Obama Must Fail so that the Country Can Win

Thursday, June 4, 2009



As Obama’s website job counter ticks away all the jobs the stimulus is creating and saving, the facts about our economic situation and how the stimulus is dragging down our economy is becoming grimmer every day. Even as the left run media hails Obama’s stimulus as the solution and reason for all the good economic news lately, the truth about how the bill is ruining the economy is bubbling to the surface. That is if you can parse the spin from the truth. Let me bring those truths to light for you, dear reader.

Let’s define what success for Obama’s stimulus bill should look like. First, the point of any stimulus is to stimulate economic recovery. In a supply-sided policy, we’d expect to see companies growing as the cost of investment and risk falls (investment increases as companies have an incentive to create more inventories). In Obama’s demand-sided policy, we should see an increase in consumer spending and if the stimulus is really successful there will be an increase in the rate at which consumers spend. Second, much of the success of Obama’s demand-sided stimulus was to be achieved by making it a mission to save and create 3.5 million jobs to ease the bleeding spending rate that would be inevitable with huge losses in unemployment. To achieve these goals, Obama’s stimulus needs to be quickly implemented, directed in a way that consumer spending is increased, and hopefully an increase in the rate of consumer spending will be a result.

Keynes argued that consumer spending was made up of one part spending and one part savings. They actually work against each other in the model. As the rate of spending increases the rate of savings will decrease. The theory behind a demand-sided stimulus policy is that you put money into the hands of consumers and based on the rate that the consumers spend a money multiplier effect will ripple life back into an economy. It’s like throwing a rock into a quiet pond, the more ripples, the more business transactions created as a result and the quicker the economy will recover. The ripple effect is directly related to the rate of consumer spending. If the spending rate drops, the ripples will be smaller or possibly nonexistent.

After three months we can now say that the stimulus has failed to increase consumer spending. A Bloomberg article on June 1st regarding consumer wages, spending and savings has all the facts needed to show that Obama’s stimulus has achieved the opposite of its intended purpose with regards to increasing consumer spending. The article states that consumer spending has fallen .1% in April and .3% in March. Though this may sound like the stimulus is spurring a slowdown in the drop of consumer spending, the following analysis puts this possibility to bed.

“The savings rate rose to 5.7 percent, spurred by an unexpected jump in incomes linked to the fiscal stimulus.”

The dot that is not being connected in this article is that as the savings rate grows, the spending rate drops. Even though the total amount of consumer spending is not dropping as quickly in April as it did in March, the rate in which consumers are spending had a devastating decrease. There can be no doubt about what was written, the stimulus is actually directly responsible for diminishing the economic ripples that are necessary for the bill to be successful.

If you go on to read, you’ll see that the stimulus has created such an increase in savings that it is wiping out the effect of stimulus and is bleeding into consumer spending that is unrelated to fiscal policy.

“Incomes climbed 0.5 percent, the biggest gain in almost a year, reflecting increases in unemployment insurance benefits and social security payments associated with the Obama administration’s stimulus plan.”

Once again, this sounds like Obama’s plan is working as household incomes are increasing. However, you will notice that the rate of savings has grown at a far faster pace than the rate that incomes increased. To sum it all up, the stimulus is causing people to decrease spending so much that they are saving, not spending, all the stimulus dollars and some of their none stimulus income as well. The stimulus is actually causing the economy to shrink, not grow.

Meanwhile after 3 months, the NY Times reported that Obama estimates he has created 150,000 jobs. The losses the Obama administration ordered in connection with the auto industry more than wipe out those employment gains. Obama has decreased employment as much as he increased them.

Obama gets a failing grade as far as the execution of his bill goes as well. The NY Times reported that after 3 months, only 6% of the stimulus bill has been apportioned. At this rate, it will take nearly 4 to 5 years for the funds to be depleted. As pointed out previously, the stimulus has created less spending and a decrease in the rate of consumer spending.

Bad legislation wouldn’t be complete without other severe negative side effects. After all, what can you expect from a bill that was rushed by a congress who never bothered to read the bill. The stimulus bill started a snowball of international concerns regarding the stability of US currency. Coupled with Obama’s budget which projects a larger deficit than revenues, Obama’s economic policies has caused international investors to shy away from purchasing US debt. The circumstances are becoming so dire that Fed Chairman Bernanke threw Obama under the bus yesterday stating:

“Concerns about large federal deficits," Mr. Bernanke said, are one cause of the unwanted rise in yields. The wider the deficits, the more the Treasury borrows and the higher rates go. Wider deficits also stir inflation fears, which also push Treasury yields up.”

Bernanke also stated that Obama’s deficits must be addressed or the economy will suffer.

The economic score since this blogs inception:

C Gen: 2 (stimulus will be a failure and Obama’s policies will ruin the economy)
Obama: 0
Larry Summers: 0
Ben Bernanke: 0
Timothy Giethner: 0
Paul Krugman: 0


Unfortunately, the Republicans were lambasted by the left and the press (as if they were not one in the same) for their opposition to Obama’s stimulus plan. It turns out that hoping for Obama to fail in passing his stimulus would have been good for the country. Somehow I doubt that the media will now start to point this out. Luckily, we’ve only spent 6% of Obama’s stimulus. It’s time we repeal his package and institute one that will actually create jobs faster than Obama can destroy them, increase consumer spending and the rate of spending. Let’s pass a responsible stimulus that can be quickly implemented and get a bigger ripple in the economy for less of the cost. If Obama’s economic policies don’t fail in congress, then it is certain that the country will suffer. Just ask the Fed Chairman.

8 comments

C Gen - Great points. Here's my two cents -

1. - today's unemployment numbers show that we are getting close to 10%, the folks in the media know this, thus the positive spin on the economy lately.
2. - Keynesian policy never works, I would like to see anyone here point to an example that proves that it does. My examples? The Keynes-induced Nixon policies into the Carter Admin, and most importantly the Great Depression. Unemployment went up after every New Deal program was instituted.
3. - Obama cannot have what he wants because essentially his sabre rattling and policies have put businesses on the sidelines and caused a mini Galt situation.
4. - Did you know that federal tax revenue has fallen 17% from the pre-recession level? The % increase in federal spending from the pre-recession level? 37%. That spells doom for an eventual recovery, as they will jettison the free market with wild tax hikes.....

June 4, 2009 at 2:47 PM
The Law said...

I think your analysis has a couple of issues here, because you are misplacing your blame for the saving:consuming ratio.

“The savings rate rose to 5.7 percent, spurred by an unexpected jump in incomes linked to the fiscal stimulus.”

Now let us rewind back a few years. When tried to stimulate the economy, we got rebate checks in the mail. John McCain, Bobby Ginadal, and John Boehner, along with other republicans wanted to do exactly the same thing, thus it is reasonable to assume if a republican was in the white house now, that is the course of action they would take. That stimulus plan failed because people didn't spend it. They paid off debt and saved the rest.

The stimulus is not causing people to save. Just like with the Bush rebate driven stimulus, the reason why consumption didn't increase is cause most Americans are broke as hell. The responsible thing to do when you are like me... $100,000 in debt (school loans) is to use that extra cash to save money and pay off your debt.

Also, consider that fact that most 20-30 somethings, whom I imagine are the largest consuming population, are at record levels of credit card debt. Again, if you have some extra cash to spend, be it stimulus money, wages increases, or tax break rebate checks, the responsible thing to do is save your money and ay off your debt.

Regarding unemployment, it is only logical that unemployment would be so devastating because the bubble the busted was a HUGE one. These number you show seem to me that the bleeding has more or less stopped. It's like a trauma patient involved in a nasty car accident. They may have a ruptured spleen, concussion, and broken bones, but if they bleed out, they'll die no matter what you do, so mission is stopping the bleed out. Stage two is prioritizing the damage. So next ting to attack is the ruptured spleen (unemployment?). Then the broken bones and last the conussion. You get the point.

June 4, 2009 at 11:31 PM
The Law said...

edit: paragraph 3, sentence 2

When *Bush* tried to stimulate the economy...

June 4, 2009 at 11:32 PM
Devrim said...

C-gen as usual great post, especially that bleeding patient example.

I believe the savings rate rose as people who are lucky enough to have jobs today are hunkering down for the day they'll loose their jobs. a 5.7% increase translates to almost double that number when you consider 10% of the population is unemployed and living off their savings. 10% is what economists say we should be saving for a comfortable retirement, so the savings level has just normalized, it was one of the symptoms of our patient, say the broken bones, loose cannon spending creates bubbles, bubbles burst. The savings rate, which the government didn't have any interference with, healed itself through the forces of the free market. The bleeding the government tried to attach an IV worth $787 Billion is still going on as the kids playing doctor forgat to stitch it.

June 5, 2009 at 10:26 AM

tL,

I'm not totally sure where you were going with your point. The article does say that incomes increased by the stimulus (that's is in fact what should happen) and that this increase has caused the spending rate to drop and savings to increase (this is not a good outcome for a demand-sided stimulus). In fact, what should happen if you want to stimulate the economy is that spending rate should increase as people have more discretionary income. The logical conclusion would be that a demand-sided stimulus was foolish. A demand-sided stimulus should have been an obviously bad choice since the same thing happened to the last demand-sided stimulus that Bush tried. Obama learned nothing from the failed policies from the last year of Bush's adminstration. In my opinion, you cannot condemn Bush's policy and appaud Obama's. They are from the same school of thought. They are proving to have the same results.

If you disagree with the article's analysis I will give you the point that often cause-and-effect analysis when looking at stats can be wrong or inverted. I did not look at the data myself(my eyes would go cross eyed with bordom), so I won't try to defend the analysis on that point.

However, Ben Bernanke's comments are a corner that is turning with the economic ruling class in Washington. There is a serious problem emerging with our currency, because we rely heavily on foreign investor's confidence about our currency so that we can run up large deficits without consequence. The mentality is that the world would simply continue their investment in the dollar without consequence to the actions of the adminstration. The fact of the matter is that these foreign investors to not see Obama's stimulus as a serious policy toward curbing the economic crisis. If Obama had been serious, he would have top loaded his plan to be spent in the current year instead of three to five years and would not have been a hodge-podge of leftist projects off of their Christmas wish lists. The stimulus coupled with the fact that Obama is pushing a 2007 spending budget without recognizing the difficulty and reality of the 2008-2009 US and world economy. The result is that our economy is about to step into that canyon that I've been writting about for 3 months. This is the truth and it's actually in the press.

One of the largest actions the President can take to reverse the possible economic damage is to create a serious stimulus instead of the joke that he passed. Second, he needs to scrap and rethink his budget agenda. I'm not saying this is the best way to go, but it is at least a better path to go than what he is doing.

Dev,

Thanks for the comments and welcome back. Your comments have been missed.

June 5, 2009 at 11:13 AM
Devrim said...

C-gen, I know I had been AWOL for a while, but it is the fishing season out here now and I need to fill my freezer before Bawney Fwank taxes the shit out of it.

Related to your post on healthcare, http://news.bbc.co.uk/2/hi/health/8083684.stm , most disturbing paragraph for me The Joint Committee on Vaccination and Immunisation, which advises the government, said in February that it would only consider recommending the vaccine if its price were significantly reduced. . Yup, let's socialize medicine, it is cool, it will be cooler after I am done with this joint.

June 5, 2009 at 6:53 PM

CGen, awesome analysis and some really great comments! You have an intelligent amnd observant readership I see. But let's get into the meat of the matters.

"To achieve these goals, Obama’s stimulus needs to be quickly implemented, directed in a way that consumer spending is increased, and hopefully an increase in the rate of consumer spending will be a result."

Well by my post you know I agree with you on that. The only problem is that his form of stimulus doesn't really follow Keynes. I am about to commit herecy but in defense of Keynes, he never advocated this rampant social spending we are seeing. In fact Roosevelt only adopted a few of Keynes's theories, not its totality. A correct example of Keynes economic theory at work was the economic investment by the government after WW II. Where you saw about 39-40% of the GNP geared towrds manufacturing for the war effort. Of course the downside to this the inflation that follows from the infusion of so much cash and the debt you accrue. In the end someone has to pay it back, the hope is that the population has become so prosperous that they will be able to pay back the debt via tax increases and still have enough left over to consume.

Also, Keynes basic premise was to inspire people to invest and spend. However he failed to take into account the fact that people, by nature, in times of economic downturn will try and save or paydown debt. While I disagree with you that the stimulus is the cause of this, you are correct in pointing it out. Basing it on my own experiences and those around me, I see this psychology as a response to the downtrun itself rather than implementation of the stimulus packages.

Great post and very thought provoking.

June 6, 2009 at 9:25 AM
The Law said...

I'm not makign a defense for either supply side or demand side economics. In supply side, it seemed more often than not, money was hoarded, and in demand side, the article seems to indicate that despite the intended effects of the stimulus appear to be working, people still aren't consuming.

To answer your question, I do not agree with the article. I think consumption hasn't increased because people are so broke, that priority #1 is to pay off debt. I can tell you that's my #1 priority... there's a lot of things I want, but they have to take a back seat until my credit cards are paid off. I think what we will see, is bottom up... demand side economics, will work in time as people pay of their debts, they will begin to consume again. For the article to place to blame of lack of consumption on the stimulus is in my opinion misguided.

June 7, 2009 at 8:14 PM

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