The Obama Stimulus Plan: Why I'm Concerned 42 comments
an article to
-
Font Size:
-
Print
- TweetThis
As the Obama Stimulus Plan becomes more and more of a reality, many different people are asking many different questions about it. To me, four basic issues need to be debated very seriously before Congress passes any such plan:
- How fast do we really need to move in passing such a plan?
- How big does the stimulus package really need to be?
- How is all the debt created by such a plan going to be financed?
- Can the stimulus really be withdrawn once the crisis is over?
In terms of speed of enactment, we hear repeatedly that speed is of the essence. Things are really bad and things are going to get a lot worse. We need to get into the game and do something as quickly as possible!
We heard this argument before, not too long ago. It was reported in the Wall Street Journal, “Federal Reserve Chairman Ben Bernanke reached the end of his rope on Wednesday afternoon, September 17.” Bernanke was reacting to things falling apart in the financial industry. He called Treasury Secretary Hank Paulson and said that the administration had to move. Thursday September 18. Paulson responded that he was “on board.” Bernanke insisted that Congressional leaders had to be assembled, which Paulson set up for that Friday evening. Bernanke read them the riot act at that meeting and insisted that a bill - what became TARP - be enacted no later than Monday or everything would fall apart. (For more on this see my November 16, 2008 post on Seeking Alpha, “The Bailout Plan: Did Bernanke Panic?”) The bill was not enacted that Monday and the last half of the TARP money was not released until just recently.
Now we are hearing the call again - we must hurry. The Obama Stimulus Plan has been put on the fast track and the pressure is on to get the plan enacted by Congress by President’s Day, February 16. Does this plan really need to be enacted that quickly? Is it better to have any plan by President’s Day or is it better to have a plan that works?
It seems to me that the pressure to get something done quickly has important implications for the second question asked above. Since so little is known about how effective the plan will be, the issue then becomes - MORE IS BETTER! Given the uncertainty of how the plan will work, it is important to throw as much as possible against the wall in the hopes that some of it will stick.
Wow! What a way to run a government! But that is what Bernanke/Paulson did.
And, this approach gives rise to the new justification for the program - confidence. The argument goes like this:
If the government shows that it is serious in ending the recession and this seriousness is reflected in the size of the stimulus package…this will spur on an increase in confidence…which is just what the economy needs right now!
Let me get this straight. It doesn’t really matter whether or not the stimulus plan works, but what is important is that the stimulus plan be very large, so that people will regain confidence. And, if this is the underlying theory behind the stimulus plan, then how is this going to raise the confidence of the worldwide investment community, which relates to the third question presented above - to invest in the debt of the United States government?
Oh, well, the United States dollar is the world’s reserve currency and the United States debt is the place for world investors to go when there is a “flight to quality” in world financial markets. Given this fact, people will continue to flock to United States Treasury issues. There’s no doubt about it!
As Alice Rivlin, economist of the Brookings Institution, former member of the Board of Governors of the Federal Reserve System, First Director of the Congressional Budget Office, and Director of the Office of Management and Budget (a cabinet position and appointed by President Bill Clinton a Democrat) recently testified before Congress:
We seem to be counting on the Chinese to keep investing to pay for this (the U. S. deficits) and we’re assuming that the rest of the world isn’t going to lose confidence once we use this moment to spend on a whole range of programs. And, I’m not sure that’s the right assumption.
Rivlin also has something to say about the fourth question…the question about what happens in the long run. She stated that:
Because we’re doing this outside the budget process, it means that no one has to talk about what the long-term effects of any of this might be.
That is, what is going to happen beyond the short run if much of this expenditure is still going into the economy as the economy begins to grow again. No one is anticipating how this situation might be dealt with.
As Niall Ferguson, who shares his time between Harvard University and Oxford University, stated recently at Davos (and I am paraphrasing): The new administration seems to believe that by creating an impressive amount of new leverage that it can resolve a financial crisis created by an excessive amount of leverage.
So, I go back to the first question: Do we really need to rush so quickly? Yes, I agree with President Obama, he won and he gets to set the table. But, does he want to do it right, or does he just want to do it?
The Congress is supposed to be a deliberative body - it is supposed to mull things over, kick them around, debate and dialogue with one another. Isn’t it better to get something right, than to not do something well or to do something that may not work?
Projects should not just be put into a stimulus plan simply because they are a “good idea” or because “they are something we want to do and they are available.” In order to be included, projects need to have some real justification for their inclusion in such a plan - the benefit of the project (the whole flow of benefits accruing from the project) should exceed the social cost of the project. Questions about the timing of the project and, when the expected benefits are expected to be received need to be asked. The Congress should be very intentional about what it is going to do and how much it is going to spend. The success of its execution should be the key criteria as to whether a project gets included in the plan - not just the speed of passing the bill.
If Congress were to judge the plan - the whole plan as well as the components of the plan - in this fashion, then something more specific could be said about the size of the plan. Given that every element of the plan could stand up to some form of cost-benefit analysis then the size of the plan would be less of an issue. We would have some rationale for the size of the plan and it would not be a question of hoping some of the material thrown against the wall would stick! The parts of the plan would be chosen because they work, and not because they make the plan “large.”
Questions about financing a stimulus plan will remain. A plan constructed as suggested above would still result in the creation of a lot of new debt the United States government would have to issue. However, the investment community would have more justification to “trust” the plan because the Congress has done its homework and, if the Congress had done its homework, there would be something to say about how the debt will be financed and paid down in the future. That is, the United States government would be acting like a responsible steward of its fiscal responsibilities, something world financial markets have not seen for eight years or so.
To me, this is a crucial issue the Obama administration and the United States government has to deal with, restoring confidence in the fiscal credibility of the United States, which is something that Bush 43 fell far short of doing. Rushing into the fray with a hastily constructed, ill-conceived stimulus plan, one that relies on the Chinese and the rest-of-the-world to finance with no thought for the future is not going to resolve the financial and economic mess we are now experiencing.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
Top
StockTalkers.-
1
David Fry
-
2
Cliff Wachtel
-
3
Mike Havrilla
-
4
David White
-
5
Hedged In
Top StockTalkers » -
1
"Sometimes, you have to be patient. Sometimes, the best thing to do is nothing. Take a few deep breaths. Think the problem through."
Along with many others I regret that there was insufficient good sense around to have avoided the financial mess that we find ourselves in and wish we had more options than we do. However, for governments, around the world, to do nothing as you suggest would create a high probability of a global depression, wealth destruction on a massive scale and most likely some very scary socio-political consequences. It is urgent, in my opinion, to reduce the likelihood of such an outcome.
I propose a radical new idea: let's support the president like the nation did in the past. Put aside personal interest and make something work. Throwing stones is non-constructive.
On Feb 02 08:22 AM aflitzy wrote:
> It would be easier and more efficient to eliminate Fed. income tax
> for the period 1/1/09 to 6/30/09. It would give an amazing influx
> of cash to main street and it would be quickly felt by business.
>
> It would cost the country less than the current package.
> The reason it could NEVER happen is 1} people would be overwhelmend
> and very angry 7/1/09 when they receive their taxed paycheck.
>
> 2} it would put the control back to the individual vs. the fed government.
> This would mean the pet port projects would not be funded.
Are you kidding? That's the same bull Madam Speaker uttered. What's winning got to do with it?
The “Stimulus Plan” is flawed. Social giveaways are useful but not simulative. Put that stuff in another bill. It goes to show you, the Presidents economic team is simply anemic. One plus one can’t merely equal two here. Every government dollar properly spent generates four dollars of economic (cash flow) activity.
It doesn’t even take an MBA or PhD. in Economics to come to the conclusion simply giving money away will do anything positive either short or long term. Build something; spend the money. Employ people who will subsequently spend it and pay taxes but equally important end up with a tangible, useful thing. Like a bridge, working sewer system, modern energy efficient school, safe roads with improved intersection safety and vehicle control, rapid transit, and the list goes on.
And don’t tell me laid off clerks can’t use shovels. Only in China, where there are more workers than chickens, still use shovels.
Apologies if I was not clear -- I thought I said "do nothing **NOW**. take a few deep breaths. think the problem through"
Implied (but I guess not stated) was the idea that there are long term investments that would make all kinds of sense.
I have serious doubts about the entire concept of a quick fix. I think a lot of our current problems were caused by yesterday's quick fixes
There is also a very real danger that corrupt politicians will use a false sense of urgency to ram through changes that restrict our freedoms and our future economic happiness.
The false urgency used to pass the TARP legislation should give us all pause. Not even Henry Paulson knows where he spent **OUR** $350 billion.
Taking a little time to think through the best **LONG TERM** solution will produce a far superior outcome than a bunch of self serving politicians hastily passing more foolish ideas to create the illusion that they are doing something positive
"First - a good portion of the bill is tax rebates - no project planning involved. (Not that I think this is the best idea, still not a bridge to nowhere)"
This $900 billion is not free money -- it is a future tax bill. Tax "rebates" now, and a tax bill later on? In a time when most people have too much debt, you think it is a great idea to take on MORE debt -- albeit debt fraudulently labeled as a "rebate". Its not a rebate if we have to pay it back later, which we do -- its a loan.
"Second - the spending is frequently not for any specific projects. The states will work on infrastructure projects. Many of these projects are already planned. Some will be planned over the next several years."
This $900 billion boondoggle is not for any specific projects. We will spend now, and plan "over the next several years". And the planning will be done without a shred of Congressional oversight?
What is the urgency of passing this horrible idea **NOW** when even supporters like yourself acknowledge there is nothing shovel ready? Why not wait for the states to propose new projects -- and consider the pros/cons of those projects when the details are actually available?
I'm amazed at the hyperbole coming from the "conservatives" at this point.
For example:
- The Stimulus Plan provides almost no stimulus -- Apparently only roads and bridges can stimulate the economy and are the full extent of infrastructure. We should all become construction laborers. Yeah. that will bring back prosperity. The stimulus needs to stimulate as wide a set of industries and occupations as possible. Teachers, police, mfg, IT, artists, musicians, scientists, as well as construction. It's hard to conceive of a government expenditure that doesn't cause an immediate stimulus. All expenditures are either going to hire people or to buy materials. When a person gets paid, he / she spends money, which helps store owners, businesses, etc. When materials are purchased, they stimulate business, which causes more people to be hired / retained.
- Tax Cuts are always Better Stimulus than Expenditures -- Do tax cuts provide a better multiplier? The data is ambivalent. Sometimes yes, sometimes no. Hey, maybe the stimulus should provide some of each. Now why didn't Obama think of that?
- The CBO says that only a third of the money will get spent this year -- Pleeaaasse! Give me a break. Like you haven't heard that that was a prelim review of an early plan, which has been fixed since then. Wow, do you think the authors of the plan might have considered how to get it spent more quickly. Go ahead, keep repeating worn out lies if you want, but you know you're lying.
- Stimulus is bailing out bad irresponsible people who spent frivolously and didn't expect the biggest economic disaster anyone's ever seen to happen. How could they be so dumb? Anyone with half a brain like Wallstreet executives, company CEOs, Government Economists, Entrepreneurs, all could see it coming a mile away! We're just rewarding "bad behavior", like trying to make ends meet on a salaries that have been stagnant while cost of living has gone up continuously.
I hope I've made some of you "conservatives of convenience" feel guilty. If you're going to use lies and hyperbole instead of reasoned argument to make your point, at least feel bad about it!
Bush I: Read my lips.
Clinton: I didn't have sex with that woman.
Bush II: WMDs are a slam dunk.
Obama: Change is coming to America
Glad to see Obama's word is worth the same as all the other politicians.
I fear Obama's spending policies are going to represent the same type of "change" from the past
We could now fix the infrastructure. But we have, for example, $66 billion ADDITIONAL to the DOE, since they waste so much already. That's how government works today, apparently even when all is crumbling. And Nancy Pelosie's contraception subsidy is a good example of frivolous inanity beneath that of an adult.
The politically connected/rich crowd, Washington and Wall St, is partying. They figure they have to throw some chum to the more connected at lower levels now. When the partying slows, the average person minding their own business and trying to make their excessive taxes and bills will be the pumpkin.
How come the "something" that has to be doen never seems to include "facing the ramifications for our earlier decisions"?
We spent too much for many years... so at some point (never is always the preferred time) we are going to have to spend too little
The longer we wait, the greater the cost
On Feb 02 07:49 AM cristian wrote:
> The "stimulus" plan is quite lame. Even their flagship ideas, hawking
> "green" technology, is little more than making fossil fuel technology
> more expensive. Hardly a stimulus of the economy.
>
> If the Bush crowd was dominated by crooks, idiots at that, O'Bama's
> crowd seems even more dangerous. Ideologically motivated, clueless
> sapsuckers. It would be a stroke of luck, if they will not drive
> us over the deep end.
> capacity than is required in a more sane and eco-friendly world...
Not sanely, one couldn't. The most eco-friendly nations are those that are most developed. I'm not advocating rampant consumerism. But the notion that the world would be better off ecologically if we all went back to dwelling in huts is absurd.
When did you see a bank shopping at a store at Christmas or standing in line to get a hot new product. NEVER. Banks don;t make the economy grow, Ordinary people spending their hard earned money makes companies grow. If yoi mark the money the banks have gotten and go back to them in 10 years, most of the marked money will still be at the banks. Their charters do not allow them to give money to the man on the street. I say give each taxpayer making less than 250,000 a year 20,000 cash from the federal bank bailout monies. You will see the stores empty of merchandise over night. Manufacturers will not be able to keep up with the sales demabd. Extra shifrs will have to implemented, new hires trained, and the GNP will jump upwards noticably
Give the banks more money and not a ripple will be seen, just super bonuses to a select few who don't even know how their company makes money
Albert939
I was kind of happy when he got elected because I felt had he not won, the world never would have found out what kind of President he would have been.
After 10 days, I have to admit I'm disappointed.
This "stimulus bill", which will probably run over a trillion dollars, is failed Keynesian theory at its worst.
When Obama said "There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy." he was dead wrong. There is plenty of disagreement.
I disagree. 250 of the world's most respected economists, including three Nobel prize winners, disagree- and took out a full-page ad in the New York Times to let us know.
The bill is mainly just burning money. As always, billions will go to line the pockets of the wealthy and well-connected who will score the biggest contracts, as usual. It won't create jobs.
$335 million is allocated to educate high school students about STDs? Who will get this money? I could produce a DVD, replicate one for every high school student and mail them to every school for less than $10 million.
If I delivered the program over the internet via Amazon Cloudfront and merely required all teachers to play the program for their classes, it would cost $4,500 in bandwidth.
How could you spend $335 million on this? You could buy gold-plated chastity belts for every female of high school age with this amount of money.
Instead, $335 million would pay for 40,000 students stuck in the nations worst public schools to attend nice private schools for a year. Isn't this a far worthier use of the funds?
(For $112 billion, we could just send all high school-age kids to nice private schools and scrap the secondary school system that fails half its students.)
One of G.W. Bush's biggest failures was his completely irresponsible, record-shattering, enormous explosion of debt, culminating in a biggest-ever $400 billion deficit in 2008 (contrasting sharply with Clinton's very-close-to balanced budget). For his first year, Obama is on track to more than double that.
FDR's disasterous expansion of government made what would have been a few year downturn into the 15 year Great Depression that caused widespread starvation and suffering.
Is Obama blindly going to repeat this mistake?
2.6 million jobs were lost in 2008, the worst year in over 60 years. Unemployment is at 7.2%. The more people are out of work, the less people buy, meaning companies have to lay off a lot more people. And so the economic meltdown death spiral continues.
Entrepreneur and venture capitalist Karen Mills, the person chosen by Obama to head the Small Business Administration, said "Small business is at the heart of the economy. They create 70% of the new jobs each quarter". She's right.
And small business is 100% focused on helping people- if they don't provide a valuable product or service, they go out of business- quickly. Large business sometimes sticks around for decades due to monopolistic trade practices, entrenched distribution or juicy government support. But no one bails small business out.
So, if Obama is serious about creating jobs and "fixing the economy", the answer is simple: give a $20,000 tax credit to any small business for each new person they hire and keep for a year.
Craigslist would light up within 15 minutes of this bill passing. Small businesses would be tripping over each other trying to hire and train people in REAL jobs that help customers, not wasteful busywork.
This would cost $52 billion,, a small fraction of the $819 billion Obama wants to spend in a "stimulus bill" most economists agree won't help the economy much, if at all.
2.6 million people would be hired by NEXT WEEK. Problem solved.
Why do I always have to think of this stuff? :-)
appropriations.house.g...
Let's put ideology aside for a moment.
This is a sharp group here at SA, but for those who have not had the pleasure of spending a lot of time attempting to decipher Washington mumbo-jumbo, I humbly offer the following....
If you take the time to read the bill (It will have some changes in the Senate, but they are not likely to be big changes), you will notice that it is often very difficult to decipher precisely what the money is for. That is intentional, and politicians from both parties engage in this deception. Funds are allocated and intended to go to specific companies or organizations, but they do not name names. If you know what particular regulation number they are referring to, and what regulation numbers are defining certain portions, you can get to the bottom of what they are legislating. An infamous example from way back was a tax break for "all automobile manufacturers with $xxxx in sales who are incorporated in the State of Delawre". It was for GM, and only GM.
Much of the debate in these comments is about how much of this is really "stimulus" as opposed to a spending bill that has been blended into a stimulus bill. If you saw Madam Speaker trying to explain to George Stephanopoulos how birth control pills will stimulate the economy, you understand why the citizenry were looking for their pitchforks, and why that part was taken out.
In this bill there is a lot of targeted "stimulus", and as usual, it generally does not name names. There is some 8 billion for housing programs, and the further qualifying portions would seem to make Democratic favorites like ACORN the likely recipients of much of those funds. There is also 2 billion for Head Start programs and some millions to help the homeless..
The bill has significant (Although, is a few billion really significant any more ?) funds directed to studying global warming and a variety of Democratic interests. Democrats wrote 100% of the bill, so that is what would be expected.
Not wishing to debate the merits of the recipients, I would only ask if this is the best use of funds for stimulating the economy, or if there is a better way to use the money ? This bill has been advertised as "urgent" for an economy in peril, so you will decide for yourselves if use of some of these funds is appropriate for this bill.
. Additionally, there is quite a bit of money headed to the States to help them out. Use of the State money will be directed by the Governors. No doubt this was done in this manner because most of the Governors are Democrats, who will use the great discretion they are given in this bill to direct funds to their favored constituencies. Of course, if Republicans were in charge, they would be writing the bill in a manner that benefited their favored constituencies.
Mine is not an ideological argument, i.e. whether it is better to have temporary jobs or whether it is better to give tax cuts to businesses. The Democrats won the election and they are in charge.
Many (myself included)believe that a great deal of what is in the bill is not what the best economic minds in America would view as the most efficient method of getting the economy back on track.
However, just as a citizen, I ask this : Is it not possible for these politicians , in a moment of great crisis in our country's history, to refrain just this once from politics as usual and think of the nation first, instead of their own re-election and power base ?
The Chinese have their own backyard to look after and have been steadily pulling back from any guarantee that they will continue to fund the crap game that passes for responsible economic policy in the U.S..
Looking at what has transpired to date, one can only assume that the intention has been to transfer the wealth of the population to the banking and corporate elite. Period.
What needs to be factored in to any analysis of Stimulus packages or Bank Bailouts to better interpret them are the underlying components of Geopolitics, the steadily nurtured plethora of executive orders, policies that have not been reversed by the current administration (Predatory lending, Gramm-Leach-Bliley Act), the window dressing of expressing opprobium at the bonuses on Wall St. commensurate with any lack of any real engagement with reforming the financial regulatory framework.
The bigger picture needs to be looked at. Let's face it; what has been done to date has been a complete failure as far as repairing the economy is concerned.
The arguments are completely logical and we would have to assume that the Economic Dream team must be aware also so the big question that needs to be asked more than any other is Why ?
I am focused on question #3: "How is all the debt created by such a plan going to be financed?"
I am certain it will be paid the same way all the other US sovereign obligations will be paid: NOT AT ALL, EVER. The rush to pass something quickly is an attempt to avert any rational national discussion about our true fiscal condition. Any such discussion that was not carefully controlled would quickly reveal that we are broke, period. If US debt rapidly increases during "good" economic times, and increases at an insane pace during "bad" economic times (15% OF GDP), how will we ever pay it off? We imagine that we are not broke as long as we still can borrow money; this is the exact equivalent of a college kid not being broke as long as his credit card still works (with apologies to college kids everywhere for comparing them to Washington DC). Even more incredible, we imagine that we are not broke even if the only one we can borrow from is the Fed's printing presses. This is a denial of reality, nothing less.
I really and truly want someone to explain this to me. Debt is in essence future consumption brought forward into the present. Genuine debt repayment can only come from deferred consumption going forward. Where is the political constituency for that? Which majority caucus in Congress will advocate that?
This idea that we can borrow our way out of debt is on its face the stupidest thing imaginable, and yet it is given serious play by media pundits, economists, Internet bloggers, and the political class. "Stimulus" packages are acts of borrowing from the future; they do nothing to increase productivity; increased productivity, not borrowing, is how wealth is increased.
You make very good points. While I firmly believe in the Austrian School, and therefore fundamentally agree with you, in our political / economic reality, I think the stimulus and deficit spending makes sense. Von Mises theories only work when all prices are elastic (there's currently little downward elasticity in labor prices), and there's a disciplined foundation such as the gold standard would provide.
If we let things fall now, when we are basically flat on our back (borderline insolvent) and in a broken system, the decrease in productivity and social chaos will not only not help for a long time, but will increase our deficits since there will be little income or consumption to tax.
Our only choice right now is one more shot of Inflationary Adrenaline (or is it Heroin?) to get us on our feet once again. Inflation is the only reasonable way out, though it will be painful. And yes, if we don't change our system this time, we're finished. Hopefully this "near death" experience will wake us up, but the answer isn't to roll over and die just yet. Get the economy moving and then, deal with the problem is the only way to go in my opinion.