This post originally appeared on CBS' MoneyWatch.com.
As you file your tax forms this year, odds are that you're not thinking, "Wow, I've really got it made!" While writing checks to the IRS or trying to figure out why the "gross" number on your paycheck is so much bigger than the amount deposited in your account, you're probably not savoring the moment, reflecting on how little you actually have to pony up to Uncle Sam. Maybe you should be. You're still enjoying the fruits of the 2001 and 2003 tax cuts. In fact, the actual taxes paid by Americans, as a percentage of adjusted gross incomes, dropped from 15.3 percent in 2000 to 12.7 percent in 2007.
Enjoy it while you can. With government spending projected to outpace revenues by $9 trillion over the next decade, today's low tax rates can't last, even if Congress were to find the will to cut spending. Just to eliminate this year's budget deficit, tax rates would have to be 24 to 85 percent, not today's 10 to 35 percent, according to the Tax Foundation, a Washington, D.C.-based think tank.
Meanwhile, spending keeps marching along. Assuming no changes to tax rates, by 2020 roughly 93 cents of every dollar of federal revenue will be eaten up by major entitlement programs such as Social Security and Medicare, and payments on the national debt.
No one in Washington disputes that tax policy is in need of an overhaul, but most agree that the timing is off for sweeping reform this year. "I don't think Congress has the stomach for it, after what it has gone through on health care reform," says Howard Gleckman, research associate at the Tax Policy Center and editor of the TaxVox blog.Continue »
This article by Cait Murphy originally appeared on CBS' MoneyWatch.com.
The U.S. should consider using a European-style
value added tax to help bring the deficit down, said White House
adviser Paul Volcker in response to a question from CBS MoneyWatch.com
at a panel discussion in New York City Tuesday night. "We have to think
about really revamping the tax system," said Volcker, who's best known
for successfully beating down inflation while serving as Ronald
Reagan's Federal Reserve chairman. The VAT, a levy on all the goods and
services you consume, is not a "toxic idea," he added.
recently, discussion of a U.S. VAT had been limited to the back rooms
of think tanks and cocktail hours of high-minded conferences. But
nearly every other industrialized nation has one, and the idea is
beginning to spread. In addition to Volcker, the head of the Senate
Budget Committee, Kent Conrad (D-N.D), has mused that a VAT has "got to be on the table," and Speaker of the House Nancy Pelosi (D-Calif.) has murmured sweet nothings
about it. In fact, interest in a VAT is cropping up all along the
ideological spectrum (albeit more often along the leftish end).
case for a VAT is simple: The U.S. government's fiscal gap is widening
by the hour. The deficit for 2009 alone was a cool $1.4 trillion, and
it's projected to hit $1.6 trillion this year. By the end of the year,
the Office of Management and Budget says the gross federal debt will
stand at $13.8 trillion. As Bruce Bartlett, a former Reagan economic
advisor who supports a VAT, puts it, "The U.S. needs a money machine."
A VAT, because it touches every transaction, is just that: The
Congressional Research Service estimates that each one percent of a
value-added tax would raise $50 billion. That's real money.
To be sure, no one expects a VAT to join the tax code this year or next. But what about by 2020? The odds narrow sharply. "There's very little chance in the next few years," says Brian Harris, a senior research associate at Brookings, a left-of-center think tank, "but a substantial chance in the next decade or so." And Ryan Ellis, tax policy director at the right-of-center Americans for Tax Reform, who loathes the idea, says of the VAT, "I think it's coming, in the next five to 10 years certainly."
What's to Love and Hate About a VAT?
About 150 countries have a VAT. It comes in different shapes and sizes, ranging from 5 percent in Japan to 25 percent in Sweden.
It's easy to see why it's popular: As a broad-based tax that's easy to
collect and hard to see, a VAT can rake in a lot of money.
This post by Carla Fried originally appeared on CBS' MoneyWatch.com.
Will the next pop you hear be the sound of the China bubble bursting? A few of the world's savvier financial minds think so.
Jim Chanos has made a fortune betting against investments he believes are ripe for a fall. Among his most illustrious short trades was pegging high-flying Enron as a disaster in waiting. Today the hedge fund manager is taking aim at China. "Without a modicum of doubt we have a credit-driven property bubble right now," Chanos recently declared in a talk he gave at the London School of Economics. That was a toned-down version of his quip to the New York Times that China is "Dubai times 1,000 -- or worse," a comment the manager of the $6 billion Kynikos fund now half-heartedly describes as tongue-in-cheek.
Chanos is adding his respected voice to a growing rumble that China's economy is nearing 212°F. In a recent survey of investment pros who subscribe to Bloomberg's news and data service, 62 percent said they believed China is brewing a bubble. Also singing in the China bubble chorus: Harvard economics professor Kenneth Rogoff, Gloom and Doom report publisher Marc Faber, and, most recently, James Rickards, a Virginia-based consultant who knows a thing or two about financial calamity -- he was the general counsel for Long-Term Capital Management. To be clear, the China bubble talk is mostly focused on the country's real estate sector, where property sales jumped 76 percent in 2009 and prices in some markets have recently been rising 8 to 10 percent a month. But the fear is that a meltdown in the real estate market could take down the rest of the Chinese economy with it, as has happened in the U.S. and Japan. And with China expected to account for about a third of global growth in 2010, the consequences could well be global.
The Mother of All Stimulus Projects
The roots of the problem lie in China's aggressive response to the financial crisis. To make up for reduced exports, the government ramped up domestic spending and what ensued was the "mother of all stimulus projects," says Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. The roughly $575 billion in direct stimulus doled out by China's central government represented 15 percent of its GDP. (Consider that if the U.S. stimulus program had clocked in at 15 percent of GDP we would be debating the merits of a $2 trillion program, not the $787 billion Congress settled on.)
China's banks also followed the stimulus script, doling out $1.4 trillion in loans last year, a 30 percent increase from 2008. All that liquidity did the job. According to China's official data (which are notorious for their lack of transparency) the domestic economy expanded 12.6 percent in 2009, offsetting a three percentage point decline in GDP from exports. Overall, China's economy grew 8.7 percent in 2009, up from 2008's anemic -- at least by China's standards -- GDP growth of 6.8 percent.
However, much of the stimulus spending and lending has found its way into real estate, creating ominous imbalances and the potential for huge amounts of bad loans that the Chinese government would then have to cover. Commercial developers who were all too happy to take the stimulus money and build on spec are now often hard-pressed to find tenants; entire office buildings and shopping malls stand empty in many large cities that have attracted the most development. In the residential market, the problem is flipped: too much demand and not enough supply. Homes are the default investment choice for an increasingly flush populace that has limited access to other investment vehicles. And the prevailing sentiment is that if you don't buy today you are going to be priced out of the market tomorrow.
In response to concerns that it's inflating a bubble in real estate, the central government has begun taking steps to cool things off, but to date it's more talk than action. Bank reserve requirements and a key lending rate have been increased only slightly, and official 2010 lending targets, while lower than last year, will still surpass credit outlays from 2008.
- 1. Leverage is muted. About 25 percent of Chinese buy their homes outright with cash. Among borrowers, a 50 percent down payment is typical; you can't get a mortgage with less than 20 percent down and if you are looking to buy a second (or third) property the down payment is 40 percent. China also has yet to develop a HELOC market. Lardy, of the PIIE, notes that China's household debt as a share of household income runs about 40 percent. In 2007, U.S. household debt to income was 130 percent. Nor has China fallen into the grasp of Wall Street alchemists concocting toxic real estate derivatives.
- 2. It's not a blanket bubble. Beijing, Shenzhen, and Shanghai are China's Florida, Nevada, and California: speculation and overbuilding have clearly fed bubble valuations. But Nicholas Consonery, China analyst at the Eurasia Group, a political risk consulting firm, says there's still plenty of unmet demand in China's second-, third-, and fourth-tier cities.
- 3. The ubiquitous demand argument. Consonery also articulates the most oft-heard reason for why the bubble doesn't have to burst: China actually needs more construction, not less, to accommodate the mass migration of Chinese from their rural past to their urban future.
A torrent of commercial development, a residential market convinced that if you don't get in today you're toast, and a wan government response to overheating ... Sound familiar? But there are several key structural differences between our real estate mess and China's situation, which suggest it is simplistic to assume China's bubble must end in a U.S.-style meltdown.
While China's real estate picture doesn't necessarily stack up as Dubai times 1,000, or even the United States circa 2006, similarities to Japan's property bubble could be more salient. Rather than a quick burst, Japan is still working through a long slow deflation from its epic property bubble that peaked in the late 1980s. Patrick Chovanec, professor at Tsinghua University's School of Economics and Management in Beijing, who has advised private equity funds on China investments, says that's the danger facing China. "Never underestimate the ability of the Chinese to brush things under the rug, rather than acknowledging losses and poor investments," Chovanec cautions. "That can create a long-term drag on the economy."
Koyo Ozeki, head of Pimco's Asian credit analysis team, acknowledges the Japan corollary (his comparison of China, Japan, and U.S. real estate bubbles is below), but he believes a crucial difference is that China has the ability to grow its way out of trouble. His worst case scenario is that there's a two- or three-year cooling off period for property values, but not a meltdown. "I think that it [would be] a 'correction,' as opposed to a 'burst of a bubble' similar to those seen in the developed countries, because of China's structural demand for modern houses," says Ozeki.
Source: Pimco estimates
The 437,000 Renminbi Question
- Stocks: China is the third largest economy behind the U.S. and Japan, and it is expected to push its way to number two this year. The IMF forecasts that China will grow 10 percent, more than double the overall world rate. If the bubble does in fact burst, growth will slow and we could be in for round two of a global recession. That's an argument for being cautious with equities and making sure your emergency cash fund stays stuffed.
- U.S. Treasuries: China holds about 10 percent of outstanding Treasury debt; it jockeys with Japan from month-to-month for the top spot among foreign investors. If China's economy hit the skids, one theory is that it might choose to sell off Treasuries to raise capital for spending back home. But dumping Treasuries is far from an easy call for China, as it would depress the value of its Treasury portfolio and cause the renminbi to rise in value (and the dollar to fall), which is not ideal for its exports. Questions about how China will handle its cache of U.S. Treasuries will likely keep the bond market on edge. That's just another risk factor to add to why Treasuries aren't exactly the safest investment right now.
- Emerging market funds and ETFs: These are the most obvious losers if China falters. It's not just that China represents 17 percent of the MSCI Emerging Market Index -- the single largest country weight -- but that so many of the other emerging markets, especially those rich in resources such as Brazil and Russia, need China to remain a hungry consumer. Overweighting emerging markets seems especially dicey right now, despite the sector's recent strong performance. But even beyond the implications of a China bubble, it's also wise to understand that the fastest-growing economies don't always produce the highest investment returns.
What does this mean for your portfolio? When you have sharp minds on both sides of the argument that should be a tip that making a big bet on either is probably unwise. Moreover, China presents a few extra challenges. Despite its large footprint -- China is expected to take over Japan as the second largest economy in 2010 -- keep in mind we're still talking about an emerging market.
Volatility and surprises (both upside and downside) are the norm. Add in the fact that China's financial system and data reporting aren't exactly open source code and you have another layer of complexity. And even the China bears are careful to point out that they have no clue when the bubble will burst. "We are not calling for an impending crash," Chanos reminded the LSE crowd. Rogoff, former chief economist of the IMF and co-author of This Time is Different, which chronicles the long history of global financial calamities, recently told Business Week he believes the liquidity deluge in China will eventually culminate in enough bad debt to cause China's economic growth to slow to just 2 percent to 3 percent a year. But as for when, well, Rogoff would only pin it down to some time in the next 10 years, and added that the setback would be short-term, not a Japanese-style slow bleed.
Given all that uncertainty, it seems wise to channel Pascal's Wager: Acknowledge you might be wrong and adjust your portfolio accordingly. In this instance, that's an argument for taking a look at what might happen if in fact China's bubble blows so explosively that it sends the economy into a severe downturn. Here's how your portfolio could be affected:
Bubble or not, one thing is clear: China is teeing itself up for plenty of volatility in the coming years. And it will affect the whole world. "Even with the strong long-term fundamentals, any market that has experienced such rapid growth creates its own fragility," says investment banker Euan Rellie, senior managing director of Business Development Asia LLC. "That makes it certain there will be declines and corrections."
More on MoneyWatch:
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
Snowicane? Schmoicane! The BLS report is out and despite whispers of horrible numbers due to February storms along the East coast (over 1 million workers didn't work in February due to bad weather; in a typical February, just 291k aren't able to work; so the weather really was bad), the news was better than expected.
Here are the basics:
• The US economy lost 36,000 jobs in February, bringing the total of lost jobs since the beginning of the recession to 8.43 million
• December job loss revised from -150K to -109K; January revised to -26K from -20K
• The unemployment rate was unchanged at 9.7% -- the rate may have peaked at 10.1% last fall
• The broader unemployment rate, which includes part-time and discouraged workers, rose to 16.8% from 16.5%
• Long-term unemployment (more than 6 months) is still a problem-6.13 million workers have been unemployed for more than 26 weeks, which equals 4% of the civilian workforce, a slight decrease from the 6.3 million and 4.1% record set last month. (Records started in 1948)
• Temporary jobs continued to improve for the 5th consecutive month with 48K new positions added last month -- temp jobs are seen as a leading indicator for future full time jobs
I was on CNN's American Morning today, analyzing the jobs report with my pal Lakshman Achuthan from ECRI. I loved his line that this is turning out to be "The Rodney Dangerfield Recovery," because it gets no respect. Who knew-an economist with a sense of humor?
It's been a long slog for the US economy and it's not all bright and sunny just yet. After all, nearly 15 million people are still out of work and there are nearly 6 unemployed workers for every job opening available. This chart from Catherine Rampell at Economix says it all.
But maybe, just maybe, there are signs of sunshine on the horizon.
More on MoneyWatch
• Health Care is Important, But Don't Forget the Unemployed
• Top 10 Job Interview Mistakes
• Job Interview Tips: Don't Act Old
• Graduate School: Should You Get Another Degree?
This post by Kathy Kristof originally appeared on CBS' MoneyWatch.com.
The IRS won't talk about Stack, simply saying in a prepared statement that it is working with law enforcement to thoroughly investigate the events that lead up to the crash. Otherwise, the agency says it's top priority is ensuring the safety of its employees.
However, tax experts say that if you want to really annoy the IRS, you could do one of three things: Fail to file a return completely; loudly maintain that the tax code doesn't apply to you; or cheat on employment tax filings for your workers. Stack appears to have done all three. And if the tone of his letter is any indication, he not only hit all of these IRS hot buttons, he hit them with a belligerent attitude that could have further exacerbated his tax woes.
This post by Suzanne McGee originally appeared on CBS' MoneyWatch.com.
6138626It's been a year since President Barack Obama took office at the height of the worst economic crisis since the Great Depression. Since his inauguration, Wall Street has stabilized, but Main Street remains fragile and job losses continue, albeit at a slower pace. MoneyWatch asked top economists, journalists, and bloggers how they'd grade the president's handling of the economy in his first year, a time of almost unmatched economic challenge. Their verdicts show a wide diversity of views, painting the portrait of a difficult policy environment and a sometimes-flawed policymaking process. Here are their assessments, in order from best to worst.
Professor of Economics, University of Oregon; Blogger, Economist's View and Maximum Utility
•Overall Grade: B+
"I would have liked to see a bigger stimulus package; what was possible in political terms wasn't enough to generate job creation. As it emerged from the political process, the package was too heavily larded with tax cuts. The federal government could also have done a lot more to help the states by tying money to programs that would help create jobs.
"My biggest criticism overall is that when it came to stabilizing the financial markets, they just continued the policies begun under President Bush and Treasury Secretary Paulson. Had Obama nationalized the banks, the administration could have undertaken the same measures to support them going forward - but the benefits would have flowed to the taxpayers rather than the executives. They also dropped the ball by not pushing forward immediately with new regulation; now the financial industry's lobbyists have had time to muster their opposition. Still we can't forget how bad the situation was, and how many different challenges they had to address at almost the same time."
Chief Economist, Moody's Economy.com
•Overall Grade: B
"You can't give him an A, because the economy is still losing jobs and unemployment is still in double digits and likely to rise further. But the administration's policies have been instrumental in bringing an end to the financial crisis and the recession. The stress tests, a Treasury Department initiative, really helped end the panic, and now many of the banks are overcapitalized. Now people think the banks are safe; the key will be getting them to lend to businesses and consumers again.
"The policies that haven't worked so well are the efforts to mitigate housing foreclosures, where they assumed that if lenders reduced payments, homeowners would agree to loan modifications and not default - they got that premise wrong. This remains a risk to the economy. I also would have liked to see a larger stimulus bill. Still, it's hard to be critical of that, given that the important thing last February was to get it done fast. The real question today is whether the policy uncertainty over regulatory reform, energy policy, tax policy, etc. will keep businesses from hiring."
Modeled structurally on the 9/11 Commission, the bipartisan, congressionally appointed panel will issue a report in December 2010 on the causes of the crisis, and has the option to provide recommendations for reform. According to Chairman Phil Angelides, its work is supposed to "serve as an antidote – much as the Pecora hearings did in the 1930s — to the kinds of market practices that none of us would want to see repeated ever again."
Below, highlights from the hearings.
Day 2: Critical but Yawn-Inducing
Thursday, January 14, 2010 — 4:37 p.m.
The second day of the Financial Crisis Inquiry Commission lacked the fireworks of the first. Testimony from key regulatory agencies: the Securities and Exchange Commission, the Federal Deposit Insurance Commission and the Department of Justice. Questions centered on the regulatory agencies knowledge and capacity to act at various points during the housing bubble and the crisis that followed. The agencies were broadly in agreement on causes (housing bubble, leverage, poor underwriting, inadequate risk management, etc.) All supported more effective systemic regulation with a few differences in emphasis and structure.
In other words, important and critical but yawn-inducing. The video is available on C-SPAN and the submitted testimony at the Commission's Web site.
As important as the testimony was the commission's attempting to lay the groundwork to effectively investigate. Vice Chairman Bill Thomas confirmed in perfunctory ways that the SEC (Mary Schapiro) the FDIC (Sheila Bair) would soon finalize agreements with the Commission to share information. In what was clearly a planned move, he asked the Department of Justice (first Attorney General Eric Holder and later Assistant Attorney General Lanny Breuer) whether they could expect a similar agreement by the end of the month. There was some hemming and hawing that Thomas ultimately judged as "probably yes."
This is important. The Commission is unique in its ability to look across the various agencies and other participants in the crisis. One the key causes appears to be the interconnectedness of the problems and the gaps among regulators. As a result, getting full and early access to information from each agency is critical. Delays would be a disaster for the commission, which has to deliver its report by December 15. When the 9/11 commission had trouble getting access to the various agencies, pressure from the families of the 9/11 victims was key to overcoming the resistance. The Financial Crisis Commission has to work without the same public support.
Top 10 Metaphors at the Financial Crisis Inquiry Commission
Thursday, January 14, 2010 — 8:56 a.m.
With apologies to David Letterman.
While waiting for today's FCIC's hearings to begin I reviewed my notes and glanced through the statements of the commissioners from their initial announcement on September 17, 2009. Content aside — and now that the FCIC site is up, there is some content, I was struck by the range of metaphors used to frame the crisis. Nothing so far seems to have stuck.
This is interesting because one of the key challenges for the commission is to find a way to connect to people. This will not be easy without a coherent story line and imagery to complement and frame the data. It's also interesting to watch the competing metaphors. For example, early on many bankers were calling the confluence of events "a perfect storm" with "plenty of blame to go around."
Until something substantive takes hold, I thought I'd review some of the current metaphors that have surfaced.
10. What a Dog Returns To
• Brian Moynihan, Bank of America: "We ate our own dog food and we choked on it."
9. Hidden Bombs/Mission Impossible Theme
• Phil Angelides: "... We witnessed the implosion of our financial markets, yet the fuses for that cataclysm were undoubtedly lit years before. It is our job to diligently and doggedly follow those fuses to their origins."
8. The Illiad and the Odyssey
• Brooksley Born: "Some powerful financial instruments have begun to mobilize forces to prevent meaningful reform and return to business as usual. The country cannot afford to listen to the siren song of self-regulation and delay or weaken our response to the crisis."
7. Evicted from the Castle
• Keith Hennessey: "I hope to share some of my insider's view on what happened ... our task is now one of hindsight, where we know what happened."
• "There's a temptation in this kind of process to look for villains, and indeed some have already been found and locked up."
• "In Washington, the easiest solution is often to form an unruly political mob and march on Wall Street ..."
6. (Used to Be) A Wonderful Life
• Byron Georgiou: "We have proceeded far beyond the idyllic banking model of the local building and loan institution immortalized in the Jimmy Stewart classic Christmas movie "It's a Wonderful Life ... "
5. Intensive Care
• Sen. Robert Graham: "The guiding principle of this commission should be do no harm... "
• Financial Institutions are "not only in the intensive care ward, but in the ward for those who are closest to death."
4. Dr. Frankenstein's Lab
• Heather Murren: "The commission has critical role to play in bringing to life the facts surrounding the financial collapse... "
• "I hope to bring light into areas that have been obscured by complexity... "
3. Bubbling Tsunami
• Douglas Holz-Eakin: "It has been likened to a tsunami that swept across the American economy... "
2. This Might Hurt a Little
• Peter Wallison: "... The diagnosis determines the prescription."
And the No. 1 image comes from the vice chairman, Bill Thomas:
1. Lazarus Waking Up in an Infectious Wasteland after an Earthquake
• "... I appreciate a little more than I did before what Lazarus must have felt like... "
• "... we had an earthquake... and one of the inevitable factors with earthquakes is that there are aftershocks."
• "... we're becoming familiar with natural mutations of virus, with manmade viruses, computers and this one of a financial nature."
• "... are we going to be in a jungle? "
After today's hearings I'm going to ask my bartender friend to create a drink we'll call "the Bubbling Tsunami." Take away that punch bowl.
Day 1: Watching Lloyd Blankfein Get Mad
Wednesday, Jan. 13, 2010 — 9:29 p.m.
Spent the day at the opening hearings of the Financial Crisis Inquiry Commission. Fascinating for a variety of reasons, not least of which was watching Lloyd Blankfein get mad.
First, the background: The FCIC is a bipartisan commission tasked with examining the "causes of the financial and economic crisis." It's modeled in some ways on the 9/11 Commission. (They have subpoena power but seem inclined to ask nicely first. No subpoenas yet.) According to Chairman Phil Angelides, its work is supposed to "serve as an antidote – much as the Pecora hearings did in the 1930s – to the kinds of market practices that none of us would want to see repeated ever again."
Today, the commission heard testimony from three separate panels. The first and most interesting had Goldman Sachs Chairman and CEO Lloyd Blankfein, JPMorgan Chase Chairman and CEO Jamie Dimon, Morgan Stanley Chairman John Mack, and Bank of America CEO and President, Brian Moynihan making statements and taking questions under oath. (It was explained that this would be standard practice by the Commission.)
Phil Angelides, the Chairman, said the Commission would serve as "proxy eyes, ears and possibly voice" for the American people. Angelides was particularly impressive in his ability to redirect some of the diversionary cliches that have been used to describe the crisis, e.g. "perfect storm" or "lots of blame to go around."
"But was this a perfect storm or a man-made storm?"
"Maybe it's like the Orient Express. Everyone did it."
Vice Chairman Bill Thomas said he planned to ask questions "the way the American people would, in ways that they can understand it." This explains distracting asides – for example, I now know that in 1950s Southern California the goal for tenants: "Get anything" as a first house and wait for it to appreciate. Some called this blather.
I think Thomas is cannier than that. For example, the other commissioners had to prioritize a few questions because of their extremely limited time. Thomas simply said, "My questions are the New York Times' questions," and requested written responses to them. In one move he asked 10 questions, requested responses under oath, and enlisted the Times' help in checking the facts.
Perhaps he was trying to get under the skin of the CEO's. That seemed to work for Angelides. Largely in response to Angelides questions, Blankfein lit up the room with his energy, intelligence and occasional hints of aggression. Both Angelides and Thomas have to be sensitive to the risk that the hearings will turn into esoteric discussions of leverage and risk management practices at various points of the crisis. That would only weaken the commission's effectiveness and will come out as a result of the investigation anyway. The FCIC needs to establish a baseline for credibility, build a solid foundation of facts, and connect the housing crisis and it's aftermath to the country at large. Thomas' digression makes more sense in this context: "If you could get on the first rung you could get onto the second. That was America."
One memorable turn of phrase from Blankfein in discussion about negligence, market-making and norms of behavior before and after the crisis: "The standards at the time were different."
Let's make sure that's the truth.
More on MoneyWatch:
• FCIC: Members with Conflicts
• How Lehman's Fall Changed Your World
• By the Numbers: How Far We've Fallen
In February, President Obama signed the massive $787 billion stimulus bill into law with the idea of jump-starting the economy with spending on everything from tax cuts to new highways to programs to increase energy efficiency. The size and specifics of the package-and even whether it was necessary at all-were hotly debated, and the resulting bill was supported by only three Republicans in the Senate. Seven months later, what can be said about whether the stimulus package has worked or not?
The answer is that at least some of the spending has goosed the economy. But it's a tricky business to assign credit-if a start-up hires six people, was it the entrepreneur's vision or the government grant that was responsible? And the jury's still out on all the stimulus money that hasn't even been spent yet.
In many ways, the Cash for Clunkers program, which offered rebates of up to $4,500 to consumers for upgrading to new, more fuel-efficient cars, exemplifies the debate over the effectiveness of stimulus spending. The program disbursed $2.9 billion in rebates, spurring the purchase of close to 700,000 new cars and giving a much-needed boost to the faltering auto industry. Critics accurately point out that many of those purchases would have been made anyway in the future, without taxpayer subsidies. But one of the primary goals of stimulus spending is to get people spending money now, while the economy is hurting, and Cash for Clunkers certainly did that. (See our earlier story, "Did Cash for Clunkers Really Work?")
As a result, both GM and Ford announced they were adding workers and shifts to help meet the increased demand created by the program, and other auto-related industries were helped as well. And the workers whose jobs were saved or whose hours increased had more money to spend on nights out at Applebee's, and the waitress at Applebee's had some extra cash to buy fall clothes for her children, and that in turn boosted retailers' fortunes. Economists call it the multiplier effect, and it's a key component of a successful stimulus program.
"[Cash for Clunkers] was a much needed leg up for the auto industry at a time when suppliers were hanging on by their fingernails," says Diane Swonk, chief economist at Mesirow Financial and former president of the National Association for Business Economics. "If it prevents some suppliers from going into bankruptcy, extra production at that stage of the game is a pretty good payoff."
But the $2.9 billion spent on Cash for Clunkers was only a very small portion of the entire $787 billion package (see chart above). Among the many programs big and small being funded now are $1.6 billion to help save 800 jobs at the Savannah River nuclear site in South Carolina, $120 million to create new jobs at the U.S. Census Bureau to analyze results from the 2010 Census, and even $220,000 to preserve jobs in the Isanti, Minn., Police Department. Economists polled by the National Association for Business Economics predicted that the government's stimulus spending will add between 0.5 and 1.5 percentage points to the economy's annualized growth rate in the second half of 2009; by comparison, in the second quarter, GDP declined by 2.4 percent compared to a year earlier.
However, it's important to remember that not all stimulus spending is the same-simple rebate checks, for example, are usually saved or used to pay down debt, which doesn't lead to any additional economic activity. The true indicators of the effectiveness of any stimulus spending, as discussed and debated in this MoneyWatch article, are whether it leads people to spend more money than they otherwise would have and if it results in follow-on economic activity, as Cash for Clunkers did.
Complicating the problem of evaluating the effects of the stimulus package is that four-fifths of the money set aside hasn't even been spent yet, according to Recovery.gov, the government's Web site tracking the spending. Infrastructure and health care projects, to give just two examples, take time to get off the ground. In New York City, for instance, the mayor's office announced in August that federal stimulus spending will help fund the construction of 739 affordable housing units-creating 2,800 jobs. But turning those plans into construction sites, hiring contractors, getting permits, and so on, doesn't happen overnight, so the new jobs and presumed ancillary effects will only unfold in the coming months and years.
"The real guts of the stimulus spending won't show up until well into 2010 and 2011," says Swonk. "The bigger bang for the dollar is going to be on the construction projects that wouldn't have been there otherwise. But they take a lot of time to get going."
As a result, economists say we really won't be able to make a definitive call on the success or failure of the stimulus package for years. In particular, they'll be looking for signs that consumer discretionary spending is increasing on a consistent basis, since more than two-thirds of the American economy is driven by consumer spending, and payroll numbers continue to improve. Indeed, Swonk says jobs are key. "That's how the American public measures it," she says. "That is what voters vote on-jobs. They don't vote on a technical recovery in GDP." One worrisome sign for the labor market is the sharp 6.6 percent jump in labor productivity in this year's second quarter. That's the highest rate since 2003, and it suggests that corporate America is learning how to produce more goods and services without expanding payrolls, increasing the possibility of a jobless recovery. Expect disappointing numbers when states release mandatory reports in October on their stimulus spending: The state formula doesn't take the multiplier effect into account.
The Final Accounting
Even if the economy does pick up in the next few months, it will be hard to assign credit to the stimulus package. That's because the Federal Reserve has been providing vast amounts of monetary stimulus to the economy, cutting interest rates to near zero and doing other things to boost liquidity and spur lending such as buying up so-called toxic securities from banks.
The problem is that when you rush a patient to the ICU and inject him with three drugs, it's tough to know which one saved his life. We don't know how the economy would have fared had the stimulus legislation died a quiet death on Capitol Hill this past winter, although we do know that the monetary stimulus has been massive.
"The really big bazookas have come from the Federal Reserve," says Swonk. "They've got $2.2 trillion on their balance sheet."
Even if we assume that the stimulus package will reduce the severity of the recession, as many economists do, will it have been worth the cost? The nonpartisan Congressional Budget Office estimates that the federal budget deficit for 2009 will total $1.6 trillion, or more than 11 percent of GDP. The stimulus bill, even when it's fully spent, will only be responsible for less than half of that, but it's still a serious chunk of change. The mounting red ink increases the risk of the "crowding out effect"-higher borrowing to finance the deficit means more investment in government and less private investment. It also sends interest rates higher. In effect, we may be borrowing growth from the future and at a steep price.
The Federal Reserve's actions could also contribute to higher interest rates and higher inflation down the road, since the Fed has been printing money and lowering interest rates. In some ways, that's the point-inoculating the economy against a lengthy bout of deflation-falling prices-is a key goal of the Fed's monetary policy of late. The trick will be nipping the inflationary effects in the bud so that they don't end up gaining momentum and hurting economic growth in the long run.
The full price tag for stimulating the economy may eventually look reasonable, but only if all or most of the government spending greases the wheels of the economy and leads to additional spending and economic activity. Stay tuned.
James Picerno is editor of the Beta Investment Report.
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There are plenty of good phrases to sum up the American consumer spirit of the past few decades — such as "Were you completely insane?" But what sticks in my mind is a bumper sticker I once saw displayed on a late-model Hummer hauling a trailer loaded with matching sparkle-painted $15,000 jet skis: "The one who dies with the most toys wins." I couldn't figure out why dying was key to the deal. But now I get it: There was no way that bozo could pay for so much crap in one lifetime — and his kids can't handle the bills either.
American consumers have awakened, bolt upright, with belated sticker shock ("I bought what!? I spent how much!?"), from a shopping spree that's arguably lasted since the early 1970s. That's when spending started to outpace economic growth, according to the federal Bureau of Economic Analysis. Credit cards proliferated. Easy credit based on rising real-estate and stock prices fed the delusion that we could go on consuming more than we produce forever. And it just got giddier after 1997, when consumer spending bubbled up from 67 percent to more than 70 percent of gross domestic product (versus 55 to 65 percent in more sober economies). "People are using their homes almost as a third income," an executive for a major lender told me in 2005, and she thought that was just fine.
Megan McCardle, The Atlantic
So, the speech. Here's what we've got: Guaranteed issue. Community rating. Portability. Exchanges. Mandate. Deficit neutrality. The public option is negotiable. In other words, virtually nothing that we haven't heard before. The most powerful parts were the beginning and end, but I wonder how many people were watching by the end...However, I think the line he's taking is smart. Start over and do it on a bipartisan basis, which polls well. Don't add another layer of hard-to-understand bureaucracy. Don't break the budget. They're putting out a platform of modest, easy to understand reforms.
Paul Krugman, The New York Times
Will this [speech] do the trick? It's easy to be skeptical — how much difference can a speech make, anyway? But the big problem on health care these past few months has been the sense that Obama had lost control of the issue — that the shouters and cynics had taken over the debate. Now, finally, we have some leadership and clarity from the president. And maybe this is all it takes to turn the tide.
Ryan Avent, Economist.com
Mr. Obama delivered a good speech, as he usually does. But I doubt he won over many converts. At least not in Congress, where the debate has become too polarized...Some of it sounded very Clintonesque—the setting up of markets where companies and individuals could buy insurance. Much of it sounded defensive, an attack on the many lies—let's call them what they are—that have been spread about the plans being considered. Some of it was surprising, like Mr. Obama's strong defense of the public option, which came shortly after the White House said he would not insist on it. But I don't think the state of the debate has changed. Most Republicans are still hell-bent on opposing reform. And the Democrats are still counting votes in the Senate.
James Surowiecki, The New Yorker
It's hard for me to see how the principles Obama laid out...can actually be meaningfully gamed, precisely because the requirements seem pretty black-and-white: community rating, out-of-pocket spending limits, requirements for the kinds of treatment that must be covered, and no rescission. Of course, the devil is in the details. But if we get something along these lines, coupled with an insurance exchange, it should make it much harder for insurance companies to compete by engaging in bad behavior, while creating an incentive for them to compete along the lines we want them to compete on: better customer service, better access to providers, and so on. I realize this will be a long way from a single-payer system (which from an economic point of view has always seemed to me the most sensible way to provide insurance). But I think it's a mistake to underestimate how much it would improve things.
Gerald F. Seib, The Wall Street Journal
To address middle America's cost concerns, [Obama] kept the price tag of expanding coverage to nearly all Americans at $900 billion over 10 years—plenty hefty, but lower than some other plans. And he proposed something new: a "fiscal trigger" that would require the administration to produce more spending cuts if medical expenses aren't being tamed. Meanwhile, for activists on the left wing of his party, who know how to beat the drums for action, the president said he still likes the "public option," or the government-run health-insurance alternative (even while suggesting he wouldn't fall on his sword to get it)...That mix of messages certainly was designed to shoot the narrow gap between right and left in Congress. But it also is structured to move through a similar opening for action in public opinion. That opening got narrower over the summer, but it didn't disappear.
Ed Yardeni, Dr. Ed's Morning Briefing
[In his speech], President Barack Obama tried hard to move toward the center on this controversial issue. In my opinion, he is still left of center...I didn't hate his speech because it includes most of the relatively noncontroversial talking points that might be a good place to start as a reasonable compromise...President Obama has been known to distance himself from liberal friends and liberal ideas when they no longer suit his needs. Last night, Mr. Obama indicated that he is willing to sacrifice the public option.
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