Motives Behind the Stimulus

Michael Grunwald, of Time magazine, has authored "The New New Deal," his reporting on the Obama stimulus. He makes the case for how well intentioned the stimulus deal was and the belief that without it, the economy would have been in even worse shape. I don't intend to debate those points. I think that hidden in the book is the admission that Obama wanted to use the stimulus to permanently alter the politics of America and lock the country into long term federal government involvement in new parts of the economy. Grunwald is certainly left of center, and he skewers Republicans for what he considers their purely political opposition to the stimulus. From The Economist:

One thing that may surprise readers not fully acquainted with the grisly nature of political sausage-making is the degree of cynicism that surrounded the passing of the Recovery Act. It was naive of Mr Obama to expect the Republicans to play ball. But because he needed to win at least a couple of their votes in the Senate to break the threat of a filibuster, he tried hard to court them. Mr Grunwald lays out in shocking detail how the Republican leadership decided early and wholeheartedly not to co-operate with the new president. So deep was their opposition that they even opposed things that they supposedly supported, such as the Recovery Act’s deep tax cuts and its emphasis on infrastructure.

But, even if shamelessly and politically motivated, the Republicans were right to have opposed the stimulus, because of what Obama was trying to accomplish.

The whole point of an economic stimulus is that it is supposed to stimulate. It needs to move money out of the door fast, get it quickly to where it can do most good and not carry with it a tail of long-term spending commitments. But Mr Obama’s agenda was always much bigger than that, and it is in explaining this that Mr Grunwald’s book is at its best.

Much of the meat involves parsing the issues that riled the Republicans: how the stimulus bill was to be used as a tool to transform American society. Right from the start, Mr Obama wanted his Recovery Act to spend money on a low-carbon future, on radical school reform, on health reform and on creating jobs. All of these, Mr Grunwald thinks, are laudable aims. Many readers would agree. But Republicans in Washington have other views. New energy projects, like job creation, should be left to the market, not picked by bureaucrats; school and health reform should be a matter for individual states. What they saw was an attempt to use the crisis to push the political economy of America in a more statist and Washington-centric direction. Mr Grunwald does not attempt to deny that; it is simply that he has no problem with it.

In terms of economic history, I think that the stimulus failed because we have already entered an era in which the accumulation of government debt has left fiscal and monetary policy ineffective. With interest rates near zero and the governments at all levels having issued tens of trillions of debt that may not be repaid, more debt to stimulate the economy will also have the effect of reducing confidence.

If the Democratic administration had such nakedly political motives for the outcome of the stimulus, then Republicans were right to oppose it.

Failure of the Stimulus

Economist John Taylor sums up why the stimulus had little effect on the economy. (H/T The Grumpy Economist, John H. Cochrane.)

In the case of the 2009 stimulus package, there was also an attempt to increase significantly government purchases of goods and services. But the evidence is that this attempt largely failed. A special satellite account produced by the Bureau of Economic Analysis shows that federal infrastructure investment—at the peak quarter—increased by only .05 percent of GDP as a result of the stimulus and federal government consumption by only .14 percent.

While state and local governments received substantial grants under the 2009 stimulus, a statistical analysis by John Cogan and me shows that they did not use these grants to increase their purchases of goods and services as many had predicted. Instead they reduced net borrowing and increased transfer payments. Even with balanced budget laws, state and local governments can borrow for infrastructure, and they borrowed less on a net basis during the stimulus period, while they put additional funds into financial assets.

So there you have it, all we have to show for the stimulus is a huge increase in federal debt, which the states chose to spend reducing borrowing and using the money to pay for welfare, unemployment or other transfers. The federal government's own bureaucracy is the main reason it can't spend. Even if you give money to one agency to spend, two others, one of them being the EPA will prevent the spending. By the way, people who received one time tax rebates also didn't spend the money, but reduced debt or increased savings. All the stimulus did was to shift money around in the economy, but certainly it did not change aggregate demand as is claimed by the administration.

Stimulus Not Selling

I got an email from BarackObama.com informing me of the defeat of more stimulus legislation in the Senate.

Last night, Democrats in the Senate tried to pass a simple piece of President Obama's jobs plan that shouldn't be controversial: provide money to prevent further layoffs of teachers, cops, and firefighters at the local level, and pay for it by taxing the income of millionaires an extra 0.5%.

This morning a lot of media outlets reported that the Senate "rejected" or "voted down" this proposal.

But that's not what happened. The measure didn't come to an actual vote.

That's because every single Republican senator filibustered the bill -- meaning they wouldn't even let an up-or-down vote happen. Republicans have unilaterally decided not to allow even that simple majority vote on anything that might help the economy before the next election.

To be clear: This bill would have created jobs, and both parties have supported similar measures in the past.

Note the demagoguery of going after millionaires to pay for temporary spending in an area that is not even the federal government's responsibility. I applaud the Republicans for not getting sucked into this. Since this is temporary spending, it only postpones the day of reckoning for states in dealing with budget problems associated with pensions of teachers, cops and firefighters. Better to allow these tough times to force state governments into action now.

Further, all of this stimulus spending is doing squat to increase private sector employment. At a time when we need to expand the tax basis by increasing private sector employment, employing more government workers isn't going to help the economy, because their pensions become a long term liability on the public purse.

The next gambit will be spending on "infrastructure" like roads and bridges. To some extent, this is a federal responsibility at least, but it should be adequately funded in ongoing budgets. Further, the same stupidity of taxing millionaires will be used.

Wonder why stimulus spending isn't helping the economy? The main reason is the temporary nature of the spending. Second, it is put to uses that primarily benefit various levels of government. Finally, the various program tend to be poorly administered. Consider, how the small business stimulus of $30 billion worked out. The Treasury actually only disbursed $4 billion. They only started approving applications in July, 2010, three months before the program ended. And consider this little gem.

More troubling, the $4 billion in loans the government did make might not really help small businesses anyway. A Wall Street Journal analysis of Treasury data found that about half of the banks that took cash from the fund used some of it to pay back the Troubled Asset Relief Program. Rather than giving money to the restaurant around the corner or the startup in your neighbor’s garage, the banks gave it right back to Uncle Sam, bettering their balance sheets but doing little to spur business expansion or job growth. The Chamber of Commerce howled, branding the program little better than a bailout for small banks.

TARP has been defended as a success because the loans are being repaid. But if GM and small businesses are just using government dollars to repay TARP, how is that a success?

The economy would recover on its own if the government would just get consistent tax and regulatory policies in place and start to deal with long term liabilities and debt. But perpetual short-sightedness seems to prevent that.

Regretting It

Headline from WSJ: Government Forces Out Wagoner at GM. Betcha he's REALLY regretting that private jet trip to DC to beg for stimulus pork. He would have been better off filing for bankruptcy, at least he might still have a job. The look on his face says it all.

Meanwhile, we have to ask, "How do Obama's early economic moves differ in any significant way from the way Hugo Chavez started his regime?"

On the bright side, I just don't see many more execs running to DC to beg for a bail out. Could be wrong, will keep you posted.