Stimulus Spenders and Their Silly Excuses

August 28, 2010

This past week the government announced that existing home sales plunged 27.2 percent in July while new home sales were down 12.4 percent.  The numbers surprised most “mainstream” economists who expected more modest losses.  Of course, with the housing market still in shambles the value of homes is expected to drop further than the $6 trillion already lost by American homeowners.  This development coupled with continuing high unemployment and low consumer confidence is making many economists predict we are headed for a double-dip recession.

Now, naturally, proponents of the government’s failed stimulus policies have their excuses for why it didn’t work all lined up.  They are not even waiting for the double-dip to officially hit.  They are already claiming that the stimulus wasn’t spent on the right things and was simply “too small” to actually make any difference in “stimulating” the economy.

Here are the facts.  First to address the issue of sinking home sales, no one should be surprised by the numbers.  Home sales are way down for several reasons.  First of all, Obama’s first-time home buyer’s tax credit expired in April.  Folks are now waiting to see if Congress will enact a new credit before they buy.  Second, all the signs are there that housing prices will continue to drop, so why rush into purchasing a property that in a few months might be gotten at an additional discount?  Lastly, given the number of people in America who are unemployed, underemployed, and just downright broke it is no wonder that a huge expense like homeownership is not high on many people’s minds.

So the massive drop in home sales in July should not be surprising.  Anyone who understands human behavior and even the most basic fundamentals of economics knows the president’s housing stimulus program was doomed to failure.  During the time it was effective there was an increase in home sales and a leveling off of home prices, but once the program ended the bottom fell out.  No lasting growth ensued. Additionally, many first time buyers who took advantage of the tax credit used it for a down payment.  Essentially, the government was once again encouraging folks to buy houses who didn’t have the ability to save for a down payment.  This probably represents a misallocation of scarce resources and we can expect to see many of these homebuyers on a list of foreclosures in the future.

But, the president’s homebuyer tax credit is just a small part of the overall massive stimulus Washington has injected into the economy since 2008.  The entire stimulus “invested” by the feds has had a similar effect on the whole economy.  It stabilized things for a while and then wore off.  Because economic priorities are determined by politics and not the free market, we are left with a whole lot of mal-investments and possibly new bubbles.  So when stimulus proponents say the money was not spent on the right things they are technically correct.  After all, stimulus money has been spent on things like converting an abandoned train station into a museum, the development of interactive dance software, new windows for a visitor’s center that closed 3 years ago, and a study to determine the effects of cocaine on monkeys.   If these expenditures are not mal-investments, I don’t know what is.

But this is one reason why government stimuli never work.   Bureaucrats and elected officials don’t operate in a world of profit motives, competition, and the consequences of failure.  Ultimately, the allocation of taxpayer funds is doled out based on what they think is needed and to feather their own nests with the folks back home.  This is obvious given the aforementioned stimulus expenditures.

Besides the stimulus wasn’t spent on the right things argument, proponents of the policy are also saying the government’s effort was not big enough thus rationalizing its failure.  They always only point to the president’s $850 billion program passed by Congress shortly after he took office.  But, there is a lot more that has been “invested” in the economy since the depression began.  Federal spending has included everything from the Troubled Asset Relief Program (TARP) to Cash for Clunkers to GSE mortgage-backed securities purchases by the Fed.  The total of all federal stimulus spending as of December 2009, exceeded $3 trillion!  This represents more than 20 percent of annual gross domestic product.  $3 trillion actually spent and all we have to show for it is sustained high unemployment, sinking home sales, low consumer confidence, foreclosures through the roof, food stamp expenditures at all time highs, and a looming sovereign debt crisis.  The problem is not that we haven’t spent enough.  The problem is that we spent the money in the first place.

At the end of the day, government spending, quantitative easing or whatever the political establishment wants to call it simply doesn’t work.  As economist Robert P. Murphy has written we have a great comparison between the depression of 1920-1921 and the Great Depression of the 1930s to prove this point.  In the former, government cut its budget and the Fed raised interest rates.  The crisis was over within two years.  In the latter, Hoover increased government spending and the Fed slashed rates to all time lows at the time.  The result was the beginning of 15 years of economic misery.  Given the amount we have spent this time, get ready for a long rocky economic ride. 

Article first published as Stimulus Spenders and Their Silly Excuses on Blogcritics.


Lies, Intolerance, and Disrespect for the Rule of Law

August 22, 2010

President Obama was absolutely correct last week when he proclaimed that the Cordoba Initiative, under the Constitution, had “the right to build a place of worship and a community center on private property in lower Manhattan, in accordance with local laws and ordinances.”  Of course the president’s remarks set off a firestorm of responses from Republicans looking to capitalize on the issue in this election year.  Sen. John Cornyn (R-Texas), chairman of the National Republican Senatorial Committee, told “Fox News Sunday” that Mr. Obama’s view “demonstrates that Washington, the White House, the administration, the president himself seems to be disconnected from the mainstream of America.”  Former House Speaker and potential Republican presidential candidate in 2012 Newt Gingrich said on his website last month simply “No mosque.”  Lastly, of course, the Jesse Jackson of 21st Century political America Sarah Palin wrote in a Facebook message originally posted July 20 – “Many Americans, myself included, feel it would be an intolerable and tragic mistake to allow such a project … to go forward on such hallowed ground.”  These remarks and others like them represent what is so wrong in America today – deceit, intolerance, and disrespect for the rule of law.

In the first place, Palin is stretching the truth by using the “hallowed ground” rationale. The proposed site of the mosque is several blocks from Ground Zero and would be surrounded by a store offering lingerie, a peep show, and sex toys, at least 11 bars, and a strip club.  Calling this neighborhood “Hallowed Ground” is like attaching the same nomenclature to the Strip in Las Vegas.  Given the current makeup of the area, a mosque would add a spiritual influence to its fabric and actually make the district more “hallowed”.  In any event, Palin’s statement, like many uttered by our politicians today, is misleading and has certainly led many Americans to a false opinion of whether the mosque should be built.  

Newt on the other hand employs direct intolerance in his opposition to the mosque project.  “No mosque” leaves little room for negotiation.  How can someone who possibly aspires to be president be so vehemently discriminatory?  Since there are already 10 churches and 3 synagogues in lower Manhattan near the Ground Zero site, a mosque would actually enhance the diversity of that community.  Additionally, these are times when people of different faiths should come together to solve problems and be role models of tolerance and cooperation.  I can imagine no greater tribute to those lost on September 11, 2001 than for the churches, synagogues, and mosques near Ground Zero to work together on projects that promote understanding and peace.  With Newt’s thinking this won’t be possible.

Lastly, Senator Cornyn should know that property rights under the Constitution are not a popularity contest.  Just because a majority of Americans hold a certain opinion, in this case that the mosque should not be built in Lower Manhattan, it does not mean it is the law.  The Constitution specifically grants all Americans equal protection under the law and protects us against deprivation of life, liberty, or property without due process of law.  The builders of the mosque have broken no laws and are entitled to the same justice as churches and synagogues.  Thus, they have a right to build their place of worship on their property.  Cornyn’s inference is dangerous because it violates the Constitution by making mob rule king and minority rights arbitrary at the whim of the mob.  At a time when property rights are already under attack from both courts and policymakers, all Americans should stand with the Cordoba Initiative in support of its property rights.  By doing so, they may be defending a future attack on their own.

The debate over the so called “Ground Zero Mosque” is representative of the lies, intolerance, and disrespect for the rule of law which has become so pervasive in American society.  To gain an upper hand in a campaign politicians lie.  We see this all the time in campaigns where candidates have lied about their opponent or themselves.  We have become intolerant by labeling those we don’t agree with “racist”.  More ominously, we have become a society averse to the rule of law, by condoning leaders who lie under oath, lie to start wars and invade sovereign nations unprovoked.  Instead of chastising the president for defending the Constitution, it would have been refreshing if Cornyn, Palin, Gingrich, and others who claim to support the same document, would have come out in support of the president’s position.  Perhaps in America’s current environment this is too much to ask?

Article first published as Lies, Intolerance, and Disrespect for the Rule of Law on Blogcritics.

Tocqueville as Prophet

August 14, 2010

“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

Alexis De Tocqueville, Democracy in America (1835)

Last week the economic central planners at the Federal Open Market Committee (FOMC) of the Federal Reserve Bank issued a statement tempering their previously optimistic forecast for recovery from the “Great Recession”.  In its statement, the Ben Bernanke led FOMC indicated that the weakening recovery has made it necessary for the Fed to keep interest rates at “exceptionally low levels…for an extended period”.  Additionally, the FOMC stated it will change course.  Instead of shrinking its historic $2 trillion balance sheet, the Fed will reinvest money from maturing mortgage bonds to buy up more assets (notably government treasury bonds).  All of this will be done in an effort to further stimulate the markets to recovery.

No one doubts that something needs to be done to reverse the downward spiral that our economy is once again taking.  After all, consumer confidence is down, factory orders are down, the real unemployment rate which takes into account discouraged and underemployed workers is still north of 16 percent, Food stamp usage has skyrocketed to a record high of 40.2 million recipients, and  Bank repossessions and foreclosures are still a massive problem.  No, nobody doubts that something needs to be done, but that something should not be more of the same that got us into this mess in the first place and is keeping us in it in the second.

Now, I would not question the intelligence of anybody on the FOMC.  Bernanke and his comrades are smart folks.  They all have fancy degrees and have spent years on Wall Street and/or in the government cutting their teeth becoming seasoned economists and financiers.  They certainly are not “wet behind the ears” as is said in the business.  So then if it is not mental ability maybe it is motives that drive the FOMC members to pursue what appear to the reasonable layman as an insane policy.  Let’s analyze the situation further by looking at historical examples.

Faced with double digit inflation and an unemployment rate of 11-12 percent in the early 1980’s, then Fed chairman Paul Volcker did exactly the opposite of what our current Fed commander has done.  He raised money market rates to 19 percent.  It was painful at first, but in the long run the policy broke the decade long grip that stagflation had on our economy and ushered in a decade of solid economic growth.

Then we can point to Japan’s horrible experience with “quantitative easing” in the 1990’s as another example for objecting to the FOMC’s lamebrain policy.  Japan’s financial meltdown in the early 1990’s like ours this time was caused by government induced easy money and real estate speculation.  Once the bubble popped the Japanese powers that be pursued a policy of massive fiscal stimuli, propping up of insolvent banks, and discriminatory credit allowances. Sound familiar?  All in all, in the decade of the 1990s Japan passed 10 fiscal stimulus packages worth more than 100 trillion yen.  Instead of curing its economic ills the spendthrift policy led to what is now known as the “Lost Decade” in Japan.  In fact, many economists claim Japan has still not recovered.

Of course, Bernanke will make up excuses why the same policy he is pursuing for the U.S. didn’t work for Japan but will work for us.  Actually, all he really has to do is reference noted Keynesian economist Paul Krugman who says both Japan in the 1990s and the U.S. today simply did/have not spent enough to stimulate their respective economies.  Unfortunately for Bernanke at least two of his underlings don’t buy the argument.  In March of 2009 Timothy Kehoe, Edward Prescott of the Minneapolis Fed and a team of 24 economists from around the world published a report indicating that it is the “overreaction” by government which “prolongs” and “deepens” economic downturns.  In fact, if you look at the three crisis in the last 100 years where government has overreacted the most (the Great Depression, Japan’s Lost Decade, and our current crisis) they are also the longest lasting.  This is a fact that seems to solidify Kehoe and Prescott’s conclusion.

Lastly, the U.S. government has tried quantitative easing and Keynesian economics to solve our most recent troubles for close to 3 years now.  When the “Great Recession” began in December 2008 the national debt was a little over $9 trillion.  As I write this article, our debt is more than $13.3 trillion.  And this doesn’t count the trillions of dollars in easy credit doled out by the Fed to induce banks to loan again.  The longevity and size of the effort can only make one wonder about the motives of the FOMC to pursue more of the same.  Could it be that we are missing some information only available to the Fed?  Or could it be that Tocqueville was correct when he prophesized that Congress would discover that it can bribe the public with the public’s money.  We are talking about the Federal Reserve but who chartered the Fed and refuses to audit its books – Congress.  What’s unknown, given our current circumstances, is how much longer our republic can endure?           

Article first published as Tocqueville as Prophet on Blogcritics