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Dramatic Changes Needed to Recover From This Depression, Not Earmarks
Raymond Richman, 5/29/2010

Pres. Obama’s economic stimulus plan which the president signed on Feb. 17, 2009, known as the American Recovery and Reinvestment Act of 2009 paid out as of 5/21/2010, $398.7 billion or 50.7 percent of the amount appropriated. This, to be sure, is not a great administrative accomplishment.   As the following table shows, $162.7 billion or 20.7% consisted officially of tax benefits, 13.6% contract, grants, and loans, and 16.4 % entitlements. These expenditures produced no permanent jobs. Most of the administration’s activities during its first year gave unjustified priority to the Obama health care program and mortgage relief. The current economic crisis requires dramatic changes to create the conditions for economic growth. The stimulus program does not even appear to be designed to create any permanent jobs at all.

The Economic Stimulus Program To Date

Updated: 05/21/2010. Source: Recovery Act website.

Some of the grants went for highways and bridges already planned by the states. They made a small contribution because some of the projects would have been postponed for lack of state funds. What employment was created was temporary and evidently had very little effect on unemployment. The spending for entitlements included unemployment compensation funding, food stamps, and other aid to individuals and state. The government budget office calculated that the program as of May 14, 2010 helped “create or save” up to 2.4 million jobs and increased GDP from negative recession levels to the latest reported rate of growth of 3 percent in April, 2010. If so, we must have been in a depression. The economy shows few signs of recovery. Indeed, to us, there is no recovery in sight because the administration’s economists appear to be engaged in trivial pursuit.  

The government and the Federal Reserve system gave priority to rescuing homeowners and the banks from defaulting on their unwise mortgages. The plan included a refinancing program to help individuals refinance their mortgages at lower cost, a Home Affordable Modification Program (HAMP) to help 3-4 million "responsible homeowners" avoid foreclosure by reducing payments on their loans, a temporary mortgage payment assistance program to help unemployed homeowners, and a principal write-off and refinancing plan for homeowners currently underwater with their mortgages, but otherwise current in their payment. In addition, the Federal Reserve System using money it created bought about a trillion dollars worth of mortgages. It stopped purchases of mortgage securities on March 31, 2010. The government adopted a clunkers program which temporarily stimulated the purchase of new autos but the stimulus ended when the program ended. The government gave first-time buyers of houses tax credits up to $8,500. None of these created any permanent jobs. These, except the Fed’s purchase of mortgage securities, are included in the table above.

Today's Keynesians appear to believe that it does not matter what the government spends borrowed money on. Perhaps that was Keynes's view in his magnum opus, The General Theory. But that was discredited in the economic relapse of 1937-8. Throwing money at problems will cause temporary growth. Lasting growth requires a substantially different program, stimulating real private investment. Expenditures to stimulate new housing expenditures after the collapse of the housing bubble and the continuing mortgage crisis has to be ruled out. The only effective and permanent way out is to stimulate private investment in factories and equipment. By contrast, the economic stimulus plan has no stimulus at all for private businesses.

Here is what we believe should have been done as soon as the housing bubble gave evidence of coming to an end.

1. End the enormous trade deficits which amounted to over $800 billions in 2008 roughly equal to the Obama stimulus program. It represents the equivalent of about 8 million industrial jobs. How do we accomplish this? Under WTO rules as we pointed out in our book, Trading Away Our Future (Ideal Taxes Assn., 2008), any country experiencing a chronic trade deficit with any of its partners may impose a tariff and other barriers to imports so long as the trade deficit persists. A ten percent tariff would raise about $80 billions in tariff revenues the first year. A uniform tariff on all goods imported from only those countries that have large trade surpluses with us would act like a currency revaluation, making imports more expensive to American importers. But our trading partners would be put on notice that growing at the American worker’s expense would no longer be tolerated. We prefer our proposal to the one made by Prof. Paul Krugman in the NYT a month ago of a temporary 25% tariff on Chinese goods intended to pressure the Chinese to allow the yuan to appreciate. China has so many informal trade barriers – it rations foreign exchange -- it can limit imports regardless of the value of the yuan. Our proposal will have an immediate effect and will end when and only when they start buying American goods.
2. Abolish the Corporate Income Tax. As we pointed out in our book and on this site, the corporate income tax so far as domestic sales are concerned is equivalent to a sales tax and so far as exports are concerned it makes American firms less competitive abroad. Almost all of our trading partners impose a value-added tax which under WTO rules they can rebate to their exporters and charge on entering imports. By contrast, income taxes cannot be rebated. If we substituted a value-added tax for the income tax and integrated the corporate income tax with the personal income tax -- as we suggested in our book– which means treating corporations as partnerships, we would restore our economy to real rapid growth

There are many other actions that we can take to get the U.S. economy back on track but none as dramatic and effective as these proposals.  Steve Wynn, the CEO of Wynn Resorts in Las Vegas and Macau, in an appearance on CNBC stated, “Washington is unpredictable these days. No one has any idea what’s next…the uncertainty of the business climate in America is frightening, frightening to everybody, and it’s delaying the recovery.” In Macau business knows what to expect from government; no one knows what to expect from government in the U.S. Let’s end the politicking on trivial issues in Washington and get real. Real problems need real solutions

Comment by Scott, 5/31/2010:

Just came accross your most informative blog. Thank you for your service to inform and educate over what many consider to be a complicated problem but is really simple and straightforward in orgin, but, what I feel, is impossible to solve politically.

 First the problem in the financial economy... -Xn => artifically lowering of price inflation => artifically increase in asset inflation (bubbles) with the Fed's only concern being the dual mandate => financial bubbles => bubble in financial paper issued with Wall St. being enriched.

The second problem is in the real economy...-Xn => slow down in GDP => reduction in value added manufacturing jobs and wages => even higher -Xn => GDP dependance on 'wealth effect', increase in debt level and ultimately +G when the bubbles pop => overall further slowing of the economy and to deflation as disinflation from -Xn crosses the Rubicon into outright deflation => increase in G becoming an ever larger piece of the pie 'saving us' from liquidation depression, but creating a much worst decades long morphine drip bailout depression=> Becoming Japanese..

This has been brewing since the 1971 ending of BW with Wall St. the main beneficary and Washington DC the secondary, all the while Main St. has suffered greviously. Solution, really simple, turn -Xn into at least 0Xn or,  correcting for past sins, +Xn...the quickest and best would be a liquidation depression. The policitical realilty is this will simple not happen, for if reveresed Wall St and DC lose along with the irresponsible moral hazard Main Street'ers (no more loan modifications). Given this group own the country, latest example defeat of Volcker Rule, do you really think this will happen?  THE problem is -Xn. As one of your posts points out you can't pump up a tire until you plug the leak. Simple and true.  Thanks again for all your collective efforts. Sayonara.