Son of Stimulus

Floating out there around the 15 million unemployed like a malevolent fog are the chattering voices of the political class ruminating over the need for another stimulus. The unemployed (and the employed) have a reason to be a bit anxious about this talk; the first $787 billion, passed with great fanfare in January, has done nothing for employment, unless you count those happy few working at Congressman John Murtha's Airport in Nowhere.

I know, I know, I am now expected to deride Big Government spending and corruption. However, the idea of 15 million of my fellow citizens out of work appalls me, and I think it is time to do something about it.

A $1 trillion stimulus? That's for pantywaists. We need much more than that, much more than the government - even one as big as the United States - can possibly spend. Where are we going to find such huge sums of money as we need? Well, the entire global economy is about $60 trillion. If we could just get 23% of the global economy, $14 trillion worth, to invest just a third of that money into America and American jobs, that would be almost $5 trillion right there.

How can we attract this money? Through a massive Public-Private partnership between the U.S. and the world. Our fearless leaders need to declare America a world "Jobs Zone," and slash regulations and other disincentives to entry into the American market. Free up our oil fields for drilling; super-streamline the approval process for nuclear power plants; fast-track new oil refineries; and rationalize our politicized securities regulation to attract venture capital and new IPO's, and reestablish America as the corporate capital of the world. Oh, and while we're at it, adopt a "strong dollar" approach at the Federal Reserve, to assure the world's capital that investing in America is not the same as investing in Zimbabwe. What will flow will be jobs, jobs and more jobs.

What, you don't think this will attract the world's capital to American shores? Well, since America's economy itself is 23% of the world's economy, that's really not important. America herself can fund all of this and more.

And the beauty of it all is that not one of the things I have mentioned - not one! - will involve the public expenditure of money by government. In fact, drilling for oil will produce massive additional revenues for cash strapped government of all levels, Federal and State, as will the new taxes being paid by all the formerly unemployed.

Jobs, jobs and more jobs, with no deficits! What a concept!

Re: CLUNK!

Easy, what's amazing is that there are some usually reliable conservative commentators yielding grudging admiration of the huge crowds in dealerships that were induced by the Clunkers program. This shows that human activity of any kind has a powerful hold on the imagination.

But you could get a swirl of human activity by offering to give away $4,500.00 to every man, woman and child who walks 50 times clockwise around the Washington Monument wearing a flowered hat. And not just a swirl; I suspect you would get a torrent of human activity of Kansas twister proportion, but besides the increased sales of flowered hats, I doubt this would produce anything more than a potentially dangerous public nuisance.

The question is whether the activity is real or trivial. The purchase of the new cars under the Clunkers program is certainly real, producing actual economic benefits to all parties. But this benefit is offset by the fact that it is induced by $4,500.00 taken from some Americans and given to others, which works a decrease in overall economic activity, especially in those goods and services that might otherwise have been bought except for the Clunkers program.

But the worst part about the program is the positive damage done to the economy by the destruction of the clunkers. This would be the equivalent absurdity of requiring the Washington Monument walkers, upon receiving their bag of cash from the government, to burn the money rather than spend it.

There is nothing, nothing at all, good about the Cash for Clunkers stimulus program.

CLUNK!

The so-called "Cash for Clunkers" program "has worked better than any other stimulus program that was conceived," crows Transportation Secretary Ray LaHood ungrammatically.

And he's right. It is better, if your goal is to blindly spend Federal tax dollars as fast as you can. After all, it is now many months later and only about 10% of the $787 billion money appropriated by the Democratic whiz kids in Washington has been spent. The $1 billion allocated for Cash for Clunkers took about a week to disburse.

But if your goal is to spend the taxpayers money responsibly, then Cash for Clunkers is just another disaster in a long line of disasters. In the first place, the goal of the program is to reduce America's dependence on oil by encouraging people to trade in their older, low mileage vehicles for higher mileage cars. But as I have pointed out time and time again to friend and foe alike, higher mileage cars reduce the effective cost of gasoline and lead to an increase in gas usage.

Having endured many derisive smiles and dismissive shrugs before, I am going to say it again a bit stronger, so that perhaps the point will sink in: in all times and places, under every economic and cultural scenario, to the extent higher mileage cars replace lower mileage cars in an economy, usage of gasoline always increases more than it otherwise would have.

Therefore, one week out of the box, and using only Obama's stated goal for the program, the Cash for Clunkers program is already an abysmal failure and an utter waste of $1 billion in taxpayer funds.

The Clunkers program was also supposed to induce much needed consumer spending and shore up the faltering auto industry with increased sales. It does this, but only in that slight of hand way that only government can do. What's the difference between government giving GM and Chrysler $1 billion in exchange for preferred shares of stock and $1 billion under the Clunkers program? Under the Clunkers program, taxpayers get nothing for their money - Zip, Zero, Nada. In other words, Clunkers is just a pure gift to the auto companies after we have already bailed them out to the tune of billions. It's also a gift of taxpayer funds to a small number of fortunate citizens. But since it is only a one time gift it gives no incentive to auto makers or dealers to expand production or hire new people, will not lead consumers out of their current savings binge and will not stimulate the economy in any other conceivable way, no matter how ingenious the talking points dreamed up by the Washington whiz kids.

Wait a second, you say, what about the clunkers turned in by consumers? They are worth the $4,500.00 or so per vehicle spent by the government, are they not? So, the Clunkers money is not just lost, it has gone to purchase viable assets, assets that could be sold by the government or car dealers down the road, which would increase sales, the economy, jobs and GDP. In other words, you budding economists would say, the Clunkers money would stimulate the economy as the initial $4,500.00 per vehicle is cycled again and again through future sales and re-sales.

Well, you obviously have not heard about the really stupid part of the Clunkers program. The clunkers traded in exchange for the Clunkers Federal money will be scrapped, dismantled and melted down, so that not even the parts will be available for resale. That's right, your taxpayer dollars are going to purchase perfectly good cars that will then be destroyed. In one week, "poof!" went $1 billion of your money.

And since no one has ever thought of such a thing before, this will create a new, if short-lived, job-category: EPA approved car destruction experts. Ever heard the phrase "tossing money down a rathole?" Clunkers is a program that creates the rathole - a used car destruction system - so that it will have a big enough rathole for all the billions it needs to spend.

This is all a bit of insanity only the ideologues in Washington could come up with.

Cheap Stimulus

President Obama tells us recently that "stimulus" = "spending," and that therefore any money spent by the government regardless of purpose will be a stimulus to the economy. For an alternative view, see "Rat Hole Stimulus Bill 2009" below. But assuming arguendo that the President is right, might it not be prudent to at least think about stimulus spending that, you know, doesn't cost so much? Let me give a few examples.

Mark to Market. This economic fiasco is, by all accounts, driven primarily by the collapse of the real estate and financial sectors of the economy. So why not a stimulus that not only would directly shore up the balance sheets of banks, but also encourage lending and ... will not cost a dime in federal money? I think it was Bill McGurn who wrote an excellent Wall Street Journal article last October or so, who said in effect that we don't know that suspending the mark to market accounting rules would help banks, but since we are contemplating spending $750 billion, why not just give it a try first? After all, suspending an accounting rule is cost-free; billion dollar bail-outs are expensive.

But that type of reasoning is too subtle for the political class. As an accounting disabled person, I don't know much. But I do know that whereas liquid markets are an excellent indicator of the current value of an investment, they are not the be-all of valuation. Markets can be wrong, and sometimes, it is the sellers who refuse to sell at low prices who are correct. If my house price goes down $100,000.00 (which would bring my palatial home down to approximately -$50,000.00), I can decide that the market is stupid and hold onto my investment until the market corrects itself. This kind of contrarian thinking happens all the time. The oldest rule in investing is "buy low, sell high." How is that possible if the market is always right?

But banks have a particular problem with market pricing of their assets. By law, banks have to maintain a minimum amount of capital. When they (perhaps stupidly) buy huge amounts of sub-prime mortgages and the market in those suddenly turns nasty, then mark to market rules require them to immediately recognize billions of dollars in lost capital. But those assets are not lost in reality (the banks still own the paper), but only because of an accounting rule, a theoretical construct. No one really knows what these assets are worth, and so why can't a bank decide they are worth more than the market thinks, and hold onto them until the market corrects itself?

Sure, savvy investors will have their own ideas as to what these assets are worth, and if they see Bank of America has valued them well above what they deem reasonable, they will pull up their handy calculator and conclude that BOFA is insolvent. And then sell short. BOFA's stock price will plummet (as it's doing now), but BOFA will not face an immediate capital crisis, and will thereby have time to work-out the problem and find out if the short-sellers are correct. This is how markets function, and mark to market short circuits this process to the detriment of banks, lending and our economy.

But again, suspending mark to market wouldn't cost a dime of taxpayer money. Why not get rid of an abstract accounting rule and see what happens?

To Be Continued ....

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