Why the Spending Stimulus Failed

Yesterday the CBO reported that tax breaks were the least effective portion of the stimulus plan. Now we’re being told that the stimulus failed because it needed more tax breaks? Here’s the thing, we’ll never be able to prove that an economic plan “worked” or didn’t, simply because we can’t know what would have happened had we acted differently. So, at the end of the day, it’s all just speculation, but enjoy some more:

From the Wall Street Journal:

President Obama and congressional leaders meeting yesterday confronted calls for four key fiscal decisions: short-run fiscal stimulus, medium-term fiscal consolidation, and long-run tax and entitlement reform. Mr. Obama wants more spending, especially on infrastructure, and higher tax rates on income, capital gains and dividends (by allowing the lower Bush rates to expire). The intellectual and political left argues that the failed $814 billion stimulus in 2009 wasn't big enough, and that spending control any time soon will derail the economy.

But economic theory, history and statistical studies reveal that more taxes and spending are more likely to harm than help the economy. Those who demand spending control and oppose tax hikes hold the intellectual high ground.

Writing during the Great Depression, John Maynard Keynes argued that "sticky" wages and prices would not fall to clear the market when demand declines, so high unemployment would persist. Government spending produced a "multiplier" to output and income; as each dollar is spent, the recipient spends most of it, and so on. Ditto tax cuts and transfers, but the multiplier is assumed smaller.

Continue reading at WSJ.com...

Job Creation Will Be Administration's Main Focus In The Coming Months

From the Huffington Post:

One year in, President Barack Obama faces a perilous economic choice. He can't pull back the stimulus too quickly, despite the public's concerns about rising deficits, because that could kill a fragile recovery. If he steps too hard on the accelerator to create more jobs, responding to another voter imperative, he risks feeding inflation and restarting the dangerous cycle.

The GOP Senate upset in Massachusetts shows the political risks of any bold move are enormous.

Either way, the road ahead probably means painfully slow job creation accompanied by more government debt and higher taxes.

"Without significant changes to tax and government spending policies, the budget outlook will deteriorate rapidly even after the costs associated with the financial crisis abate," said Mark Zandi of Moody's Economy.com, a former adviser to Republican Sen. John McCain who now counsels congressional Democrats.

When Obama took office in January 2009, financial markets were teetering, jobs were evaporating and global economic activity was tanking faster than in the 1930s. A depression seemed imminent.

Now the economy is back from the brink, thanks largely to the most aggressive global government intervention in history.

"The economy is growing, albeit at an unsatisfactory rate," said Lawrence Summers, director of the White House National Economic Council. While chances of a depression are "remote," there is still "a long, long, long way to go," Summers acknowledged.

The Jobless Stimulus: It's still not too late for business tax cuts

From the Wall Street Journal:

The recession may be over on Wall Street and Silicon Valley, but on Working Family Avenue it still has a ways to run. That's the lesson of yesterday's August jobs report that showed losses of 216,000, which believe it or not is the slowest monthly decline in a year and caused the White House to praise with the faint damn that the "trajectory is in the right direction." That's the good news.

On the other hand, the jobless rate popped up to 9.7%, the highest rate in 26 years, from 9.4%, reflecting an increase in the size of the labor force. The main concern we see going forward is the slow pace of new job creation to soak up the 7.4 million workers who have lost jobs since 2007.

There are now 26 million Americans who can't find a full-time job. Average weekly hours remained at an abysmally low 33.1—which is putting a strain on family budgets. And the jobless rate including so-called discouraged workers, or those who have stopped looking, leapt to 16.8% from 16.3% in July. Meanwhile, the number of Americans working part-time who want full-time work increased by 278,000 to 9.1 million, which as a share of the workforce is larger than at any time since the recession of 1982. These are the workers that employers will tend to hire first as a recovery unfolds, so it is worrisome that this cohort remains so large.

None of this does much for the credibility of the Obama Administration's stimulus spending plan, which was sold with the promise of a jobless rate this year of "below 8%" if the stimulus were passed. That was off by some three million jobs in a mere seven months. The same economists who fretted in February that $780 billion in stimulus was too small now claim that the $300 billion or so that has been spent has somehow ignited the recovery.

Where's My Stimulus?

With so much effort being spent on re-building the banking industry, and pushing through a health care reform package, many small business owners around the country are feeling forgotten. CNNMoney.com posted a new article explaining the frustration of small business owners who are beginning to ask, “what about me?” I’ve included a snippet of their article below, but you can check out the full text at CNNMoney.com.

During her four years as an entrepreneur, Trina Nelson has seen plenty of ups and downs. But nothing prepared her for the crisis last December, when the American economy lay in tatters and her Dallas-based catering business nearly collapsed. "The phones stopped ringing," says the founder of Par-T-Trayz Catering (motto: "From sushi to soul food").

Unfortunately, Nelson, 38, has had a history of borrowing woes. In 2007 she needed a loan to stay afloat but was turned down by four banks because she didn't have an established line of credit. (Like many startup founders, Nelson had used personal credit cards to fund her business; now her credit rating is "shot.") Lenders said the amount she was seeking -- $15,000 -- was too small.

"They told me I wasn't asking for enough money," she recalls. "Why would I ask for more money than I needed?"

For the past nine months, Nelson has struggled to keep her business alive. Fortunately, her phones have started ringing again. But that's revealed another problem. "I'm turning down big business because I don't have the staff to execute the orders," she says. If Nelson had the capital, she would hire 10 full-time employees and expand to offer mail order and personal-chef services.

"The government is giving billions to companies that make billions, and they're still going out of business," she complains. "Why don't they give some of that money to small businesses?"

U.S. Threatens To Rescind Stimulus Money Over Wage Cuts

From the LATimes.com:

Reporting from Sacramento -- The Obama administration is threatening to rescind billions of dollars in federal stimulus money if Gov. Arnold Schwarzenegger and state lawmakers do not restore wage cuts to unionized home healthcare workers approved in February as part of the budget.

Schwarzenegger's office was advised this week by federal health officials that the wage reduction, which will save California $74 million, violates provisions of the American Recovery and Reinvestment Act. Failure to revoke the scheduled wage cut before it takes effect July 1 could cost California $6.8 billion in stimulus money, according to state officials.

The news comes as state lawmakers are already facing a severe cash crisis, with the state at risk of running out of money in July.

The wages at issue involve workers who care for some 440,000 low-income disabled and elderly Californians. The workers, who collectively contribute millions of dollars in dues each month to the influential Service Employees International Union and the United Domestic Workers, will see the state's contribution to their wages cut from a maximum of $12.10 per hour to a maximum of $10.10.

The SEIU said in a statement that it had asked the Obama administration for the ruling.

The cut was highly contentious during last winter's budget talks. Republican lawmakers insisted that the rapidly growing, multibillion-dollar state program, In Home Supportive Services, be scaled back significantly.

Democrats fought major reductions in the program, which they say is a cost-effective alternative to nursing-home care, but ultimately compromised.

Reversing the wage cut would require a two-thirds vote of the Legislature, meaning Republican support would be needed.

Schwarzenegger on Wednesday sent U.S. Secretary of Health and Human Services Kathleen Sebelius a letter urging the federal government to reconsider.

"Neither the Legislature nor I make decisions to reduce wages or benefits lightly, but only as a last resort in response to an unprecedented fiscal crisis," Schwarzenegger wrote.