Friday, January 30, 2009

Critics Of The Stimulus Plan

Its often been said that you cannot please everyone. Having watched CNBC, I can finally confirm that they have too many Republicans on the show as anchors. I am not saying that Obama's stimulus plan is perfect, far from it, but it is never going to please the majority because there are not just two sides to the stimulus plan. There are many sides you can take. If you put the top 10 economists into a room to debate the plan, I would bet that there would be 11 views.

I also think I have to put a strong protective layer on my TV screen as I am very very close to throwing things at my TV everytime Gasparino or Kudlow speak.

We have to appreciate that beneath our views and opinions on the stimulus plan are our very unique assumptions of what will work and where our inherent priorities and biases lie. Safe to say that most people who like to say things on business channels will have a view, and believe that their understanding of economics are the appropriate school of thought.

It is easy to bash the plan if you are a conservative, hence you are unlikely to find favourable articles reading Wall Street Journal. Not calling everyone is wrong but that we all need a broader context to appreciate the enormity of the task at hand. My words in purple below.

WSJ: There's $1 billion for Amtrak, the federal railroad that hasn't turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There's even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.( OK, the Amtrak thing and Arts facility are a bit silly but the child subsidies sounds ok for those who require them in times like these. The global warming and carbon capture are ok as part and parcel for the US to further their advancement in cutting edge arena - the US not only need to boost employment but also invest for the long term to boost their competitive advantage in technology and other cutting edge industries).

In selling the plan, President Obama has said this bill will make "dramatic investments to revive our flagging economy." Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There's another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities. (Both are essentials, although one can argue for a greater deployment for infrastructure). Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren't likely to help the economy immediately. (That's the bone of contention for most critics, that only 12% of actual plan is for actual stimulus. If thats the basis for judging the stimulus plan, then its a short sighted view as what brought the US to its knees is the lack of savings, lack of proper regulation, voracious appetite for debt... the plan needs to address the future as well, if not, then even after recovery the US will be left behind in many cutting edge industries, and investing in broadband, education, science are necessary to go hand in hand with jobs creation in order to sustain a more competitive USA of the future).

[Review & Outlook]

Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party? Here's another lu-lu: Congress wants to spend $600 million more for the federal government to buy new cars. Uncle Sam already spends $3 billion a year on its fleet of 600,000 vehicles. Congress also wants to spend $7 billion for modernizing federal buildings and facilities. The Smithsonian is targeted to receive $150 million; we love the Smithsonian, too, but this is a job creator? (OK, the Smithsonian is not necessary but please, look at the bigger picture, its only $150m, same with cars, its $600m... if you guys want to get bogged down in small stuffs you will be missing the bigger picture. As for renewable energy and mass transit, these low yielding investments are necessary as backbone for business and seeking alternative energy sources.)

Another "stimulus" secret is that some $252 billion is for income-transfer payments -- that is, not investments that arguably help everyone, but cash or benefits to individuals for doing nothing at all. There's $81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don't pay income tax. While some of that may be justified to help poorer Americans ride out the recession, they aren't job creators. (This is where the Republicans come out whingeing ... you need safety nets strengthened during difficult times. Its not a yes/no question for the stimulus, and as conservatives you would shy away from supporting these measures, but they are not wrong or bad, just what you believe in and what is fair).

As for the promise of accountability, some $54 billion will go to federal programs that the Office of Management and Budget or the Government Accountability Office have already criticized as "ineffective" or unable to pass basic financial audits. These include the Economic Development Administration, the Small Business Administration, the 10 federal job training programs, and many more. (Obama has already promised for more oversight and accountability. The ineffectiveness of these institutions has more to do with the previous government or rather the Republicans, so shut up... I guess if I was American I would be a Democrat).

Oh, and don't forget education, which would get $66 billion more. That's more than the entire Education Department spent a mere 10 years ago and is on top of the doubling under President Bush. Some $6 billion of this will subsidize university building projects. If you think the intention here is to help kids learn, the House declares on page 257 that "No recipient . . . shall use such funds to provide financial assistance to students to attend private elementary or secondary schools." Horrors: Some money might go to nonunion teachers. (I don't see the issue here, you need to invest in education. God knows how far behind the US is lagging behind many other countries. So what if some of it goes to teachers, you want better teachers, and people who are properly incentivised).

The larger fiscal issue here is whether this spending bonanza will become part of the annual "budget baseline" that Congress uses as the new floor when calculating how much to increase spending the following year, and into the future. Democrats insist that it will not. But it's hard -- no, impossible -- to believe that Congress will cut spending next year on any of these programs from their new, higher levels. The likelihood is that this allegedly emergency spending will become a permanent addition to federal outlays -- increasing pressure for tax increases in the bargain. Any Blue Dog Democrat who votes for this ought to turn in his "deficit hawk" credentials.

This is supposed to be a new era of bipartisanship, but this bill was written based on the wish list of every living -- or dead -- Democratic interest group. As Speaker Nancy Pelosi put it, "We won the election. We wrote the bill." So they did. Republicans should let them take all of the credit.

(Well, to all the conservatives, I know one thing the Republicans won't do if they were in office... they wouldn't freeze their own pay. Let the change begin, let they guy do something, you buggers had your chance, in fact, you buggers fucked it up royally during the last administration).

p/s photo: Noon Wongsawan


madcap said...

Well, I've taken to watching bloomberg instead of those hysterical tv anchors who only speak from one point of view. If I understand the problems in US well enough, there is firstly a banking crisis caused by those the republicans view as the bastions of the economy. And their view is to reward their greed with more money through tax cuts. Tax cuts it seems is the cure for all economic ills. Secondly there is a consumer crisis because they have been spending money they have yet to earn. This plan, it seems to me, is to flood the economy with money, put money in consumer hands so as to generate a greater velocity of money. The only issue is how to spend it so it has the greatest value for the country and so the money can quickly get into the economy. Does not speak well for the US that there is so little unity of purpose in the face of crisis.

see said...

WSJ still sour grapes cos their man John Mccain didnt win election.....hehehhee

SH said...

USA has virtually zero savings rate. It cannot continue to rely on external financing in the future to fund its consumption. Consumption has to go down and Savings has to go up in USA as future savings is required to fund future investment that will enhance its economic wellbeing. The USA is no different from any other country in this regard.

The Banking crisis is the result of the FED's loose monetary policy and the deliberate interference of the US government in not allowing the free market system to enforce market discipline to cleanse itself of incompetent people and incompetent companies that had failed big time over the past 20 odd years.

True Capitalism thrives on the Darwinian principle of survival of the fittest( or survival of the most competent)but unfortunately the Free Market System was not allowed to operate freely since the collapse of the LTCM more than 20 years ago. Market discipline was not allowed to be enforced on the incompetent people and incompetent companies and consequently more and more people/companies took bigger and bigger risk with the full confidence that the FED will rescue them should they fail again in the future. This is the mindset of a typical socialist and the FED and the US government had inadvertently or perhaps knowingly encouraged the sustained growth of the Socialist Business Mindset amongst its Super Rich since the LTCM debacle. This Socialist Business Mindset is now a drag on the future wellbeing of the USA as a "True Capitalist Nation". Consequently the USA lacks the moral leadership and the moral authority in the eyes of the rest of the world as it had practised double standards in practising "Socialism for their Super Rich Friends" and Market Discipline for the you and me and the Rest of the World.

The fundamentals of the US financial system had been eroded gradually over the past 20 odd years to the extent that there is a real possibility and high likelihood that the USA may default on its US Bonds in the not too distant future. The FED is debasing the US currency by printing money excessively hoping that the USA can export its way out of the current financial malaise it is in right now. This is a zero sum game as this will result in competitive devaluation of the other major currencies as well.

It took the USA 200 years to accumulate debt of US 5 trillion but the FED recently has over the past 6 months ballooned the US debt by another US$ 7 trillion (maybe even more). The notion that a nation can generate more debt to finance more consumption is ridiculous and smacks of gambling at the highest level.

The Rest of the World has to prepare and manage itself for a sustained reduction in US Consumption and to wean itself off from the current over dependence of exports to the USA for its growth. They are better off keeping whatever reserves they had accumulated over the years to fund local investments that will enhance its medium to longer term economic competitiveness.

The Current Obama stimulus programme to all intent and purposes is a mixed bag. It may ease temporary pain and provide a short term fillip and euphoria but it falls seriously short of long term strategic objectives of weaning USA off its undue reliance on cheap energy which may turn into expensive energy in the not too distant future once excessive risk aversion subsides and substantial risk appetite grows again globally.

CSK said...

wah, got X Japan song in the playlist. Do u know X Japan making a comeback? Toshi is back to sing.

Terrance said...

The law of gravity always apply. What ever goes up will eventually fall to the ground. US has her turn now so why worry. I have predicted that US and the world will be in trouble. Serve them right especially those who are greedy.

lets learn maths and save our self by saving

Muse-zik and Rocker said...

what good is a tax cut if you don't have a job and income? Tax cuts are only good for big businesses who still pay their CEO's fat bonuses. I believe that job creation is the main priority.

Salvatore_Dali said...


u r absolutely spot on...


yes, finally a kindred spirit, they (X-Japan) are brilliant.. for those who do not know Mondialito, they are both Japanese, a nice looking young sultry girl and the guy who is on guitar n doing all instrumentation, they sing mostly in French, how weird but absolutely enchanting...


good article, you should have your own blog to voice your views, i will support

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