Friday, March 6, 2009

Critique: American Recovery and Reinvestment Act of 2009

I have been struggling to gather real data on what, if any, positive steps have been taken by our government (or by business), with the intent of estimating a possible recovery timeframe. Examples would be: evidence of home sales or of measures that will stimulate such sales, freeing up markets, freeing up credit, removal of damage done to the economy such as bad mortgage-based assets, etc. Such information has been exceedingly hard to find and quantify.

However, you can find information about the various bills passed, and so I decided to look at the recently passed recovery act to see if it might help.

Below is a chart listing the various amounts in by the bill (including tax breaks). Bear in mind that the total is about $780 billion, which if we assume a GDP of about $14 trillion, is roughly 5% of our economy's value. That's a significant sum. Will it do any good?


Below, I have summarized the various types of allocations, with positive portions in green (that is to say, positive or at least neutral), and negative portions in red.

Unfortunately, much of the bill plays the usual shell game of aspiring to "create" jobs and growth, but it really won't. The fundamental reason is that the government does not create anything. It only has the power to move money around and mandate actions. Spending money trying to create jobs simply takes money from some and gives it to others. Basically, it takes it from private, profitable uses, and moves it to less-profitable mandated uses, such as "green energy".

It is a fatal conceit of government planners that they think they know how to use our money better than we do. Such uses will result in less economic growth and draw out the recession by leaving productive businesses with less capital. It will likely result in inflation down the road. And it will create business sectors dependent on government funding, which if removed, will cause them to fail: a recipe for more spending in the future.

$BillionsPurpose
$237.0Tax relief for individualsOK, but not as effective as business cuts, because they are the ones who will make investments to grow the economy.
$51.0Tax relief for companiesThis is 0.3% of GDP. That does not seem like enough to do much for such a depressed economy.
$147.7HealthcareUltimately the government should not be in healthcare. This will not produce more prosperity.
$90.9EducationSame for education. This will not produce prosperity, and the solution to the woes of public education is to end it. (I am aware that a good education is necessary to do well in some jobs, I simply don't think it should be provided by the government)
$82.5EmploymentThis is partly paying people to be out of work. Some of it, such as food bank funding, needs to be left to private charities, who would have more money if government would stop ruining our economy.
$80.9InfrastructureInasmuch as government has infrastructure to maintain, this is OK, but government's role in infrastructure should be reduced.
$49.7EnergyThis is a 100% boondoggle. Most of this moves money from profitable ventures into less profitable ones (green energy). It will not help growth, it will result in economic dislocation and stagnation, and create more businesses dependent on government funding.
$12.7HousingSome is infrastructure repair, but much is just welfare.
$8.9Scientific researchDr. Stadler would be disappointed, but I have to nix this one. Government should get out of science.
$17.2OtherSome of this is for law enforcement, the rest should be cut.
$778.5TOTAL

The best items in the bill are the tax cuts, although the usual altruist mistake is made of shortchanging business. It is businesses that will drive the recovery, not people paying rent and buying TVs, because business has the power to expand capacity and create new jobs.

Furthermore, if you look at the details of the business tax portion, $7 billion actually refers to the repeal of a credit, and $15 billion is for credits for renewable energy activity, which encourages economic growth in unprofitable areas. This will not spur growth, this is simply a policy decision, which will actually cost us in growth.

If I understand correctly, only $116 billion of the individual tax items will result in cash in hand in 2009 (the payroll tax credit, which I think means less will be withheld) and it's only $400 per individual; the rest are applicable for filing 2009 taxes next year, which means they will not help the recovery. This represents less than a 1% shift in the way money is spent in 2009, and it really does not address the fundamental problem: housing.

There is an $8000 home buyer credit, which I discussed here. That is a small positive, and is the only thing that addresses one of our real problems. Unfortunately I have been unable to determine what percentage of the unsold housing market this represents, but I can't imagine that $8000 is going to get people to run out and buy up all the existing homes. The dollar value of $6.6 billion is 5/100 of 1% of GDP.

Bottom line: I give the bill a grade of "D" in terms of recovery potential. Most of the spending consists of bad investments that will delay recovery, and the tax credits that could spark recovery are not big enough, or come too late. The rest is maintenance on existing programs, which of course keeps money out of the hands of private investors. I predict a very small effect for this bill on our economic recovery in the housing sector, and a small effect in terms of household spending. Of course, a spending bill does nothing to increase the fundamental freedoms of business to operate effectively. At best, it looks like a very small nudge.

4 comments:

  1. "Basically, it takes it from private, profitable uses, and moves it to less-profitable mandated uses" -- I see no guarantee that "private" and "profitable" are somehow intertwined. There are plenty of exceedingly moronic private companies that are not only not profitable (to the tune of trillions overall), but also get tons of tax breaks, subsidies, grants, etc... in order to continue their streak of massive unprofitability, all the while moving jobs overseas or cutting them altogether. In the end, most of this government spending will go to private companies anyway. The people who fix the roads may very well be employees of a company that bids on the job, not necessarily state or federal employees.

    The argument here isn't whether or not to tax, unfortunately you've lost that one. The argument is how best to use those dollars in a way that can create work, and benefit society. (There is also data that govt spending directly increases the GDP.) Fixing bridges and roads will create work and is a darn good way to spend that money so we don't have falling bridges. Green jobs are good because in the long run if we can attain independence from oil we will finally be able to stop sending hundreds of billions of dollars to nations that wish us dead. Some of the issue with green jobs is a chicken-egg thing, until there is critical mass on projects, they cannot be profitable - the only entity capable of creating that mass is the govt. It's simply impossible to believe that private industry would ever be capable of overcoming the prolific gas station-gas powered car economy without a massive Manhattan project to help with the replacement.

    Plus, many of those green jobs have certain functions (such as installation of windmills and charging stations) and thus cannot be shipped overseas.
    Apparently some companies (like GM) used the Bush stimulus package to actually subsidize the move of jobs overseas. I can't believe that Bush put no conditions on the money - but I absolutely believe that a private business would be so selfish as to take money from the hands of the people who keep the company alive, consumers and employees alike, and use it against them.

    In the end, the summary is "We've tried it their way" ie.. private businesses making brilliant decisions and the economy is now in a shambles, so now let's "Try it our way" and see what happens.
    Unfortunately I think they are going to undershoot this stimulus by about triple. Everyone is tiptoeing around because they are so afraid to go over a trillion dollars, but that's what it's gonna cost. Sure it's perfectly fine to spend a trillion to kill a million people, but when it comes to saving what was once one of the world's greatest nations, we're looking for the Walmart price rollback on a new economy.

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  2. Thank goodness three times this money is not going to be wasted! This amount is bad enough!

    The nature of government spending is that money is removed from voluntary uses, and instead employed for unchosen uses (i.e. money is taken in the form of taxes and used for some purpose the original owners did not choose). By definition, it is for things we do not want. The particulars do not matter.

    On balance, the original use would have been more profitable, because companies are not in the habit of throwing away money on unprofitable ventures (unless the government gives them some reason to do so, such as encouraging green energy, affordable housing, or whatever the latest money pit is).

    Force will never produce better results. Only letting people free to think and act using their property, will.

    And... it's also morally wrong.

    This book does a good job of covering this in more detail: http://www.amazon.com/Capitalism-Ideal-Ayn-Rand/dp/0451147952

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  3. Thanks for contributing this post to the Round Up this week!

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