats just maintaining governments size while keeping warm of their sorry azzes. They don't produce anything. Its only costs US taxpayer money! 31 billion dollars to be exactly!!!
Overall, its an incentive, but its not going to be enough in my view.
does the author know what this company does?
it has nothing to do with BRIDGES. it's an ENERGY infrastructure company
What it effectively does is use future soc sec entitlement as default insurance and would motivate banks to lend, result in a serious injection of money into the economy. Also motivates responsible borrowers as when people are paying off their house they are also putting money back into their retirement?
Better yet for a long term solution, and Obama alluded to this in his inauguration speech, prepare our workforce and schools to compete globally.
Of the $777B summarized, only $144B or less than 17% of the total $850 would create any jobs. The rest are from old broken down unsupported Democratic congressional social programs. Do we give fish away for a single day OR teach someone to catch for a lifetime. Come people, get real!
Yes, those on unemployment are hurting big time. I’ve been there, done that. But extending benefits and Cobra (18 months already) doesn’t create jobs. Regards Cobra, one must pay 102% of the original cost to extend the basics of the benefit available while unemployed. Why not reduce the coverage to a more affordable amount?
Nor does state aid make sense especially to states like California who spent money like it was falling from the sky just a few short years ago. Why should the 75% of us pay for their indiscretions? We’re looking at $342B going out with virtually NO fiscal controls of how and why it’s spent. And we complain about the Bank bailout transparency! States will be spending “win-fall” monies like drunken sailors. And not even an employment stimulating bridge-to-nowhere.
Regards infrastructure, will procurement regulations typical of military programs be required? What’s that you say? Simply, buy American. Airplanes with American produced aluminum. Steel from American steel mills. On the renewable energy front, currently large towers for wind mills come from Viet Nam. Will foreign owned (e.g. Westinghouse) nuclear design and equipment be allowed? How about Vestas, the Danish owned turbine company who heavily advertise on national TV?
And will prevailing wage provisions prevail? Will it mean only one bridge is constructed in New Jersey or Illinois verses two in Texas for the same money?
This program is fraught with waste and politics. A lot of money . . . . an earth shattering economic tsunami being tackled by an inept congress. Gag!
$300 Million for the fish & wildlife service
$20 Million for fish passage barrier removal
$1 Billion more for the census bureau
$600 million for govt vehicles so the government can buy NEW cars
$500 million to NASA- because that is going to create jobs!!
$2 billion for emissions
$850 Million TO AMTRAK!!!!!!
$650 Million for people to get coupons for digital TV signal boxes
$34 million for the commerce dept to "modernize" although all of the depts get money yearly for such modernizations- so what have they done with the "other" money?
$20-25 billion for welfare?? because we need more people that do not work but collect a paycheck at the expense of the taxpayer. the vast majority of which can work -- but why work when they can get a check for doing nothing?
& what was it $300 million that Pelosi wanted for contraceptives & abortions not only in the US but throughout the world-- becasue giving condoms to people in africa is somehow going to increase jobs & spending in the US--
The truth of the matter is that the ONLY good provision that was in the whole package was that they wanted all of the products to be AMERICAN made from AMERICAN RAW MATERIALS-- this was dropped when the European Union threatened to take the USA to world court.
The other truth that the author apparently is refusing to see is that the government is the reason for the housing market collapse, if anything all of these politicians should be on trial for high treason against the USA & its taxpayers, why you ask, becasue not only did they know it was coming they were cashing in on the freddie mac & fannie mae fiasco, Henry Paulson made $500 Million from it , but he was far from the only one, Obama was collecting $100,000 plus for the past 8 or 10 years.