I’ve been reading a lot about economic stimulus. Mostly partisan rhetoric in posts and comments on blogs, pertaining to whether Roosevelt’s spending spree got us out of the depression or whether it was the spending on WWII that got the job done.  Quite frankly, it’s a moot point.  Keynesian economics (the premises for FDR’s “New Deal”) was formulated during an epoch when the U.S. economy was based primarily on the production of widgets in factories across this great land.

The world’s changed a lot since then.  Most of the widgets are made in China. The U.S. economy is now based on the “sale” (not so much the “production”) of iPODs, automobiles, gasoline, and real estate and on providing SERVICES … LOTS of services.  Whether it’s computer programming, nursing, or advertising and selling a Big Mac, this is what today’s economy is all about.  And it’s this major difference in today’s world, compared to Roosevelt’s and Keynes’s world, that makes LOTS OF SPENDING on “projects” a little less effective than it used to be for pulling a stagnant economy up off the ground and to its feet.
Matthew Yglesias, in his blog post, In Defense of Stimulus Waste, is right about one thing, “The efficacy of stimulus as stimulus just has to do with how quickly the funds cycle into private hands and then out into the wider economy … “  And this is where the 2009 stimulus package horribly falls short of its intended purpose.

Although $787 billion sounds ominous, it’s an expenditure that a country like the United States, with potential for high production and growth, can conceivably fund within a few years.  It’s not likely, as claimed by the Republicans, that our grandchildren will be paying for this bill for years to come.  Well, on second thought, it might be a true statement for John McCain since the guy’s grandchildren are already paying taxes.  But even if the President’s prediction of “SAVING” or creating 3.5 million jobs is accurate that means that each job created (or “saved”) is costing the American people (or their as yet unborn children and grandchildren) about $225,000 for each job created.  Considering that the average salary of the individual hired to these new positions will likely be in the range of $30,000 to $40,000 annually, it will take seven to eight years to recover enough “stimulus” to repay the American people for what they spent to create each job. I suggest that there is nothing efficient about this cost/benefit ratio.  Score a negative one point for the Donkeys.  All these spending projects are horribly non-productive as stimuli.

So what about the tax cuts?  Well, if we give the same $225,000 directly back to the American peeps (call it a tax credit, a grant, or gift, it’s still rock and roll to me) then that expenditure is available dollar for dollar for spending from the day it’s received.  We don’t have to wait for a train to be manufactured or for rails to be laid. We don’t have to wait for buildings to be erected or painted.  That gift back to the American people can be spent on iPODs and Big Macs the minute it’s received.  But … not all tax breaks are created equal. If you give a tax break to a guy that already has more than enough money to buy the “stuff” he needs (or wants), that guy will just put that money in a trust fund so that his great grandkids can go to Harvard or Princeton.  (God forbid, since it’s those Harvard and Princeton graduates that are the “brainpower” that concocted this ill-conceived “not-so-stimulus” package.)

The Matthew Yglesias rule that judges a stimulus “by how quickly the funds cycle into the private hands” fails on certain tax breaks because we have to wait until the recipient’s grandkids are in college to collect the investment.  This makes the $70 billion spent to eliminate the alternative minimum tax (something that primarily benefits rich dudes whose grandkids will go to Harvard or Princeton) something that is just as ineffective as the excessive spending projects proposed by the bleeding heart liberals.  So on the some of the tax breaks, score a negative one point for the Elephants.

Of course the stimulus package had a few good tax breaks … the kind that find themselves put back into the chain of commerce rather quickly.  The tax break that was most likely to do some immediate good was the $15,000 home buyer tax credit.  This was one that had a lot of immediate benefits. It gave a dollar for dollar benefit to everyone  that purchased a home in 2009 (not just first-time homebuyers). What a splendid idea.  This one not only put significant sums of money immediately (or at least within a few months) back into the hands of lots of peeps, it served the secondary purpose of inhibiting or reversing the downward spiral of real estate values (which most economists concur is at the root of pit current economic crises) by creating more demand in the housing market.

Of course, this provision, added in the Senate version of the bill, was axed in conference committee. God forbid they actually put something that sounds and smells like “stimulus” in the bill!  To add insult to injury, our lawmakers, then reduced the package’s $500 tax refund to $400.

The stimulus Bill is further devoid of any provision that will contribute to the one most important element of an economic recovery plan … “low mortgage rates”.
After all, it’s not as if we have no experience with recessions in the modern era.   We had one in the period from 1991 to 1993 and another in 2001 through 2003.  In each of these recessions economic stimulus was primarily fueled by low mortgage rates which led to a refinance boom during both recessions.

The nice thing about low mortgage rates is that they are “super-charged” recession fighters. Like the $15,000 home buyer credit (that was eliminated from the package) low mortgage rates accomplish multiple objectives in a stimulus plan.  First, they encourage refinancing. And refinancing puts $300 to $400 back into the pockets of a huge number of home owners.  Let’s do the math. If about 20 million homeowners (an estimate by the government of the number of homeowners that would benefit from refinancing to an interest rate below 5%) could put $400 each month into their pockets (from the interest savings on refinancing) for three years the savings would be $288 billion dollars.  It’s hard to say just how much money Congress or the Treasury Department would have to spend to artificially push rates down to 4.5% for a year, but I can assure you it would be less than $787 billion.

Secondly, lower mortgage rates stimulate home buying.  For the same reasons that the $15,000 tax credit would have been a good thing, this is also a good thing.  It stimulates home buying which in turn reverses the decline in property values through increased demand.

Finally, lower mortgage rates, and the accompanying refinancing it creates, accomplishes another positive in the recession battle… It forces the employment of hundreds of thousands of individuals by the financial services industry to meet the demand created by thousands of new refinance and purchase mortgage applications each day.   This almost immediate creation of new jobs acts as third powerful stimulus.

We can only hope that the economic bailout package will provide the necessary elements to encourage lower mortgage rates, because the stimulus package just passed is totally devoid of anything designed to encourage lower mortgage rates.

In the final analysis, Congress and the President scored poorly on the stimulus package. Blame goes to Democrats and Republicans alike. The stimulus bill is an ill-conceived, hastily formulated plan, devoid of any significantly effective recession fighting provisions.  The bulk of the spending provisions and a good many of the tax breaks fail to provide any immediate economic stimulus.  I just hope that by the time a second bill is up for consideration after the first one falls short of its objectives, those Harvard graduates have taken the time to read this post.

My name is Ken, and that’s my take on it.