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Why Obama's $8billion Recovery Act Did Not Stimulate the Economy
Raymond Richman, 3/20/2011
On Feb. 13, 2009, Congress passed Pres. Obama’s American Recovery and Reinvestment Act of 2009, a $787 billion economic stimulus proposal. The Recovery Act stated that its goals were 1) to create new jobs and save existing ones and 2) to spur economic activity and invest in long-term growth. It provided $288 billion in tax cuts and benefits “for millions of working families and businesses,” $275 billion for federal contracts, grants and loans, and 244 billion in entitlements. In addition to offering financial aid directly to local school districts, expanding the Child Tax Credit, and underwriting a process to computerize health records to reduce medical errors and save on health care costs, the Recovery Act plans investment in the domestic renewable energy industry and the weatherizing of 75 percent of federal buildings as well as more than one million private homes. Given the enormous expenditure, Keynesian economists are hard put to explain why the Recovery Act created so few new jobs.
The reason for its failure to spur economic activity, we believe, is that a third of the expenditures were transfers to state and school districts which may have saved some jobs assuming the recipients could not have raised revenues or cut expenditures. Grants were made to households which used the proceeds to pay off debt preponderantly, creating few jobs. The tax benefits and entitlements, five-eighths of the total, did not get spent by the recipients on consumption or investment goods. Either that or too much of it was spent on imported goods and services which provided jobs abroad and not in the U.S.
A glance at the government agencies that paid out the most money indicates what the balance of the money went for.
Funds Paid Out
Department of Health and Human Services
Department of Education
Department of Labor
Department of Transportation
Department of Agriculture
Social Security Administration
Department of Energy
Department of the Treasury
Department of Housing and Urban Development
Environmental Protection Agency
Department of Defense--Military
Corps of Engineers-Civil Works
|Source: www. Recovery.gov
The largest amount was spent by the Department of Health and Human Services, $105 billion. Why was this expenditure not part of the health care legislation? Or a separate bill. It may have been to avoid a debate in the House and Senate. It does not belong in an economic stimulus package. The Department of Education paid out $71 billion or nearly ten percent of the total. Why is this part of the economic stimulus plan? It may have preserved jobs for teachers and administrators. It certainly was not intended nor did it produce a sustainable increase in employment. What jobs did the expenditures of the Department of Labor, eight percent of the total, create? Presumably the Department of Transportation spent most of its 3.3 percent on roads and bridges with about a third still to be paid for. But what a trifling amount went to this obvious candidate for infrastructure investment. The Department of Energy had spent as of January of this year only a third of the amount allocated and much of that was for insulating houses and public buildings and subsidizing hybrid and electric-powered vehicles etc. But much of it was spent for subsidies to so-called renewable energy projects. Moreover, it has billions at risk (not included!) on guaranteed loans made by banks for construction of those facilities as we shall note below,
The trouble with wind and solar power is that they are high-cost producers of electricity. Taking costs and subsidies into account, their cost of electricity is 2 to 5 times natural gas which is becoming increasingly plentiful as a result of new technology for extracting natural gas from shale. Shale is abundant in the U.S. and many other countries in the world. Only when natural gas becomes so expensive that wind and solar will be able to compete with it, will it become worthwhile to invest in wind and solar plants. When will that be? Perhaps, in a half century or so. Investing in such alternatives sources before they can compete without taxpayer subsidies is very much like paying for digging holes and filling them up again.
It does not require a degree in mathematics to see that just spending money does not produce sustainable jobs. The federal budget deficit was $1.6 trillion in 2010. If just spending money gave employment, $1.6 trillion ought to have created 10 to 16 million jobs. It barely created enough jobs to equal the natural growth of the labor force. We estimate that we only need 8 million jobs to fully employ those officially and unofficially unemployed. The evidence is already in that energy from renewable sources, including fuel alcohol, is too costly and is creating a serious drag on world economies and soon our own.
Spain which went “gung-ho” for wind and solar energy announced recently that it was cutting back on its incentives to wind and solar. It continues to strain its budget and recently Spain’s credit rating was reduced by Moody’s. Others in the European Union are similarly reducing subsidies. The U.S. stubbornly continues to waste billions on so-called green energy. Bowing to their environmental critics, our legislators are spending unwisely on so-called “green” projects.
Prof. Gabriel Calzada, an economics professor at Juan Carlos University in Madrid, reported in a study that Spain lost 2.2 jobs for every job created by wind or solar. While the number of jobs has been challenged, the fact is that wind and solar is more costly than coal or natural gas. Based on data calculated by the Heritage Foundation, we estimate the cost of on-shore wind and thermal solar energy to be 1.8 times and 2.5 times that produced from coal. That is not counting the cost of securing access to a grid. Environmentalists argue that its main contribution is reducing carbon emissions in the atmosphere. Maybe so but it is not creating jobs as the following examples show.
On December 16, 2010, U.S. Energy Secretary Steven Chu announced that a partial loan guarantee for a $1.3 billion loan to support the world's largest wind farm in eastern Oregon sponsored by Caithness Energy, LLC and GE Energy Financial Services. He said, "Renewable energy investments like these are creating jobs while helping to maintain America's global competitiveness in the clean energy economy. . . By leveraging our nation's vast natural resources, we can help provide alternative sources of energy and stimulate economic growth and job creation." Unfortunately, this is just wish-thinking. According to company estimates, the project will directly employ 400 workers during construction and 35 workers during operation. So about $2.25 billion will have been spent on this project to create 35 sustainable jobs at a private and government cost of $64.2 million per job. And to add insult to injury, much of the cost will consist of imported products and actually cost American jobs by creating jobs abroad.
In the U.S., subsidies take two forms. The initial subsidies to facilitate the construction of plants producing electricity from solar or wind are just the beginning. The plants produce electricity at a very high cost. So when they are connected to the electricity grid, power distributors are forced to buy the electricity and are authorized to pass the extra cost on to their customers. It amounts to a sales tax on consumers of electricity including businesses.
The federal government approved a guarantee of a $1.75 billion loan to a Spanish company Abengoa Solar Inc. to construct Solana, a concentrated solar power (CSP) facility located near Gila Bend, Arizona. The total cost of the project will exceed $225 billion. President Obama stated that after years of watching companies build things and create jobs overseas, it’s good news that we’ve attracted a company to our shores to build a plant and create jobs right here in America. Unfortunately, it will create only about 1600 temporary jobs building the plant and only 80 permanent jobs at the facility. By contrast, gas and coal-fired generating plants have very low cost per kwh and use all domestic materials and they produce sustainable jobs.
If Pres. Obama’s advisers suggested to him that the project was good for the U.S., he has been grossly misinformed. While there was increased employment in the industries producing the materials and building the plant, they were temporary. In addition, thirty percent of the materials are expected to be imported, which would have to made up by exports. Nothing in the Recovery Act is a stimulus to exports. To make matters worse, federal and state governments as a concession to their “environmental” supporters have been impeding the drilling for oil. As a result, we have become more dependent on foreign sources of oil.
The time to build wind and solar plants is when the prices of coal and oil double relative to renewable resources. That is likely to happen eventually, perhaps a year or more. Until then, the money spent on them is wasted. It is very likely that most of the renewable plants will go bankrupt when the subsidies end. This may already be happening in Europe. It appears that we have chosen voluntarily to become a declining power in the face of an imagined threat of anthropogenic global warming.
Comment by Jonezin_va, 3/22/2011:
It's amazing how we can just burn coal, burn natural gas, and burn it all. Where does the smoke go? How about our nuclear power? Thats even cheaper than coal. But as long as we can leave all this mess for our children to straighten out, I guess no harm, no foul. Solar panels last 25 to 30 years. One time expense with minor maintenance. Return on investment can be as little as 8 years. Then the panels have paid for themselves, but they still produce power. I am impressed how much disinformation you have here. 7% of the earth is all it would take to produce all the energy we need, or I guess we can just continue to burn everything....
Response to this comment by Raymond L. Richman, 3/22/2011:
There is an experiment going on at CERN, the European Union's principal research center, to shed light on what causes climate change. Prof. Kirby's studies to date indicate that CO2 has little effect on climate change. Most of the changes are due to the sun's emissions. The experiment is designed to test this.
Comment by , 3/22/2011:
The numbers for the solar plant Solana are wrong by two orders of magnitude. The federal loan guarantee is for $1.75billion.
Response to this comment by Raymond L. Richman, 3/22/2011:
Thanks for calling my attention to the fact that I failed to put a decimal point after the 1 in 175. I corrected it.
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[An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]
Journal of Economic Literature:
[Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....
Atlantic Economic Journal:
In Trading Away Our Future Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]