It is no secret outside the Washington Beltway and Manhattan Island that the American economy is still absolute rubbish. While President Obama jets around the world on Air Force One bowing to Saudi sheiks, the rest of the United States – and nearly 300 million Americans outside of the DC/NYC metro areas – remain mired in economic stagnation, continued uncertainty, and a loss of confidence that the America left for the next generation will be better than the America that’s being left behind.
The objective numbers are indisputable. 47 million Americans are on food stamps, representing a 50% increase in the past four years and the largest number in history. One in six Americans – nearly 53 million – are in poverty, also the largest number in history. Unemployment remains lodged at 8%, interest rates remain at zero, the government has run consecutive trillion-dollar deficits, and entitlement spending is in imminent danger of spiraling completely out of control.
All of this is being caused, directly or indirectly, by Barack Obama’s abjectly failed attempts to initiate an economic recovery. I will address each issue separately: the failure of the stimulus package, the lack of business confidence, the failure of monetary policy, the lousy economics of bailouts, and the longer term effects of policies such as the PPACA and Dodd-Frank. It will, consequently, be subdivided into four sections, with a brief commentary on what could credibly work – or at least what I could get on board with.
Let’s Face It, the Stimulus Didn’t Work
The White House economist, Christina Romer, famously claimed that with the stimulus package, unemployment would peak at around 8.5% and quickly decline to 5.4% by Election Day of 2012. Well, as of November 8 (two days after Election Day), the peak was more like 10.5% and unemployment remains stubbornly high at 7.8%. And even that number is misleading, as it is a very narrow of definition of unemployment.
The Bureau of Labor Statistics reports monthly the U-3 unemployment, which includes workers that are (1) unemployed and who are (2) looking for work at the present moment. Unfortunately, this fails to include workers who are either (1) working part time instead of full time; (2) working at FedEx when they have a bachelor’s in finance; or (3) have given up on finding a job altogether. That broader definition of unemployment, known as the U-6, is north of 13%. That is the true economic situation in America.
Why then, did the ARA fail so abjectly in achieving its goals? The answer lies in the failure of Keynesian economics, which many economists and advisors in the Obama Administration subscribe to. The theory, proposed by the British economist John Maynard Keynes in the 1930’s, stated that the economy was subject to boom-bust cycles as people didn’t always necessarily act in the common interest. When the economy took a down-swing, it was government’s responsibility to increase spending – via financing deficits – to take up the slack, until the economy recovered. When the economy was good, government would pay down that debt in preparation for the next downturn, and the government would be well-positioned to counter that.
The problem lies in the failure of Keynesian economic theory when actually applied in the real world. According to the traditional IS-LM demand curve, a dollar in government spending will produce as many as five extra dollars down the road. The government wants to build a road, so they hire a company. The company pays its workers, the workers shop at Kroger’s for food, Kroger’s pays its workers, and so on down the chain.
Unfortunately, the actual return on government investment is much lower. Government, unlike the private sector, is not accountable financially to anyone. Not the shareholders’ board, not the Wall Street investors, not the accountants, nobody. Government has no incentive to economize, to seek the best value for their money, or even to invest their money properly. Hence – and this is a temptation on both sides of the aisle – legislators try to bring the bennies home to their districts or their ideologies, regardless of whether it makes economic sense.
Of the $787 billion stimulus package, roughly $90 billion of it went towards “green energy” companies of dubious investment value. While we can sit here and extol the virtues of the green economy endlessly such as reducing pollution and getting us off fossil fuels, the intractable argument remains that the economics of solar power and electric cars are lousy. Reuters recently came out with a report that the true cost of building a Chevrolet Volt is closer to $90,000. MSRP after Federal tax credits is still in the $40,000 range, which means that not only is the Volt priced well out of many working Americans’ ranges, but also that the Chevy Volt is a massive loss leader for General Motors.
Other green companies that received generous Federal stimulus dollars have also gone belly-up, with disastrous PR results for the administration’s policy. A123 Systems, Solyndra, and Fisker are just a few of the more well-known names. Frankly, I’m not surprised Fisker went bankrupt – their cars were mysteriously catching fire for as-yet unknown reasons.
Another $300 billion of the stimulus package went almost directly to the states in the form of tax benefits and direct transfers to state treasuries. This permitted states to close up budget deficits for a year or two, since the broader economy’s fall resulted in a corresponding decline in state revenues. Unlike the Federal government however, states are extremely limited in their ability to finance deficit spending. This is why we see exceedingly nasty fights over union pension reforms, tax hikes, and fights over local tax levies since about 2010 or so – because that’s when the stimulus money ran out, and states had to tighten their collective belts. Effectively, the stimulus package allowed states to punt on their budget deficits and kick the can down the road a couple years.
That time has run out. Large cities such as Stockton in California have gone bankrupt. That state is talking about raising the state income tax to an unheard-of 13% in a desperate bid to close a yawning budget gap. Scranton, PA is running under state oversight and is paying its city workers minimum wage in violation of their labor agreement because the city is flat broke. Ohio, failing to reform public employee collective bargaining agreements, was forced to gut state funding to local school districts, causing local fights over tax levies which have been almost uniformly rejected. Kentucky state employees are forced to take mandatory, unpaid furloughs. State and local government continue to lose workers in the face of unsolved budget woes, hampering the recovery on all levels. I can go on and on about the shortfall of money at the local level.
Another $200 billion of the stimulus went to entitlement spending. This primarily took the form of increased food stamps, increased welfare spending, and extending the unemployment insurance (UI) from 26 weeks out to 99 weeks as out-of-work people were given more time to find another job. Of course, as Newt Gingrich famously quipped during a debate, 99 weeks is an associate degree. Government was purely concerned with extending benefits with nary a look at how much more productively that time may have been spent, reeducating and retraining workers.
Now, did each of these programs have immediate benefits? Sure. The state employees remained on the job for another two years. People on unemployment could pay their bills and eat properly while looking for another job. Jobs were created at Fisker, Solyndra, and other green companies. But all of that was temporary and the underlying economics simply failed to support those programs indefinitely. It’s obvious that unemployment will not last forever. And unless the underlying economics behind state government and green energy make sense, they will go belly-up the minute the government rug is pulled out from under them.
The market knows this, which is why private investors and consumers will fail to get on board with the Chevy Volt. If government wanted to make a concerted effort to shift national energy policy, government must find a way to credibly discount private sector fears of green energy’s lousy economics. This can only be done by making a long-term effort over decades to subsidize and develop the green industry, including creating comprehensive economic incentives to improve energy efficiency/renewability. We can see this by numerous private programs piggybacking on the technology that NASA pioneered over five decades of government investment and the subsequent achievements they made. The cost of a comprehensive green energy policy would of course have been many times what any legislator could have stomached: thus, we were forced to settle with a two-year plan which was doomed to fail from the start.
Lastly, the stimulus package results in a PR disaster for the Obama administration because few people could point to any quantifiable benefits from the program. The public at large is not going to notice when their state employees remain on the job. They are unlikely to notice in say, Ohio, when a California company gets stimulus dollars. Suburban residents will not benefit from a high-speed rail line that goes from one city center to another, with no stops in between. And someone who kept their job is not going to benefit directly from their neighbor receiving unemployment benefits.
A Stimulus Plan That Could Have Worked
There is one credible, visible stimulus package that I could have gotten on board with – $800 billion over the next ten years to rebuild and upgrade our roads, bridges, and tunnels. Fixing potholes, rebuilding bridges, and upgrading the capacity and design of our Interstate and US highway networks would produce benefits far in excess of the initial government investment. Higher speeds and higher network capacity mean less otherwise-productive time wasted on the roads or mired in congestion, which will return untold billions for decades to come. Although more difficult to quantify, lower commute times can translate to better quality of life, employee morale and productivity, and needless to say, less fuel wasted in traffic jams.
The Sierra Club, Cincinnati mayor Mark Mallory, and the rest of the public transit advocates will of course cry foul at this, claiming that increasing road capacity will increase global warming, increase pollution, and continue the trend of suburbanization. But they fundamentally fail to forget that roads have been in use since the rise of civilization. They don’t have to necessarily carry gasoline-powered cars, and the time may well be in the near future that cars run on electricity or some other renewable, clean fuel.
Killing road expansion in the name of deterring environmental harm is simply hindering progress and development – the exact same kind of economic development we need today to get America back on track. Brazil today runs a significant proportion of its road cars on ethanol extracted from sugarcane, which is extremely renewable and efficient (far more than corn ethanol). And the issue of suburbanization is entirely the City’s problem – the City failed to attract and retain residents. It’s not an excuse to kill road expansion.
In Part Two, I will address the failure of monetary policy to kickstart the economy, primarily due to actions at the Federal Reserve, support from the Obama administration in these Fed actions, and a possible solution to the Fed’s actions.