Sunday, February 8, 2009

Obama Economics -- Our First Real Look

We are three weeks into the Obama presidency and some things are becoming very clear. First and foremost, the post-partisanship theme, "changing the way Washington does business," is dead on arrival. Obama's stimulus package has nothing in it that could conceivably appeal to Republican voters or lawmakers. It was nothing more than a wish list of every half baked proposal from the unions, environmentalists and protectionists. If the package that was presented to Congress survives in toto, it would undermine international trade, violate most of our international trade agreements, discourage workers from looking for new jobs,increase the current inefficiencies in health care provision, create higher unemployment by keeping wages artificially high on government spending projects, and waste more taxpayer dollars than any proposal put before the US Congress in history.

Even the Congressional Budget Office (CBO), now controlled by Democratic Congressional leaders, couldn't find a kind word for the Obama package. The CBO, last week, said the package would provide almost no new jobs and would make things worse, not better, within a few years. Robert Harrow, Jr's article in the Washington Post of February the 8th, lays out in detail why the proposed spending package will very likely be mostly wasted. My suspicion is that President Obama reads the Washington Post. Perhaps, he should check out Harrow's article. It's on the front page.

The chief reason the CBO is negative on the package is the enormous impact this bill (and the various bailout schemes) will have on treasury debt financing. There is now a serious possibility that the US may not be able to fund its debt in the near future. What if double digit rates are required to fund the national debt? This might be the most optimistic scenario. The Obama Adminstration is so convinced that the economy is in a depression that they are ignoring positive signals from the economy. You are beginning to see substantial vulture bidding in the housing market. Even markets in south Florida are beginning to show some life. January was one of the best months in history for investment grade debt, high yield debt rallied in January as well, stock volatility continued to drop and short term treasury yields came off the floor, Pfizer announced a $ 22 billion acquisition of Wyeth and Pfizer announced that they had secured financing for the acquistion! These are all important signs that the world is not coming to an end.

What about commercial bank lending? If you watch major networks including CNBC, you would think that bank lending was falling? The facts are exactly the opposite. Commercial bank lending in the 4th quarter of 2008 set a new record and was 2 1/2 percent higher than 3rd quarter 2008. For the 2008 year as a whole, commercial bank lending in the US was 5 1/2 percent higher than in 2007. This information is all available at the Federal Reserve website...just check out the Federal Reserve Bulletin which provides the real data for all to see. So much for news reporting!

True, unemployment is growing. If another two million lose their jobs then we might be looking at the percentage unemployed in the 1989-9 recession. If five million lose their jobs from here, then we might reach the level of the only other important recession since the 70s, the 1979-81 recession. We are a long way from approaching a serious recession. We may get there, especially if the stimulus bill passes and the bailouts continue, but we are not there yet, not by a long shot. The reason the press keeps saying that unemployment is the highest in 30 years is that the country's population is seventy percent higher than it was 30 years ago. Absolute numbers are a poor measure, it is the percentage unemployed that counts and that percentage is still well below the level for any recession since the end of World War II and is below the unemployment levels considered to be full employment by every European economy.

Obama's rhetoric makes it clear that he is more interested in "getting even" with people that have made money, particularly Wall Streeters, than seeing the economy improve. Witness the Obama grandstanding this week on executive compensation. This is classic "form over substance." This is "change" that represents a serious effort to duck an issue, while making headlines as if you are really doing something.

At some point there has to be a realization that if you want lenders to lend and businessmen to hire people, perhaps constant demonization of businessmen and lenders from the White House and Congress is not a good strategy. Business folks do not, by law, have to hire anyone. They need incentives to do that, not constant verbal abuse from the politicians. Same with lenders. Most of the Obama program, for example the "Card Check" bill and most of the stimulus package are counterproductive.

Much of the problem is simply one of attitude. President Obama and the entire Congressional leadership have never held a job in the private sector. Indeed, none of them has ever done anything other than map a career in politics. To these folks, anyone in the private sector is a borderline criminal because he/she is trying to make money. These politicians like Daschle who extract millions as inflluence peddlers (without,or course, taking the time to register as lobbyists) think they are above the ordinary rules of morality and law. In their minds, it is not possible for them, by definition, to be as corrupt as folks in the private sector. So, they just do whatever the hell they want (Geithner, Daschle, Rahm Emanuel, Charlie Wrangle, Christopher Dodd, Barney Franks, and the list goes on and on). They have one standard for themselves and another standard for everyone else. Guess which standard is higher?

The problem with all of this is that the attitude of the President and the Congress is not helpful. They are not as interested in getting the economy going as dividing up the shrinking economic pie. If you look closely at the stimulus package, it has absolutely nothing to do with economic stimulus and everything to do with rewarding constituencies that have labored in the Democratic vineyards and are expecting payback. This bill is mostly about payback.

Even the public is not buying this. The latest Rassmussen poll shows a clear plurality against the president's stimulus package. Only 37 percent now think it will do any good. That number will fall. The package is a terrible waste of money and an incredible expansion of the role of government, but contains no short term stimulus for the economy.

Obama was in a marvelous position to create a stimulus package that could have been 50 percent infrastructure spending and 50 percent tax cuts. This plan is 5 % infrastructure spending and practically zero percent tax cuts (It is not a tax cut to give money to someone who does not pay taxes). It is 95 percent pork and payback. Obama is a not new kind of politician. He turns out to be a Democratic hack who is more interested in dividing us than uniting us.

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