Five Years Later...Why the Stimulus And Keynesian Economics Failed

Remember this chart:

This is what Obama's economic advisers predicted would happen with or without the passage of the $787 billion Stimulus Package (aka the American Recovery and Reinvestment Act of 2009).  Of course, implied in that chart is that economic activity, as measured by our Gross Domestic Product (GDP), would also return to normal levels by the First Quarter of 2014.

The plain fact is that real unemployment did even worse than Obama's "Without Recovery Plan" with the peak unemployment rate hitting 10.1% in 2010.  Today, when it should be at 5%, we are still struggling at 6.6%.  When Obama took office there were 155.2 million workers in the labor force.  Despite the fact that nearly 7.5 million new workers should have entered the workforce over the last 5 years, the number has only inched up to 155.4 million. That 7.5 million, euphemistically called discouraged workers, have just given up looking for work.  As a result, they are no longer counted as being in the workforce. So much for "real" job creation.

And, GDP?  Well, its seen the worst recovery since the Great Depression with an average of about 1.97% growth per year since the recession ended in 2009.   Normally, growth should be 50% greater than that; at 3% or higher. Obviously, the stimulus didn't work as promised; and, even today, three-quarters of Americans still think we are in a recession.

While there are several reasons why Obama's Keynesian-Style Stimulus Package failed, the primary reason lies in the false belief that, when the economy slips into recession as a result of slack consumer spending, that lack of spending can be made up by increasing government expenditures.  But, this is just ridiculous.  The simple fact is that consumers don't spend like governments.  They don't build roads or bridges and they don't spend their money fixing them.  So, instead of stimulating the existing parts of our economy that are in the process of dying off, the Keynesian stimulus winds up  stimulating a subset of the economy that had nothing to do with the reason that the economy faltered in the first place.  What's worse, most of these projects have a low labor cost to materials and equipment costs ratios.  That is why you wind up with statistics that show that, at the very least, it cost the taxpayers $185,000 for each job that was supposedly created.

Another problem with using federal and state construction projects as a means of trying to stimulate the economy is the fact that any spending and job creation will always be short lived.  If the project is 1 month long or 3 years long, that part of the economy that is being stimulated will only benefit as long as the project is still alive. Once its over, so are the jobs and so is the spending.

Lastly, there's the argument by the Democrats that every dollar spent returns $1.50 in economic activity.  To some extent that's true, but $1.50 is an average.  Depending on how labor intensive the  effort is, the returns will range between 70 cents (a loss) and $1.90.  Heavy construction projects are more towards 70 cents than anywhere near $1.50 because the labor costs are so low relative to the overall cost of the project.  Thus, the potential for any true economic expansion is lost. More importantly, the stimulus is a drag on everyone's wallet because deficit spending devalues all the dollars that are in the economy.   This weak dollar effect means that things will cost more; especially imported items.  For example, oil, which is priced worldwide on the basis of the strength or weakness of the U.S. dollar, has dramatically risen since 2009.  The result has been that gasoline prices rose from $1.74/gallon in 2009 to the current rate of $3.63. This is despite the fact we are now awash in new, domestic oil as a result of fracking and other new technologies. In contrast, natural gas, which is not traded in terms of the value of the dollar, has seen its prices fall from $12.49 a cubic ton to $9.40 from 2009 to 2012.  All because of fracking.

Despite whatever spin the White House puts on the stimulus results, it was nothing but a failure and, I think, definitive proof that Keynesian economics is simply another tool for left-wing politicians to grow the government and redistribute wealth.

References:

The Worst Four Years Of GDP Growth In History: Yes, We Should Be Worried: http://www.forbes.com/sites/realspin/2013/04/12/the-worst-four-years-of-gdp-growth-in-history-yes-we-should-be-worried/

As Obama starts sixth year, 74 percent say US still in recession: http://www.foxnews.com/politics/2014/01/22/fox-news-poll-as-obama-starts-sixth-year-74-percent-say-us-still-in-recession/

White House Says The Stimulus Cost Per Job is $185,000; not $278,000: http://www.nationalreview.com/campaign-spot/271107/white-house-nuh-uh-stimulus-jobs-only-cost-185k-each

Politifact: Every Dollar of Spending Returns Between $0.70 & $1.90 in Increase Economic Activity: http://www.politifact.com/truth-o-meter/statements/2010/jul/27/jeanne-shaheen/lawmaker-claims-unemployment-benefits-boost-econom/

A Scorecard on the economy under Obama: http://www.politifact.com/truth-o-meter/article/2012/jun/01/scorecard-economy-obama/

Five Reasons Why Our Economy Won't Recover Any Time Soon

As I have stated before, our economy is 70% driven by consumer spending; and, if in any way, the consumer is forced to spend less of their income on discretionary items, the economy will suffer. To that, I present five reasons why I think the consumer is significantly absent from our economy and why our economy will continue to falter.

1. Unabated Declines in Home Values and a Resulting Higher Savings Rate. Prior to the recession, most Americans saw the rapidly increasing value of their homes as a measure of their wealth. As a consequence, people were only saving about 2% of their income towards retirement. But, when home values collapsed, Americans started to save an increasing amount of their money. Today, the savings rate has nearly trebled from that 2007 rate of 2%. This means that 4% of the average consumer's paycheck is no longer being spent on all those "extra" spending items that would normally help drive the economy.

2. A Continually Weakened Dollar and the Resulting Inflation. Over the last 2-1/2 years, Obama and the Federal Reserve have spent trillions of dollars in money we just don't have. All of it having to be borrowed. As a consequence, the dollar's value has dropped significantly. But, when the dollar is devalued like that, the price we pay for imported goods rises sharply. As a country, we are heavily dependent on imported products in our daily lives. For example, when Obama took office, oil was at $36.15. Just before the so-called Arab Spring, oil had already risen to just above $89 a barrel. Then came the Arab Spring and it jumped to $120 a barrel. Contrary to stimulating the economy, all that government spending is actually depressing the economy by forcing the average consumer to spend an increasing amount of their paycheck to cover inflated prices; leaving less to spend on those discretionary items that would help our economy grow. Many low income consumers are being forced to forgo the luxuries of things we consider essentials; like new clothes. Many Americans have had to cut back on a lot of previous expenditures. For example, recent satellite and cable company reports show the consumer is leaving these services. Something that had never before happened.
However, inflation doesn't just end with import prices. Domestic prices also rise when the dollar is devalued. First, any increases in oil prices affects food and transportation prices because both those areas are so energy intensive. Also, when the dollar is devalued, our domestically produced goods become cheaper to sell on an export basis. This, then, creates a higher demand for U.S. produced products. With this higher foreign demand, we then find ourselves competing worldwide for many of our own, home-grown products. The result is simple: Increased demand means higher prices. Once again, the consumer finds more and more of their paycheck going to higher prices.

3. Regressive Increases in State and Local Taxes and Fees. While the Federal Government may not have increased taxes since the recession started, state and local governments have been busily hiking taxes and fees in their effort to fight off massive deficits. But, in doing so, they have been crippling the consumer by, once again, diverting money away from the economy. In Illinois, alone, the state income tax was upped by 67%. But, the increasing of taxes, especially in a weak economy, only makes the economy weaker. Instead of raising tax revenues, the result is the opposite effect with the consumer becoming less active.

4. Oppressive Government Regulation. The Obama Administration has certainly been the most prolific regulator in U.S. history; with thousands of pages of new regulation being issued each year. From health care to the environment to financial transactions, all these new regs are just adding up to increased costs that will ultimately be passed on to the consumer. ObamaCare hasn't stemmed the rapid rise in health care costs. Instead, it appears to have accelerated cost increases. The EPA's pending crack down on carbon emissions, are only going to make energy more costly for all of us; starting in January. The Interior Department's hold on domestic oil drilling will just make oil even more costly going forward. And, the supposed consumer financial protection will create higher transactional costs for the banks which will result in lower interest on our savings accounts and increased fees for other banking activities. Like it or not, regulation is another form of tax that the consumer will ultimately have to pay. Again, taking money away from the economy.

5. Continued Debilitating High Unemployment. There are 15 million unemployed workers in this country. On top of that, there are 8 million temporary workers; most of which would prefer a full-time job. Then, you have about 10 million workers who are totally discouraged from even looking for a job. All in all, you have about 21% of this nations workforce who are just limping along and who are not being full-time consumers. That means that 1 out of every 5 employable workers are not spending the kind money that would be needed to grow our economy.

Next Thursday, President Obama will take another swipe at trying to grow the economy and create jobs. But, unless he can address all of the above issues, we will see no improvement from this very psychological recession: a recession that isn't technically defined as such but, one that many Americans feel just the same.

What Obama Didn't Count On

In the State of the Union Address, Barack Obama made the claim that his policies would double exports in 5 years (Click to See Full Story: Obama Sets Ambitious Export Goal ).

This just reaffirms what I have always felt about the President and his economic team. I have always believed that Obama and his academic elite economists have this untested plan to kill the U.S. dollar with higher and higher accumulated debt (deficit spending). This, in turn, would result in an extremely weak U.S. dollar. Then, as the dollar weakens, American products would become cheaper and cheaper in the world markets. That, in turn, would result in higher exports. And, as I have written in the past, a weak dollar will also punish us for the more than 60 percent of manufactured goods that we currently import.

But, what Obama didn't count on is the fact that other countries might be just as deep in their own debt -- resulting in the collapse of other world currencies like the EuroDollar.

Since December, the U.S. dollar has actually been strengthening after having dramatically fallen since Obama took office and passed his budget busting Stimulus Package. The reason for the dollar's strength today comes out of the assumption that, even though heavily wounded by high deficit spending, it is still a better bet to hold than other currencies; making it more attractive in the world markets. This attitude started when it was learned that the country of Dubai was at risk of defaulting on its loans. It has been furthered by the fact that Greece, Spain, Portugal and three Eastern European countries are also in jeopardy of not meeting their debts. Right now, the EuroDollar -- not the U.S. Dollar -- looks to be in serious trouble as Europe struggles with its collapsing economies (Click to See Full Story: Collapse of the euro is 'inevitable': Bailing out the Greek economy futile, says FRENCH banking chief).

With the dollar gaining strength, we now have another ill-thought-out Obama plan. That's because, besides having massive debt, we no longer have a promise of greater exports. In fact, just last month, U.S. exports fell more than expected because of the strengthening dollar (Click to See Full Story: U.S. trade deficit soars in December).

Every day, this President's plans continue to reflect the ineptness of his economic team. This is what happens when a bunch of "big idea" academics get a hold of a country. None of these people have any practical, real world experience and that fact keeps showing up in their failed policies. Failed policies that haven't created jobs or stemmed the tide of foreclosures and bankruptcies. Failed policies that haven't increased business and consumer loans. Failed policies that aren't stimulating this economy. And, now, a failed policy that will leave our children paying for the outrageous spending and the lack of promised increases in exports.

In the classroom, Obama's economic team's big ideas have no consequences. But in the real world, they have serious consequences that affect all of our lives. I am concerned that these experiments will leave us with the frightening reality of economic collapse.

The "hope and change" that America should be wishing for right now is the "hope" that it isn't too late to "change" before our own economy is completely destroyed by these people!

Stocks Are Moving Against The Dollar

Since March of this year, the stock market has moved markedly higher. This is despite rising unemployment and our struggling economy. The answer as to why the market is moving up actually lies in the weakening of the U.S. dollar and is not necessarily due to some anticipated economic recovery.

If you look at the above chart, you can easily see the correlation between the weakening dollar and the U.S. stock market.

After hitting rock bottom in March, the stock market has climbed steadily. At the same time, the U.S. index has fallen. The rationale behind this is that American made products will be cheaper and more competitive overseas. Consequently, multi-national American companies will be more profitable. At the same time, our stock market is a better deal for overseas investors because they can buy more bang for their Yen and Eurodollars than they could in their own markets. It is primarily because of all of this foreign investment that we are enjoying such a long and sustained rally in our stock markets in the midst of a recession.

We should be concerned that this is creating another bubble. As I have pointed out before (Click to see my October 11 blog entry: What Earnings Are Truly Saying About The Stock Market), the stock market is severely overbought and, stock prices have completely gone beyond the forward earnings capability of our companies.

If we have any signs of a double-dip recession, I can guarantee you that the stock market will tumble hard. At some point, it has to correct itself because, without that event, the bubble is only getting bigger with an increasing potential for a hard fall.

Yesterday, the market went up strongly by almost 180 points at one time. It went up because the dollar was, once again, weakened strongly. That weaker dollar was a direct result of the Health Care Bill being forwarded for debate in the Senate. The world's investment community is dumping dollars and weakening them because they keep seeing unsustainable spending in America. They see spending for a Stimulus Program, Cap and Trade, bailouts, and, now, the high likelihood that a mega-trillion dollar debt will be created by a health care reform package. Clearly, the U.S. dollar is the canary in the coal mine that every American should worry about. If it collapses, we will find ourselves with the debilitating effects of double digit inflation.