Setting us up for more spending and much more debt
Yesterday the CBO director, Douglas Elmendorf, released a synopsis of its analysis of the Stimulus bill’s effect. The findings are listed below:
- Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.2 percent,
- Lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points,
- Increased the number of people employed by between 1.2 million and 2.8 million, and
- Increased the number of full-time-equivalent (FTE) jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)
The effects of ARRA on output and employment are expected to increase further during calendar year 2010 but then diminish in 2011 and fade away by the end of 2012.
A few points – A) part of GDP calculation is government spending. Since we know how poor the rest of the economy was doing at the time of this analysis, most of the “increase” in GDP is government spending, not productive increases. B) the spread is monstrous and mostly meaningless – which is it 1.7 or 4.2? C) unemployment reductions are a result of spending. Further on in the report, it is claimed that 700,000 jobs were reported to have been created by the money. Whether or not those jobs were permanent or temporary is not mentioned, nor whether they still exist. Over 8 million are out of work. D) also note the final bullet – FTE can be as little as overtime.
So, with all of that understood, let’s go to the bill itself, something I mentioned yesterday via Keith Hennessey – H.R. 4213, The American Jobs and Closing Tax Loopholes Act of 2010. In reality, it is another deficit building “stimulus” bill. It’s main components are:
- increases infrastructure spending by $26 B over ten years;
- extends a raft of expiring tax provisions, mostly for one year
- provides funding relief for certain employer pension plans;
- raises a bunch of taxes, mostly on businesses and a certain kind of partnership income called “carried interest;”
- extends unemployment insurance benefits, increasing federal spending by $47 B over the next two years;
- increases Medicare payments for doctors through the end of 2013 for eighteen months at a $63 B cost;
- increases health insurance subsidies for the unemployed (through “COBRA”) by $8 B over the next two years; and
- increases federal Medicaid spending by $24 B for a six-month policy change.
And, as I mentioned yesterday, CBO scored this as a bill which thoroughly trashes PAYGO to the tune of an increase of $134 billion deficit.
But the CBO report at the top of this post is going to be used as the impetus and reason for going ahead with it because the Democrats are still firmly convinced to two things – you can spend your way out of economic trouble and per the CBO it’s working. Again, note the final paragraph in Elmandorf’s analysis cite. The supposed benefits of what has been spent to this point will “diminish in 2011 and fade away by the end of 2012.”
Enter HR 4213 and more deficit spending.
James Pethokoukis gives us 5 good reasons why “son of stimulus” is a very bad idea. But what caught my eye was a quote by one of the economists on President Obama’s deficit panel said yesterday:
The gross U.S. debt is approaching a level equivalent to 90 percent of the country’s gross domestic product, the level at which growth has historically declined, said Carmen Reinhart, a University of Maryland economist. When gross debt hits 90 percent of GDP, Reinhart told the commission during a hearing in the Capitol, growth “deteriorates markedly.” Median growth rates fall by 1 percent, and average growth rates fall “considerably more,” she said.
Reinhart said the commission shouldn’t wait to put in place a plan to rein in deficits. “I have no positive news to give,” she said. “Fiscal austerity is something nobody wants, but it is a fact.
It may be a fact, but it not a fact that this President or the Democrats want to face.
Meanwhile, other forces are at work in the economy which could very negatively impact all of this:
The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.
“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.
Don’t tell that to the Dems or the administration – in their view, it is because we’re spending our rear ends of that we are recovering:
The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to “grit its teeth” and approve a fresh fiscal boost of $200bn to keep growth on track. “We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on,” he said.
It “grinds on” because of economic stupidity being demonstrated in the continuance of massive deficit spending, its effect on private markets and perpetually extended unemployment benefits that no one can afford.
Remember all the talk about the panic that led to TARP and how the cool, calm and collected Obama played the crisis just right? Yeah, well that was then and this is now:
David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. “You truly cannot make this stuff up. The US government is freaked out about the prospect of a double-dip,” he said.
And a spending panic is in the offing.
We keep hearing the likes of Paul Krugman tell us we’re not Greece. But when debt reaches 97% of GDP next year and 110% in 2015, I hope Krugman’s still around to tell us again why we’re not Greece, don’t you?
I wonder who will be there to bail us out?