Thursday, February 5, 2009

CBO: Obama stimulus harmful over long haul

We don't need a stimulus bill that doesn't stimulate and only serves to expand the reach and power of our federal government. We can't afford to waste hundreds of billions of dollars on something that is being sold as so urgent that we don't have time to weed out the pork and the bridges and roads to nowhere. We should just say NO. Even the CBO says it's a complete waste of money.

President Obama's economic recovery package will actually hurt the economy more in the long run than if he were to do nothing, the nonpartisan Congressional Budget Office said Wednesday.

CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing.


Public Library said...

God help us!

Mark Gerber said...

Hi Scott,

Harry Reid seemed to put the screws to the Senate Republicans today by announcing he had the votes necessary to pass this stimulus boondoggle. Thus, I was surprised the market rallied today. I can only guess that today's rally was more about the real stimuls going on in China and the weakening dollar that will help our exporters improve their earnings.

Since Gold was up today and high yield bonds were down today (HYG), does this confirm that this boondoggle stimulus is indeed expected to harm our economy?


Scott Grannis said...

The word right now is that a Senate vote won't come until Friday at the earliest. I don't think the market was trading up on the prospects for a quick passage of this monstrosity of a bill, but I could be wrong. If anything, the bill's prospects have been declining over the past few weeks. The more people look at it, the uglier it becomes.

I'm thinking the market is betting that the bill will be either improved a lot or it won't pass--and that would be good news.

As for the dollar, it has actually strengthened quite a bit since the panic started late last summer. Exports have been picking for some time now, and I think that's a function of the big drop in spending on housing. Foreigners have been spending more of their export earnings on US goods and services, and buying a lot less securitized debt. So as we have less need for debt financing, our exports pick up.

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Mark Gerber said...

Thanks Scott.

For what it's worth, I meant to say the dollar weakness relative to the yen. That seemed pronounced yesterday.

To add further speculation into short term market psychology, I wonder if the market is giving credit to Obama's form over substance -- for the time being. We know that his speech last night was filled with misleading content, especially his neglect of the role of congress and leading democrats in fostering this housing bubble driven crisis; however, he sure made a forceful deliver and solid performance as a populist president.

On top of that, we're going to get the announcement of the more important Financial Stabilization plan, which sounds like it might have something for everyone -- softening of mark-to-market, asset insurance, bad bank funding, housing buyer incentives, etc. Geitner acknowledged in his WSJ interview this week that actions so far has been late, which implies to me that he knows it's time to catch up. Obama's strong populist attacks on Republicans and Bankers/Wall Street this week, may be to build political cover for a big, unpopular Financial Stabilization plan coming at us next week. Also, by giving the Dems in congress liberal pork in the Stimulus bill, he may be able to buy their support for the otherwise unpopular Financial Stabilization plan.

We could be in for a big rally if Geitner comes through on MOnday.


Mark A. Sadowski said...

I read the letter the CBO sent Senator Gregg and it seems to make some of your remarks sound somewhat extreme. In fact the CBO says the short term effects are quite large and positive:

"According to these estimates, implementing the Senate legislation would increase GDP relative to the agency’s baseline forecast by between 1.2 percent and 3.6 percent by the fourth quarter of 2010. It would also increase employment at that point in time by 1.3 million to 3.9 million jobs, as shown in Table 1. In that quarter, the unemployment rate would be 0.7 percentage points to 2.1 percentage points lower than the baseline forecast of 8.7 percent. The effects of the legislation would diminish rapidly after 2010. By the end of 2011, the Senate legislation would increase GDP by 0.4 percent to 1.2 percent, would raise employment by 0.6 million to 1.9 million jobs, and would lower the unemployment rate by 0.3 percentage points to 1.0 percentage point."

The effects on GDP in the fourth quarter of 2009 would be even larger than in the corresponding period in 2010. The CBO also pointed out that in the short term there would be absolutely no crowding out effect. The letter can be linked to from the following CBO page:

On the other hand, here is what the Director's Blog (above link) had to say about the long term crowding out effects:

"The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provisions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net."

In other words the current Senate bill will reduce long term GDP growth by 1/100 to 1/300 of a percent per year through 2019. Although any reduction in long term growth is bad, this is, quite frankly, extremely small.

In summary, CBO says the current Senate stimulus bill has a significant positive benefit in the short term and a tiny negative effect in the long term. Furthermore, it says that spending on infrastructure, education and tax incentives for investment (currently 25% of the bill) have a positive long term effect. Why not just include more of those types of programs so that the net long term effect is at least neutral?

Scott Grannis said...

If that's the best thing the CBO can say, then you can bet the real thing is a lot worse. CBO is overlooking completely the waste, fraud, and corruption that is certain to accompany such a bill that is so laden with pork and special interest spending. It's an abomination, and it stinks to high heaven.

Scott Grannis said...

Mark: If Geithner comes up with something worthwhile for the banks, we could indeed see some room for optimism. I think he is moving in the right direction. That would do more than the entire stimulus bill.

Mark A. Sadowski said...

Well, I disagree with you about the stimulus (if only because I think we're in a liquidity trap) but I don't think it will be truly effective unless we also fix the financial sector. Thus far, as far as I am concerned, TARP has been a huge dissapointment. I hope Geithner has something dramatically better to announce on Monday.

Mark Gerber said...

Yes, I agree that the "Financial Stabilization Plan" is far more important than the stimulus plan.

I think Obama is a smart man and a great politician. Perhaps I'm going out on a speculative limb, but if I connect the dots:

1) Now is the time to hit these deflationary forces hard and stabilize the financial system. I believe this may be the last chance as it will get too expensive if housing keeps sinking.

2) Geitner and Obama understand that time is running out, and turning the markets around now is necessary to getting the economy going in the right direction later. They have to hit it hard in a way that will move the risk markets (eg. stocks, corporate bonds) up.

3) They understand the stimulus bill is not nearly as important as financial stabilization. Thus, it makes sense to hand out goodies in the stimulus to get what they need in the financial stabilization. Pelosi (the bad cop) went a little too far on the goodies so they will give some back to give some cover to Obama (the good cop).

4) When they blow us away with a powerful financial stailization plan next week, the markets will continue to rally giving cover to the goodies given away in the stimulus.

Well, that's probably enough speculation on Obama's political chess game. This may all be a figment of my imagination, but I hope I'm right. A lot of new foreclosure inventory is about to hit the market (from the various moratoriums late last year), and more layoffs are coming. I believe we have got to turn the housing and financial markets now or the deflationary scenario will come back and can't be stopped.

Last night Kudlow said he didn't want to see the USA turned into a hedge fun, but I believe we are already there. It's now or never for turning this ship.

Scott Grannis said...

Mark: I think you're unduly pessimistic about things. But it sure wouldn't hurt to have Geithner give us a sensible plan to put finis to the bank problem.

Mark Gerber said...

I figured you didn't share my pessimism :) By the way, I've noticed for a long time that you have a wonderful way of expressing yourself in writing in your posts. I wish I could express myself so well!

I suppose we will have to agree to disagree on the severity of the risks we face from a continuation of the viscious cycle (negative feedback loop) of dropping housing prices/foreclosure causing financial problems causing declines in consumer spending causing layoffs causing more housing problems ...

I think it was very interesting that Obama/Geitner felt compelled to tell us they will make their financial stabilization announcement Monday, not just sometime next week as previously stated .... knowing it would get the markets moving up today. More cover for their goodies.

Have a great weekend Scott and thanks for your great blog!


Scott Grannis said...

Mark: keep in mind that downward spirals do not self-perpetuate unless policy mistakes keep getting worse. We've seen enough house price declines to change the dynamic in some markets already. People respond to changing incentives. Asset prices are adjusting significantly; there will be positive responses to these adjustments. We don't need government to stop a recession.