Our Changing Globe

Archive for the ‘global slowdown’ Category

 

And A Second One Would Be An Even Worse Mistake

The stimulus package was introduced a year ago and there’s now a lot of discussion as to whether it was effective or not, and although a definitive answer is hard to come by, I’d say that an extra $600 billion of public spending at the cost of $900 billion in private expenditure, was a very bad deal indeed!

What’s more, the cost of the package has so far risen from an estimated $787 billion to $862 billion, and as I type the two major questions that need to be answered are;

1) Did the government’s spending reduce or increase private spending?

2) Did public-sector hiring reduce or increase private hiring?

The Good And The Bad

If we look at short term public investment and consider things such as building a bridge or a new highway or even fixing potholes, then the stimulus package might appear to have been a good plan.

But if you then factor in the fact that the $600 billion of government spending added heavily to government debt that will have to be paid for at some point by raising taxes then it looks bad.

And The Ugly – A Massive Reduction In GDP

Let’s suppose that the government will collect an additional $300 billion of taxes in each of 2011 and 2012 then using a tax multiplier of minus 1.1, and a allowing for a one-year lag, then the higher taxes would reduce GDP by $330 billion in each of 2012 and 2013 and to make things worse, countries with larger public sectors tend to grow slower over the long term.

What Do The Figures Mean?

Viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending, but it comes at the cost of $900 billion in private expenditure which is clearly a very bad deal, and adding a further stimulus package in 2010 would be an even worse mistake.

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“The Bank Bailouts Have Created More Risk in The System”.

Neil Barofsky, who is the special inspector general for  TARP (The Troubled Asset Relief Program)  states quite clearly in a quarterly report that was released to Congress last Sunday, January 31, 2010 that the problems that led to the last financial crisis have not yet been addressed, and in some cases have actually grown worse.
“Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car”.

And referring to the “Too big to fail approach” he added, “The government’s bailout of financial institutions deemed “too big to fail” has created a risk that the United States could face a worse fiscal meltdown in the future, and the $700 billion financial bailout has encouraged more risk-taking because bank executives, who are still receiving massive bonuses, figure the government will come to the rescue the next time they steer their ships nearly aground”.

The report warns that these supports mean the government has done more than simply support the mortgage market, and in many ways has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.

“The government has stepped in where the private players have gone away and if we take government resources and replace that market without addressing the serious underlying concerns, there really is a risk of artificially pushing up home prices in the coming years”.

The report also revealed that, while the Obama administration pledged to spend $75 billion to prevent foreclosures, that only a tiny fraction of it amounting to just over $15 million has been spent so far and figures indicate that under the Making Home Affordable program, only about 66,500 borrowers, or only 7% of those who signed up had completed the process as of December.

And it might be worth noting that even though there are growing calls for another stimulus bill, in spite of the fact that only 30% of the first $700 billion has so far made its way into the system and the real jobless rate is now at 17.5% if the jobless that have given up looking for work are included.

Sen. Susan Collins, R-Maine, who is the ranking member of the Senate Homeland Security and Governmental Affairs Committee said, “The market mentality now seems fixed that the U.S. government will continue to step in and bail out giant financial institutions. The IG’s findings confirm my decision to oppose releasing $350 billion in TARP funds last year and my recent vote to terminate the program altogether”.

And Rep. Darrell Issa, R-Calif., who is the ranking member on the House Oversight and Government Reform Committee added, “The SIGTARP’s report is just another reminder of how Congress and the administration have ignored the role that politics and government played in causing the housing crisis and the economic collapse while pursuing other regulatory reforms will not fix the underlying problem”.

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