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One of my chief concerns is that our leaders in DC do not really understand the nature of this crisis and are therefore going to either perform ineffective actions or, worse, harmful ones.
I have been silently crossing my fingers beneath the table, hoping that Obama’s team would figure out that this crisis is unique and will require some non-status-quo solutions.
Although I titled this "Analyzing the Obama Plan," this is neither a partisan nor political posting, and not even as much a critique of Obama himself as it is an examination of how the DC machinery currently operates. No one person controls much more than a sliver of the overall process and results that emanate from DC.
Now that there’s finally some meat on the plan which we can react to, let’s parse the numbers.
The Obama Plan
Obama's proposal to stimulate the economy includes tax cuts of up to $300 billion -- including $500 for most individuals and $1,000 for couples if one spouse is employed -- as well as more than $100 billion for businesses, an Obama transition official said.The break would be retroactive to Jan. 1, and couples receiving a $1,000 tax cut would begin receiving an extra $40 in twice-monthly paychecks as the government tries to spark more consumer spending. [Edit: This is strangely worded. The plan calls for less taxes to be taken out, not for extra money to be put in. I wonder what happens to people who have opted for zero witholding?]
New federal spending, also aimed at boosting the moribund economy, could push the overall package to the range of $800 billion or so. Some $77 billion would be used to extend unemployment benefits and to subsidize health care for people who have lost their jobs.
Another provision brought to the negotiations by the Obama team would award a one-year tax credit costing $40-50 billion to companies that hire new workers, and would provide other incentives for business investment in new equipment.
The rest would go toward job-creation projects such as roads and bridges and toward long-term goals such as alternative energy programs.
To summarize:
- $800 billion in total
- $300 billion of that for tax cuts, resulting in $40 every two weeks for couples
- Of the remaining $500 billion, $77 billion would go for extended unemployment benefits
- Another $50 billion goes to companies that hire new workers
- This leaves roughly $375 billion, spread over two years, to go towards infrastructure projects and possibly some alternative energy programs
Said another way, less than one tenth the amount promised to a destitute and undeserving financial industry ($8.5 trillion and counting) has been pledged as relief to taxpayers and state infrastructure budgets. I suppose the truest measure of one’s priorities are one’s actions.
Now, as I pointed out in Crash Course Chapter 13: A National Failure to Save, engineering associations have estimated that the repair bill to bring US infrastructure up to first-world standards is more than $2 trillion.
That is, $2 trillion is the bill for repairing what we’ve already got. Getting a new smart grid, or high speed trains, or reconfiguring our public transit systems, or restoring our waterways for ship transit would be entirely above and beyond that number.
Here we might ask ourselves what impact $185 billion each year for two years would realistically provide. Sure, some jobs would be created, and this is a good thing. But my hoped-for infrastructure upgrade looks like little more than a stabilization project.
So I am hard-pressed to see this as a sufficient amount to begin to address our urgent infrastructure needs, especially when I wear my “non-status-quo” hat.
Instead of $800 billion tossed into a somewhat ordinary array of tax cuts, business incentives, and road repair, I was hoping for at least a glimmer of something new.
For starters, a non-status-quo approach would have us begin by admitting that the money lost on the real estate bubble has been hopelessly betrayed into unproductive works. In the words of the boomers themselves (once upon a time): "Man, it’s gone."
Right there is Obama’s first opportunity. Come right out and say, “Man, all that phony wealth, it’s gone!” The truth is, the world was living on borrowed money and borrowed time, and both ran out. We partied way past our bedtime, and now is the time for a restorative rest, not another dose of artificial stimulant.
But DC doesn’t play the game of self-awareness, instead preferring bold actions and big spending.
So let’s play it with them.
Assuming that a massive round of government stimulus money is a foregone conclusion, then we might as well make the most of it and start by creating a set of national priorities.
Right now, as best as I can tell, the national priority is to get people shopping again. For reasons too numerable to mention here, that’s a failed plan. In fact, it’s no plan at all. It’s a reactive tactic. Attempting to reignite the debt-based, consumer model of years past will squander time and money.
My priorities would include creating truly livable communities where work, play, food, and entertainment all existed close to people's homes.
I would pour money into distributed solutions such as localized cogeneration plants,so that the waste heat from electrical generation was not waste at all, but a valuable by-product. Local communities would be more in control of their power and responsible for using it wisely.
I would establish massive grants for innovators and streamline the bureaucratic and corporate barriers to entry that stifle so many creative ideas before they have a chance to flap their wings even once in the public marketplace of ideas. Big corporations are good at some things, but off-the-wall innovation isn’t one of them. Let’s stoke the passions of garage tinkerers everywhere with prize money that would at least rival a winning lottery ticket.
Imagine what $5 billion could do for the permaculture movement. Or $50 billion for residential solar grants (not tax credits). Or $100 billion for applied research into energy efficiency and next-generation battery development. How many of our best and brightest would jump at the chance to put their energy into a national calling to creatively solve our biggest problems?
Any one of these would perk my ears up and make me take notice, because it would imply that somebody, somewhere understood the problems we actually face.
I will keep a close eye on the amount that actually gets directed towards "alternative evergy programs" and the portion of that heading somewhere other than existing ethanol plants in the districts of high-ranking politicians.
What we find in the plan is that families will get an extra $80/month, some bridges will get repainted, some roads resurfaced, and corporations will walk off with another $50 billion if they promise to hire more people.
For now, I reluctantly have to give the new stimulus package low marks for creativity. It is a status quo package with absolutely no surprises, except, possibly, for the amounts being discussed.
It may well soften the blow a little, and tide us over, but I see nothing in there that indicates a fresh round of new opportunities in the offing.
This only serves to confirm my belief that real change has to come from outside the beltway and be resolutely placed in the center of the bargaining table.
That’s where you come in.
- cmartenson's blog
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Chris,
Thanks again for the keen observations. My comment though is focused on what you don't say. I cannot thank you enough for keeping politics out of your message. I find too many well-meaning sites fall into a political discussion and there all is lost. Case in point - I was reading about the Fair Tax which was very intriguing, so I picked up a book about it. The author started off saying how the Fair Tax movement is and must be totally bipartisan, then a few pages later he started throwing very partisan politics around. I put the book down and never finished it.
It seem to me members of this site understand the apolitical nature of our problems, or perhaps more so the omni-political nature - meaning our economic woes stem from bad politics from all ends of the spectrum.
I know it is hard to discuss a nation's state and not get into a political discussion and Chris, you must be a tightrope walker since you handle it so well. I've tried to discern your political persusions and it eludes me. Thanks - keep it that way, you're doing a great job.
Great breakdown and analysis!
...and lobbyists and pork and?
Chris,
Thanks for the excellent write up.
I was listening to the details of this plan this morning on NPR, and it struck me that this is indicitive of a larger mentality that has really taken root in American Culture; and that is treating symptoms instead of addressing causes. From medicine to violence, we're only trying to apply topical remedies.
In this case, they're trying to solve rampant overspending and underproduction by increasing overspending. Seems to make sense to the layman...
The image that comes to my mind is a run-away bus, in which the occupants have no seat-belts.
It keeps accelerating, and though it hasn't hit anything yet - it's inevitable at some point. The buses speed is tantamount to the economy, which is increasing; while the occupants represent the folks who stand to be hurt in this equation. When the economy finally hits a jersey barrier, the momentum is going to throw people from the bus... It's hard to tell if it'll be the Bankers driving, or the politicians and CEO in the front seat, or the farmers and laborers in the back.
Either way - applying the breaks at this point in time probably will just cause a different manner of accident, and the only safe place to be is outside the bus.
Cheers!
I am free, no matter what rules surround me. If I find them tolerable, I tolerate them; if I find them too obnoxious, I break them. I am free because I know that I alone am morally responsible for everything I do. -Robert Heinlein
"Fluidity is the way to life. Fixation is the way to death. This is something that should be well understood." -Miyamoto Musashi, the Book of Five Rings 'Gripping the long sword'
"Nos perituri mortem salutamus. Sola resurgit Vita."
Helpful analysis, Chris, and reinforces the idea that change comes from the periphery, not from established power bases. We boomers also used to say "power to the people". It just occurs to me as I write this that we should have been concerned about electric power, LOL!
One would like to hear an Inaugural Address that addresses Triple E problems but...
SG
The real question - Where's the money going to come from to pay for all this?
As long as the Fed Reserve is monetizing this debt it's all paid for with inflation. The Fed can't create wealth. If this isn't paid with earned money (savings) then all it will do is redistribute the wealth. For every dollar the gov't spends to create some inefficient job there will be a job lost somewhere else in the private sector. The ones getting the bailout or new jobs will benefit at the expense of everyone else. As prices rise (due to inflation) the companies further down the money food chain that operate at low profit margins will fail and produce unemployment on that end.
This is just one big disaster. The gov't is just making it worst.
Given that our government is insolvent, doesn't any money spent and any money given away, and any tax cuts simply put more wood on the currency bonfire?
The complete lack of understanding on the part of our government truly frightens me. It's not where we are right now that's so bad, it's where we're headed. And I'm honestly a bit surprised that those who wanted "change" seem to have desires that might (perhaps literally??) be only skin deep. I don't want to judge the next President too early, but thus far, I have seen nothing but a hardcore push back to status quo, bureacratic Keynesianism. Where is the intelligence? Where are the protests? Why aren't career bureaucrats frightened about losing their own jobs?!!
The subversive irresponsibility of money-printing angers me, but I agree with Chris on this. If we're going to spend the money, this might be the very last Keynesian "boost" we'll ever be able to give the economy. Let's make sure we aim before we shoot. Unfortunately, it seems many in Washington, like their fellow Americans, fail to grasp the difference between paper dollars and wealth or capital. Sure we have a financial crisis, but we can print money. I doubt we're going to find a way to print oil anytime soon, so it's time we started to focus on the oil crisis, amongst many others.
I think the stage is getting set for some severe destabilization in the medium term. Bureacracy and overpowered government are "luxurious" complexities only available to civilizations with a great surplus of wealth. We are yet falling into the abyss in America, but we have most certainly depleted any surplus, so we had better plan our next steps very carefully. Try convincing Washington to get out of the way and it will feel as though you are attempting to persuade a sycamore into running a marathon.
Yes this is a financial crisis, but Washington has failed to grasp the true reality. Finance is something of an artificial (and luxurious) construct of humankind. Food, heat, transportation, and shelter are far from artificial. You can feel them.
Frustrated,
Mike
-formerly StudentOfJefferson, reporting live from the Washington D.C. Metro Area
Tax cuts would be okay provided the gov't reduced its spending in a commensurate manner. However, it's only spending more. As you said, the gov't is insolvent. Considering the gov't has to borrow bigger sums and cuts taxes to reduce its income for paying its existing debt obligations and prints more money to pay for its debts (monetizing the debt) which means the debts are being paid with diluted dollars... yes the dollar is toast. The dollar is only alive because other countries have been proping it up to keep the party going. It's becoming a bigger expense for the rest of the world at our benefit. When the music stops those left holding dollar savings will be the loosers.
We have not sunk yet because people still need to raise dollars to pay off their huge debts. Also, coordinated central bank interest rates are creating inflated / weaker money supplies in most of the countries so exchange rates are some-what holding. Also, the gov'ts have been interfering in the gold market to keep it down to make the dollar appear not as weak. When the huge money supply begins to get lent out and obama dollars start flowing the huge money supply will create big money velocity and watch out inflated prices. When dollar holders feel that inflation will not be haulted then the dollar will crash when everyone tries to buy today instead of tomorrow, unless interest rates rocket up to save it. Then the newly created obama bubble economy will crash because all the weak companies addicted/relying on cheap credit will fail.
I don't agree with any Keynesian shot in the arm if it's going to inflate the money supply. The economy will only survive until the fix wears off and will just crash again if it doesn't get another. It's not like jump-starting a car. It's like giving a shot of heroin to a drug addict in rehab to help him get off drugs.
The reason we had a bust was because too many people & companies over invested and malinvested in an economy that appeared strong & wealthy but really it was fantom equity wealth and debt, not savings. All these companies were profitable as long as the credit they operated on was cheap and inflation kept prices rising faster than wages were increasing. The Fed was intentionally blowing up a credit bubble because the interest rates were forced below the natural interest rate supported by the savings rate of people. Last year when the dollar started to get too weak from the inflation and prices became far too high the fed raised the interest rates. The barely profitable companies relying on cheap credit became unprofitable. People could not afford to buy houses at more sensible interest rates and lending standards.
We need a recession to clean out all the bad investments, failed non-profitable companies and to put unemployed home builders in other jobs that do demand their services. A shot in the arm keeps the failed economy on the same road to no where.