Monday, January 26, 2009

Change I Can Believe In

With the economy tottering the new Obama Administration is pushing for another “stimulus package” of some $850 billion to perhaps one trillion. This on top of the one trillion already tossed out the door at various struggling entities such as banks, insurance companies and auto manufacturers. Together these two incomprehensible amounts of money will increase the national debt by a whopping 20%.

The bad news is that this reprise of Keynesian Theory will work no better than it did during the Great Depression when FDR was throwing money around or in the ‘90s when Japan tried the same thing. All together now…. “Here we go again.”

The latest news on the results of the TARP (Troubled Asset Relief Program) has just come in. This was the grand scheme for the government to ship off $148 billion to the top banks in the faint hope that they would start lending again. The bad news: Bank lending went down some $48 billion since they got the money. None of the money from TARP got loaned out and the banks made even fewer loans with their own cash. Why? Because their balance sheets are a mess, that’s why. They have a pile of assets that are worth essentially zero because of the “mark to market” accounting rules enacted after the Enron fiasco. The Congress could help the banks shore up their balance sheets at no cost to the treasury by simply reversing this rule. It was political overkill anyway and under the present circumstances, a big hindrance.

The Obama team has proposed massive amounts of infrastructure spending with the hope of jump-starting the economy. They’re talking about highways, fixing up schools, tossing cash at solar and wind power programs and building new transmission lines to carry all this new electricity. One of the big problems with this kind of thing is that a lot of time elapses between the decision to build something and when someone actually turns a shovelful of dirt on the project. Most of money allocated for this kind of stuff won’t help the economy for a year or more.

If the Obama team insists on massive infrastructure spending, the least they can do is suspend Davis-Bacon. This act, passed in 1931, requires that “locally prevailing wages” be paid on all federally-funded projects. The phrase is shorthand for construction union wages. Because of this requirement and the red tape involved in federally funded projects, many companies refuse to bid on them, raising the cost of these projects as much as 40%. Suspension of Davis-Bacon during emergencies has been done many times before. Nixon, Bush I and Bush II have done it, the latter during Katrina. Even FDR did it. While it makes perfect sense now, I doubt Obama will take this sensible step. He owes the unions too much for their help in getting him elected.

As I’m sure you already guessed, I have a few additional suggestions. As already discussed above, they could reverse the Mark to Market accounting rules. It’s a freebie. Only problem: Politicians hate to admit they made a mistake. I suspect this is why they have not already taken this simple step.

A few weeks back a Texas Congressman made a suggestion to put money quickly in the hands of Americans so they could start spending again. (I forget the guy’s name. I could probably look it up but hey, I am in Hawaii and there are other things to do) [Editor's note: Louie Gohmert (R-TX)]. Elegant in its simplicity, the Congressman’s idea was: If you are going to spend $350 billion in stimulus why not just stop deducting taxes from everyone’s paycheck for three months? For one thing, doing it this way avoids the inefficiency of having the government dole out the money. Anytime you run money through a bureaucracy you are assured of losing a pile of it with inefficiency. Remember the last stimulus package? Writing and mailing out a $600 check to everyone had to cost a ton. (I never got one, by the way. Big Brother, are you listening?)

The Bush Administration doled out some $13 billion to the auto companies out of the TARP funds. They will certainly be back hat in hand looking for more cash in the months to come. I would tell them “NO”, and then “HELL NO!” if they misunderstood. They should be allowed to go bankrupt. Hey, Chapter 11 is not the end of the world. They need to restructure, to renegotiate their labor and distribution contracts and to develop a business model that makes sense.

To balance this tough love Congress should give them some breaks on the CAFÉ standards by allowing them include their whole fleet in their calculations and by not imposing even tougher mileage standards in the near term. They could offset any perceived loss of fuel efficiency by allowing the importation of autos made by the Big Three in their overseas plants… especially small diesel cars. The chances of this happening?

None. The UAW will never allow the Democrats to do it.

Obama and his Democrat controlled Congress could do much to ease the minds of investors and business owners by voting to make the Bush tax cuts permanent. The fear and uncertainty of tax hikes continues to put a damper on the stock market and anyone thinking about starting a business right now has to be skeptical. Again, the chances of this happening are remote at best. Despite ample evidence to the contrary, the Left doggedly sticks to the myth that the Bush cuts were a sop to the “rich”. (One of my earlier posts has some specific numbers.)

Finally, I think it worthwhile to devote some thought to the revenue side of the equation. Eventually, someone will have to pay for all this massive government spending. The only idea that bubbles to the surface of a left wing brain involves raising taxes. Little credit is given to the drag that excessive taxation places on an economy or the degree to which it prevents a country from growing its way out of debt. (Think France and the other socialist economies of recent history.)

Besides taxation there is another way to raise revenue and many countries have become quite wealthy in this fashion. The Middle Eastern countries, Venezuela and Russia have exploited their oil resources to good advantage. Canada too. The US has plenty of oil. It also has 250,000,000 automobiles on the highway according to the DOT (2006). The US could raise billions of dollars in royalties, not to mention improving its balance of payments, drilling for oil and natural gas in currently restricted areas. I’ve read that many wells could be brought into production swiftly by utilizing existing offshore platforms and the new drilling techniques. As an added benefit, new supplies from domestic sources would help retard price increases when demand returns.

There are those on the conservative side who believe that Obama and the liberal Democrats want to use this economic crisis to move the US further toward socialism, just as FDR did during the Great Depression. They opine that moving more middle class folks off the tax roles and into receiving checks from the government will make them Democrat voters. Perhaps.

One thing is clear, unless they make intelligent, common sense decisions to let the American economy absorb the asset bubble and encourage the private sector to grow, this mess will persist.

A long recession (depression/stagflation) will impact everyone, regardless of your position on the economic ladder.

1 comment:

Heide said...

I'm the first to admit that the mechanics of our economy and the proposed stimulus plan are all goobledygook to me. I don't understand how it works. I don't understand how to fix it. However, it sounds like you're pretty savvy on the workings. You need to send your thoughts off to as many political aids as possible in hopes that one or two might pass the info on to a representative who can present it as his/her own. Lord knows someone with a brain needs to have some input into this mess.