Zimbabwe

The Junta's favorite governor, Mark Sanford, invoked comparisons to Zimbabwe in describing the stimulus package.

Priming the Pump

Last night, President Obama gave his first press conference to make his case for the spending package. He did a pretty good job of demonizing the opposition, and painted a pretty bleak economic picture. First of all, I agreed with him on two points: 1) Republicans, specifically Bush, got us into this mess. 2) Alex Rodriguez using steroids is a black eye on Major League Baseball.

For his main point though, Obama's defense of using massive government spending for stimulus is based on junk science. I don't remember him using the analogy, but the typical one used for this kind of stimulus package is "priming the pump". His idea is that the government can spend a lot of money on projects for a while, and that will create confidence, spark consumption, and at some point, spark private investment will create more long-term jobs. It's an idea right out of Lord Keynes' General Theory. The problem is that the theory has never been supported by evidence in the real world. During the New Deal, despite 5% of the workforce being employed by the CCC and WPA, unemployment remained relatively constant. The jobs created by government were almost completely offset by jobs destroyed in the private sector. We got some nice National Parks' buildings from the CCC, and nice paintings on Post Offices from the WPA, but no economic growth. Over the past 15 years or so, Japan has had a similar experience.

We will get some good infrastructure projects out of the spending bill and some wasteful ones. Some people who have lost their finance job that won't come back will get to stay in their house a little longer than they would earlier. Some state and local governments won't have to cut as many programs. What we won't get is stimulus.

Make-work Projects in Beaumont

Yesterday I predicted that much of the so-called stimulus package would be make-work projects that don't really improve infrastructure. Today, the local radio station reported that Beaumont Mayor Becky Ames has been in Washington lobbying for her projects. Here's the list:

Amtrack train stop - $750,000
Block grant reinvestment zone housing - $5 Million
Landfill hydrogen project - $5 Million
Public Safety Headquarters - $272,000
Bus stop rehabilitaion - $1 Million

The current Amtrack station in Beaumont is a slab, because it gets no passengers. It's near my office, and I see the train stop there when it does in the afternoon. They could triple their ridership and still not get passengers on every stop. But it has nothing to do with new riders. The
mayor's justification was, "We want to move it to a nicer area so when the train stops in Beaumont, the passengers get a better view." She has called this her highest priority for stimulus money.

I have no clue whether housing block grants are needed, but it seems that every city asks for them every time Federal money is offered.

The landfill hydrogen project is a cool project. They reform the methane as it comes off the landfill and sell the hydrogen to local refineries. This project is already funded and will go forward without Federal funds. They're just asking for Federal dollars because they might be available.

I don't know anything about the Public Safety Headquarters. From the amount of the funds request, I think they're going to build a house for the Police Chief.

Bus stop rehabilitation is the only project of the bunch that is a good idea and not currently being progressed. Most Beaumont bus stops are just benches, and I often see people waiting for the bus out in the pouring rain. I'm really skeptical about the amount of economic stimulus it will
provide.

Obama's Economic Recovery Plan ± 80%

President-elect Obama used his weekly radio YouTube address to make bold claims about his stimulus package, the amount of growth that it will create (3.7%), and the amount of jobs that it will create (3,675,000). He based it all on this report that his incoming administration created. Everyone should read the plan. Why? It will show you the absolute lack of depth and judgment that Obama's advisers have so far. It reads more like a Freshman Economics term paper than something written by high-paid economic experts. There are nuggets in there that show that brilliantly. Here's one:

The final step is to take the effect on GDP and translate it into job creation. Not all of the increasedoutput reflects increased employment: some comes from increases in hours of work among employed workers and some comes from higher productivity. We therefore use the relatively conservative rule of thumb that a 1 percent increase in GDP corresponds to an increase in employment of approximately 1 million jobs, or about three-quarters of a percent. This has been the rough correspondence over history and matches the FRB/US model reasonably well.

In other words, Obama's team has no clue how closely GDP growth relates to job growth, so they made up a number. So I just decided to do run a check on their numbers: 1% GDP growth is $138 Billion per year. 1 million average workers in the US would make just over $25 Billion. Obama's numbers have no basis in fact. Denninger found the most egregious example of this, here are his thoughts:

Obama: You Need To Fire Everyoneinvolved in producing your American Recovery and Reinvestment Plan.
Why? In "Appendix 1"

We considered multipliers for the case where the federal funds rate remains constant, rather than the usual case where the Federal Reserve raises the funds rate in response to fiscal expansion, on the grounds that the funds rate is likely to be at or near its lower bound of zero for the foreseeable future.

Please tell me this is a joke. Obama really believes that The Fed can hold interest rates at zero for four years and they can spend without bound, while the bond market will blithely look on at $1-2 trillion deficits annually and the economy will begin to recover?
You're kidding, right?

To give the Obama team some credit, at least they admit how much they understand. From the Conclusion:

As emphasized at many points in the analysis, there is substantial uncertainty around all of our estimates.

Hold onto your shorts, folks. We're in for a rough ride.