Free Markets, Free People

Stimulus Spending


NBER – Recession ended in June of 2009

That’s what the National Bureau of Economic Research (NBER), our official arbiter of when we’re in a recession and when we aren’t, says the recession ended.

The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

So all those who essentially said leave it alone and the economy will pull itself out of the recession were correct.  Remember, June of 2009 was approximately 6 months after the administration took office and 5 months after the stimulus package had been approved by Congress.  Or said another way, well before any of the money it has squandered had yet been dumped into the economy.

Also note the beginning date.  The recession began in December of 2007.  By the time the Obama administration got to it, it had pretty much bottomed out and was beginning to recover.  The stimulus plan was signed into law on Feb. 17, 2009.  The recession officially ended in June of 2009 per NBER.  That’s not to say, however, that “things are better” necessarily:

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

Or, an easier way to say it is that we experienced and are experiencing now what is normal to experience in a recession, but, as usual, the business cycle turns and we begin an expansion.  Note the last line – “Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.”

So again, I stress, any claim that the “stimulus” was the reason for our beginning to recover has a bunch of inconvenient determinations by NBER to overcome.  And anyone who thinks the government can get out of its way in approximately 4 months time to have any real effect (mid Feb to June) on the economy – regardless of the size of the spending it has planned to inject – simply doesn’t have a clear understanding of how this government operates.

That said, I hope NBER is correct and that we are indeed expanding.  As it stands now, though, most of the unemployed out there looking for scarce jobs most likely don’t give a rip what NBER says.  Until they’re again employed, they’re still suffering from a recession.  And that doesn’t bode well for Democrats at all in November.

~McQ


Quote of the Day – master of understatement edition

But, I would guess, a pretty typical story:

"I’m disappointed that we’ve only created or retained 55 jobs after receiving $111 million," said Wendy Greuel, the city’s controller. "With our local unemployment rate over 12 percent we need to do a better job cutting red tape and putting Angelenos back to work." According to the audit, the Los Angeles Department of Public Works spent $70 million in stimulus funds — in return, it created seven private sector jobs and saved seven workers from layoffs. Taxpayer cost per job: $1.5 million.

Anyone – tell me again how efficiently government does things and how we should "trust" it with our money because it will always spend it wisely? This, as we’ve seen, isn’t the only wasteful spending of taxed and borrowed money under the supposed stimulus. We also have funded such things as a study (for $823,000) by a UCLA research team to teach uncircumcised African men how to wash their genitals after having sex.

Certainly "shovel ready" wouldn’t you say?

~McQ


Chart of the day – tell me again why we need another “stimulus”?

Because as I read this chart, what is being proposed by the Obama administration is about what remains unspent from “Porkulus I”, er, the first stimulus bill:

chart-of-the-day-stimulus-sept-2010

 

We already know this hasn’t worked.  That’s the implied reason for the second stimulus (although unstated, of course).  So there’s no reason to assume the second stimulus – mostly a smaller repeat of what failed in the previous rendition – is going to do any good either.

Here, I have an idea – go ahead with the $65 billion in remaining tax cuts, combine them with the tax cuts in the new stimulus and cancel all spending left in the first and that proposed in the second.

And watch Paul Krugman melt down.   Yeah, that’s the ticket.

~McQ


“Stimulus” an expensive bust

The so-called "stimulus", upon closer examination, looks like most government spending – excessive, poorly targeted, poorly monitored and not at all accomplishing what was intended.

Senators Tom Coburn and John McCain have issued a report that details some of the most dubious "stimulus" spending. That’s over and above the money that just disappeared after being sent to non-existent congressional districts and zip codes.

For instance:

$700,000 for a researcher to study improvised music. For a project on interactive dance, 44 percent of the money goes to "overhead."

The $1.9 million spent to photograph ants in foreign countries has created two jobs created so far. That’s better than other ant research stimulus projects: $451,000 has created one job,

$276,000 spent on another created six one-hundredths of a job, and the $800,000 spent on a different one created no jobs.

The $144,000 spent to study the behavior of monkeys on cocaine created four-tenths of a job. To study why monkeys respond to unfairness cost $677,000 – and has created no jobs yet – except maybe for the monkeys.

And my guess is that they will find that monkeys react to cocaine much the same way humans do. Of course the White House claims, most likely through some model in which they plug in a factor (something like x number of jobs are created when y dollars are spent), that 3 million jobs have been "created or saved". But at what cost? Note the amounts spent above to "create" each job. And then there’s the ironic side of the story:

In the state of Washington, another stimulus project may be hurting those it was designed to help. Construction began one year ago today in front of the Archery Bistro Restaurant. The owner says it’s shut off business like a fly in a bowl of soup. He’s had to stop serving lunch, close two days a week and, ironically, lay off 12 workers.

The "stimulus" has been an expensive bust.

What positions have been “created” are temporary at best and will disappear when the tax dollars run out.  Additionally, much of the money is consumed in bureaucratic overhead – certainly “saving” and perhaps expanding those non-productive jobs.

But as for “stimulating” the economy – well, look around.  As my mom used to say, “the proof is in the pudding”.

~McQ

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What part of “production” don’t these people get?

In today’s NY Times, Robert Schiller laments the lack of jobs brought by the “stimulus”.  Essentially, he posits, government focus is on the wrong thing.  Instead of boosting the GDP, the “stimulus” should be focused on creating jobs.  And where should government be focusing that effort?

Why not use government policy to directly create jobs — labor-intensive service jobs in fields like education, public health and safety, urban infrastructure maintenance, youth programs, elder care, conservation, arts and letters, and scientific research?

Would this be an effective use of resources? From the standpoint of economic theory, government expenditures in such areas often provide benefits that are not being produced by the market economy. Take New York subway stations, for example. Cleaning and painting them in a period of severe austerity can easily be neglected. Yet the long-term benefit to businesses from an appealing mass transit system is enormous. (This is an example of an “externality,” which the market economy, left to its own devices, will neglect.)

The problem with this idea, of course, is nothing is really produced.  In fact, the focus on kicking up the GDP isn’t the wrong focus.  And trying to produce make-work jobs or “service” jobs don’t help with that.  They certainly would keep those who got the jobs busy, but a clean subway will not lead to more jobs elsewhere.

The tendency to think like this is apparent among a certain set who believe that spending money on jobs, whatever the sector and whatever the labor, make a difference.   A job is a job is a job.

But it isn’t.  Government jobs are not jobs that “produce wealth”.  They consume wealth.  And they don’t certainly don’t produce jobs that do produce wealth.

That comes in the private sector where people produce things – to include services – that other people want and that old “voluntary exchange of value between two people” takes place and produces wealth, which in turn kicks up the GDP.

It is wrong-headed to think the government can “stimulate” employment by employing people in non-productive, busy work jobs.

If government has a role in a recession or depression it should be to clear the way with less regulation and provide the incentives through tax breaks for businesses to hire and expand. 

What is hold all of this up at the moment is the unsettled tax picture and regulation regime as well as new legislation the business world is still trying to digest and pending legislation which would further complicate recovery.  It isn’t rocket science.  Until the marketplace is much more settled than it is now, no jobs are going to be created and now businesses are going to expand.

You can paint and clean all the subway systems in the US and it won’t make any difference.  The mid-term elections, however, may.  If the GOP takes the House and closes the gap in the Senate, you may start to see some hiring and some expansion, based on the belief that the worst is over  – governmentally that is – and perhaps it is now safe to begin the long, slow process of recovery.

~McQ

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Another “Great Depression” or just a very slow recovery?

Of course you an find “experts” who will point to each and say that’s our future.   USA Today has a list of them in an article which explores the title question.  It appears most believe it will be the latter – a slow recovery.  But some are worried about signs that the present situation compares very closely with the 1930s.

And, in many ways it does.   We continue to see weakness everywhere.  And it appears until we get the housing market squared away (housing starts down 5% this month) and some other areas cleaned up, plus get some hiring going on, it is going to continue to be rough out there.

Jobs continue to be key to the recovery (we are a consumer driven economy – no job, no money.  No money, no consumption) so the faster we can employ the jobless, the faster we see the recovery take off.  However, that’s a huge undertaking:

The national unemployment rate stands at 9.5%, or more than 14 million Americans, says the Department of Labor, far below the peak unemployment rate of 25% during the Great Depression. But those numbers don’t fully convey the jobs weakness. Another 8.6 million people are working part time because they can’t get full-time jobs. And 3.8 million, discouraged by the dearth of job opportunities, are out of work but were not counted as unemployed.

So while not at 25%, we’re most likely somewhere in the 14% range in real terms (not the politically motivated U3 of 9.5%). 

"If you’re not making money, it’s pretty hard to spend it," or pay bills, Johnson says. "There’s no fuel in the economic engine to make it grow. People are spending less and saving more."

This, of course, is where the impetus comes from to claim if the people can’t spend, the government should.  We’ve seen, first hand, how that’s worked out – unemployment went up and stayed up.  And “more” wouldn’t have made any difference as is now being argued.

The answer isn’t government spending – not in a consumer driven economy.  No, the way you help solve this problem, if you’re government, is to incentivize business expansion and thereby hiring to drive consumer spending.  Instead, the policies of this administration, at least to this point, have businesses on the sidelines sitting on both their hands and their money.

Further crimping the outlook for future growth is the fact that cash-rich U.S. companies, despite improving profitability, are still leery of the recovery and are reluctant to deploy that money to grow or hire new workers.

"Companies have pared their expenses dramatically, upgraded their technology, improved their profit margins," Johnson says. "But they are not hiring more people, because they would have to see greater demand to do so."

Once again, the government can’t create that “greater demand” via “stimulus”.  That demand has to come from consumers.  Those are the customers businesses rely on to generate demand, and with about 14% in the unemployment/underemployment mix, that demand simply isn’t there – or, at least, not enough to expand and hire.

Catch 22?  In a way.  So what can government do? 

Cut business taxes.  Get out of the way.  Provide incentives to expand and hire (accelerate capital equipment depreciation for instance, if bought now).

There are lots of ways short of spending us into oblivion that the government can positively effect the market and the business climate.  Unfortunately, as Mort Zuckerman has stated and the business community as a whole believe, we have an “anti-business” administration in charge right now – and that further unsettles the situation.  Perception being reality, as long as the business community believe that, not much is going to change.

So, there’s your day’s sunny outlook on the economic front.  As Donald Luskin says:

"The only way to get out of debt is to earn money," Luskin says. "The only way to get out of recession is to grow. If you kill growth, you are" in trouble.

And right now, we’re in trouble.

~McQ

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Is Keynesianism finally dead?

By that I mean the belief that massive public deficit spending is the cure for an economic recession/depression?

It should be. And that’s the argument going on in at the G20 meeting in Toronto. The US is urging Europe and the rest of the world to “pump it up”. The rest of the world, rightly in my estimation, is resistant to the plea. The WSJ reviews why for us, using the US’s experience as the case study:

Like many bad ideas, the current Keynesian revival began under George W. Bush. Larry Summers, then a private economist, told Congress that a “timely, targeted and temporary” spending program of $150 billion was urgently needed to boost consumer “demand.” Democrats who had retaken Congress adopted the idea—they love an excuse to spend—and the politically tapped-out Mr. Bush went along with $168 billion in spending and one-time tax rebates.

The cash did produce a statistical blip in GDP growth in mid-2008, but it didn’t stop the financial panic and second phase of recession. So enter Stimulus II, with Mr. Summers again leading the intellectual charge, this time as President Obama’s adviser and this time suggesting upwards of $500 billion. When Congress was done two months later, in February 2009, the amount was $862 billion. A pair of White House economists famously promised that this spending would keep the unemployment rate below 8%.

Seventeen months later, and despite historically easy monetary policy for that entire period, the jobless rate is still 9.7%. Yesterday, the Bureau of Economic Analysis once again reduced the GDP estimate for first quarter growth, this time to 2.7%, while economic indicators in the second quarter have been mediocre. As the nearby table shows, this is a far cry from the snappy recovery that typically follows a steep recession, most recently in 1983-84 after the Reagan tax cuts.

The chart in question:

2.7% is not good, especially when most of the spending is government spending. Or said another way – this isn’t a great advertisement for over a trillion dollars spent to “stimulate” the economy.

And, as you see here – for the money, job creation has been absolutely abysmal, except for government jobs.

Now couple all of that with the awful news about house sales this past month (down 33%) and it would appear, economically, that the “stimulus” has essentially failed in its dual role of stimulating economic and job growth, wouldn’t you say?

Yet it seems the spin doctors in the administration want to pretend otherwise and, by the way, hook the rest of the world on their public spending addiciton. Thankfully, at least for their citizens, most of the rest of the world isn’t buying into the scheme. We, however, are stuck with the world’s most profligate spendthrifts in the guise of the Obama administration and the Democratic Congress.

We are told to let Congress continue to spend and borrow until the precise moment when Mr. Summers and Mark Zandi and the other architects of our current policy say it is time to raise taxes to reduce the huge deficits and debt that their spending has produced. Meanwhile, individuals and businesses are supposed to be unaffected by the prospect of future tax increases, higher interest rates, and more government control over nearly every area of the economy. Even the CEOs of the Business Roundtable now see the damage this is doing.

That’s a long way of saying the anticipation of raised taxes to pay off this unprecedented and massive assumption of public debt is keeping businesses on the sidelines and the business atmosphere unsettled. They’re not about to expand their businesses until they have a much better handle on what it will cost them to do so. That’s why, for what little recovery is taking place, it is mostly a jobless one.

Most who understand at least rudimentary economics knows that some “stimulus” from government spending, coupled with other government actions, such as tax cuts for individuals and businesses, may have a beneficial effect in times of recession. The stimulus funds get money in circulation and the tax cuts encourage businesses to expand and hire.

What we’ve seen is nothing but “stimulus” – no tax cuts, no incentive for businesses to come off the side lines. Additionally we’ve seen attacks on the business community, calls for much more draconian regulation and new mandates imposed by legislation such as health care reform.

The result has been a seemingly perpetually unsettled business atmosphere that has provided absolutely no incentive for companies to expand or hire.

What we should have all taken from this is that government “stimulus” funded by massive public debt isn’t the answer we were led to believe it was and, when it is all that is done, is more of a problem than any sort of a solution. All the “stimulus” has managed to accomplish is the promise of large tax increases to pay down the debt it created.

The other service it hopefully has rendered is to prove defective the once cherished Keynesian belief that government can spend us out of recessions.

~McQ


Food Stamps Do Not Increase Employment

You may recall that I questioned the efficacy of Paul Rosenberg, et al.’s argument that increasing food stamp benefits would directly lead to an increase of 9 to 10 million more people being employed:

Without arguing the statistical or modeling specifics behind the chart, there is one glaring item that reveals how much magical thinking went into its creation. By far the most “stimulating” actions set forth are “Temporary Increase in Food Stamps”(calculated to create 9,803,333 jobs), “Extending Unemployment Insurance” (9,236,667 jobs), and “Increased infrastructure Spending” (9,010,000 jobs). The closest tax-cutting measure, according to this analysis, in job creation is a “Payroll Tax Holiday” which is estimated to create 7,253,333 jobs. Do you see the problem?

How, exactly, do food stamps and unemployment benefits create jobs? Arguably, spending on infrastructure could create construction jobs on a temporary basis, although that hasn’t proven to be the case with the stimulus bill that was passed. But there is simply no logic to the idea that providing government benefits to the poor and unemployed will serve to create jobs, much less 9 to 10 million of them. That’s just magical thinking.

[...]

Whatever the virtues of income support, and even if that support will be quickly spent in the economy, there is no justification for concluding that it will expand the economy. At best, it can stabilize a downturn by maintaining some level of consumer spending. But that does not expand the economy in any way, shape or form, and it certainly doesn’t create jobs [at] an unprecedented level as suggested by Rosenberg.

As it turns out, we have plenty of empirical evidence to show that, in fact, increasing food stamp aid does nothing to increase employment. Indeed, for the past decade, the US has dramatically increased the number of participants who receive food stamps to the point that 1 in every 8 Americans now partakes in the program:

The reason for the expansion, as the chart’s creators point out, is that we’ve been pushing food stamps not just on the needy, but on the working poor as well [via: James Joyner]:

States eased limits on people with cars and required fewer office visits from people with jobs. The federal government now gives bonuses to states that enroll the most eligible people.

A self-reinforcing cycle kicked in: outreach attracted more workers, and workers built support for outreach. In a given month, nearly 90 percent of food stamp recipients still have incomes below the federal poverty line, according to the Department of Agriculture. But among families with children, the share working rose to 47 percent in 2008, from 26 percent in the mid-1990s, and the share getting cash welfare fell by two-thirds.

Whether this is a good policy or not is neither here nor there. Instead, what should be glaringly evident is that there is no correlation between food stamp distribution and job creation. Over the past decade, as the number of people using food stamps rose from around 17 million to almost 35 million, the economy has both created and shed millions of jobs. For example, since December 2007, when the recession officially began, the economy lost 8.4 million jobs according to the Labor Department. Yet in that same time, according to the chart above, around 7 million more people received food stamps (rising from about 27 million to 34 million). If the “food stamps = job creation” were correct, how did we lose all of those jobs?

The inescapable conclusion is that food stamps do not create jobs, and at best only serve to keep some minimal level of economic activity going during down times.


Magical Thinking

The progressive base is having conniptions over the failure of President Obama to get his agenda through Congress despite having supermajorities. Now that Obama is making token gestures (however feeble [via:HA]) towards fiscal sanity, they are experiencing political apoplexy:

As noted in quick hits by BDB and rayj, [UPDATE] and by David in a diary that just caused me to push back this diary’s publication time, Obama has now gone off the deep end. After passing a stimulus that most economists (not just liberal ones) said was too small, and that was made even more inadequate by being heavily tilted toward poor-performing tax-cuts, Obama is now intentionally recreating FDR’s mistake of 1937, when he prematurely cut back spending to try to balance the budget, and sent the country into a new recession.

[...]

Specifically: He’s going to announce a spending freeze on domestic programs (but not, of course, on the military) that is “projected to save $250 billion.” The rationale is that he wants to appease folks worried about runaway deficits. Which is just what FDR was worried about in 1937.

This is Bush-style idiocy. There is no other word for it.

The cause of this consternation is magical thinking on the part of the author, Paul Rosenberg.

Here, to remind you, is the chart I put together during the stimulus debate, showing, among other things, the relative ineffectiveness of tax cuts vs. spending in generating jobs, which is the key to getting the nation out of this recession–the only way that we can rationally hope to start bringing down the deficits:

While some tax cuts are much better than the real stinkers, it’s virtually a given that once Obama starts talking about tax cuts, the GOP is going to start demanding that Bush’s tax cuts be made permanent. Not only–as you can see from the chart–are these about the least helpful tax cuts of all, they are also heavily skewed toward helping the rich and the super-rich.

If you look closely at the chart you will be unsurprised to find that government spending is calculated to provide substantially more “bang for the buck” in creating wealth and jobs. That’s unsurprising because this chart is intended to support a progressive prescription for the economy. Of course it will show government as the answer.

Without arguing the statistical or modeling specifics behind the chart, there is one glaring item that reveals how much magical thinking went into its creation. By far the most “stimulating” actions set forth are “Temporary Increase in Food Stamps”(calculated to create 9,803,333 jobs), “Extending Unemployment Insurance” (9,236,667 jobs), and “Increased infrastructure Spending” (9,010,000 jobs). The closest tax-cutting measure, according to this analysis, in job creation is a “Payroll Tax Holiday” which is estimated to create 7,253,333 jobs. Do you see the problem?

How, exactly, do food stamps and unemployment benefits create jobs? Arguably, spending on infrastructure could create construction jobs on a temporary basis, although that hasn’t proven to be the case with the stimulus bill that was passed. But there is simply no logic to the idea that providing government benefits to the poor and unemployed will serve to create jobs, much less 9 to 10 million of them. That’s just magical thinking.

Rosenberg provides this explanation for the employment fairy (from Mark Zandi of Moody’s Economy.com):

Income support

The House stimulus plan includes some $100 billion over two years in income support for those households under significant financial pressure. This includes extra benefits for workers who exhaust their regular 26 weeks of unemployment insurance benefits; expanded food stamp payments; and help meeting COBRA payments for unemployed workers trying to hold onto their health insurance.

Increased income support has been part of the federal response to most recessions, and for good reason: It is the most efficient way to prime the economy’s pump. Simulations of the Moody’s Economy.com macroeconomic model show that every dollar spent on UI benefits generates an estimated $1.63 in near-term GDP.x Boosting food stamp payments by $1 increases GDP by $1.73 (see Table 2). People who receive these benefits are hard pressed and will spend any financial aid they receive very quickly.

Another advantage is that these programs are already operating and can quickly deliver a benefit increase to recipients. The virtue of extending UI benefits goes beyond simply providing aid for the jobless to more broadly shoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose their sources of support.xi Increasing food stamp benefits has the added virtue of helping people ineligible for UI such as part-time workers.

Whatever the virtues of income support, and even if that support will be quickly spent in the economy, there is no justification for concluding that it will expand the economy. At best, it can stabilize a downturn by maintaining some level of consumer spending. But that does not expand the economy in any way, shape or form, and it certainly doesn’t create jobs an unprecedented level as suggested by Rosenberg.

Indeed, in order to give money to the poor and jobless, the government has to take money fr0m someplace else. Since it doesn’t create anything, the government will either (i) tax those who are working and creating wealth at higher rates, (ii) borrow money, or (iii) print money. Again, these are not wealth producing actions, but instead wealth destroying ones. It is true that, assuming such income support shortens a downturn, tax receipts will eventually outpace the costs of funding those supports. What is not true is that the government benefits will create jobs.

On the one hand, of course, I don’t want to discourage the left from turning on Obama (enemy of my enemy and all that). It just pains me to see it done based on such absurd premises.