Not Feelin’ The Stimulus …

CNNMoney.com writes Stimulus spending short sighted – watchdog:

Fiscally-stressed states are using their stimulus dollars to satisfy immediate needs rather than undertake longer-term reforms, according to a government report released Wednesday.

For example, states are spending education funds to prevent layoffs and maintain programs, a Government Accountability Office report found.

Trying to survive one of the worst economic downturns since the Great Depression, state and school district officials say they don’t have the money to undertake projects such as building new schools and expanding early-childhood education.

Similarly, states are using nearly half their infrastructure funds for pavement improvements, which can be implemented quickly and don’t require environmental clearances and in-depth design work.

The $787 billion recovery act walks a fine line between trying to get funds out quickly to stimulate the economy and spurring longer-term initiatives.

In Flint, Mich., for instance, no new school buildings have been constructed in more than 30 years. While the district would love to use stimulus funds to renovate its facilities, the cash-strapped city must use the money to maintain current programs.

Near 2,000 teachers will retain their jobs in Florida’s Miami-Dade district because of stimulus funds. Officials in half the states surveyed said recovery act money will prevent layoffs.

The recovery act’s architects had hoped districts would use the funds to put in place longer-lasting educational reforms that improved student achievement. In order the receive the funds, schools must assure they will increase teacher effectiveness, provide support to turn around troubled schools and advance in creating college-ready and career-ready standards.

The budget crisis, however, is putting those efforts on the back burner.

“Many school district officials also reported that using [stimulus] funds for education reforms was challenging given other more pressing fiscal needs,” according to the report.
GAO finds flaws

The GAO is charged with tracking stimulus spending in 16 states and the District of Columbia that combined will receive two-thirds of the funds. Wednesday’s 161-page report is the second it has released.

The federal government is pushing out stimulus funds slightly faster than expected. As of June 19, $29 billion was given to states and localities — 90% of which has gone toward Medicaid and education.

The money is helping states deal with their budget crunches, Acting Comptroller General Gene Dodaro told a congressional committee Wednesday.

Still, the agency found that some states have been giving short-shrift to a recovery act requirement that infrastructure projects be located in economically distressed areas. Officials in many states told the GAO that they had picked the projects based on other priorities and only later gave consideration to ones in economically troubled areas.

And some stimulus money is going untouched, in part because state agencies are still waiting for federal guidance or approval or are still soliciting bids. For instance, public housing agencies have only spent 1.1% of the federal money made available for rehabilitating apartments.

States are also cutting back on staffing, leading to concerns about how well they will be able to report their use of stimulus dollars. Officials are finding it tough to create initiatives — such as a summer youth employment program — in the tight timeframes required by the act.

“Once the recovery act was passed, states and local areas had only about 4 months to get their new summer youth employment activities up and running — a process that officials told us would normally begin many months earlier,” according to the report.

The GAO report recommended the White House improve reporting requirements and ensure more direct communication with state officials. It also raised red flags about the reliability of the data on the government’s site, www.USAspending.gov, and the level of accountability for monitoring the funds’ use.
What about the jobs?

Lawmakers, however, were more interested in grilling Robert Nabors, deputy director of the White House budget office, about the number of jobs the stimulus funds have created or saved.

The administration has said stimulus funds have already created or saved 150,000 jobs, and should create another 600,000 by summer’s end. The figures are based on estimates that each $92,000 in stimulus money spent creates one job.

Nabors said that while America is still losing jobs, it is doing so at a slower pace because of stimulus money. The number of positions that disappeared in June, 467,000, was fewer than the monthly job-loss pace of 691,000 in the first quarter.

“We are making progress, but we have a long way to go,” Nabors said.

Republican lawmakers lashed into Nabors, questioning his figures and saying that the recovery act hasn’t lived up to President Obama’s promises.

“How can you justify that?” said Rep. Jason Chaffetz, R-Utah, of the estimate.

What a bunch of nonsense. Created or saved 150,000 jobs? What is that even supposed to mean? It is based on the assumption that taking $92,000 from a taxpayer and spending it on fixing potholes will create new jobs. What they are forgetting is that when the money is taken from somewhere else it will be missing somewhere else, curb consumption there and cost jobs there. It substitutes bureaucratic jobs for productive jobs. It is sad to hear these mindless statements made with impunity again and again. It is annoying to see people act surprised about 100% predictable outcomes.

As I said before, this stimulus bill won’t fix a darn thing …

The $800 billion spending bill that is currently being discussed will not fix the US economy. Just as too much government intervention caused (not fixed) the Great Depression in 1929 and the following years, just as the Bush administration’s spending spree which turned surpluses into deficits, just as the rise of government expenses over the past 100 years, more government spending will not solve a darn thing. Quite the opposite. It will dig us a deeper hole. There is no way around this truth. There is no point ignoring or denying The Trouble with Bureaucracy.

There is no “Change” in having the government  spend more money. If government spending was good for the economy, the United States should by now have the best economy in the universe. Spending more money is in fact precisely the opposite of change. It is more of the same.

In fact, the administration itself realizes that the “stimulus” is obviously not working. What solution do they have on the table now? Of course, a second stimulus:

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an outside adviser to President Barack Obama.

Insanity? Why, yes that’s exactly what this is. And guess what: If there were to be a second stimulus it won’t work either. And what will be the proposed solution after that? You know it.

Which brings us back to the likely outlook for the US over the next years:

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

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Strategy Room with Judge Napolitano, Ron Paul, Peter Schiff

Great panel discussing the scams, boondoggles, and crimes perpetrated by the Bush and the Obama administrations.

Part 1/6:

Part 2/6:

Part 3/6:

Part 4/6:

Part 5/6:

Part 6/6:

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Obama’s Fiscal Promises

President Obama’s campaign promises include, among others, the following:

Reinstate PAYGO Rules: Obama and Biden believe that a critical step in restoring fiscal discipline is enforcing pay-as-you-go (PAYGO) budgeting rules which require new spending commitments or tax changes to be paid for by cuts to other programs or new revenue.

We haven’t heard much of this in regards to the $819 Billion bill that was passed today. Mr. Obama needs to clarify how he will adhere to this campaign promise. People should ask these questions and encourage the administration to be open about it.

End Wasteful Government Spending: Obama and Biden will stop funding wasteful, obsolete federal government programs that make no financial sense. Obama and Biden have called for an end to subsidies for oil and gas companies that are enjoying record profits, as well as the elimination of subsidies to the private student loan industry which has repeatedly used unethical business practices. Obama and Biden will also tackle wasteful spending in the Medicare program.

Inquiring minds might want to read the “American Recovery and Reinvestment Act of 2009” and decide for themselves to what extent Obama and Biden are stopping wasteful, obsolete government programs that make no financial sense. One provision in the bill is a requirement to establish the website recovery.gov which promises transparency and accountability for projects. I will examine in detail what this site will tell us and where the money is going once this spending bill, just like the previous ones, is successfully shoved down the throats of the American taxpayers.

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Welcome to Krugmanland

The science of economics is still young and full of clueless pundits. A perfect example is Nobel Price winner Paul Krugman and this article about fiscal stimuli:

I’ve been on the warpath over Germany’s refusal to play a constructive role in European fiscal stimulus. But what does the math look like? Here’s a simple analysis — well, simple by economists’ standards — of the reason coordination is so important for the EU.

We start from the proposition that Europe is, or soon will be, in a position where interest rates are up against the zero lower bound. This means both that fiscal policy is the only game in town, and that we can use ordinary multiplier analysis.

OK, I hope Krugman understands that interest rates are low because we are in phase 8 of the business cycle. That phase where people finally realize that too much has been consumed, while not enough has been saved so as to make available enough factors of production that produce those consumer goods. I hope he realizes that in order to accomplish the objectives of economic policy, viz. the maximization of every one’s well being in society, the government needs to do what is possibly can to let the market return to the state that the consumers are asking for in their value preferences and time preferences expressed in the form of interest rates and prices, respectively. We shall examine whether or not his recommendations even remotely accomplish this objective.

Let m be the share of a marginal euro spent on imports — either for an individual county, or for the EU as a whole (I’ll explain in a minute). I’ll assume that m is the same for government spending and for domestic demand. Let c be the marginal propensity to consume. And let t be the share of an increase in GDP that accrues to the government in increased taxes or reduced transfers.

Consider the effects of an increase in government purchases dG. This will raise GDP directly, to the extent that it falls on domestic goods and services, and indirectly, as the rise in GDP induces a rise in consumer spending. We have:

dY = (1-m)dG + (1-m)(1-t)c dY

or dY/dG = (1-m)/[1 – (1-m)(1-t)c]

Without any further analysis or detail Krugman implies that an increase in the nominal GDP is the ultimate objective of economic policy. He doesn’t go into any detail whatsoever. He passes in silence all the flaws that come with this figure and he certainly doesn’t ponder for a second what a true GDP measure should look like.

But all these amateurish shortcomings taken aside, let’s examine what the formula above really tells us. The idea behind the GDP is to approximate the total sum of the prices paid for all consumer goods and factors of production produced inside the country and consumed or used subsequently. The GDP Y is defined as Y = I + C + G + X – M, where
I = Private Investment (purchases of factors of production by domestic non government individuals),
C = Private Consumption (purchases of consumer goods by domestic non government individuals),
G = Government Expenses (purchases of consumer goods and factors of production by domestic government individuals),
X = Exports (purchases of consumer goods and factors of production by foreigners),
M = Imports (purchases of consumer goods and factors of production that were produced abroad)

Now Krugman tries to quantify the effect of additional government purchases dG on Y. dG(1-m) is that portion of government expenses that falls upon domestic consumption by the government. But for some reason he commits the unfortunate blunder of adding to that a mystical (1-m)(1-t)c dY. Where does that come from? He doesn’t even attempt to explain it. He simply assumes that the additional government purchases for some obscure reason also lead to more consumer demand due to an increase of the GDP which is … due to the increase in government expenditure. This is complete utter amateurish kindergarten nonsense.

Krugman is an intelligent person. He must have missed something here. If he wants to figure out whether or not an increase in government expenses leads to an increase in GDP then how can he commit the blunder of assuming an increase of GDP in that very same formula. This is something that not even an elementary class student would get away with. If he wants to apply the questionable GDP formula to calculate the effect of government expenses on the well being of society he should at least do that right.

First of all one has to understand, as most people hopefully do, that dG does not simply grow out of nowhere. Additional dG will have to be funded out of additional taxes. Taxes are funded by taking money from private individuals. If money is taken from private individuals it will either reduce private consumption C or private investment I or both of them by precisely the amount spent. The basic culprit is that Krugman uses variables that are dependent upon each other in the same formula. When one starts calculating derivatives for such a formula one must take that into account. Thus the following calculation is the only correct one:

Y = G + (I + C ) + X – M
<=> dY = dG(1-m) + (dI + dC dG(1-m)) + dXdM
<=> dY/dG = 1-m + 0 + 0 – 1 + m + 0 – 0
<=> dY/dG = 1-1
<=> dY/dG = 0

Of course he has to resort to complicated and sophisticated looking mathematic formulas because if he were to explain his hideous theory in words it would break down immediately.  Even if we give Krugman the benefit of the doubt, the growth in GDP, if the government spends dG, would be exactly 0. This is the one and only correct way to calculate a change dY/dG if one understands basic elementary school mathematical concepts and if one applies simple logic and reason. Paul Krugman needs to come forward and apologize for his terrible blunder.

Even if an individual were to work and save 50% of his earnings in cash in his matress, he would not inflict the slightest harm upon his fellow men. All he does in working and saving is make available more productive capacity to everyone than he in return withdraws via consumption. By withdrawing his money and saving it for future consumption he steps back and voluntarily leaves factors of production or consumer goods available to others by not participating in the bidding process on the market. The prices for those goods would thus be lower than had he participated, but they still render the same benefit to the consumers. If the government steps in and buys the good in question, it does nothing but snatch it away from someone else and employ it in bureaucratic uses. The Trouble With Bureaucracy explains what will inevitably ensue. No one is helped in this process, only harm is inflicted.

Now, I know that a Keynesian such as Krugman would now object that the additional government expenses would not necessarily have to be funded out of taxes but rather via deficit spending. OK, let’s say the government borrows additional money from one of the participants on the market. Again, this would require that someone who would have loaned the money to someone else now loans it to the government in a credit transaction. The money will thus not be available to that marginal entrepreneur who would have borrowed it. Private investment is reduced while government expenses go up. From the kindergarten GDP formula’s point of view, the effect is 0. To those who understand bureaucracy, the effect is negative.

The diligent pseudo economist, who has meticulously studied all of Keynes’s shallow theories, will then reply: “But since we are approaching 0% interest rates, no one will lend the money, everyone will hoard it. We are in a liquidity trap!” Then we would have to reply that since we are in phase 8 of the business cycle, of course people are hoarding money. The reason being a reckless monetary and fiscal deficit spending policy. And the only way to get out of it is to swiftly abandon that policy and let phase 9, the correction, occur. But even that taken aside, what I said two paragraphs above, applies just as much in this case again. There is no way around this causality, no matter how much one tries to deny it.

Then the Keynesian will reply that the added government expenses could also be funded by having the government print money and buy goods on the market. And of course the response to that would have to be that in that case, money prices for the good purchased with the fiat money will go up and, again, will force the marginal consumer to forgo consumption of that good, while it is re-allocated to the government. The Keynesian would then reply that no one would have purchased the good if the government would not have purchased it. To that we would again have to explain to the Keynesian the basic concepts of he function of a price and that a good will be demanded at a certain price, so long as that price represents the involved parties’ value preferences. If it doesn’t then the seller needs to lower the price until it does.

But even if the price for the good was 0, what good does it do if the government prints money and gives it to someone who in return has produced a good that nobody needed? He will be the first to receive this money and bid up the prices of goods that would then not be available to other marginal consumers who would have bought it in exchange for money earned from useful labor. They will then abandon their operations which the consumers deemed useful and also begin producing that same useless good in order to obtain free money from the government. The business cycle will inevitably ensue.

It is impossible to run away from the fact that government expenses will be wasteful and by necessity lower the people’s standard of living due to the irrefutable workings behind bureaucracy. The crucial shortcoming of applying the GDP formula is the blatant disregard of the fact that the government raises money violently and against the people’s value preferences before offering goods and thus faces the inability to calculate profit and loss.

Since governments are worried about debt, it’s also important to ask how much the budget deficit is increased by an increase in government spending. It’s not one-for-one, because higher spending leads to higher GDP and hence higher tax revenue. We have

dD = dGtdY

Now he continues with the false assumption that GDP is growing and happily concocts new formulas based on that. He doesn’t put into context the relevance of dD and, I have to assume, does not bother to view it in light of a corresponding reduction of private investment which would necessarily occur as I already pointed out above. He blithely assumes that magically a tdY appears out of nowhere and reduces the deficit. He then takes this flawed formula and incorporates it into his other flawed formula. Everything from hereon is based on sheer nonsense and requires no further comment:

A crucial number is “bang for euro”: the ratio of the increase in GDP to the increase in the deficit. After a bit of grinding, it can be shown to be

dY/dD = (1-m)/[1 – (1-t)(1-m)c – t(1-m)]

OK, some numbers. The average EU country spends about 40 percent of GDP on imports, and collects about 40 percent of GDP in taxes. Let me cut corners and assume that the marginal rates are the same as the average, and also assume that the marginal propensity to consume is 0.5. That is, for an average EU country, m = 0.4, t= 0.4, c = 0.5.

We can represent a coordinated fiscal policy by looking at the numbers for the EU as a whole. The only difference is that m falls to 0.13, because two-thirds of the imports of EU members are from other EU members.

And we get the following results:

UNILATERAL FISCAL EXPANSION

Multiplier = 0.73
Bang per euro = 1.03

COORDINATED EXPANSION

Multiplier = 1.18
Bang per euro = 2.23

The bang per euro is what matters: the tradeoff between increased debt and effective stimulus is MUCH better for the EU as a whole than it is for any one country.

You can play with these numbers, but I don’t think that conclusion is very sensitive to the details as long as you keep the large intra-EU trade effects in there. The lesson of this algebra is that there are very large intra-EU externalities in fiscal policy, making coordination really important. And that’s why German obstructionism is such a problem.

Krugman can’t escape the fact that his formula fails from start to finish. It sickens me that thousands of students are probably listening to him and employing his “logic” elsewhere. To anyone who still doubts my criticism, please consider the following: If the bang per Euro of deficit spending is 2.23 Euro, then why don’t we ask all European governments to spend 1,000 quadrillion Euros on deficit. This will create unprecedented wealth in Europe of 2,230 quadrillion. Then the governments can levy a tax of 1,000 quadrillion and pay off the debt. With 1,230 quadrillion Euro, this would leave Europe wealthier than ever before for years and years to come. Welcome to Krugmanland!

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