Paving the road to nowhere, one word at a time.

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Location: Tijuana, Baja California, Mexico

American born, living in Mexico since 1992.

Thursday, February 12, 2009

The Stimulus Miracle: Chapter Twenty-one – Conclusion And Opinion

Between the pirate and the privateer, there is a gray area that defies black and white or any other binary distinction along with a vast ocean in which to settle the differences. Politics and economics have always worked this way. In times of economic surplus, the pirate becomes a privateer. In times of economic peril, the privateer becomes the pirate. When the economy is stable, then it becomes difficult to determine the difference. This is what happens.

I listened to the Shiny New President's press conference the other evening. As with all presidential press conferences, the questions are prescreened, to a point, so that the President isn't embarrassed or ambushed. This is understandable. And when one reporter asked about "earmarking" on the stimulus package, Obama denied it. This is almost true, as there is almost no earmarks in the bill. But Obama went on to admit that there was a lot of "pork" in the bill. I admired his acknowledgement of the obvious. Previous administrations wouldn't have been that honest. On the other hand, he had nothing to lose, because he knew that he'd already won.

And the only obvious earmarking on the stimulus bill came from a Republican Senator, in case you are wondering.

A little more than half of this bill was written long before Obama won the election. Those portions of the bill sat on someone's desk, drawing dust and sitting patiently until an opportunity presented itself. This is how politics works. Republicans pass their type of legislation this way, too. In fact, the last administration hijacked congress, in that the act of a congressman voting against legislation that supported and funded a war that was very unpopular within their own constituency could translate to anti-patriotism. The current administration did not need such tactics, only the ability to pick off a couple of senators from the other side of the aisle.

The appropriations provisions in the stimulus bill are ostensibly designed from the Keynesian macroeconomic model which contends that increasing the cash supply to government for investment in infrastructure, when combined with tax cuts or credits to the lower and middle class, stimulates economic growth. This is similar to what the Roosevelt administration did with the New Deal. There is plenty of debate amongst economists and historians concerning the effectiveness of the New Deal, and that perhaps the second World War had more to do with recovery from the Great Depression than did anything else. I am willing to seek a compromise that the combination of the two events helped to get the United States of America back on its feet.

And to be fair, and completely honest, I don't believe that Supply-side macroeconomics had as much to do with economic recovery from the recession in the Reagan administration as did other factors.

* * * *

Many years ago, I took my family up to Del Mar for a day at the racetrack. I remember that they had these booths set up, temporary kiosks, and that people were giving away free souvenirs, horse racing stuff. One item - and it escapes me now as to what that item was, appeared very attractive to add to my collection. I wanted to buy one, but they weren’t for sale. They were free! All I had to do was to fill out an application for a credit card. I explained to the young lady that I really didn't want a credit card, but she insisted that it was harmless, and that the most that they would do is to simply offer me the card and that I could refuse it if I chose to do so.

Perhaps a month later, I was sitting at my desk at work, and I received a telephone call. It was a credit card company.

"We'd like to ask you a few questions," she said.

"But I don't own any credit cards," I told her.

"No, this is concerning your application."

"But I didn't apply for..."

Then I remembered that I had, indeed, applied for their credit card. I acknowledged it.

"We were wondering, how old are you?" she asked.

"Thirty-eight, why?"

“Well, you have no credit rating at all. In fact, we can't find any reference to where you bank. We were just wondering if you were just starting out, you know, maybe that you just graduated high school or something."

"Nope. I have no credit cards and no bank account."

She was dumbfounded. I told her why I applied, that it wasn't for the card, it was for the horse racing memorabilia that I could add to my collection. I told her that she could rip up my application and that I was sorry for wasting her time. But it occurred to me that people are sometimes worth more by what they owe than what they don't owe. This is truer now than it was then, in that if you have a credit card with a high limit and you aren't using it and you don't owe on it, the card will likely be cancelled soon. In order to maintain a good credit rating, one needs to owe something against it. Ironic, just a little?

* * * *

The last company that I worked for began to feel it immediately and it wasn't pretty. The majority of their business came from companies that provided material used to sell houses, mostly new houses, because traditionally such advertising and attention-getting has paid off for the housing industry. Orders began to drop fast as the inventory of unsold houses began to climb. I rationalized that the housing industry still needed to advertise, and that perhaps they wanted it at a lower cost. I argued, unsuccessfully, that the company should go directly after the homebuilders, cutting out the middleman. Unfortunately, the owner had a lot of loyalty to these middlemen, and even though our sales staff had leads on builders that our clients weren't pursuing, they didn’t have the required experience to go after them.

Last that I heard, that company is still in business, but in very bad shape. There isn't anything that I found in this stimulus bill that is going to help them, except that one of their clients sells motivational material to schools. Unfortunately, their profit margin with this client is extremely low. There are a lot of businesses that will not benefit enough from this particular bill to keep them from going under. This was a problem in the Roosevelt administration, and it will be a problem for the Obama administration. This is what happens.

Under the Keynesian model of economic recovery, the limitation is that government spending dictates the area of recovery. Under the Supply-side model, the limitation is that wealth in the private sector dictates the area of economic recovery. Both are, at best, unproven theories with supporters and detractors, and at worst, irrelevant to thousands of people who have lost their jobs, and their homes, and their future.

* * * *

Dismiss, for a moment, the catalyst that started this particular recession. The Reagan administration loosened the reigns on tight controls of financial institutions by the Federal government, in order to provide wealthy investors that had benefited from Supply-side tax cuts the opportunity to secure financing for reinvestment into the private sector. This had the appearance of success when the economy recovered and, in fact, flourished in the mid-eighties, but this also reduced government income, thereby creating a dichotomy. The twenty years that followed Reagan, this dichotomy was not only ignored but exploited by politics, and while the reigns were completely let loose on financial regulation by the time that the last President began his second term, government at both the State and Federal levels continued to spend money that it didn't have.

Financial institutions and government irresponsibly ignored what any child already knows: You can't spend what you don't have, and you don't loan money to someone that you know can't pay you back. But that's over now. The Federal government has no choice but to print more money in order to make some attempt at staving off a complete collapse of the economy, which would ensure a depression, and then maybe even a war in order to reset everything. Nobody wants that.

Economic recovery occurs when the private business sector begins to invest in the production of goods and the provision of services, mandated and balanced by the demand of the market. These businesses secure capital for such investments through loans and lines of credit, which are secured through banks and other lending institutions. Lending institutions make money through one of two methods: by marginally high interest made on a moderate amount of loans, or from marginally low interest rates on a high volume of loans. Because of their irresponsibility, these lending institutions don't have a lot of money, which precludes the latter method. But interest rates are so low that loaning only a little bit of money can't make a substantial enough profit.

So, under this stimulus plan, interest rates should rise. This will enable financial institutions to get back on their feet while also staving off potential inflation from printing out almost 800 billions dollars and pumping it into the public sector. Unfortunately, this isn't going to help the housing industry or the automobile industry, or any other industry that relies on consumer loans in order to sell their product. And small businesses will suffer, because their lines of credit will command higher payments. So, under this stimulus plan, you have to keep interest rates down, guard against rising inflation, while pumping billions into the public sector. They've tried to give the lending institutions more money in order to provide them with enough to loan at a reduced rate, but that didn't work out too well, because the banks decided to use their first bail-out to make money through other means, like buying up smaller banks.

This is an impossible task, because people seem to not want to cooperate.

* * * *

The spending of public funds in this bill is ridiculous. Most of it is not designed to get the economy back on its feet, and it is irresponsible and misleading to claim that it is. A National Health Care system is something that should be debated separately and that it's part of a stimulus package is deceitful. In fact, a good half of the items in the bill should all be legislated separately and so should funding for education and so should funding for the Army Corps of Engineers. The problem with such funding is that these funds are often misappropriated, especially when given in bulk. In the decade prior to hurricane Katrina, the State of Louisiana had been given nine billion dollars in order to repair and improve the levees that protect the city of New Orleans. Only ten percent of that money went toward its intended use.

What would I do differently? A lot. First of all, don't give any money to businesses that substantially manufacture goods outside of the United States of America. General Motors is going to take what they get and invest it at facilities in Brazil and Mexico because they profit more from the assembly plants there. Secondly, give smaller companies the bigger tax breaks, because those companies are going to close quickly without their lines of credit. Banks will not close the lines of credit on larger companies as fast because the volume, in spite of the low interest rate, makes them more profitable. And another thing I would think would work better, is to figure out a way to get money into the public sector a lot faster than the appropriated funds seem to allow. Billions of dollars in highway funding will certainly create a lot of jobs, but unless the planning has already been completed this is going to take a long time before constructions actually begins.

The thing that most disappoints me about this particular stimulus package is that it is a combination of money that is both thoughtlessly thrown into government spending and unilaterally tied to partisan projects. Trying to make up for a lack of revenue by the government for necessary projects that were overlooked by previous administrations in this way isn't fair to anyone. One alternative would be to give the tax breaks and other portions of the bill that would have an immediate impact on the economy, and then to set aside the other appropriations and subsequent items of the bill, debate them, and come up with better organized and more widely accepted and acceptably compromised ways to accomplish what needs to be done in order to revive the economy.

"This bill is not perfect," President Obama told reporters at his latest press conference.

I agree, Mr. President. Thank you, at least, for not lying to me.


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