Stimulus Nation: What Are We Getting for Our $3.27 Trillion? 23 comments
-
Font Size:
-
Print
- TweetThis
The result really wasn’t all that surprising. The reaction wasn’t either. On Thursday morning the Commerce Department released its advance GDP reading and proclaimed the end of the recession by asserting the American economy ‘grew’ at an annualized rate of 3.5% in the third quarter. A previous commentary already pointed out the fact that government borrowing shouldn’t be counted in GDP calculations anyway, so I’ll not repeat that exercise. Certainly there isn’t much to say on this topic that hasn’t already been said. However, there are some salient points that have been glossed over that are worth mentioning.
Cost vs. Price
It would probably be rather hard to find a single American that didn’t know the price tag of the stimulus bill. $787 billion has been included in nearly every news piece regarding the topic. What most people are not aware of, however, is that $787 billion only represents that amount of money actually put into the economy by the feds. It comes nowhere near addressing the actual cost of the program. A good recent example of this miracle of government accounting is the Medicare part D prescription benefit program. The price tag was $394 billion, but the cost is much higher – around $8.7 trillion and counting depending on which numbers you want to use. Granted this represents the net present value of the cost of these ongoing benefits over a 75-year period, but you get the idea.
Fortunately for taxpayers, the stimulus package is not an ongoing expenditure (yet), and as such consists of predefined outlays. Despite this, the total cost of the bill as compiled by the Congressional Budget Office is approximately $3.27 trillion. Amazing in this is the fact that we’ll pay nearly as much for debt service on the stimulus bill ($744 billion) as the measure was supposed to provide to the economy! Talk about sticker shock. The gory details are here.
The question now becomes one of return on investment. What exactly are we going to get for our $3.27 trillion? It had better be good too, because nearly all of it is borrowed from someone – either foreigners or the Fed. Unfortunately, such is not the case. Using the $3.27 trillion projected cost, the ROI for the stimulus bill stands at a whopping -415%. In the private sector, such a revelation would result in a project being killed instantly in the concept phase. Not so in the hallowed halls of Congress where the laws of economics and common sense do not apply.
A Good Deal for Taxpayers?
We have been assured in almost doublespeak fashion that the stimulus bill was necessary, and was in fact, a good deal for the American taxpayer and would create or save millions of jobs. The ballyhooed cash for clunkers program deemed such a success ended up costing taxpayers around $24,000 for every car sold under the program. This when the actual benefit to the buyer was only $4,500. Some other examples, courtesy of AP, include:
- A company working with the Federal Communications Commission reported that stimulus money paid for 4,231 jobs, when about 1,000 were produced.
- A Georgia community college reported creating 280 jobs with recovery money, but none was created from stimulus spending.
- A Florida childcare center said its stimulus money saved 129 jobs but used the money on raises for existing employees.
One disconcerting admission in the past week came from Christine Romer, the head of the Council of Economic Advisors. She stated that the largest impact from the stimulus had already been felt and that moving forward, the stimulus would only serve to prevent the economy from slipping further rather than contributing to any growth. Sounds like a recovery eh? It would sound as if Ms. Romer is already laying the groundwork for the next brainchild of economic ignorance: Stimulus – The Sequel. Here are her quotes:
"By mid-2010," she said, "fiscal stimulus will likely be contributing little to further growth."
"While job losses will likely end early next year, robust job gains may still be several quarters away,"
"This is not a normal recovery, Coming out of this, we've got lots of things working against us."
Like the laws of economics for starters?
What also must be noted is that the federal deficit alone for FY 2009, which doesn’t include net present value of unfunded liabilities, was $1.4 trillion. The fact that such a large sum of money had to be spent to prevent an all-out collapse of the US economy should be alarming to anyone with a pulse. The fact that current projections are for $1 trillion plus deficits annually for the next ten years should curl your eyebrows.
Let’s assume for a minute that Ms. Romer is correct and that we’ve seen all the bounce we’re going to get from the stimulus. According to AP, the number of jobs created directly by stimulus spending was around 25,000. Sure, there are probably some others that slipped through the cracks and it is very likely that some firms held off on layoffs because of the temporary burst of cash. But let's look at the cost of those jobs JUST in terms of the debt service created by the stimulus bill. Each of the 25,000 jobs created cost the taxpayer $29,600,000 in debt service alone.
Keep in mind that unemployment has been going up constantly during the time when we were getting the maximum ‘benefits’ from the stimulus. As soon as the money wears off, firms will fall back on their original plans, which include cutting back on staff. Another stimulus package will be needed – and soon – to stave off the infamous double dip that many economists and commentators have long been forecasting. The proverb that a house built on a rock will weather any storm, but one built on sand will certainly collapse rings very true in our current state of affairs.
The real question that needs to be posed to anyone supporting additional foolish stimulus needs to focus on an exit strategy. How will additional stimulus create a foundation for fundamental, healthy economic growth? The short answer is that it won’t, but let's make them answer anyway.
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
TopSee all
StockTalkers.
Top StockTalkers »
This article has 23 comments:
1. Enormous expansion in an arrogant and malicious Big Govt
2. Vast misallocation of national resources from high valued to low, no or negatively valued resources which has given us this new and wondrous thing: a "V" economic recovery with no jobs, no income, no credit and soon no homes for Main St
3. Euphoria on Wall St, made tangible by those well deserved and still inadequate bonuses
4. The triumph of the WashDc-Wall St-MSM Troika over the Middle Class and the Constitution
5. Great expansion of the Parasitic Economy where entitlements, instant gratification, unearned consumption and irredeemable debt are the geometry of the New Economics
6. Maniacal growth in public debt and a brilliant new insight that debt is an asset and financial vapors are economic solids
7. Demented increase in Fiat Dollars that encircle the world in a web of deceit and delusion
8. Impressive increase in unemployment and underemployment and record Main St bankruptcies and a proclamation that in the New Economy these things just don't matter
9. The replacement of facts by Govt statistics as the new norms and metrics of truth
10. The end of America as a global hyperpower
On Nov 02 07:58 AM User 353732 wrote:
> We got a lot, much more than we imagined we could get, from the Stimulus.
>
> 1. Enormous expansion in an arrogant and malicious Big Govt
> 2. Vast misallocation of national resources from high valued to low,
> no or negatively valued resources which has given us this new and
> wondrous thing: a "V" economic recovery with no jobs, no income,
> no credit and soon no homes for Main St
> 3. Euphoria on Wall St, made tangible by those well deserved and
> still inadequate bonuses
> 4. The triumph of the WashDc-Wall St-MSM Troika over the Middle Class
> and the Constitution
> 5. Great expansion of the Parasitic Economy where entitlements, instant
> gratification, unearned consumption and irredeemable debt are the
> geometry of the New Economics
> 6. Maniacal growth in public debt and a brilliant new insight that
> debt is an asset and financial vapors are economic solids
> 7. Demented increase in Fiat Dollars that encircle the world in a
> web of deceit and delusion
> 8. Impressive increase in unemployment and underemployment and record
> Main St bankruptcies and a proclamation that in the New Economy these
> things just don't matter
> 9. The replacement of facts by Govt statistics as the new norms and
> metrics of truth
> 10. The end of America as a global hyperpower
>
>
Counting what we lost in assets due to dollar depreciation the number is even more staggering. Those who like to do comparative economics undoubtedly realize that although it makes sense for poor nations to depreciate their currency to stimulate growth and exports because they have few assets to speak of to start, it is absolutely ridiculous for a nation that has substantial assets to do the same thing and ground their assets down to nothing. That is unless they are planning to somehow block everyone from pilfering those assets that have been decimated by their foolhardy actions.
Andy Sutton makes a good argument about how foolhardy the rest of our "stimulus works". These actions sound like some 3rd grader's list of ideas to solve a crisis not the results of the biggest bureaucracy in the world's solution. Can't they hire a real economist and stop relying on the Federal Reserve and Goldman Sacs for asinine solutions. Remember it was Goldman Sacs that advised AIG to get into the derivatives market to start with. Really, would you trust them?
From the article:
"It would probably be rather hard to find a single American that didn’t know the price tag of the stimulus bill."
Huh? I read this stuff constantly and I didn't know the price.
Still, your main point is well taken. A stimulus that doesn't stimulate, and then we have to pay for it.
On Nov 02 07:59 AM Andy Sutton wrote:
> Very well said!
But, please, don't discount future costs of programs without discounting future benefits- it's like telling someone they've just lost a million dollars because they just had a child and have to pay for food, housing, clothing, tuition, cars, vacations.... The prescription drug program net present cost may be $8.7 Trillion, but the net benefit may be considerably more if those drugs prevent heart transplants and lost work hours- and the cost may come down as economies of scale allow lower cost development and manufacture of drugs.
As for inflation and fiat dollars, the focus should be on the infinitely larger fiat CREDIT expansion- and contraction. Reigning in leverage- while monetizing some of the debt to make repayment easier while punishing those in the money who allowed credit to grow as it did- is more important than trying to affix money creation to a single precious metal (or some other standard that would take the "fiat" out of fiat currency).
"There weren’t enough Americans with (bad) credit taking out loans to satisfy investors’ appetite for the end product. The firms used (financial bets) to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when (hedge funds) bought a credit-default swap, (they) enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets (hedge funds) and others made with firms like Goldman Sachs and AIG. (Hedge Funds), in effect, were paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all."
“They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” (Eisman) says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans."
Blaming the crisis on CRA or subprime lending is flat out wrong: there simply were not enough subprime borrowers to cause a catastrophe of this magnitude. For that, you needed greed-induced leverage, a complete lack of ethics, and a set of parasitic financial institutions.
As we noted in April, 2008:
"With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic."
You also need a compliant (non functioning) regulatory apparatus, something we warned about in 1998:
"“The nature of financial market activities is such that significant dislocations can and do occur quickly, with great force. These dislocations strike across institutional lines. That is, they affect both banks and securities firms. The financial institution regulatory structure is not in place to effectively evaluate these risks, however. Given this, the public is at risk.”
See:twisri.blogspot.com/20...
Why the market failed - twisri.blogspot.com/20...
Adam Smith on the Current Financial Crisis - twisri.blogspot.com/20...
What happened. What now. - twisri.blogspot.com/20...
To REALLY see what went wrong, take a look at page 6: www.sec.gov/rules/prop... See page 2: www.sec.gov/rules/prop...
Also see: www.ethicalmarkets.com...
I too agree with your argument for an exit strategy for the stimulus program, with one caveat:
"The question now becomes one of return on investment. What exactly are we going to get for our $3.27 trillion? It had better be good too, because nearly all of it is borrowed from someone – either foreigners or the Fed. Unfortunately, such is not the case. Using the $3.27 trillion projected cost, the ROI for the stimulus bill stands at a whopping -415%. In the private sector, such a revelation would result in a project being killed instantly in the concept phase. Not so in the hallowed halls of Congress where the laws of economics and common sense do not apply."
I have never heard of applying ROI methods to government programs, by the government anyway. My understanding (theoretical more than anything) of economic (market) and social (government) good is that the social good can't be readily quantified, which would make a ROI analysis difficult compared to a similar analysis of a business choice. Not to say that performing a ROI on the stimulus program isn't warranted, or needed, and perhaps it is time for that - a ROI analysis of social programs. But it sure would have been asking alot of the government to produce a ROI for the stimulus program when the economic world was crashing last year. Imagine the ROI info spewing forth from the government back then, compared to what is being conjured up presently by the government (example from your article - "A Florida childcare center said its stimulus money saved 129 jobs but used the money on raises for existing employees.") What the h - were the 129 employees going to quit work if they didn't get a raise? So much for separation between government and the market. But I digress, and the point is that a ROI analysis is called for before the fact, so that options can be quantified before the trillions start flowing. Perhaps the next stimulus, if there is one, should be handed over to someone like Warren Buffett, if we are talking about a quantifiable return from it.
Putting the role of stimulus induced government debt in its proper perspective; the real culprit is the massive debt bubble created in the consumer and financial markets prior to 2008 and not the subsequent growth of national government debt associated with stimulus measures. For too many years prior to 2008, the stagnation in the creation of productive capacity in the traditional ‘First World’ economies was masked by overstimulation of the consumer debt and the focus of finance away from capital formation and into secularized debt and derivative pyramid creation and manipulation. Now that the resulting debt bubble threatens to implode, government stimulus is needed to stabilize the financial system and the larger economy to give national governments the time and capacity to begin to address the underlying structural problems in the economy. Addressing these underlying problems will be an extended, many staged and difficult process and not the simple return to growth through pump priming, on the one hand, or a short and sharp bout of creative destruction and recovery, on the other, as envisaged by too many otherwise perceptive observers on the centre left and centre right respectively.
While some Libertarian and Austrian School enthusiasts might embrace the noble notion of a great cleansing destruction of the inefficient and inappropriate elements of the economy if only governments had stood aside and allowed the market (in the form of the deflationary collapse mentioned above) to do its thing unimpeded, more grounded individuals will appreciate that the nature and scope of the destruction would have been well beyond the ‘creative destruction’ of a mild recession. Not only would the destruction and suffering be too deep to contemplate but this very chaos would delay any prospect of recovery and reform of the economy. In closing it is interesting to note the similarity of this millennium vision of some Libertarian and Austrian School enthusiasts to that of some extreme Marxists for the efficacious effects of “The Revolution” and of some extreme Syndicalists for the efficacious effects of “The General Strike”.
THEN, when we've done all that, we DEFAULT on all the loans and leave the other countries holding the bag.
Of course I'm joking, but it sounds like that's what the Dems think they can do. That's our exit strategy folks!
The experience of Japan over the past 20 years is evoked by both sides in this argument; the interventionists as evidence that stimulus must be provided at decisive levels and coupled with vigorous restructuring of inefficient and ineffective financial and industrial enterprises, on the one hand, and the anti-interventionists, on the other, as evidence that necessary economic reform (and therefore the real end of the recession) can only occur if the recession is allowed to do its work of constructive destruction (which artificial stimulus measures only delayed or impeded). In other words, both sides acknowledge that Japan’s economy stalled in near deflation for a protracted period and that the efforts of its government and central bank failed to end that state of affairs but the interventionists see the Japan’s error to have been to have done too little while the anti-interventionists see the error to have been to have intervened against market forces at all.
The effectiveness or otherwise of intervention at various stages in the US between 1929 and 1941 are another focus for this debate a sidebar of which is speculation (arguably of marginal utility) whether the US today is at 1930 or 1937 by comparison with the stages of the Great Depression. Interestingly, the same debate about the efficacy of intervention was in full throat in the 1929 -41 period (the anti-interventionists then prevailing in the early stages and the interventionists later – the interventionists prevaling so far this time).
The next two or three quarters may be decisive in showing whether intervention has worked as planned. It is doubtful, however, whether this debate will be finally settled to the satisfaction of all (the devil always being in the details).
Real damage cannot be assessed until we get REAL numbers as to jobs created and jobs saved (???). Jobs saved - how do you measure that?
They should also add a number of underemployed (20%? 40%? 60%?) But that statistic would really blemish the bottomline.
If Joe Blow loses a financial job on Wall Street making $300K and now has to take a job at Home Depot for $14 an hour, is he in a new "jobs made" category? Jobs "saved" (well, he still has A job)? Or, underemployed statistic with much less buying power?
Dont forget Bush's stimulus
this will be the third year in a row of stimulus, signaling a broken down economy where "prosperity" by borrowing from future generations hides the cracks in the foundation. Don't mind them.
I'll wait until January when the stores will be selling stuff at 80% off - if they don't close up on January 1st like some did last year. Then I and others like me might be able to afford it.
Some analysts saying we turned the corner on the recession? Yeah - into a brick wall for some of us.
Admitedly my first comment was a bit heavy handed (must get those of your persuasion roiled up enough to respond in detail!). I take your point but ask what you realistically propose be done now that wouldn’t have a major negative impact on many many people.
bob adamson
On Nov 02 05:38 PM jimboy wrote:
> Andy - good article. Bob - bad comment (your first one, the second
> one was OK) that I totally disagree with. You accuse "Austrian" critics
> of the stimulus/bailout of wanting the recession to take its course
> and cause unimaginable suffering. The "more grounded individuals"
> like yourself welcome the government's efforts to prevent a deep
> recession. This is completely unfair - if anybody had been listening
> to the heartless Austrians in the early part of this decade when
> the Fed was "fighting" recession with super-loose money then we wouldn't
> be in this mess. The lesson from that period is that mitigating a
> recession by monetary and fiscal stimulus merely postpones the day
> of reckoning and makes the underlying problems worse. Why should
> this time round be any different? As Andy's article shows, the so-called
> "stabilization" you so admire is mostly illusory and has come at
> a high price.
Compare the cost of responding now against the benefits of responding now. (costs are still being tallied, and the benefits are difficult to quantify--compared to what?)
Compare the costs of not responding (many many more failed banks, failed currencies--Iceland anyone?, and possible failed states, possible 20% unemployment, higher crime?, global unrest) against the benefits of not responding (saving money, avoided currency collapse, lessened moral hazard).
Benefits of not responding are virtually identical to costs of responding- except its money saved vs. money spent.
But the benefits of responding are NOT the same as the costs of not responding. The benefits of responding may seem like thin gruel, (some jobs created, some saved jobs) but compared to the COSTS of not responding--it may be a bargain.
The costs of not responding are unknowable, but were so threatening that they were deemed to be real, and potentially catastrophic to the global financial system.
In other words--we don't know, but two administrations looked into the abyss and decided that the risks of not responding were greater than the costs of responding. They erred on the side of caution if global economic and political catastrophe were to be avoided.
Any sensible solution is going to start with innovation and to end with better use of resources. How can locking up capital in bad loans lead to innovation? We have trapped capital in the mistakes of the past. Giving bankers more money has only enabled them to hold on to the vacant properties more cheaply.
Watching the governments solution is like going to a horse race where people bet on which horse comes in last!
On Nov 02 04:25 PM bob adamson wrote:
> Mr. Sutton’s premises about the options facing governments last year
> when the crisis broke and now when it has been abated, albeit through
> the aegis of massive governmental fiscal and monetary stimulus, are
> flawed. The practical choice facing the central banks and national
> governments of the G8 from the late summer of 2008 to March of this
> year was to allow unimaginable collapse and chaos to ensue (i.e.
> allow first the investment banking system to implode occasioned by
> the realization that 20 trillion dollar or more of secularized debt
> instrument and derivative related asset assumed value was substantially
> worthless and then watch first the general financial system and then
> the general global economy implode in an unprecedented deflationary
> black hole) or stabilize this 20 trillion dollar or more asset problem
> by massive governmental fiscal and monetary stimulus (i.e. give a
> governmental guarantee, backed by infusions of money and credit by
> government insofar as required, that this 20 trillion dollar or more
> void would not be allowed to collapse). There was no third thrifty
> option. Mr. Sutton therefore chooses the deflation option.
>
> Putting the role of stimulus induced government debt in its proper
> perspective; the real culprit is the massive debt bubble created
> in the consumer and financial markets prior to 2008 and not the subsequent
> growth of national government debt associated with stimulus measures.
> For too many years prior to 2008, the stagnation in the creation
> of productive capacity in the traditional ‘First World’ economies
> was masked by overstimulation of the consumer debt and the focus
> of finance away from capital formation and into secularized debt
> and derivative pyramid creation and manipulation. Now that the resulting
> debt bubble threatens to implode, government stimulus is needed to
> stabilize the financial system and the larger economy to give national
> governments the time and capacity to begin to address the underlying
> structural problems in the economy. Addressing these underlying problems
> will be an extended, many staged and difficult process and not the
> simple return to growth through pump priming, on the one hand, or
> a short and sharp bout of creative destruction and recovery, on the
> other, as envisaged by too many otherwise perceptive observers on
> the centre left and centre right respectively.
>
> While some Libertarian and Austrian School enthusiasts might embrace
> the noble notion of a great cleansing destruction of the inefficient
> and inappropriate elements of the economy if only governments had
> stood aside and allowed the market (in the form of the deflationary
> collapse mentioned above) to do its thing unimpeded, more grounded
> individuals will appreciate that the nature and scope of the destruction
> would have been well beyond the ‘creative destruction’ of a mild
> recession. Not only would the destruction and suffering be too deep
> to contemplate but this very chaos would delay any prospect of recovery
> and reform of the economy. In closing it is interesting to note the
> similarity of this millennium vision of some Libertarian and Austrian
> School enthusiasts to that of some extreme Marxists for the efficacious
> effects of “The Revolution” and of some extreme Syndicalists for
> the efficacious effects of “The General Strike”.
You ask for a different solution. Here is a solution for housing that will lead to a better allocation of resources. I am not saying that it would have avoided the crisis. I am not even saying that it will solve the entirety of the problem. I am saying that it is a 3rd choice, an option to pouring welfare on the past. It is about innovation.
seekingalpha.com/insta...
On Nov 02 08:48 PM bob adamson wrote:
> jimboy -
>
> Admitedly my first comment was a bit heavy handed (must get those
> of your persuasion roiled up enough to respond in detail!). I take
> your point but ask what you realistically propose be done now that
> wouldn’t have a major negative impact on many many people.
>
> bob adamson
I agree that we need to get out of “curse the darkness mode” and try to envisage some candles to light.
bob adamson
On Nov 03 07:45 AM a fat panda wrote:
> Bob (anyone for that matter),
>
> You ask for a different solution. Here is a solution for housing
> that will lead to a better allocation of resources. I am not saying
> that it would have avoided the crisis. I am not even saying that
> it will solve the entirety of the problem. I am saying that it is
> a 3rd choice, an option to pouring welfare on the past. It is about
> innovation.
>
> seekingalpha.com/insta...
>
It isn't about trying. It is about trusting capitalism to allocate resources well.
Here is the future, otherwise: There is a property where I live which is completely miscast for the neighborhood. Having not sold for years, it is now owned by a banker, who flush with cheap taxpayer capital, is more than willing to hold the property until the market realizes that the original loan was sound.
If this banker had to pay real interest rates. That property would be liquidated, and reinvented. That process would create wealth and jobs. Instead, the only thing that it produces is depreciation.