Three Reasons the Stimulus Will Fail 34 comments
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The Administration and Congress have decided that a massive, debt financed, increase in government spending is correct public policy. This policy is marketed as a stimulus evoking the image of an after dinner restorative for a glutton. The stimulus will fail for 3 reasons that people in power today ignore but are surely not ignorant of since the current US regime assures us it is intelligent, well read, sophisticated, honest and hard working. We have their word for it.
The 3 reasons why the stimulus will fail in the US (as it will in the EU) are:
1. Foreigners will not bail us out
The US plans to issue trillions of dollars in new debt in the near to intermediate future. Americans either lack the resources or the appetite to buy much or even a majority of this debt. Foreigners are expected to be the principal source of financing.
The 5 largest holders of foreign reserves are, in descending order, China, Japan, Russia, Germany and Taiwan. Of these, Japan, Germany and Taiwan are nominal(but not reliable) allies while Russia and China are adversaries. China’s reserves are greater than those of the next 3 combined. For several years, these nations have been very large buyers of US treasuries, which financed US deficits and enabled both the government and scores of millions of consumers to live beyond incomes and earn beyond worth.
Foreigners have 3 reasons for investing in US government bonds and notes: national security (Japan and Germany in the 1970s and 1980s because the US protected them from the Soviet Empire and, until recently, Taiwan because the US protected it from China); market preservation (lend America the money to finance imports; as long as we over consumed, the rest of the world could enjoy export driven prosperity: our various domestic consumption and speculative bubbles became their export bubbles) and desperation (nowhere else big enough to park all the surplus dollars).
These reasons have now evaporated or are evaporating. Each of these 5 nations faces the same major economic problems, which are a squeeze on exports accompanied by contracting home markets. The problem is acute for Russia and Japan, becoming more serious for Germany and Taiwan and an increasing challenge for China which faces deep structural and demographic weaknesses that only high economic growth can disguise. Accelerating reverse internal migration in China and a crumbling real estate market suggest simultaneous unrest in both urban and rural communities lies ahead.
The response of each nation will be similar, which is to turn inward, use their financial surpluses to subsidize internal consumption and failing companies. Russia has experienced the most rapid depletion of foreign reserves in its modern history; if current, quite grim trends continue, Russia may be forced to be a net seller rather than a net buyer of US and EU government debt within 6 to 9 months; Japan’s exports have fallen faster than at any time since WW2 and China’s economic growth has now plunged below the worst case forecasts of its own government. Japan has admitted that it faces a long and deep recession and can do nothing to avert it, despite its elaborate stimulus plan. China concedes that its economic challenge is a test of the ability of the Communist Party to maintain its monopoly on power. Russia has failed in multiple efforts to defend the ruble and mitigate capital flight.
Foreigners, therefore, now have much less capacity to buy US treasuries than they did a year ago even as the US Treasury plans to issue vast amounts of new paper.
Moreover, most of the US debt held by foreigners has a maturity of under 3 years so there is an impending refinancing problem of monumental proportions for the US.
2. Confidence, not cash, is in short supply
The true currency of free and fair markets is confidence.The real currency of collectivism is coercion. Confidence has a higher multiplier than coercion. Confidence leads to enthusiastic innovation; coercion to sullen compliance. The value added to the economy from innovation far exceeds that from compliance. The current economic policy of the US is to replace confidence with coercion and staple this swap to an enormous increase in the supply of dollars that are backed by no assets at all.
Savers are told they can get no return on their funds and investors are told that bad investments will be salvaged while good investments will be savaged; bad managements will be coddled while good managements will be pilloried; bad judgments will be rewarded while good judgments will be punished. In this environment, confidence in all the major institutions of the US government (except the military) is plummeting. Americans who still have both investable resources and common sense (maybe 10% of all adults in the US, if that) are driven to hoarding cash and avoiding entrepreneurial risk. A significant portion of these people, who are essential to any revival of market based innovation, growth and productivity increases, are even spurning US Treasury investments because they believe US government debt is the new big bubble. These people understand that every dollar the government spends on low value added mandated programs will be at the expense of a dollar of private spending on high value added projects and ideas. They know why North Korea is not the most prosperous nation in the world and why Venezuela and Iran are becoming poorer by the day.
The worldview of the current US government is that the cure for problems caused by overconsumption is more government subsidized consumption; the cure for excessive private debt is more public debt; the cure for private overinvestment in real estate is public overinvestment in real estate; the cure for undesirable autos made at shareholder expense is undesirable autos made at taxpayer expense. According to this governing philosophy, bad private decisions about resource allocation can be remedied by bad public decisions about resource allocation. This remarkable philosophy states that it is not the decision per se that creates problems but who makes the decision. This is change indeed.
Private investors facing the current reality, it seems, plan to go into “internal exile”, endure and wait out the US Government until, exhausted and defeated, it retreats in muttering confusion. Only then, as coercion retreats, will confidence advance. Unfortunately, a market adjustment that would have taken 18 to 24 months without coercion will perhaps end up taking 36 to 48 months with coercion.
A trillion dollars in federal spending will probably not even create a trillion dollars in net economic benefits given the high overhead associated with spending this money. A trillion dollars in tax cuts aimed at investors, risk takers, entrepreneurs (e.g in the form of a 5 year elimination of the capital gains tax) would probably lead to $5 to $10 trillion dollars in net economic benefits.
3. Assumptions are not truths
The stimulus plan is based on 5 assumptions. The world has an endless appetite for government debt; government directed infrastructure spending on small to medium sized projects that private investors shun is a sound economic idea; increasing taxes on high income families and investors has no influence on their behavior; a one time check for people who pay no taxes and are behind in utility, credit card, auto and medical bills will lead to sustained increases in consumer spending; feeding incompetent corporate managements while starving competent corporate managements will lead to vigorous job creation. In the past 50 years, governments all over the world have pursued these notions at various times. There is no instance of documented, enduring, success.
Since WW2, four factors have impelled US recovery from recessions. These are: inventory rebuilding by businesses, household spending, home construction and payroll growth. These factors are, in turn, based on rising business and household confidence and expanding profits or household asset values. None of these factors are present in the economy in early 2009. They will, of course, eventually return.
The tragedy of the stimulus plan that it will actually hinder these factors from operating, rather than encouraging them. At the end we will have lost two years and a trillion dollars in taxpayers money. Now this is not great in the life of our nation or compared to the long term wealth creating capacity of free men and women; but, for a family with no wage earners, for a young adult fresh out of college, for a small business with shrinking revenues and no political patron, and for an electorate that is both impatient and anxious, two years is a very long time indeed.
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1. China, Japan and Europe need America's revival as much as, if not more than America does and so will support the debt without batting an eyelid.
2. Just the fact that in the next year to 18 months, there will be over $2T of stimulus money from various nations of the world to be spent on a variety of projects and tax cuts will raise business confidence. This in turn will over time improve consumer confidence.
3. Thirdly, the world knows that without stimulus intervention the world economy engine will just not start. So appetite for accepting debt however unpalatable it may be has to happen.
It is now well understood that tax cuts and trickle down are a poor and inefficient mechanism for stimulating an economy. They are a help (may be) when the economy is stagnating or sputtering, but not when an economy is really moribund as it is now or when the business and consumer confidence are this abysmally low.
The reason our government has chosen to "spend" our way out of this is simple...they are elected officials and HAVE to do something. Unfortunately they also have no real solution. However, if they sit by idly while the world crumbles they are sure to be out of work with the rest of us and they know that one fact all too well.
On Feb 08 08:49 AM Ferdinand E. Banks wrote:
> I see things working as follows: a highly intelligent man sitting
> at a table where his stimulus plan is being fine-tuned by the best
> economics brains in the US. If this is the ex-post scenario, and
> it might be, then the assumptions in this article will not turn out
> to be the truth.
On Feb 08 09:20 AM Am American in Paris wrote:
> The author is clueless. He is engaging in the usual Right Wing morality
> play - excess living must be replaced with prudent living. Many of
> the countries that experienced housing bubbles such as Spain and
> Ireland have much higher savings rate than the US. That didn't prevent
> their bubbles.
>
> Recessions are caused not by too much spending on goods and services,
> but too little.
>
> Conservatives during the early years of the Great Depression made
> exactly the same arguments as this author - we should tighten our
> belts and balance budgets!
>
> They were wrong. The US economy only reached full employment when
> it government spending and deficits dramatically increased during
> WWII.
>
>
>
The economy is driven by demand, not supply. Most of demand is consumer demand. Put more money in the pockets of workers and demand increases. In addition to hiring people to do useful things (including people in the arts and including fixing the mall in DC) I'd like to see the bill include a $2/hour raise in the federal minimum wage. They should restore the money to the states as that will keep people employed.
It is very difficult if not impossible to target a stimulus bill to give jobs exactly to those who were laid off. What you can do is get the economy moving again and then those who were laid off might be hired again, if not at their previous jobs.
Get real-- the only issue is weather or not the government's stimulus is large enough and sustained enough to get us through the very real trouble that lies ahead.
As for 'the best brains never saw it coming' .. duh! there weren't any. The previous admin was run by the brain dead.
American in Paris has it on button.
On Feb 08 11:12 AM Prognostic wrote:
> Excellent article and right on the mark!
>
> I am very disappointed with the so-called stimulus plan. What really
> baffles me how all this govt spending on public buildings, parks,
> FBI, solar panels and such si supposed to provide jobs to all the
> white collar and bule collar people that have been laid off. I know
> several people that are laid off and as best as they know they know
> nothing about installing solar equipment or building windmills or
> construcing highways and so on. The most prudent thing to have done
> was to pass these monies in the form of tax credits and incentives
> to businesses and entrepreneurs who then would create the jobs that
> have gone missing in this new economy. Agree 100% with the author.
> McCain screwed a great opportunigty when he pandered to the religious
> right and picked Palin as his running mate and screwed the pooch
> by supporting a continuing Iraq war. He had the right ideas in mind
> with regards to just how we turn this economy of ours around. And
> now I have signed on to several more miserable years of a rapidly
> destructing economy.
On Feb 08 11:12 AM Prognostic wrote:
> Excellent article and right on the mark!
>
> I am very disappointed with the so-called stimulus plan. What really
> baffles me how all this govt spending on public buildings, parks,
> FBI, solar panels and such si supposed to provide jobs to all the
> white collar and bule collar people that have been laid off. I know
> several people that are laid off and as best as they know they know
> nothing about installing solar equipment or building windmills or
> construcing highways and so on. The most prudent thing to have done
> was to pass these monies in the form of tax credits and incentives
> to businesses and entrepreneurs who then would create the jobs that
> have gone missing in this new economy. Agree 100% with the author.
> McCain screwed a great opportunigty when he pandered to the religious
> right and picked Palin as his running mate and screwed the pooch
> by supporting a continuing Iraq war. He had the right ideas in mind
> with regards to just how we turn this economy of ours around. And
> now I have signed on to several more miserable years of a rapidly
> destructing economy.
Government does nothing well.
The machine has become so complex with the "Special Case" rules and regulations that not even those at the top can comply => Tax issues in the news with the same excuse => sorry about that.
Until the "Special Case" Tax, Tariff, and Law are done away with no amount of spending will salvage the system. When Law of the land means that those with money and influence suffer the same consequences as those without; things will improve. While the Mountains of Hypocrisy still stand, things will continue to get worse. No amount of spending will return us to where we were.
There are dark things that are being planned as contingencies by many governments. Power given is not so easily taken back.
A review of how dictators come about and their machinations is in order.
The Worst Is Yet To Come.
You are blind as a bat. The President, who is ignorant of economics and business and never had a real private sector responsibility of any note, but has been in politics his whole life, delegated the writing of this bill to the most leftwing and partisan Congress ever. Pelosi and Co. They stuffed this political bill with billions in trashy, dumb pork, giveaways to friends and very pet liberal project under the sun. This bill grows the Government, not the economy.
The Democrats planned to use this 'crisis' to pass this hoax bill and gain power. They are now going to hope that the natural recovery will bail them out and enable them to take credit for a recovery that will only be hobbled by the debt and waste that this bill will create.
This is false because it, like too many keynesian type analysis focuses on economic activity. Instead focus on WEALTH creation and living standards. the economy only really recovered- in terms of standard of living - after WWII. We had a Republican Congress then, which fixed some of the problems the FDR Democrats created in the economy. It helped USA move forward..
America wont recover from this crisis either until we restore the Congress to Republican hands. History repeats itself.
No, you are clueless. He is saying the wasteful boondoggle Gvot spending bill, mislabeled and dishonestly sold as 'stimulus' will not help the economy. It will not. Even CBO has scored the bill as showing WORSE ECONOMIC ACTIVITY THAN DOING NOTHING over a 10 year period. Any short term benefits (which are overstated) will be more than outweighed by the long-term pain of another trillion in debt - the largest deficit in a single year. This is a path to financial ruin for the country. We taking an easily manageable recession and turning it into an excuse for killing the dynamic private economy.
" Many of the countries that experienced housing bubbles such as Spain and Ireland have much higher savings rate than the US. That didn't prevent their bubbles."
Which is a complete and utter non sequitor. Credit bubbles are if anything *fed* by excess savings into inappropriate investment.
But it IS indeed wise to point out that you cannot fix one bubble with another bubble.
We had an internet bubble, which caused pain, so Greenspan created another bubble - housing and commodities - to fix that.
Now to fix the pain we are creating a Govt debt bubble. It will end, if history repeats itself, with us looking like Japan 1990s or like latin america 1980s - over-indebted and with a pernament sluggish economy.
"Recessions are caused not by too much spending on goods and services, but too little."
This is like saying a cold is caused by coughing. Recessions are by definition a reduction in economic activity, but underspending is NEVER the ultimate cause. the credit
Get thee to a von Mises textbook.
"Conservatives during the early years of the Great Depression made exactly the same arguments as this author"
Classic logical fallacy.
" - we should tighten our belts and balance budgets!"
"They were wrong. The US economy only reached full employment when it government spending and deficits dramatically increased during WWII."
We had deficits for the whole 1930s. FDR's New Deal was a failure; after 8 years unemployment was still in double digits and economic activity was still lower than 10 years prior in 1939. FDR and Hoover both left tax rates too high and burdened the economy with regulations. Had the tax rates and regulations been reduced, the economy would have done much better.
What we really needed was to restore confidence, and only by getting Govt out of the way and securing the benefits of the natural private economy can you restore the economic activity and wealth creation.
That was the Republican alternative - it was about growing the economy.
But the Democrats main goal was not to help the economy but to abuse this crisis to ram through their very liberal spending agenda.
It's a travesty to even call this trillion dollar boondoggle bill a 'stimulus'. It's a hoax and a Madoff-like con scheme.
The ignorance of this comment is stunning. This is the economic equivalent of flat-earthism. You only demand what you can afford, you can only afford what wealth you have, you only have wealth based on real production, ie supply.... so supply of economic goods do drive it all.
That's why you are wrong about everything you say neutrino23. tax cuts do work, because the economic world is not flat!
... The Republican alternatives by House and Senator Jim DeMint were about the best we can do. We cannot stop the recession, but we can keep it shorter by getting ready to incentivize economic growth long-term. This means tax rate reductions on income payroll and corporate income, regulation reform, encourage domestic production of energy, and lift the threat of Co2 regs.
Do all that and 2010 would be a nice recovery year.
This bill LOWERS business confidence because big Govt is back, its soaking up taxpayer wealth and crowding out investment with deficits. Its adding regulations and scaring business with the threat of socializing industries. And bashing companies left and right.
And btw, there are no real tax cuts of the tax rate type. There are only dinky tax credits that even non-taxpaying deadbeats can get. IT USED TO BE CALLED WELFARE. Why business confidence would rise when the economy is socialized and the welfare state expanded is a mystery.
The bill is a huge massive hoax of the worst sort.