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Is the Obama stimulus package working?
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IAP Photo - Pablo Martinez Monsivais
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From Bush to Obama
The latter part of the Bush presidency saw exorbitant spending and the beginning of an unprecedented downturn for the US economy. Cumulative social mandates along with hybridized state run/privately owned GSEs (Government sponsored Enterprises) adding to a multitude of legal rulings counterproductive to function of the free market, led to a free market operating independently of free market rules.
As a rule, the free market has the drag coefficient of a spear, however, as burdens (i.e. well intended social programs which ignore simple rules of making or losing money) are placed upon the market, its ability to create wealth and elevate the average human condition, is impeded. Being a self correcting mechanism, the market did as it will always do; it began the process of resetting itself. Housing prices throughout the US declined as did stocks, production and consumer purchases.
As President Barack Obama took office he was faced with a citizenry, many of whom were losing their homes, livelihoods and any hope for recovery. Since no president since FDR has been forced to undertake such large economic resets, history has helped to guide our president in selecting the appropriate corrective course for the country.
While FDR’s initiatives are agreed by most all modern-day economists to have lengthened the great depression and thrown unemployment into mid-double digits, President Obama has seen fit to enact many similar proposals in an effort to effect positive economic change.
Learning from the global catastrophe stemming from US inception of the Smoot-Hawley act in 1929/1930, the President has cautioned Congress and the Senate against implementation of trade tariffs. Most economists agree that the great depression was “triggered” (not caused) by the Smoot-Hawley tariff of 1929/1930, which imposed confiscatory taxes on literally thousands of imports. The result was that other countries retaliated in like fashion, enacting tariffs of their own. This immediately threw the global trading system and successively the global marketplace into a state of collapse. The flow of capital between countries slowed and ceased and global purchases and sales dried up.
Since the president, through example, has shown his beliefs to reside in Keynesian and command economic theories, his recovery proposals have resulted in inception of a slower, less effective demand side stimulus/recovery package. Everyone from the “stuck in static” CBO to the country’s top economists and investors agree that despite the fact that the president’s stimulus may have some intermediate term success in limited job creation, the mid to longer term impact will be detrimental to GDP, employment and ultimately the wealth of our great nation.
Stock tumble as job losses accelerate in June
US markets experienced a low-volume drubbing on Thursday July 2nd, after the Labor Department reported a decline in payrolls for June, that was much bigger than forecast. The job loss figures help raised increasing concerns about the, as-of-yet, unsubstantiated economic recovery.
The NYSE composite and S&P 500 each lost 2.9% of their value, while the Dow Industrials dropped in value by 2.6%. Each of the markets sliced its fifty day moving average, while the NASDQ gave up 2.7% but held above its fifty day trend line. The week’s change, till Thursday, ended with the S&P 500 loosing 2.4%, the Nasdaq 2.3%, the NYSE composite 2.2% and the Dow Industrials shedding 1.9%.
At this point in time, the general consensus on Wall-street is that the unexpected job-loss figures bolster the likelihood that the enormous stimulus package pushed through by the Obama administration is not currently having the intended effect on the US economy.
Why isn’t the stimulus working?
Initiatives put forth by the wildly unpopular Nancy Pelosi led congress and signed by President Obama weren’t supposed to work immediately. With the American workweek down to a 33 hour average (the lowest since World War II), the President must be wondering if Congress set him up to take the heat for tons of government spending that hasn’t positively affected the unemployment rate.
In fact the bulk of expenditures to be made by the stimulus package will not be spent until just prior to the 2010 election cycle. The expenditures are timed to take place just prior to the election cycle so as to strengthen – this is something to note if you are unsure as to which is more important to congress, us or them.
Another of the problems that president faces is that traditionally, by the time economic stimulus spending (supply side or demand side) begins to work, economies are usually already out of a recessing period.
Another problem that the administration faces is that empirically, poor employment figures improve at a much slower pace than the overall economy. This is due to may reasons, but is primarily affected by current corporate psychology which shows that employers are redicent to layoff employees until the economy is really bad and don’t want to hire laid-off employees back until things are really good.
In addition, the packages’ spending is based on the Keynesian theory that pumping money into government projects such as national high-speed rail systems, rescuing troubled homeowners and constructing new government facilities will trickle down or make its way to American workers. The idea being that when the economy is in better shape it can repay the debt through taxes.
The problem with this Keynesian principle is that, if a government has to borrow or create capital to finance these types of public projects, GDP growth will be reduced as a result of debt, interest on debt, higher interest rates and taxation of the citizenry to repay the debt. The larger the sum of money borrowed to finance infrastructure growth, the heavier a repayment schedule, the higher interest rates go, the larger the tax burden is to be repaid by all Americans and the greater a hindrance on economic stability and growth of GDP.
Today, degradation of our financial fundamentals due to the administration’s unprecedented stimulus spending has brought us to the point where our ability to repay our debts is now not only in question, but thought by other countries to be almost certainly impossible. Even beyond our ability to repay our debts being questioned, the premium “street-cred” enjoyed by the US is now in doubt.
As interest rates inevitably edge up even further, the economy’s ability to maintain current employment, ability to facilitate job growth and its ability to maintain positive GDP growth are in doubt. Throw into the mix that Social Security, Medicare/Medicaid are in financially insolvent positions in need of immediate restructure or massive capital infusion, almost guarantees the likely-hood of a “bad-hair-day” for the US economy.
How do we gauge economic improvement
The president’s economic team made very public and very lofty claims about how certain it was that the stimulus package would work. They claimed that passage of his stimulus package would stop job losses before the nation reached 8 percent but it’s now nearly 9.5 percent, and still climbing.
The best factor in judging the economic and political success of any president is always a nominal unemployment rate - if unemployment is low, people are happy. As unemployment remains high however, and continues to show signs of further unencumbered increase, the belief that the current administration is using correct financial judgment in guiding the economy, will erode.
That being said, this writer believes that we will see an uptick just prior to the 2010 elections, but what is not so certain is if it will be enough to pull America’s keyster out of the fire for a quarter or permanently.
Do you think that the stimulus is working? Let me know your side of it.
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