Detailed Abstractions

This just seems to be a lie that won’t quit.  At the very beginning of the Obama administration we were told, by economists, business leaders, the WH, congressional leaders, and really most people that more stimulus was needed in order to avert a major depression of the economy.  We were told, incorrectly, that this bill would keep unemployment below 8%.  Indeed, the referred to the Great Depression as hyperbole on a number of occasions to push their point.

A minority of people continued to say that we didn’t need this or want it and most Americans weren’t for spending more money, but we know the fear tactic worked.  President Obama signed on February 17th a $787 billion dollar appropriation bill to further stimulate the economy.

Since it’s signing, we also been told it’s worked well.  According to the WH it will create or save 3.5 million jobs between now & 2010 (here):

WASHINGTON (Reuters) – The Obama administration’s fiscal stimulus plan will meet previous estimates to save 3.5 million U.S. jobs by the end of 2010, but the unemployment rate at that time may be higher due to further deterioration in the economy, a senior administration official said on Monday.

Vice President Biden also got into the discussion very recently (here):

He touted the administration’s accomplishments with regards to the stimulus packages. Biden said 500,000 to one million jobs have been created from the American Recovery and Reinvestment Act. He noted that when the Obama administration took over in January, the country was losing 700,000 jobs a month thanks to the worst “bagel” in decades (yes, I’m newly addicted to the West Wing). That has slowed to 274,000 jobs.

Mr. Obama as well (here):

July 11 (Bloomberg) — President Barack Obama said his $787 billion stimulus bill “has worked as intended” as he pushed back against Republican criticism that his recovery program has failed to rescue the economy.

& of course, we couldn’t have this debate without a Nobel Prize winning Economist weighing in.  Proving the Nobel Prize isn’t all it’s cracked up to be, Paul Krugam weighs in (here):

Aug. 9 (Bloomberg) — The U.S. economy is stabilizing and may have bottomed out, as the government’s stimulus plan probably saved a million jobs, Nobel Prize winner Paul Krugman said today.

Mr. Krugman wasn’t satisfied with just praising of the administration.  Lone ago giving up up using true economic theory as it refutes his political agenda, he went further:

A second stimulus package for the economy is still needed, and should be directed at state and local governments as well as infrastructure spending, he said in an interview in Kuala Lumpur. The world economy may face several years of weak growth without falling into a “double-dip” recession, he said.

What’s the issue with all these pronouncements?  Simply said, they have no proof in reality.

Currently only 15% of the money has been spent.  That deserves repeating, only 15% of the stimulus has been spent.  According to everything we’re hearing though, this prevented a depression by creating/saving jobs (here):

The $787 billion economic stimulus bill signed into law by President Obama nearly six months ago contained $288 billion in tax cuts and $499 billion in new spending. So far, the administration has spent $76.3 billion — 15% of the total available.

However, even taking the 15% amount isn’t necessarily a true reflection of the spending.  One must then ask, what was the money spent on and can those expenditures be tied to jobs?

Even the answer to that is a resounding no.  Almost all of that $76.3 billion wasn’t spent on anything one would typically associate with creating wealth.  $57.3 billion being was spent on safety net, food stamps, medicare, unemployment benefits and other social programs.

Please note, this is not a refutation on social spending, that would be a completely different discussion.  Having said that, it seems obvious that paying people to stay at home is not going to create or save jobs.

The analysis can’t stop here though.  With a very small percentage of the stimulus itself being spent, the total spent also represents a very tiny fraction of the economic activity in the United States.  According to current estimates, we expect the US economy this year to produce about 14 trillion dollars in GDP.  This is lower than previous years of course, but still a staggering amount of money.

Using all the numbers we have, we can inject some very simple math.

If we assume that the in the last 6 months, economic activity is around 7 trillion dollars, 76.3 billion dollars a only a little over 1% of total economic activity.  Which means it will be about 1/2% of the economy at the end of the year, unless of course the government actually starts spending the money.

Even as small as that is, if you remove the  $57.3 billion spent on social spending, then you have a total of $19 billion, which is less than 1/2 or 1% of the economic activity generated over the past 6 months.   & that is being very nice, by assuming that all $19 billion actually went to job creation.

Luckily, most Americans already know this (here):

A USAToday/Gallup poll released Monday found that 41 percent of Americans think the spending has made the US economy better, but 57 percent believe it has either made no difference or worsened the recession that began in 2007.

But the idea is still worth repeating since administration officials continue pushing the economic changes as a success for their policies.

Simply stated, the idea that by adding 1% to the current level of economic activity to the US economy would effect it in such a way as to prevent a Great Depression is a fallacy.  A fallacy which needs to be defeated.

Before the last stimulus bill, the Obama administration trotted out how dire and desperate things are and would be without the all powerful government.  According to their reports, unemployment rates without the money would hit 10%, while with spending would not go above 8% (here).

By the government’s own standards and the new unemployment numbers of 9.5%, they have failed. But like true politicians, facts are just numbers that haven’t yet been spun.

With trillions of dollars in “stimulus” already spent on pet projects, buying up failed companies,  green jobs, and anything else the government can think of, the only thing they are now positive of is that it wasn’t enough.

Through Mr. Obama’s remarks after the G8 summit (here):

“While our markets are improving, too many people are still struggling,” Obama said at a press conference in L’Aquila, Italy after a summit of the Group of Eight nations. “Full recovery is still a ways off.”

and senior administration officials putting our feelers (here):

Senior administration officials think further stimulus might eventually be needed but they do not want to have this fight now. Both the economics and the politics call for postponing a decision to late this year or early in 2010.

& of course, the sage Warren Buffet’s self-serving advice (here):

As folks in Washington and the rest of the country grumble about the depressed job market and underwhelming consumer spending reports, the calls for a second stimulus continue.

“I think that a second one may well be called for,” Warren Buffett , the widely respected investor, said Thursday morning on ABC’s “Good Morning America.”

It appears we’re on a path to spend more money we don’t have.  Effectively, the government is acting just like the poor investors and home buyers did – buying a lot of stuff for too much money, which is completely borrowed.

As Cato notes:

Investors understand that increased government spending diverts valuable resources away from the private sector and ends up imposing even more demoralizing taxes on labor and capital.

A major study of 18 large economies by Alberto Alesina of Harvard and three colleagues appeared in the 2002 American Economic Review. This paper, “Fiscal Policy, Profits and Investment” found that the surest way to make economies boom can be through deep cuts in government spending–the exact opposite of the “fiscal stimulus” snake oil.

Like the problems of social security, medicare, and medicaid though, we’re simply going to borrow all of this money and kick the major problems down the road for whatever generation will suffer from our mistakes.  They will pay the higher taxes for lower benefits all because we can’t control our spending.

So for those playing the home game – the solution to alcoholism is to drink, just as the solution to a spending binge is more spending.