Why The Economic Stimulus Plan Was A Taxpayer Failure But A Political Class Success

Yesterday we made the case that the TARP program to save the world's financial system was basically an expense failure for taxpayers but provided a successful new source of campaign slush funds to keep incumbent politicians in office. Today we will look at some aspects of Obama's economic stimulus program and see if the American taxpayer got their money's worth in this government program:

• The easiest analysis of the stimulus program is to just look at what the administration claimed would happen if we did not pass the program. Their claim was that, without the economic stimulus, unemployment could rise as high as 8%. Well, Congress did pass the stimulus program and unemployment has been stuck between 9.5% and 10% for who knows how long, with no immediate prospects for it getting anywhere close to the upper limit the administration says it would hit WITHOUT the stimulus spending. No matter how you cut it or how many times Pelosi blames the Bush administration, the stimulus program has been a bust when measured against the parameters that the Obama administration put forth. Oh, and by the way, while I am certainly no fan of Bush, the Democrats have controlled the purse strings and economic policy for the past three and a half years in Congress so Pelosi's recent blaming of the Bush administration for the economic doldrums in the country ring hollow, given she and the Democrats have been running Congress since 2006 and the White House since early 2009.
• In late October, 2009, about a year after the stimulus program took effect, the Associated Press ran an article by Matt Arizzo and Brett Blackledge that reported the Obama's administration claim that the stimulus program had created or saved about 640,000 jobs. At the same time, propublica.com's analysis estimated that at that same time, about $183 billion of stimulus money had been spent. [Note: Reason magazine estimated that by the end of 2009, the administration would have spent almost $200 billion of the stimulus money, indicating that the propublica.com estimate was probably a good estimate for late October, 2009]. If we do the simple calculation of dividing the Obama administration's number of jobs created/saved (640,000) into the amount of taxpayer money spent up to that point, we see that each job created or saved cost about $286,000, or more than four times what the typical American household earns in one year. Thus, we could have created four typical earning American household jobs if we could have theoretically just written four checks out of the $286,000. Instead, we as taxpayers only got one job for each $286,000 spent. inefficient, wasteful, and a failure, from a taxpayer perspective.
• Also in late 2009, the Associated Press ran another article concerning the stimulus, this one covering bridge construction and repair. One of the selling points of the stimulus program is that it would have a twofold effect relative to infrastructure jobs: it would create construction jobs and those jobs would fix our nation's crumbling infrastructure which would better serve the nation and the economy once things got back to normal. Unfortunately, the Associated Press investigation found that of the 2,200 or so bridges fixed under the stimulus program, about half of them were perfectly fine and needed no repair or construction work. It is pretty obvious what happened. Politicians in power were able to direct stimulus construction funds to their home districts or states even if the money could be better spent elsewhere on bridges that really were dilapidated and falling apart. Thus, rather than get an efficiently fixed infrastructure, we created phony work to fix things that were not broke, basically paying twice as much in taxpayer money to get the benefit.
• Two Republican Senators have issued a report that highlights, in their minds, the 100 worse uses of stimulus money. I will just go through the first five today, it gets pretty depressing after reading about five:

1. Almost $550,000 of stimulus funds were spent to replace windows in a Forest Service visitor's center at Mt. Saint Helen's. One might think this is a good thing except for the fact that the center has been closed down since 2007 and there are no immediate plans to reopen it since the Forest Service believes it has enough facilities for visitors already in place. As we have said many times in this blog, government does not create jobs, it creates work when it comes to stimulus spending. Once those windows were needlessly replaced, the jobs disappeared. Short term work was created, a long term job was not.
2. About $762,000 of stimulus funds were spent at the University of North Carolina to develop a computerized choreography program that the recipients of the funds hope will lead to a Dance version of YouTube. How this creates a long term, sustaining job is a mystery. If the market needed a computer program to develop a Dance version of YouTube, someone would have stepped forward with the venture capital funding.
3. About $62 million of stimulus funds were earmarked for the city of Pittsburgh to extend its light rail system under the Allegheny River and connect to a river casino and two professional sports complexes. This money was allocated despite the fact that the Pennsylvania governor called the rail connection a waste of money, the local Pittsburgh paper called it the tunnel to nowhere, and earlier attempts to build the tunnel were met with severe cost overruns. Talk about throwing good taxpayer money after a bad idea.
4. About $1.2 million of stimulus funds were earmarked to convert an abandoned train station, on a dead train line, into a museum in Glassboro, New Jersey. The train station closed almost forty years ago and is currently boarded up and covered in graffiti. it has no windows, they have been replaced with plywood, it has not immediate parking or landscaping, and if you see the picture, it cannot be more than 20 by 30 feet big. As with Pittsburgh, if Glassboro wants to create a museum, or Pittsburgh wants to build a light rail tunnel, then let that town fund it, not the Federal taxpayer. Creating a museum in dinghy, small, obsolete rundown building has nothing to do with creating an economy that can self generate long lasting jobs.
5. About $1.9 million of stimulus money was sent to the California Academy of Sciences to research ants in the southwest Indian Ocean and east Africa. The money would be used to capture, photograph, and analyze exotic ants. This one is so ridiculous from a job creation perspective, I cannot even come up with anything witty to say.

So where are we? A stimulus program that does not even come close to the parameters that its creators laid out, inefficient and redundant use of money to fix things that were not broken, job creation costs that are astronomical and inefficient, and money wasted on projects for dance computer programs, cataloging of ants, and building a tunnel to nowhere. Thus, it is obvious that the taxpayer loses again, just like we did under TARP.

And who wins under the stimulus program? Of course, it is our political class. Politicians were able to divide up the stimulus money and send it to places that did not need it or spent it on things that are totally inane, all in the pursuit of getting re-elected, i.e. showing how they brought back tax dollars to the home state or district and they need to be kept in office. In the meantime, 14 million Americans are still out of work but we know a whole lot more about ants in the Indian Ocean.

Let's assume that the American taxpayer put out about $1.5 TRILLION for both TARP and the stimulus program (remember, government pays for nothing, at some point in time the American citizenry pays for government expenses). If that money had been spread out to every American household, each household would have had about $13,000 in their pocket. $13,000 they could have used to pay their mortgage and stay out of foreclosure, $13,000 they could have used to help buy a new car, stimulating the auto industry, $13,000 they could have spent at restaurants, amusement parks, on cell phones, etc. which would have more efficiently stimulated the economy from the ground up. This would have been a much better use of our money, we could live without a Dance version of YouTube or windows in a closed visitor's center, if we had our own stimulus money to spend.

We lose, they win again. That is why two steps from "Love My Country, Loathe My Government" are so critical to this country going forward. Obviously, Step 39 is important since it would impose term limits on our Federal politicians and eliminate the need for them to constantly steal from the public treasury to enhance their re-election chances. Second, we need to implement Step 44 which would prohibit the expenditure of Federal funds on any project or program unless it significantly affected the residents of at least five states. Anything short of that threshold would be funded by the affected states or not done at all. The Federal government has no business in creating a museum in a dump in Glassboro, and certainly cannot claim that such a waste is helping to create jobs.


Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.

Also visit the following sites for freedom:

http://www.cato.org/
http://www.reason.com/
http://www.robertringer.com/
http://www.realpolichick.blogspot.com/
http://www.flipcongress2010.com/

Why Obamanomics Failed And Why

It is pretty apparent now that most of this administration's economic policies have been failures. Official unemployment remains at about 10% while the "real" unemployment rate, when you count those Americans who have stopped looking for a job approaches 20%. We are almost 18 months into the administration's stimulus package and nothing has really changed. The stock market is adjusting downward, small businesses (the typical engines of employment growth cannot get reasonable loans to expand), the stimulus already spent was spent on bridges that did not need to be repaired and other trivial, non-economy expanding endeavors, and the housing market continues to be in the dumps with prices and housing starts going nowhere.

And worse of all, the political class has spent unheard of billions via deficit spending to greatly enlarge the nation's debt levels while solving no major economic problem. According to an article written by Jason E. Taylor and Richard K. Vedder in the May/June issue of the Cato Policy Report, "Stimulus By Spending Cuts: Lessons from 1946":

• The Obama administration projects a $1.6 TRILLION deficit in 2010.
• This is 11% of our GDP, almost four times larger than the 3% level which is generally accepted as a prudent annual debt level.
• This follows a Federal budget deficit of $1.4 TRILLION in 2009.
• The $3.0 TRILLION deficit from just the first two years of this administration piles more than $26,000 of debt responsibility onto each American household on average.
• The current deficit is equal to the size of the TOTAL Federal budget in 1997.
• The Conference Board's Present Situation Index of consumer confidence hit is lowest level in the past 27 years in February, 2010, over a year into the Obama administration's rule.

However, the primary emphasis of the article is not the many economic failures of the Obama administration but to describe what happened in 1946, immediately after the war. The economic community's experts were predicting very, very high unemployment as the Federal government wound down its war spending, millions and millions of soldiers returned to private live, and the government economic planning and control, as a result of the war, was allowed to lapse. Some of the dire economic predictions included:

• In August, 1945, the Federal Office of War Mobilization and Reconversions predicted that 8 million Americans would be unemployed which would be the equivalent of 12% unemployment.
• Business Week predicted that unemployment would peak at 9 million or 14%.
• An economist at the American Federation Of Labor forecasted that upwards of 20 million Americans would be unemployed or upwards of a 35% unemployment rate.
• Alvin Hansen, a leading Keynesian economist of the time (Keynesian economists believe that they are smart enough to manage the economy through economic modeling and government spending levels), argued that "government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls." He felt that removing these "government spending stimulus" funds, i.e. government spending for the war effort, would result in a new depression with high unemployment rates.

What really happened? Consider the historical facts:

• Overall Federal government spending went from $84 billion in 1945 to $30 billion in 1946, a reduction in government spending of almost 64%.
• Unemployment levels rose slightly above the wartime rate but stayed around 4.5% from 1945 through 1948, below the long term unemployment rate average of the past century.
• Civilian employment grew by millions of jobs between 1945 and 1947.
• Household consumption, business investment, and net exports grew significantly despite the drastic cut in government spending.
• By 1947, the government was running a budget surplus of close to 6% of GDP and was using the surplus to pay down its war debt.
• All of this economic good news happened despite the armed forces releasing about 10 million servicemen and women into the market.

Can you imagine what Obama and his Keynesian economic advisers would have done back then? They would have significantly increased spending and debt, which is in direct conflict which what was done and WHICH WORKED. They would have extended unemployment benefits for everyone indefinitely, muting desire to get out and find a job, they would have wasted money on wasteful public sector jobs, which are not really jobs since they disappear when the short term government stimulus spending is used up, they may have denied Americans their freedom if they followed Hansen's advice and made them stay in the armed forces "for the good of the country", they would have made the economy operate inefficiently by continuing to produce goods and products nobody wanted if they followed Hansen's advice to keep the munitions factories working, etc.

The article goes on to make a very solid case that what the political class and government interference did in Japan in the 1990s and during the Depression in the 1930s actually made the economic situations worse for a longer period of time. (We may come back to the article in a future post to explore their excellent analysis.) And that is exactly what Obama and his economic advisers and the political class are doing today, the exact opposite of what worked in 1946. It is not surprise then we have very high unemployment, obscene debt levels, and low confidence. Remember, that the best economists of today, including the best Keynesian economists, along with all members of the political class never saw the financial crisis coming until it happened. Thus, why should we continue to give and credence to the stimulus programs and wastes of money they propose when the biggest, largest, most humongous financial crisis happens without any forewarning?

That is why Step 1 in "Love My Country, Loather My Government" is the most critical step in the whole book. If we do not start doing a systematic and long term reduction in government spending and begin to drastically reduce the national debt levels, everything else including our freedoms and liberties will be a moot point. The government economic policies of 1946 showed what can happen when we trust the market and not the politicians.

Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.

Political Class Actions and The Many Unintended Consequences

One thing that most Americans never think is what happens after the political class takes action or passes a law? I think most of us just assume that once the law is passed, everything will be okay and work as planned. Unfortunately, that is almost never the case. For one, most of the laws pass never solve, or even address, the issue that they are purported to be addressing. Anti-drug laws do not work, Bush's public education initiative, No Child Left Behind, does not work (and the Obama version will not work either), the Federal government funded and started building a fence along our southern border to keep illegal Mexicans out of the country but the fence has been breached over 3,000 times, allowing who knows how many illegals to get into the country, we are told that we need an economic stimulus package that will be used to fix our crumbling infrastructure but the Associated Press reported that about half of the stimulus money for bridges was spent on bridges that were in excellent condition, etc. The list goes on and on.

Consider some more recent occurrences of unintended consequences:

• The main reason that BP has not gotten its runaway well under control is that the accident occurred about a mile under the Gulf Of Mexico. Why are they so far out in the Gulf and drilling in such deep water? Because Congress decided to force drilling further and further from the coastline, falsely assuming that our beaches would not get fouled by an oil disaster if the oil rigs were further away. The unintended consequence of their logic is that once the disaster did occur in deep water, it could not be readily fixed compared to if the drilling had been closer to shore. Yes, there may have been some localized ecological damage but it would have been contained and easily and more cheaply cleaned up. Now, this unintended consequence will spread disaster all along the Gulf and into the Atlantic Ocean, unintended consequences from a political class that did not think through the problem.
• In the past year or so, there have been horror stories of airline passengers spending hours and hours in airplanes waiting to take off resulting malfunctioning toilets, shortages of food and water, high degrees of stress, and other behaviors that one would expect being cooped up in a plane for long hours but not going anywhere. To remedy the situation, the political class passed a law that puts a cap on how long passengers can sit in a waiting plane before the airline starts being fined. Their logic was that if the airlines were facing stiff fines for delaying flights on the ground for more than a few hours, they would act more efficiently and promptly to get the passengers airborne. However, the unintended consequence of this law was that airlines can avoid fines if they cancel the flight before the time limit is reached. Consider this unintended consequence example: if a plane is scheduled to actually leave the ground fifteen minutes after the time limit elapses, rather than going through with the flight, the airline will cancel it to avoid the heavy fines and inconvenience all of the passengers even though they were very close to taking off. Thus, an airline will probably never get fined under this law but untold number of passengers will be inconvenienced by canceled flights, an unintended consequence.
• Back when the economy first started to implode, the political class told us that we had to bail out the banks because they "were too big to fail." If they failed, then the entire financial system might collapse. Two years after the political class sold us this bill of goods, it appears that the four biggest banks, Wells Fargo, Bank Of America, Citi, and JP Morgan, are now bigger than ever with a bigger percentage of deposits and assets than before the economic meltdown. Thus, in an attempt to save banks "that were too big to fail", the unintended consequence was that the political class made a handful of the surviving banks bigger than ever. This must mean that we are no closer to getting out from under the "too big to fail" dilemma despite wasting billions and billions of taxpayer dollars on bailouts.
• In almost every past recession, it was small businesses that led the country out of the economic downturns with their hiring of new workers. However, in this recession, unemployment has stayed very high and small businesses are not hiring people, they are just getting more productivity out of their current workers. What happened? According to many sources, small businesses are having a very difficult time getting loans to expand. No loans, no new hiring. Thus, the unintended consequence is that the political class has been so tied up with the big banks, all of their actions in the banking industry over the past two years has resulted in an environment where banks do not want to loan money except to the biggest companies.
• Last year, it was discovered that many children's products coming from China factories had high levels of lead in them. The serious concern was that kids might put the toys and other products in their mouths, ingest some of the lead, and suffer serious health issues. The political class and government agencies got involved after the fact and made sure that those products were removed from the shelves and not longer imported. The unintended consequence of their late actions were highlighted in a May 20, 2010 Associated Press report that found high levels of the toxic metal cadmium in some imported children's products. Thus, through incompetence, the removal of lead from products was not enough to protect our kids since the overseas factories just replaced one toxic metal with another. So, just when you thought it was safe to have your child suck on a toy because of what the government did to remove the lead, you run smack into the unintended consequence of a different dangerous metal to be ingested.
• The recent health care reform legislation that was passed was opposed by every Republican in both the House and the Senate and had to be carried by all Democrat votes. The Democrats have traditionally been strong advocates of abortion rights for women. However, according to an Associated Press May 17, 20120 article, the way the final legislation was written had the unintended consequence of making it easier for a state government to restrict abortion coverage by private insurance plans serving the 30 million uninsured Americans in the so-called insurance exchanges that will take place in 2014. In other words, if you buy your health insurance through these new exchanges, the state where you live can make it much more difficult to get funding for an abortion. Arizona and Tennessee have already passed laws to this effect and dozens of other states are considering doing the same. Not quite the result the Democrats wanted in the area of abortion rights, certainly an unintended consequence.

There are probably a number of reasons why political class and government programs do not go as planned and result in unintended consequences. First, some of these issues are very complex (the banking/financial industry, the 2,400 page health care reform bill) and the politicians are not smart enough to understand how things work. As a result, their intentions result in unintended consequences that they were not intelligent enough to foresee.

Second, there is no accountability for correctly implementing many of these programs. Why was taxpayer money wasted fixing bridges that did not need to be fixed, especially when we were told by the politicians that one benefit of spending obscene amounts of borrowed money is that our crumbling infrastructure would be improved? The fence on the border costs billions of dollars to build, why is no one being held accountable for its poor performance and numerous breaches?

Third, as we have said many times in this blog, politicians do not solve problems, they only get re-elected. They are either not smart enough to find root causes and solutions for problems, they are too lazy to find the the root causes and solutions, or they do not want to find the root causes and solutions since it may harm their election chances. In any case, we suffer the unintended consequences of bad legislation, legislation that is not properly executed, or politicians that are not held accountable for laws and policies that go astray.

Thus, in the future, whenever Congress passes a law, do not think what good the law will do. Focus on all the ways things that could go wrong, you are far more likely to be right tracking the latter possibility than the former. At the same time check out Step 39 and Step 34 in "Love My Country, Loathe My Government" to see what could be done to help minimize unintended consequences. If we do not do it, our political class will certianly not do it.




Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.

Commitment Vs. Involvement: In A Ham And Egg Sandwich, The Chicken Is Involved But The Pig Is Committed

A recent article in the St. Petersburg Times by Robert Trigaux reminded me of this grand old saying. The article was published on Sunday, April 11, 2010 and it went through the cast of characters that were somehow involved with the market crash and recession starting in late 2007. The majority of the article was based on the testimony a lot of these people recently gave in front of the Congressional committee that was investigating the causes of the economic crash.

A few things struck me as I read the article and looked at the pictures of those listed as involved in the crash. The first thing I noticed, and the most obvious, was that all of these people mentioned in the article were involved in the crisis but none of them want to stand up and commit that their actions or inactions were contributing factors to the disaster:

• Alan Greenspan, former head of the Federal Reserve Board, did not take responsibility for the crash even though many people think that under his leadership, the Fed kept interest rates way too low for way too long. During the hearings, Greenspan stated that he was right 70% of the time in his Fed decisions. While 70% might be good for an NFL quarterback for a pass completion record, 70% is not good enough when the economic well being of the nation's citizens are on the line.
• George W. Bush has not taken responsibility for the crash even the seeds of destruction were sowed and allowed to grow during his administration.
• Barney Frank has not taken responsibility for the crash even though he was the House committee chairman that oversaw the housing market, he did not see the biggest economic crash coming since the Great Depression until it hit him in the face.
• Chris Dodd has not taken responsibility for the crash even though he was the Senate committee chairman that oversaw the housing market, he did not see the biggest economic crash coming since the Great Depression until it hit him in the face.
• Henry Paulson has not taken responsibility for the crash even though as Treasury secretary he also did not see the biggest economic crash coming since the Great Depression and when it did hit, he reacted slowly with no apparent strategy for determining which Wall Street firms were to live and which were to die.
• Bill Clinton has not taken responsibility for the crash even though as President he signed laws that separated commercial banking from investment banking, creating the behavior that led to the crash along with legislation that exempted the dangerous derivative financial products from regulation.
• Christopher Cox has not taken responsibility for the crash even though as former head of the Securities and Exchange Commission his organization watched on the sidelines as the banking system almost collapsed completely due to shady and risky financial dealings.
• Richard Fuld has not taken responsibility for the crash even though as CEO of defunct Lehman Brothers Fuld allowed his company get so deeply into risky subprime instruments that its demise was the biggest bankruptcy in U.S. history.
• Raymond McDaniel has not taken responsibility for the crash even though his company, Moody's, incorrectly or falsely rated the subprime financial instruments as financially sound.
• Angelo Mozilo has not taken responsibility for the crash even though as CEO of Countrywide Mortgage his company apparently never met a mortgage customer, no matter how uncreditworthy, that his company would not accept.
• Franklin Raines has not taken responsibility for the crash even though as head of Fannie Mae his big investments in subprime mortgage securities led to a massive taxpayer bailout.
• David Lereah has not taken responsibility for the crash even though as a former economist of the National Association of Realtors, he never saw the housing collapse coming and his book, "Why The Real Estate Boom Will Not Bust" was published just as the real estate boom went bust.
• Robert Rubin has not taken responsibility for the crash even though as Citigroup Chairman he claimed he was ignorant of the risks that nearly destroyed one of the biggest banks in the world, indicating he was either a very lousy executive by not knowing how much at risk his company was at or a very lazy executive who never took the time to understand how much at risk his company was at.
• Charles Prince has not taken responsibility for the crash even though as Citigroup CEO he was just as lousy or lazy as Rubin.
• The Democrats in Congress have not taken responsibility for the crash even though they ran all of the Congressional committees responsible for the overseeing the housing and banking sectors of the economy and consistently rejected dozens of calls by the Bush administration to put stronger oversight onto Fannie Mae and Freddie Mac. They also rejected a request from John McCain in 2005 to rein in the dangerous lending and security practices of Fannie and Freddie. One reason for this resistance was that these two quasi-government organizations were large campaign contributors to Democratic Senators Dodd, Obama, and Kerry.

So all of these important people were involved (the chickens) in the financial disaster but none of them have committed (the pig) to taking responsibility for the results, it wasn't their fault. If it was not their fault, then whose fault was it? This was obviously a big deal since the stock markets suffered extensive setbacks, unemployment is nowhere close to recovering, the Federal deficit has skyrocketed in part due to the large bank bailouts, and the housing market is still in the dump. But no one is responsible. In the above list, no one went to jail, no one paid a large fine, no one went bankrupt, many did not lose their jobs, and no one has an answer of why it went so wrong and why no one in a position to acted to avert or at least mitigate the outcome.

Thus, the first conclusion I draw is that this is just another instance of where the government and the people that are currently running it are not effective and the programs they are responsible for do not work. As stated in "Love My Country, Loathe My Government," we need to do a ground up housecleaning of the people/politicians and the processes that are no longer effective in running this country.

The second conclusion I draw from he article is a little more subtle. As I look at the politicians running the hearings looking into the the causes for the economic crisis and include the list of people from above, I see that almost all of them are older white males. There are no females involved, very few younger people involved, and Franklin Raines is the only African-American who is prominent in the discussion of fault.

Could it be that this group of politicians and business leaders are not diverse enough to see a crisis developing or are too cozy with each other to want to do anything to avert these kinds of disasters? This brings us to Step 45 in "Love My Country, Loathe My Government," a step we have not talked about often in this blog. This step would require the political class to obey and heed all laws in effect that work to guarantee equal opportunity relative to race and sex. Maybe if we had a little more diversity, fresh blood, and fresh ideas involved in the process of running the country we might get some better results. Heaven knows that the current club of people running the country, both in and out of government, may be stuck in a group think mode, making them incapable of foreseeing the future disasters. Said another way, we need more committed pigs and less involved chickens running the country.



Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble.

The Obama 5% Solution That Solves Nothing

One of my very favorite Mark Twain quotes goes something like this: "Sometimes I wonder whether the world is being run by smart people who are putting us on or imbeciles who really mean it." After reading a recent Federal government budget article that was posted on the Earthlink news page on November 13, I am still not quite sure who we are dealing with in Washington.

According to the article, the Obama administration has alerted domestic parts of the Federal government that they should plan for a budget freeze or even a five percent decrease in their budget (heavens, 5%, how will they survive!). This edict came down in an attempt to cut the deficit spending catastrophe this Congress and administration has gotten us into. It was also timed to coincide with Obama's trip to the Far East in an apparent lame attempt to convince the Chinese, the largest purchasers of America's debt, that the American political class was getting it's financial house in order.

On the same day the article appeared, the government reported on the latest budget and spending results for October and the entire 2009 fiscal year that ended at the end of September. In October, the Federal government spent $176.4 billion more than it collected in revenue (not including new debt). For the entire fiscal year, the Federal government spent $3.53 TRILLION on tax and other receipts of $2.11 TRILLION, requiring the government to finance through deficit spending another $1.42 TRILLION. The 2009 deficit of $1.42 TRILLION was $958 billion more than the previous record year of deficits (2008).

As I like to do, let's have some fun with math:

• In October, the Federal government spent almost $4 million a MINUTE that it did not have and had to finance. As an example, in the time it takes you to read this final post, your government would be another $4 million in the hole.
• On an annual basis, the Federal government spent about $2.7 million a MINUTE that it did not have.
• If you had spent a $1,000 a day, a figure that most of his could probably live comfortably on, since the day Christ was born, you would still not have spent a billion dollars. In 2009, the federal government covered that ground within three hours.
• To cover just the budget shortfall of $1.42 TRILLION, every one of the 130 million US households would have to kick in almost $11,000 just to cover the deficit, before paying regular taxes. Each household would theoretically pay another $27,000 to cover the remaining part of the Federal budget.
• In fiscal year 2009, the Federal government spent 67% more than it took in via taxes and other revenue sources. As an example, if you are a typical US household making about $57,000 a year, you would of had to spend about $95,000 to keep up with the government. As you all know, that kind of spending lifestyle will not get you far.

But thank goodness the President is stepping up to get the budget under control by boldly looking for a freeze in spending and maybe a 5% decrease. Will that solve the problem? More math:

• In the best case where he gets a 5% decrease across the board, he would get the budget of the Federal government from $3.53 TRILLION to a miserly $3.34 TRILLION. This would theoretically leave the country with a $1.24 TRILLION deficit that would still be a record deficit by far.
• If each US household had to cover the reduced deficit, each one would be on the hook for just under $10,000 just to cover the spending overrun, hardly a bargain.

There are three problems that arise with this analysis as I read the article. First, the 5% is for domestic agencies which implies that defense, Social Security, and Medicare and other categories of government spending would not be under the 5% edict. Second, the article says it could be as much as 5% which means it will not be a 5% across the board cut. Finally, the article correctly points out that reducing government spending in an election year such as 2010 is usually not done. Bottom line: this 5% target will probably never see the light of day and thus, will have no effect on Federal government spending.

Now, is the Obama adminstration really smart or is it a Mark Twain imbecile? Either way, we are screwed. If it is really smart, then it must be betting that we and the rest of the world are imbeciles since anyone who does the simple math we did above would realize that this edict is nothing more than a lame public relations stunt designed to fool the Chinese and other purchasers of US debt instruments that we are really working to reduce the deficit and fool voters into thinking that this administration is serious about deficit reduction. If it is an imbecile, than we are really, really screwed since it did not do or did not understand the simple math above that proves his 5% edict is useless.

This imbecile view is consistent with an order the Obama adminstration gave earlier in the year and which was debunked by this blog where he wanted to find $100 million in spending cuts. As you may recall, $100 million in spending cuts would be worth about $.77 per household. If Obama and his economic people really believe they are reducing deficit spending with these two lame orders, than the country will hit financial Armageddon very, very quickly since this type of spending does not even account for the coming tidal wave of baby boomers who will be swamping both Social Security and Medicare very quickly.

That is why several steps in "Love My Country, Loathe My Government" are so very important. Step One must be implemented immediately, i.e. begin reducing government's size by 10% a year for the next five years. Steps 9, 10, 11, and 12 are also critical in getting the future entitlement programs under control with the least amount of pain. Anything short of these bold steps will not rein in out of control Federal spending which will eventually crush the economy and financial well being of every American. Cheap 5% public relations stunts will solve nothing.

Final note: the Democrats have been in charge of Congress for the past three years. Under the Constitution, Congress is responsible for authorizing all government spending. Thus, while Bush has a lot to blamed for in creating this record deficit spending, it has been the Democrats who have controlled the purse strings for three years, and the Presidency for almost a year, under whose watch these dangerous deficits arose. Bottom line: everyone in the political class is to blame.

Visit our website at www.loathemygovernment.com to order an autographed copy of the book, "Love My Country, Loathe My Government -Fifty First Steps To Restoring Our Freedom and Destroying The American Political Class" and to sign up for the cause. The book is also available online at Amazon and Barnes And Noble.

The Blame Game = Part 2

Let's expand yesterday's discussion about the political class use of the blame game. First, complete disclosure: I have never voted for a Republican for national office in my life. Thus, as you read the following do not think I come off as a Bush apologist, in my opinion his Presidency was a failure in so many ways.

However, should the Bush administration be blamed for the economic and housing industry meltdown as the Democrats claim and were the Democrats blameless? The following comes from a website called The Gateway Pundit and was published on their website on September 21, 2008. The website definitely has a pro-Republican bent but it documents all of its data sources and if even half of them are right, it is a damning indictment of the Democrats regarding their blame for the economic meltdown. Consider what the Bush administration thought of Freddie Mac and Fannie Mae, the two massive Federal agencies that were involved with trillions of dollars in home mortgages (the incompetency of these two Federal agencies will probably end up costing the taxpayer trillions of dollars and were central causes in the economic turmoil):

1. April 2001 - Bush administration 2002 budget declares the size of Fannie Mae and Freddie Mac "a potential problem" and "financial trouble of a Government Sponsored Enterprise (Freddie and Fannie are both GSEs) could cause strong repercussions in financial markets, Federally insured entities, and economic activity."
2. May, 2002 - Bush calls for better disclosure and corporate governance principles to also apply to Freddie Mac and Fannie Mae.
3. February, 2003 - the Office of Federal Housing Enterprise Oversight releases a report that concludes unexpected problems at a GSE could "immediately spread into financial markets and beyond the housing market."
4. September, 2003 - Bush Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend a new Federal agency to regulate and supervise the GSEs.
5. November, 2003 - Bush administration wants the new Federal regulatory agency to have enough power to "reduce systemic risk".
6. February, 2004 - the 2005 Bush budget reiterates the need for a new regulatory authority for GSEs and highlights the risks posed by their substantial growth.
7. February, 2004 - Bush cautions Congress about GSEs through Greg Mankiw, chairman of the Council Economic Advisors, calling for Congress to help reduce the risk of the GSEs.
8. June, 2004 - Deputy Secretary of Treasury Samuel Bodman spotlights the risk of the GSEs and calls for reform, emphasizing that stronger regulatory authority is needed.
9. April, 2005 - Treasury Secretary John Snow again calls for GSE reform citing risk concerns about the GSEs and the need for reform and warning of risks to the entire financial system.
10. July, 2007 - President Bush again calls on Congress to pass a reform package.
11. December, 2007 - Bush again warns Congress about the need to reform the GSEs and stronger oversight.
12. February, 2008 - Assistant Secretary David Nason reiterates the urgent need to move on reform.
13. March, 2008 - Bush calls on Congress to move forward on reforms of Fannie and Freddie.
14. April, 2008 - Bush again calls on Congress to pass the legislation needed to "modernize Fannie Mae and Freddie Mac."
15. May, 2008 - Bush calls on Congress for reform legislation.
16. June, 2008 - Bush calls on Congress to pass reform legislation.
17. July, 2008 - Congress passes reform legislation for Fannie Me and Freddie Mac, seven years after the Bush administration called for action to get the GSEs under control.
18. Note - in 2005, John McCain partnered with three other Republican Senators to "reform the government's involvement in lending." Their effort was blocked by the Democrats.

Thus, according to this source, there were at least eighteen instances where the Bush administration correctly predicted the problem that would occur from the ineptitude of Fannie Mae and Freddie Mac, insufficient oversight, and the horrible economic consequences. Combine this reality with the fact that Freddie Mac and Fannie Mae were restating financial results and having serious accounting issues during this whole time (2003 - Freddie restates financial results for three years, 2003 - SEC investigates Fannie regarding earnings manipulations, 2003 -Fannie discloses $1.2 billion accounting error.) Thus, the warning signs were all over the place but the political class did NOTHING to remedy or alleviate the situation. The question begs: Why?

Here's one theory: the political class did not WANT to fix anything since the status quo was to their benefit. From 1998 to 2009, the top three receivers of campaign donations from Fannie Mae and Freddie Mac were Democrats:

1. Democrat Senator Chris Dodd - Received $165,400 in donations from the GSEs
2. Democrat Senator Barack Obama - Received $126,349 in donations
3. Democrat Senator John Kerry - Received $111,00 in donations

But hold on! While the Democrats were the top beneficiaries of the GSEs, positions four through six were Republicans:

1. Bennett - $107,999
2. Bachus - $103,300
3. Blunt - $96,550

It all stinks, taxpayer supported Federal agencies using their budget dollars to support the political class. Combine this with the fact (source: factcheck.org) that although three top Fannie Mae excutives during this period ended up under investigation for fraud and accounting irregularities, Franklin Raines, Tim Howard and Jim Johnson, they all ended up working in handsomely paid positions for the Obama Presidential campaign. Stinks even more, doesn't it? Were GSE campaign donations traded by GSEs executives for preferential treatment by the recipients of said donations in the political class? Even if there was no quid pro quo, the potential for conflict of interest is extremely high.

Conclusion: most of the meltdown happened on the Bush watch and although his administration correctly identified the problem and the potential for economic disaster, he did not have the smarts or the clout to get what he wanted, beginning in 2001, to avert the problem. He is culprit number one. Culprit number two is the Congressional wing of the political class that either did not know how to fix the problem Bush correctly identified or, more likely, did not want the fixes to occur since it was a source of money for them, both Democrats and Republicans. Thus both Republicans and Democrats are to blame, the problem was staring them right in face seven years ago and they did nothing. But did you expect anything different from them? They have fixed nothing in the past forty years, what is another few trillion dollars of taxpayer wealth down the drain via bailouts as long as they can stay in office?

This is just another example of why Step 39 in the book requiring term limits is so important, entrenched politicians need to continually to get money for their re-election. In this case, their probable desire for GSE campaign donations led them to not fix a problem that is costing us all via our tax doillars.

Addition to yesterday's post: apparently I missed some of the Federal regulatory agencies that are in charge of some facet of the banking and housing market - OFHEO = The Office of Federal Housing Enterprise Oversight, Federal Housing Finance Agency = FHFA and Ginnie Mae. Thus, Howard Dean's statement that we examined in yesterday's blog is even more ridiculous, we have way too much bad and overlapping government regulation and interference in this country today, not too much capitalism.

The Blame Game - Part 1

Let's look at the blame game that the political class loves to play on the taxpayers. The blame game involves blaming the other political party's members for the woes of the country, absolving themselves of getting anything done. We decide what "team" we want to be on in the blame game, feel good about ourselves that our team was not responsible, and nothing ever gets done since the politicians spend so much time trying to blame others or duck responsibility for their own incompetence:

1) The latest instance of the blame game comes from Howard Dean who somehow always gets press coverage despite losing his bid to run for President and currently holding no elected political office. He recently stated that the free market and capitalism was the cause of the recent economic meltdown and that regulations were needed to avoid future problems. His specific quote was "I think we had quite enough of capitalism." Blaming capitalism may get him points with his left leaning friends but this blame game does not stand up to any logic:

Consider a few Washington agencies: FDIC, SEC, Fannie Mae, Freddie Mac, HUD, House of Representatives committees on housing and banking, Senate committees on housing and banking, Treasury department, Federal Reserve Board and lord knows how many other Federal and state regulatory and oversight political entities exist. Given all of this oversight, no one in the political class had the smarts or the guts to stand up and say we had a banking and housing problem brewing. Howard Dean is wrong, capitalism did not fail and is to blamed, the political class and its associated government bureaucrats failed to see the biggest economic tsunami coming until it hit them in the face, they are to be blamed. We paid dearly for this extensive government oversight as taxpayers and got nothing in return except a deep recession. How Dean can blame the free markets when the markets were not free and were oversaw by everyone, show either a pandering to the left and its socialistic tendencies or just plan stupidity.

2) The market did exactly it was supposed to do so you can not blame capitalism. Over leveraged banks and overpriced real estate is not the blame, it was simply reality. It is a reality that many banking executives ignored. In a new book, "A Colossal Failure Of Common Sense", Lawrence McDonald, a former vice president at Lehman Brothers presents an insider's view to the crisis. According to McDonald, as early as 2005, some experts at Lehman's were sounding the warning about a coming crisis. These experts even correctly identified the companies that were likely to get pummeled when the market correction came. Despite their expertise, they were ignored and some were even fired for speaking up. If this was happening at Lehman, it was also probably occurring throughout the banking industry. Thus, these high paid executive are to be blamed for the horrible wreckage that occurred to their companies, some of which, including Lehman's, went out of business despite being told what was likely to happen. In this version of the blame game, these same idiots that ignored the warning signs, are rewarded with multi-trillion dollars worth of bailout money. Sometimes the blame game is not logical: everyone is pretty aligned with the fact that the bankers and such brought this on themselves and the country, i.e. they are to blame, but many of them are still in the same positions and enjoying their taxpayer fueled bailout.

3) The Democrats love to avoid responsibility for the economic downturn by blaming Bush. Now, I am not defending Bush. The origins of the crisis festered and grew during his time in office. However, let's remember that the Democrats controlled Congress for the two years before the crisis erupted and did nothing to address the pending disaster. The Democrats ran all of the relevant banking and housing committees in Congress and NONE of them saw the problem coming until it exploded in their face. The chairperson of the Senate Banking Committee, Chris Dodd (seems we heard his name in less than flattering circumstances in a previous blog) was the biggest recipient of campaign donations from Freddie Mac. A little conflict of interest here possibly? The very housing entity that he was supposed to oversee was paying him more than $100,000 for his re-election campaign. Despicable. By the way, Obama was the second biggest recipient of campaign funds from a Federal agency that he should have also been overseeing as a Senator.

Do not get caught up in the blame game. In "Love My Country, Loathe My Government". several steps would address all of these blame issues including term limits, campaign finance reform, and a severe streamlining of government since having a lot of government (see the list of failures in point one above) do0es not seem to work. By limiting the government and the political class to a much smaller set of duties and responsibilities, maybe they can get something right for once and avoid a future economic crisis.

Tomorrow: The Blame Game Part 2 - Who Knew What and When Did They Know It?