Fausta's Blog

American and Latin American Politics, Society, and Culture

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Zero effect for stimulus impact

The Obama Stimulus Impact? Zero
Liberals are still arguing that the federal spending stimulus wasn’t large enough. How many multiples of nothing—its result according to new evidence—would they like?

What does that graph mean?

In the third quarter of 2010, for example, state and local governments received $132 billion in stimulus grants at an annual rate. In that quarter they borrowed $136 billion less at an annualized rate than they had in the fourth quarter of 2008, even though their revenues from all other sources were only $76 billion higher.

The bottom-line is the federal government borrowed funds from the public, transferred these funds to state and local governments, who then used the funds mainly to reduce borrowing from the public. The net impact on aggregate economic activity is zero, regardless of the magnitude of the government purchases multiplier.

This is not the first failed stimulus (emphasis added),

This behavior is a replay of the failed stimulus attempts of the 1970s. As Gramlich found in his work on the antirecession grants to state and local governments: “A large share of the [grant] money seems likely to pad the surpluses of state and local governments, in which case there are no obvious macrostabilization benefits.”

The implication of our empirical research and Gramlich’s is not that the stimulus of 2009 was too small, but rather that such countercyclical programs are inherently limited. The lesson is to beware of politicians proposing public works and other government purchases as a means to stimulate the economy. They did not work then and they are not working now.

Taking money from the taxpayers does not stimulate the economy. Never had, never will.

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Fed: Lower your expectations even more

The Fed lowers economic expectations for 2011 and the economic forecast isn’t pretty: Moderate growth will continue (it’s currently at 2.5%), the unemployment rate will likely go down to 9% a year from now, and inflation may rear its ugly head if unemployment goes to 6% range – hardly surprising considering how the Fed has been printing money like crazy, including its latest move, the QE2, Ben Bernanke’s brainchild.

QE stands for “quantitative easing”, the cruise-evoking euphemism for what amounts to a second spendulus stimulus. We’re already seeing how well the first stimulus worked, considering how Obama’s argument was that we needed the stimulus to keep unemployment at 8%.

Yeah, right.

The QE2 is that plan to buy $600 billion Treasury bonds in the hope of increasing growth and keep interest rates low. Skeptics like myself see it as paying off your MasterCard with your Visa.

The Fed is not without its dissenters,

the document also leaves little doubt that several Fed officials remain uneasy with the action. Some anticipated that they would have only a “limited” effect on the pace of recovery, arguing the action should only be taken if the odds of deflation “increased materially.”

And several “noted concern” that the action “could put unwanted downward pressure on the dollar’s value in foreign exchange markets” or “an undesirably large increase inflation.”

Commodity prices have already increased following the Fed’s QE2 proposal. The move is a deliberate devaluation of the dollar.

One can’t expect the Fed to come up with a more optimistic forecast right now. For starters, the data doesn’t lend itself to a rosy outlook. While unemployment figures may improve on a month-to-month basis, employers have many reasons to continue to remain reluctant to add to payrolls. Also, the Fed’s new quantitative easing plan would come under more fire if they make optimistic predictions that don’t pan out.

How will this economic outlook affect politics in 2011? Paul Mirengoff takes a look and sees the probability of the Democrats moving away from a hard-left agenda.

I hope Paul is correct, but as a pessimist, I also see it as an opportunity for the Dems to justify a hard-left agenda, blaming everything that can possibly go wrong (which it will), on the Republican Congress, right in time for the 2012 election, when unemployment supposedly will be at 8%.

Cross-posted at Hot Air.

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Argentina’s debt, and QE2: 15 Minutes on Latin America

In today’s podcast at 11AM Eastern,
Inflation Fuels Record Central Bank Debt Sale: Argentina Credit

Argentina’s central bank is selling a record amount of notes linked to deposit rates to curb money supply growth and inflation.

The central bank sold this week 2.2 billion pesos ($555.5 million) of nobacs, the most since the auctions began in April 2005. The securities pay 250 basis points, or 2.5 percentage points, more than the 10.88 percent badlar rate. Six-month futures show the rate will climb to 12 percent, compared with a one-month London interbank offered rate of 0.25 percent.

Meanwhile, in the USA, Here’s Why QE2 Could Threaten The Dollar’s Status As The Global Reserve Currency

With QE2, the Fed will buy $600 billion worth of longer term treasuries (and will “reinvest” another $300 billion of revenues from the previous QE1). The only plausible scenario in which this can prove useful is by “beggaring thy neighbor”. Bernanke has talked openly of his desire to raise inflation expectations, and that in combination with lowering interest rates could make America a less attractive investment option. If so, the dollar could depreciate, increasing US competitiveness in traded goods and services. This could boost exports and depress imports.

The QE2 is “quantitative easing”, that is, the the Fed’s move to buy an additional $600 billion in government securities which will flood the economy with more printed money. Enter the era of dollar devaluation.
(h/t MOTUS)

The dollar run begins?

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Getting a grip on the debt

The top story in today’s Wall Street Journal:
Fed Global Backlash Grows
China and Russia Join Germany in Scolding; Obama Defends Move as Pro-Growth

Global controversy mounted over the Federal Reserve’s decision to pump billions of dollars into the U.S. economy, with President Barack Obama defending the move as China, Russia and the euro zone added to a chorus of criticism.

The Fed’s decision to buy $600 billion in U.S. Treasury bonds and therefore flood the financial system with money after last year’s stimulus is an inherently inflationary measure.

Why should we be alarmed?

Recently, Dave Cote, CEO of Honeywell, gave a speech to the Chamber of Commerce that you should read and watch:

Bruce McQuain posted on the speech,

For instance, the discussion about China’s defense expenditures being paid for by our interest payments.  Cotes points out that if spending remains unchanged through 2020, we’ll be paying almost a trillion dollars in interest a year.   At this point, foreign governments own 45% of our 9 trillion in debt.  China owns at least a trillion of it.  And there’s no end in sight of the sale of government debt here.

The last point Cote makes that echoes Dales warning is about how quickly this will happen if we don’t do something.

While the problem builds slowly and inexorably, financial markets respond abruptly. When that decline does happen, it won’t be a case of minor monthly changes that give us 15 months to adjust. The hurt will come overnight as the herd moves against us. And then it’s too late.

That could happen at any time without warning triggered, as Dale points out, by some seemingly insignificant occurrence that normally would receive only passing attention. I don’t think, for the most part, people understand that very important point or they’d be beating down the doors of Congress.

Look at today’s headline above. Cote is not speaking empty words.

As Nick Schulz said,

It’s impressive to see a guy running a $36 billion firm develop a level of detailed policy knowledge that would put most congressmen to shame.

After you watch the speech and read it, make sure to look at the slides.

Cote ought to be is in Obama’s debt commission.

Cote poses the question,

Do We Still Have The Political Will To Be A Great Country?

And to do what it will take?

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Aggregate-demand-goosing, the Obama way

The NY Times has an article about the Tax Cut Nobody Heard Of.

First question that comes to mind is, “why hasn’t anyone heard of it?”

For starters, because,

a provision of the stimulus bill had cut taxes for 95 percent of working families by changing withholding rates

Hmmm… let’s see… the stimulus bill that was 1,419 pages long, and which Nancy Pelosi was saying “you have to see the language” while not making it available until the day of the vote?

Yes.

That stimulus bill.

How clumsy of us not to notice!

So what the Times is talking about it government spending, bigger government, and after spending your money, the government’s largesse shows itself, how?

Actually, the tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

They reasoned that people would be more likely to spend a small, recurring extra bit of money that they might not even notice, and that the quicker the money was spent, the faster it would cycle through the economy.

Because, heaven forfend that the Obama administration would trust that you would know what to do with your $65.

Economists are still measuring how stimulative the tax cut was. But the hard-to-notice part has succeeded wildly. In a recent interview, President Obama said that structuring the tax cuts so that a little more money showed up regularly in people’s paychecks “was the right thing to do economically, but politically it meant that nobody knew that they were getting a tax cut.”

“And in fact what ended up happening was six months into it, or nine months into it,” the president said, “people had thought we had raised their taxes instead of cutting their taxes.”

Yeah…

Stephen Spruiell (from whom I stole the title of this post) points out,

To me, this demonstrates just how much of the administration’s thinking is guided by Keynesian economics, pump-priming, aggregate-demand-goosing, whatever you want to call it. If the problem you’re trying to solve is how to get people to spend more money faster, then you are absolutely committed to a profoundly flawed set of views about what ails this economy and what is likely to help it grow. Early on, this administration decided that the banking system couldn’t handle the rapid, large-scale resolution of all the bad debt that is still clogging the system and causing innumerable economic problems for borrowers and lenders large and small. Fine. I disagreed with the administration’s decision to duck those problems, but I lacked then and continue to lack the knowledge required to adequately assess whether the FDIC, the Treasury, and the Fed could have managed the resolution, nationalization, and/or liquidation of one or more of the big money-center banks last year — or, for that matter, what would have happened if we hadn’t TARPed the economy. But I think we should all be able to agree that spending is just a symptom of a symptom. Should we give people their temporary tax rebate all at once or a little at a time? Tell you what: If my car has a hole in the gas tank, I’m not going to spend a lot of time agonizing over whether to use premium or regular unleaded. I’m going to try to fix the hole.

This is not to say that government shouldn’t always be working to make the tax code less of a drag on economic activity. When conservatives talk about cutting taxes, that’s usually what they mean — not this Keynesian demand-management stuff. The economic bang-for-the-buck that comes from cutting taxes has to do with incentives, not spending. The Times advances the thesis that, whatever the economic merits of the decision, doing a stealth tax cut was not very smart politics, and the administration officials who talked to the Times do their usual routine of saying self-gratifying things about their political bravery when faced with doing the right thing vs. the politically popular thing. But in giving small tax rebates to middle-income workers — workers whose incentives are mostly fixed — the administration chose to do the politically popular thing instead of the right (or correct, if you prefer) thing. The right thing to do, if you’re going to cut taxes, is to cut them for businesses and high earners so as to strengthen their incentives to expand, invest, produce more, and work more efficiently. Of course, these are the groups whose taxes Obama seeks to raise.

Spruiell assumes that the Obama administration was interested in doing the right thing. He is incorrect. The Obama administration was simply doing a politically expedient move, only that they went about it the wrong way.

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55 jobs, $111 million gone to “stimulus” waste

As $800,000+ of the stimulus money goes to teaching South Africans how to wash their penises, here in the US $111 million was spent on creating 55 jobs in Los Angeles. And it’s not even clear if there were 55 jobs actually created, since the city controller phrased it in terms of “created or retained” (emphasis added):

The Los Angeles City Controller said on Thursday the city’s use of its share of the $800 billion federal stimulus fund has been disappointing.

The city received $111 million in stimulus under American Recovery and Reinvestment Act (ARRA) approved by the Congress more than year ago.

“I’m disappointed that we’ve only created or retained 55 jobs after receiving $111 million,” says Wendy Greuel, the city’s controller, while releasing an audit report.

Where did $2 million per job go?

The audit says the numbers were disappointing due to bureaucratic red tape, absence of competitive bidding for projects in private sectors, inappropriate tracking of stimulus money and a laxity in bringing out timely job reports.

Daniel Mitchell also points out,

But this calculation is incomplete because it doesn’t measure how many jobs would have been created if the money had been left in the productive sector of the economy. Moreover, it’s also important to consider long-term costs such as the fact that Los Angeles now has more overhead, which will exacerbate the city’s fiscal problems.

How about the rest of the stimulus?

Via Liberty Pundits, Washington profited especially from the stimulus (why am I not surprised?)

More than $3.7 billion of stimulus contracts, grants and loans have gone to recipients in the District of Columbia and two adjacent congressional districts—Maryland’s 8th District and Virginia’s 8th District. That amounts to nearly $2,000 for every resident—nearly three times the national average, according to a Wall Street Journal analysis of reports filed by recipients.

And that’s how the bread is buttered, 2010 version.

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There’s stimulus, and then there’s stimulus

The American economy is nearing ruin, so the federal government spent over $800,000 of our tax dollars teaching South African guys how to wash their johnsons.

I kid you not:
Feds Spent $800,000 of Economic Stimulus on African Genital-Washing Program

The National Institute of Mental Health (NIMH), a division of the National Institutes of Health (NIH), spent $823,200 of economic stimulus funds in 2009 on a study by a UCLA research team to teach uncircumcised African men how to wash their genitals after having sex.

Via LauraW, who has a few choice words on the subject.

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