Friday, February 27, 2009

Stimulus Package from different angles Part 1

I am sure many of you do not understand the ins and outs of the Stimulus package that was passed. But I am sure if you bothered to read this that you have an idea it is meant to kick start the economy by giving it a jolt. Think electric shock on something dormant. From what little I know I am skeptical. Remember I am just suspicious , I am not condemning. What I can do is give you different audio and video and text from different sources.

I highly recommend the round table discussion below chaired by George Stephanopoulos. Who you might remember from his gig with the Clintons. I find his weekly podcast/ TV show very informative since he asks good questions and he brings opposing points of view into one place. Then you decide from there. Isn't that special??

I have to admit, the more I listened to other people talk about it, the more I am reminded of what the Bible says when it comes to handling problems. There is the short term solution and then there is the long term solution . Give the man a fish as opposed to teaching him how to fish. I fashioned my Google search after that concept and found some good stuff. I will make more entries the more information and opinions are available.

I hope you know all this stimulus money is not money lying around. The piper will have to be paid at some point. I want this to work which is very different from thinking it's going to work. I rather be wrong and have everybody financially better off than to be correct and and have all of us materially suffer.Any idiot can spend a lot of money. It's spending it on something that will perpetuate that will be the tricky part. I just hope what is going to happen is not dealing with a heroin addict by just giving him more heroin. I just hope the economy does not sleep with the fishes.

Ed (video)


Against a backdrop of grim job losses, the White House and Senate Democrats secured a deal with moderate Republicans Friday to clear the way for passage of President Barack Obama’s economic recovery plan.

After days of watching from the sidelines, Rahm Emanuel, the president’s chief of staff, came to the Capitol Friday afternoon to help seal the arrangement. Senate Majority Leader Harry Reid (D-Nev.) said he hoped to complete passage on Monday, and a party caucus Friday night indicated strong Democratic support.

"We have a deal" said one official, and at least three Republicans are expected to back the revised bill: Sens. Susan Collins and Olympia Snowe of Maine and Arlen Specter of Pennsylvania.

"Is it perfect? No. But this bill is an enormous improvement," Collins said. "The American people don’t want to see partisan gridlock. They don’t want to see us divided and fighting. They want to see us working together to solve the most important crisis facing our country."

"Personally I would prefer not to be on the edge of the pin as so frequently is the case in this body," Specter said. "But I do believe we have to act."

Specter and Collins figured prominently in the meeting with Emanuel, together with Reid in the leader’s second-floor Capitol office. Reid had already signaled to Collins and Specter that he would accept spending cuts in the range of $80 billion. With the addition of Emanuel to the mix, final concessions were made, and having Emanuel present was good political insurance for Reid in dealing with House Democrats down the road.

While details are still incomplete, it appears the package, as initially brought to the Senate floor, will be scaled back by about $82 billion in spending reductions and $25 billion in tax cuts. In addition, tax cuts approved on the Senate floor this week for car and home purchases would be modified, and the total bill then would be in the range of $800 billion.

Lost in the process—or scaled back significantly— are some important Democratic initiatives and at least $47 billion in promised aid to the states. New Pell Grant funding is largely preserved, but $16 billion in school construction funds would be cut, and increases for popular programs like Head Start cut in half.

Obama’s own agenda is not immune. The deal would trim back new funds committed for expanding broadband access and improving the electrical grid as well as investments in health information technology.

Specter’s role is striking since he is a senior member of the Senate Appropriations Committee, which helped write the bill. On the floor this week, Democrats like Iowa Sen. Tom Harkin helped him secure increased funding for the National Institutes of Health—a Specter priority. Yet in the talks, it appears that $5.8 billion in public health funds for the treatment of preventable diseases—a Harkin priority— would be severely cut or even wiped out.

Senate Budget Committee Chairman Kent Conrad (D-N.D.) , who has been critical himself of the initial package, said he expected Reid will enjoy a solid Democratic vote. "My sense from the caucus," he said, "was that the caucus was united, that the package had been improved, and people would support it."

Senate passage will not be the end of the process but will allow the administration to move into final negotiations with both the House and Senate together, when more adjustments are sure to be made. Clerks were just beginning to translate the agreement into legislative text Friday night, and Republicans were threatening a possible filibuster. But Reid was confident he could hold together his 60-plus votes, and the White House hopes to move as fast as possible since the House-Senate negotiations promise to be difficult and time consuming.

Friday’s agreement followed the release of new Labor Department numbers showing that as many as 598,000 workers lost their jobs in January — the worst since 1974 and pushing the unemployment rate up to 7.6 percent. "These numbers demand action," Obama said earlier in the day. "It is inexcusable and irresponsible to get bogged down in distraction and delay while millions of Americans are being put out of work. It is time for Congress to act."

But as Obama has stepped up his rhetoric, so has his old rival, Sen. John McCain (R-Ariz.), and Friday’s exchanges sometimes resembled a flashback to the 2008 presidential campaign.

"It will take months even years to renew our economy," Obama said. "But every day that Washington fails to act, that recovery is delayed."

Taking on the Senate floor later, McCain accused his old opponent of failing to reach out to Republicans as much as Obama once promised.

"We want to have legislation that stimulates this economy," said McCain. "But we want it to stimulate the economy, not mortgage the future of our children and our grandchildren by the kind of fiscal profligate spending that’s embodied in this legislation."

McCain appeared to zero-in on those moderates like Collins and Specter, and through the day the two senators were the center of attention coming and going from Reid’s office.

More than in the past, Reid took a more direct hand in dealing with the Republicans, and his working relationship with Collins was most important. It was at her urging Thursday night that he changed his plan to keep the Senate in all night, and the two could be seen through the open doors of the Senate back lobby as she appealed to the Democratic leader to back away from what might have been a tense standoff.

"Everyone’s going to have to give a little and understand this is a process," Reid said Friday. In the afternoon, he held an hour-long meeting with Collins and Specter at which he presented a counter offer estimated to include about $80 billion in savings.

The deeper cuts are sure to rile House Democrats. For this reason, having Emanuel on hand is good insurance for Reid, since the chief of staff is not just the president’s man but also a former lieutenant for Speaker Nancy Pelosi (D-Calif.).

I can`t help but recall my first year economics class at Harvard when I think about the current economic crisis. Despite the fact that I hated that course, I became an economics major. Now, I see the wisdom in it. In my mind everything we need to know about how we got into this mess and how we can get out of it, starts with my Ec 10 course and a simple concept known as supply and demand.

I think by now, even Mom & Pop in rural Indiana know how we got into this mess: debt. Let`s analyze this in a simple supply and demand framework. Let`s say that basic wages and prices enabled Jim to consume $100 worth of goods each year. Because Jim could use debt through either credit cards or refinancing his appreciating home, Jim was now able to consume $150 worth of goods. Subsequently, companies increased supply in order to meet Jim`s growing demand. They built a $150 supply infrastructure to meet the $150 demand. Jim and his friends could now afford $4 per cup coffee shops on every corner; so, Starbucks built them.

Everything was fine as long as Jim could artificially fill the gap between his $100 real demand and the new $150 supply infrastructure with $50 worth of debt. Then the debt dried up. All of a sudden there was no way to fill the $50 gap. In fact, as the economic condition has deteriorated, the gap has gotten even larger. The combination of people losing their jobs and the fear of losing their jobs has caused Americans to do something they have not done for 30 years: save. Now, instead of demand being $100, it has shrunk to $80. Today the demand/supply gap is not $50, but $70. So how do you solve this problem?

Here is where I differ with almost every economic proposal coming out of Washington, both from the Bush and Obama administrations. All of their plans suggest that we try to fill this demand/supply gap by artificially stimulating demand. They call this an economic stimulus package. No one really knows what that looks like, but they all agree that it starts with trying to get people to consume more to meet the $150 supply infrastructure. This is just another form of financial engineering. It is the same type of engineering that got us into this mess in the first place, except that we called it leverage (e.g. debt). What ever you call it, it is artificially inflating demand. That is the wrong answer. The answer should not be how to artificially grow demand but how to manage the contraction of the supply infrastructure.

No one in Washington (or frankly America) wants to use the term "contraction of supply". We are a nation consumed by the word growth. Everything must grow -- all the time. We have gotten blinded by growth. What we fail to realize is that sometimes things must shrink (in this case dramatically) in order to grow again. Of course, there are two obvious and legitimate reasons why politicians are afraid of contraction: unemployment and deflation. Our bloated supply infrastructure employees a lot of people. It has also led to wage growth. The contraction of our supply infrastructure will put a lot more people out of work and it may force us to reduce wages. These are not good things and can / will put even more downward pressure on the economy. I do not advocate that if we manage the contraction of supply that we stand their idle and watch unemployment grow precipitously. In my mind, that should be the focus our the Administration`s efforts. We should allocate our brain power and money towards softening the blow to employment by allocating our trillion plus dollar bailout plan to job creation programs. This type of artificial stimulus can have huge positive long-term impact through infrastructure development and the creation of a more employable workforce. Every heard of line: Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime. Giving Americans a $5000 tax credit versus re-training him for the workforce is the equivalent.

Even if we achieve the organic growth that I advocate, it will take time. I also do not believe we will be able to create enough new high wage jobs to fill the gap of those lost through this supply contraction. There is another aspect of this plan that needs to be adopted. It is a concept that few Americans are not prepared to address, but must address: contraction of expectation. As debt bloated our supply infrastructure, it also bloated our personal expectations and sense of entitlement. I was with my 19 year old cousin during Thanksgiving. She is in college and has no job, yet she has a $250 I-phone. So do all of her friends. We live in a society where unemployed kids not only have such luxuries but feel entitled to them. That must change. And, it is not just the kids. It is our entire society. Let me put this bluntly:

- Americans are not entitled to I-phones

- Americans are not entitled to more than one large flat screen tv in their homes

- Americans are not entitled to a new car every 5 years

- Americans are not entitled to retire by age 60 to a nice house in Florida on a golf course

- Single Americans are not entitled to live by themselves

- Americans are not entitled to not have multiple generations of their family live under the same roof

These are all things that we have taken for granted as Americans. We need to alter our expectations. Citizens in most developed countries around the world do not have the bloated expectations of Americans. If we do not change, the only answer is to artificially inflate demand which will lead to this same disaster happening again. Next time the result will be much worse. It will not simply be the bankruptcy of American homeowners. It will be the bankruptcy of America. And that, my friends, is game over.

So what is the answer? Stay tuned for that in my next post.

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