Tag: economic crisis

Son of the Stimulus

Like the sequel to a horror film, the politicians in Washington just passed another stimulus proposal. Only this time, they’re calling it a “jobs bill” in hopes that a different name will yield a better result.

But if past performance is any indicator of future results, this is bad news for taxpayers. By every possible measure, the first stimulus was a flop. But don’t take my word for it. Instead, look at what the White House said would happen.

The Administration early last year said that doing nothing would mean an unemployment rate of nine percent. Spending $787 billion, they said, was necessary to keep the unemployment rate at eight percent instead.

So what happened? As millions of Americans can painfully attest, the jobless rate actually climbed to 10 percent, a full percentage point higher than Obama claimed it would be if no bill was passed.

The President and his people also are arguing that the so-called stimulus is responsible for two million jobs. Yet according to the Department of Labor, total employment has dropped significantly – by more than three million – since the so-called stimulus was adopted. The White House wants us to believe this sow’s ear is really a silk purse by claiming that the economy actually would have lost more than five million jobs without all the new pork-barrel spending. This is the infamous “jobs saved or created” number. The advantage of this approach is that there are no objective benchmarks. Unemployment could climb to 15 percent, but Obama’s people can always say there would be two million fewer jobs without all the added government spending.

To be fair, this does not mean that Obama’s supposed stimulus caused unemployment to jump to 10 percent. In all likelihood, a big jump in unemployment was probably going to occur regardless of whether politicians squandered another $787 billion. The White House was foolish to make specific predictions that now can be used to discredit the stimulus, but it’s also true that Obama inherited a mess – and that mess seems to be worse than most people thought.

Moreover, it takes time for an Administration to implement changes and impact the economy’s performance. Reagan took office in early 1981 during an economic crisis, for instance, and it took about two years for his policies to rejuvenate the economy. It certainly seems fair to also give Obama time to get the economy moving again.

That being said, there is little reason to expect good results for Obama in the future. Reagan reversed the big-government policies of his predecessor. Obama, by contrast, is continuing Bush’s big-government approach. Heck, the only real difference in their economic policies is that Bush was a borrow-and-spender and Obama is a borrow-and-tax-and-spender.

This raises an interesting question: Since last year’s stimulus was a flop, isn’t the Administration making a big mistake by doing the same thing all over again?

The President’s people actually are being very clever. Recessions don’t last forever. Indeed, the average downturn lasts only about one year. And since the recession began back in late 2007, it’s quite likely that the economic recovery already has begun (the National Bureau of Economic Research is the organization that eventually will announce when the recession officially ended).

So let’s consider the political incentives for the Administration. Last year’s stimulus is seen as a flop. So as the economy recovers this year, it will be difficult for Obama to claim that this was because of a pork-filled spending bill adopted early last year. But with the passing of a supposed jobs bill, that puts them in a position to take credit for a recovery that was already happening anyway.

That may be smart politics, but it’s not good economics. The issue has never been whether the economy would climb out of recession. The real challenge is whether the economy will enjoy good growth once the recovery begins. Unfortunately, the Obama Administration policies of bigger government – combined with the Bush Administration policies of bigger government – will permanently lower the baseline growth of the United States.

If America becomes a big-government welfare state like France, then it’s quite likely that we will suffer from French-style stagnation and lower living standards.

Housing Market on Government Crutches

My house has been on the market for a month and it has drawn a lot more looks than I expected. I’ve been quizzing realtors as they come through, and each one tells me the same story: the government is single-handedly propping up the demand for housing. In addition to the homebuyer tax credit and government-induced low mortgage interest rates, most sales are being done with Federal Housing Administration backing.

As a seller, I’m looking to get out before the tax credit expires and interest rates starting ticking upward. But when I do sell, I certainly won’t be looking to buy a house, particularly since I’ll be selling at a loss. If my situation is representative of other current sellers, the housing market could be in for another tumble if the government crutches are removed. However, if the government instead continues trying to prop up the housing market, the risk that taxpayers will take another bath goes up. It’s a nasty Catch-22 that demonstrates the problems with the government distorting the housing market to begin with.

A recent New York Times article looked at the housing market in the “beleaguered” manufacturing city of Elkhart, Indiana, which has twice served as a prop for President Obama. The Times says Elkhart “symbolizes the failure of federal efforts to turn around the housing slump at the heart of the economic crisis” and that “[h]ousing in this community has become almost entirely dependent on a string of federal support programs.”

The situation in Elkhart described by the Times matches perfectly with what realtors are telling me:

To the extent that the real estate market is functioning at all, people here say, it is doing so only because of the emergency programs, which have pushed down interest rates on mortgages and offered buyers a substantial tax credit. Equally important is an expanded mortgage insurance program run by the Federal Housing Administration, which encourages private lenders to accept borrowers with small down payments. The government takes the risk of default.

The one problem with the Times piece is that it doesn’t completely connect the dots. Namely, the problem the government is trying to solve is a problem that its housing policies instigated: the housing boom and bust. For instance, the article cites a good example of government policies mimicking the irresponsible lending that helped create this mess in the first place:

The programs favor first-time buyers, who have the fewest resources to bring to a deal. Heather Stevens, a 23-year-old nurse here, is closing on a three-bedroom house this week. Since her loan was insured by the Federal Housing Administration, she had to put down only 3.5 percent of the $74,900 purchase price.

“It was a breeze to get approved,” she said.

The sellers are covering her closing costs, which agents say is often the case here. That meant Ms. Stevens had to come up with only the $2,600 down payment, which still took all her savings.

But the best part is the $7,500 tax credit. She will use that to remodel the kitchen. “If it wasn’t for the credit, we would have waited to buy,” said Ms. Stevens, who is getting married this year.

Buying houses with no money down was a feature of the latter stages of the housing bubble. It gave prices a final push into the stratosphere. But buyers with no equity were the first to abandon their properties as the market turned south.

But there’s no mention of the role Fannie and Freddie, HUD, or the FHA played in fostering that bubble.

The article continues:

With housing prices stagnant, bolstering the market by again letting people buy with hardly any money down is viewed in some quarters as a bad bet.

Neil Barofsky, the special inspector general for the government’s Troubled Asset Relief Program, wrote in his most recent report to Congress that “the federal government’s concerted efforts to support” housing prices “risk reinflating” the bubble.

He noted one difference from the last bubble: taxpayers, rather than banks, are now directly at risk in these new mortgages.

I would argue that the mere existence of TARP is proof that taxpayers were directly at risk to begin with. The risk may be more explicit now, but that’s only because the bubble’s bursting washed away a lot of the private sector’s bad actors. But the ultimate bad actor, Uncle Sam, who encouraged the private sector’s risky lending activities, has stepped in to fill the void. Just how badly this turns out for taxpayers remains to be seen.

Pakistan: More Aid, More Waste, More Fraud?

Pakistan long has tottered on the edge of being a failed state:  created amidst a bloody partition from India, suffered under ineffective democratic rule and disastrous military rule, destabilized through military suppression of East Pakistan (now Bangladesh) by dominant West Pakistan, dismembered in a losing war with India, misgoverned by a corrupt and wastrel government, linked to the most extremist Afghan factions during the Soviet occupation, allied with the later Taliban regime, and now destabilized by the war in Afghanistan.  Along the way the regime built nuclear weapons, turned a blind eye to A.Q. Khan’s proliferation market, suppressed democracy, tolerated religious persecution, elected Asif Ali “Mr. Ten Percent” Zardari as president, and wasted billions of dollars in foreign (and especially American) aid.

Still the aid continues to flow.  But even the Obama administration has some concerns about ensuring that history does not repeat itself.  Reports the New York Times:

As the United States prepares to triple its aid package to Pakistan — to a proposed $1.5 billion over the next year — Obama administration officials are debating how much of the assistance should go directly to a government that has been widely accused of corruption, American and Pakistani officials say. A procession of Obama administration economic experts have visited Islamabad, the capital, in recent weeks to try to ensure both that the money will not be wasted by the government and that it will be more effective in winning the good will of a public increasingly hostile to the United States, according to officials involved with the project.

…The overhaul of American assistance, led by the State Department, comes amid increased urgency about an economic crisis that is intensifying social unrest in Pakistan, and about the willingness of the government there to sustain its fight against a raging insurgency in the northwest. It follows an assessment within the Obama administration that the amount of nonmilitary aid to the country in the past few years was inadequate and favored American contractors rather than Pakistani recipients, according to several of the American officials involved.

Rather than pouring more good money after bad, the U.S. should lift tariff barriers on Pakistani goods.  What the Pakistani people need is not more misnamed “foreign aid” funneled through corrupt and inefficient bureaucracies, but jobs.  Trade, not aid, will help create real, productive work, rather than political patronage positions.

Second, Islamabad needs to liberalize its own economy.  As P.T. Bauer presciently first argued decades ago–and as is widely recognized today–the greatest barriers to development in poorer states is internal.  Countries like Pakistan make entrepreneurship, business formation, and job creation well-nigh impossible.  Business success requires political influence.  The result is poverty and, understandably, political and social unrest.  More than a half century experience with foreign “aid” demonstrates that money from abroad at best masks the consequences of underdevelopment.  More often such transfers actually hinder development, by strengthening the very governments and policies which stand in the way of economic growth.

Even military assistance has been misused.  Reported the New York Times two years ago:

After the United States has spent more than $5 billion in a largely failed effort to bolster the Pakistani military effort against Al Qaeda and the Taliban, some American officials now acknowledge that there were too few controls over the money. The strategy to improve the Pakistani military, they said, needs to be completely revamped. In interviews in Islamabad and Washington, Bush administration and military officials said they believed that much of the American money was not making its way to frontline Pakistani units. Money has been diverted to help finance weapons systems designed to counter India, not Al Qaeda or the Taliban, the officials said, adding that the United States has paid tens of millions of dollars in inflated Pakistani reimbursement claims for fuel, ammunition and other costs.

Writing blank checks to regimes like that in Pakistan is counterproductive in the long term.  Extremists pose a threat less because they offer an attractive alternative and more because people are fed up with decades of misrule by the existing authorities.  Alas, U.S. “aid” not only buttresses those authorities, but ties America to them, transferring their unpopularity to Washington.  The administration needs do better than simply toss more money at the same people while hoping that they will do better this time.

Here Comes World Government

Colleague Dan Mitchell sent me this heart-warming press release from the Organization for Economic Cooperation and Development, an international government organization.

Tax collectors worldwide to co-operate in revenue-raising to offset fiscal deficits.

The sub-heading is “Tax Commissioners Worldwide Join Forces To Tackle Fiscal Challenges Posed By The Financial And Economic Crisis.”

Crazy me, but I thought the way to get out of the economic crisis was for businesses and entrepreneurs to start investing and hiring again. But no, the key is apparently to launch a global drive to drain more money from the damaged private sector and fatten up the coffers of bloated governments.

The chair of the OECD’s Forum on Tax Administration, Pravin Gorhan, helpfully points out in the press release: “Tax plays a fundamental role in development through mobilising revenue, promoting growth, reducing inequalities and reinforcing governments’ legitimacy, as well as achieving a fair sharing of the costs and benefits of globalisation.”

You don’t have to be a libertarian to see what a government-centric view these OECD officials have. Taxes promote growth? I don’t think so. And we don’t need to hear about “reinforcing governments’ legitimacy” from an unelected government body that has been far overreaching its authority to force policy changes on the democratically elected governments of lower-tax nations.

If you don’t think this sort of worldwide police effort jibes with the American ideals of life, liberty, and the pursuit of happiness, you should contact your member of Congress because U.S. taxpayers pay one-fourth the budget of the Paris-based OECD.

Who’s Going to Buy Your Debt, Mr. President?

The administration’s presumption that America can borrow its way to prosperity has taken a couple of big hits over the last couple days.

First, just as the Third World debt crisis destroyed the belief among international bankers that countries don’t go bankrupt, so is the West’s borrowing binge ending the belief among international investors that the U.S. and other Western nations are safe economic bets.

Reports the Wall Street Journal:

Britain was warned by Standard & Poor’s Ratings Service that it may lose its coveted triple-A credit rating, triggering a drop in U.K. bonds and sparking global fears about the consequences of massive debts being incurred by the U.S. and other major nations as they try to dig out from the economic crisis.

The announcement quickly sent waves across the Atlantic. Investors initially dumped U.K. bonds and the pound, heading for the relative safety of U.S. Treasurys. But within hours, worries about an onslaught of new U.S. bond sales and the security of America’s own triple-A rating drove down the prices of U.S. Treasurys.

The yield of the benchmark U.S. 10-year bond, which moves in the opposite direction to the price, rose by 0.15 percentage point from Wednesday to 3.355%, its highest level in six months.

The relative gloom about the U.K. and the U.S. was apparent Thursday in the market for credit-default swaps, where investors can buy and sell insurance against sovereign defaults. Five years of insurance on $10 million in U.K. debt jumped to around $81,000 a year, from $72,000 earlier in the day. U.S. debt insurance cost the equivalent of $37,500 — in the same range as France at $38,000, and Germany at $35,000.

A shot across the bow of the American ship of state, some analysts have called it.

But shots also were being fired from another direction:  East Asia.  The Chinese are starting to have doubts about Uncle Sam’s creditworthiness.  Reports the New York Times:

Leaders in both Washington and Beijing have been fretting openly about the mutual dependence — some would say codependence — created by China’s vast holdings of United States bonds. But beyond the talk, the relationship is already changing with surprising speed.

China is growing more picky about which American debt it is willing to finance, and is changing laws to make it easier for Chinese companies to invest abroad the billions of dollars they take in each year by exporting to America. For its part, the United States is becoming relatively less dependent on Chinese financing.

Financial statistics released by both countries in recent days show that China paradoxically stepped up its lending to the American government over the winter even as it virtually stopped putting fresh money into dollars.

This combination is possible because China has been exchanging one dollar-denominated asset for another — selling the debt of government-sponsored enterprises like Fannie Mae and Freddie Mac in a hurry to buy Treasuries. While this has been clear for months, new data shows that China is also trading long-term Treasuries for short-term notes, highlighting Beijing’s concerns that inflation will erode the dollar’s value in the long run as America amasses record debt.

The national debt is over $11 trillion.  This year’s deficit will run nearly $2 trillion.  Next year the deficit is projected to be $1.2 trillion, but it undoubtedly will run more.  The administration projects an extra $10 trillion in red ink over the coming decade.

Fannie Mae and Freddie Mac need more money.  The Pension Benefit Guaranty Corporation is in trouble.  The FDIC will need more cash to clean up failed banks.  The effectively nationalized auto companies will soak up more funds.  Then there’s the more than $70 trillion in unfunded Social Security and Medicare liabilities.

But don’t worry, be happy!

Labor’s Waxing Political Influence

It has long been recognized that many capitalists are the greatest enemies of capitalism.  They want free enterprise for others, not themselves.

Unfortunately, organized labor tends to be even more statist in orientation.  Unions now routinely lobby for government to give them what they cannot get in the marketplace.

Labor influence is greatest in the public sector.  And as government’s power has expanded during the current economic crisis, so has the influence of unions.  Observes Steve Malanga in the Wall Street Journal:

Across the private sector, workers are swallowing hard as their employers freeze salaries, cancel bonuses, and institute longer work days. America’s employees can see for themselves how steeply business has fallen off, which is why many are accepting cost-saving measures with equanimity – especially compared to workers in France, where riots and plant takeovers have become regular news.

But then there is the U.S. public sector, where the mood seems very European these days. In New Jersey, which faces a $3.3 billion budget deficit, angry state workers have demonstrated in Trenton and taken Gov. Jon Corzine to court over his plan to require unpaid furloughs for public employees. In New York, public-sector unions have hit the airwaves with caustic ads denouncing Gov. David Paterson’s promise to lay off state workers if they continue refusing to forgo wage hikes as part of an effort to close a $17.7 billion deficit. In Los Angeles County, where the schools face a budget deficit of nearly $600 million, school employees have balked at a salary freeze and vowed to oppose any layoffs that the board of education says it will have to pursue if workers don’t agree to concessions.

Call it a tale of two economies. Private-sector workers – unionized and nonunion alike – can largely see that without compromises they may be forced to join unemployment lines. Not so in the public sector.

Government unions used their influence this winter in Washington to ensure that a healthy chunk of the federal stimulus package was sent to states and cities to preserve public jobs. Now they are fighting tenacious and largely successful local battles to safeguard salaries and benefits. Their gains, of course, can only come at the expense of taxpayers, which is one reason why states and cities are approving tens of billions of dollars in tax increases.

The government’s increased power over the economy also gives organized labor a new hook to lobby for more special interest privileges.  For instance, the AFL-CIO is arguing that the federal bailout of the auto industry should bar the companies from moving factories overseas.

Explains the union federation:

The pundits and politicians inside the Washington Beltway don’t get: If the United States continues to send its manufacturing jobs [1] overseas—as [2] General Motors and Chrysler are now proposing—the result will be more low-income U.S. families.

So today, workers, economists, academics and business and union leaders, fresh from the “[3] Keep It Made in America” bus tour through the nation’s heartland, brought that message to the policymakers’ doorstep as part of a teach-in on Capitol Hill.

The 11-day, 34-city bus tour showcased the ripple effect on communities of the lost jobs in manufacturing. ([4] See video.) Today, during the teach-in, those who took part brought the stories they heard along the tour and presented principles for revitalizing the auto industry to members of Congress and the press. 

Labor officials have been making similar arguments about bank lending.  If you got bailed out by Washington, then you have an obligation to keep funding bankrupt concerns.  Never mind getting paid back, and paying back the taxpayers.

Markets are resilient, but can survive only so much political interference.  If the American people aren’t careful, they might eventually find themselves living in an economy more appropriate for Latin America than North America.

All-Star Lineup in New York

Cato is planning a seminar in New York on April 30 with an all-star lineup of speakers: Nat Hentoff, our new senior fellow and perhaps the leading First Amendment advocate of the past generation. Top climate scientist Pat Michaels. Peter Schiff, the financial guru who spent 2006 and 2007 failing to persuade people that the U.S. housing and financial markets were on the verge of collapse. And Freeman Dyson, one of the world’s top scientists and the subject of a recent New York Times Magazine profile for his “heretical” views on global warming. Check out the program:

  • 11:05–11:35 a.m. Nat Hentoff —Keynote Address: An Endangered Native Species: The First Amendment
  • 11:35–11:55 a.m. Pat MichaelsClimate of Extremes: Global Warming Science They Don’t Want You to Know
  • 11:55 a.m.–12:15 p.m. Peter SchiffEconomic Crisis: A Government Failure
  • 12:30–2:00 p.m. Freeman Dyson —Luncheon Address: Climate Disaster, Safe Nukes, and Other Myths

Register for the event here ($100 per person).

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