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.

Disconnected on the Economy

Dang, do I have to give up this spiffy uniform?
Photo from Pat Dollard's blog.

Since we're on a car theme today, how are your shares of GM doing? Don't own any? Fail. You do, if you are a taxpayer.

Taxpayers likely to face initial loss on GM IPO-sources

The U.S. government is likely to take a loss on General Motors Co [GM.UL] in the first offering of the automaker's stock, six people familiar with preparations for the landmark IPO said.

KT points out that the domestic content of Obama's Iraq speech was disconnected from reality:

Hundreds of billions of dollars had been spent on precisely what he was suggesting and the results were horrible.

I remember sitting at the blackjack tables in Vegas many years ago and watching an obviously inebriated punter double down on a 5,4 hand while the dealer had a King showing. When the dealer inevitably relieved him of his chips, he loudly complained abut not getting his free drinks fast enough. This reminds of nothing so much as Obama's economic strategy.

Meanwhile unemployment is rising and there is little job creation.


Job creation is slow because of a few simple to understand facts.

1. Uncertainty. The unknowns of future regulatory policy and the impact of Obamacare are injecting uncertainty into the economy.

2. Housing slump. Many small businesses are tied to the real estate market. Businesses that serve the homeowner are often smaller ones. Further, small business owners use the equity in their homes as collateral for lending. Trying to prop up home prices only delays the recovery, because home prices need to fall so that new buyers can start fixing up properties and they can be properly valued for small business owners.

3. Future taxes. Expiring tax cuts, aka tax increases, are injecting fear into the economy.

Exit question: How does doubling down on deficit spending fix any of these problems?

So That Explains It - Obama Economics Fail

A couple of seemingly unrelated articles have brought the source of Obama's economic failure into sharp focus. First, The Foundry (The Heritage Foundation blog) reports that private sector job creation fell by 190,000 this year. They get it right, by avoiding the phrase "despite the stimulus" and not quite saying "because of the stimulus." They also get to the heart of why unemployment remains so high, and private sector employment remains so low.

How could job losses have been worse in 2001 but unemployment so much higher now? Weak job creation. The latest Bureau of Labor and Statistics data show that employers have created 8.6 million fewer new jobs this time around than they did almost a decade ago. Heritage Senior Labor Policy Analyst James Sherk estimates that lower job creation accounts for 65 percent of the recession’s decreased employment.Our nation’s unemployment rate is hovering near 10% not because of record job losses, as Biden suggests, but because of record job non-creation. Private sector employers have gone on strike. Contrary to what the President’s economic wizards and New York Times columnists believe, massive government deficit spending does not stimulate job creation. President Obama does not have a secret vault of money he can just throw at the American people. The resources the government spends come from the economy. When the government increases spending, it crowds out the resources that business owners could have invested in their enterprises.

The key fact is that employers are on strike, or lock out, because of Obama's tax and spend policies. But why would Team Barry believe this in the first place? An interesting study publicized in today's Wall Street Journal, explains alot.

Zogby researcher Zeljka Buturovic and I considered the 4,835 respondents' (all American adults) answers to eight survey questions about basic economics. We also asked the respondents about their political leanings: progressive/very liberal; liberal; moderate; conservative; very conservative; and libertarian. .... In this case, percentage of conservatives answering incorrectly was 22.3%, very conservatives 17.6% and libertarians 15.7%. But the percentage of progressive/very liberals answering incorrectly was 67.6% and liberals 60.1%. The pattern was not an anomaly.

Left Coast Rebel guest blogger Conservative Generation has some great personal observations on the study and liberal commentary on it. My favorite:

The government should not cap oil prices in response to a supply shock. I thought anyone living the Carter years would agree with that one.

Do we need any more proof that more stimulus when we are already awash in debt won't help the economy? Do we really think imposing taxes while wasting government dollars on non-productive uses will really save the economy? If you flunked Econ 101 you might.

Can Anyone Do Math Anymore?

Today's pretty diagram is brought to you courtesy of your local municipal government here in Enron-by-the-Bay and the regional government. According to the local fishwrap:

Houston-based Jacobs Consultancy, which so far has earned $3.2 million to analyze Lindbergh Field for the Sanders group, said many of the improvements could be funded through landing fees and other airport revenues.

Being in the airport consulting business seems like a great racket. The work is steady, no one really looks hard at you produce, then they just do it again next year.

OK, so how much would this lovely plan cost? It turns out that they quote a cost of a mere $5 to $12 billion. However, in my experience, whenever you have a quote like this, you take the high estimate and triple it and now you're getting close. But hey, there's lots of tourists passing under Charles Lindbergh's visage to pay for this right? Sure are. Turns out, the port authority is estimating that upwards of 20 million passengers per year will be using our airport over the next twenty years.

Now class, it's time to do some math. Don't worry, Professor B-Daddy will step you through the lesson. First, we'll be a little generous and say the project comes in at only $25 billion. How long before we demand the next airport upgrade? Twenty years? OK. How many passengers will we get? 20 x 25 million = 500 million. Wow, that's a lot of passengers. But our bill is $25 billion. $25 billion/500 million passengers = $50 per passenger. That's right, this little ol' improvement will cost an average of $50 per ticket. Southwest Airlines has some fares for less than that. That doesn't even count the interest on the bonds that would have to be issued, which only makes the math worse.

The article talks about landing fees and getting someone else to pay for this, but the bottom line is that no matter who pays, that's mighty expensive and the taxpayer money could be put to better use.

Release the Strategic Petroleum Reserve?

Last July, on BwD, I predicted a large drop in the prices of crude oil and gasoline within three years. My caveat, of course was that the federal government was perfectly capable of screwing this up. KT has a great post, with pretty pictures, showing just how cheap gasoline is today. At the time, there was a lot of hot air about a temporary suspension of gasoline taxes, releasing the strategic petroleum reserve and windfall oil profits tax, because, by gum, SOMETHING had to be done! Fortunately, nobody got around to do anything and look at the result. (I filled up today for about $2.29/gallon and I saw $2.01/gallon gas in Memphis last week.)

This scenario is perfectly illustrative of the simultaneous difficulty and importance of making the case for less government. In the midst of a hotly contested election, the temptation of politicians to pander seems almost irresistible. But if the public has the awareness of the futility of repealing laws of economics, then such efforts would be laughed off the table.

This is like the failed effort to make pi = 3.2 in the Indiana legislature in the 1890's. Today, no one would think of introducing such legislation for fear of ridicule. One would think that similarly stupid schemes to manipulate the price of oil would be ridiculed as well.