Of course, those familiar with this blog know that I tend to disagree with this type of article on various fronts.

One question (among many) that supporters of further stimulus should be asking is if stimulus is working (and there is solid evidence it is not, as seen in many of my blog posts), then why is further stimulus necessary?

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SPX at 1195.05 as this post is written

Some may wonder what tax increases I am referring to, as at least headline tax rates have yet to increase in many areas.  Tax increases have been deferred for many reasons.  Among these reasons is the negative political ramifications of raising taxes before the upcoming November elections.

However, if we are to at least partially curtail our current deficit levels, an increase in taxes is likely certain.  Everyone should know this, at least intuitively; and I believe there is widespread recognition of these impending tax increases.

Thus, our current economic situation is such:  economic weakness that is met with stimulus / deficit spending – that then leads to tax increases.  These tax increases – during a time of economic weakness – will likely weigh (very) heavily against any lasting economic recovery.

This situation may not be inherently problematical if the stimulus / deficit spending was indeed highly economically stimulative.  However, if it is not (and there is little if any evidence that recent stimulus programs have been), a “vicious circle” may form – with large stimulus / deficit spending driving ever-higher taxes – with the net result a weaker – and more highly-indebted economy.  This weaker economy in turn drives higher stimulus / deficit spending – and ever-higher taxes.

There are a lot of complexities and other factors at work in this relationship; however, such an in-depth discussion would be too prohibitively lengthy and complex for a blog post.

However, as one can envision, this “vicious circle” can become very pernicious on many fronts.

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SPX at 1107.93 as this post is written

http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address

Here are a couple of my thoughts:

First, many stimulus initiatives were mentioned.  Some of these were new ideas.  That stimulus ideas are proliferating should not be a surprise, as many in our country believe they represent a sensible solution to our many economic difficulties.   I will comment on many of these initiatives when more details are available and/or they are enacted.  For now, I will say that before we, as a nation, enact more stimulus bills, we need to analyze the results of the many stimulus efforts previously and currently enacted.  Then, we need to assess the unintended consequences and risks these stimulus efforts hold, of which I have previously mentioned on this blog.

Second, the employment situation was mentioned.  This, of course, is not a surprise and is a very popular topic among all politicians – and for very good reason.

President Obama during the speech last night made the following comment:

“But the truth is, these steps won’t make up for the seven million jobs that we’ve lost over the last two years.”

I believe that our unemployment problems, both current and ongoing, encompass a population many multiples of seven million.   Our unemployment problems will most likely not be solved by any easily enacted solution, unfortunately.

For those unaware, I previously wrote a series of blog posts on unemployment, can be found here:

http://www.economicgreenfield.com/2009/07/24/why-arent-companies-hiring/

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SPX at 1086.85 as this post is written

At this juncture, one is led to wonder “what if more stimulus is enacted?” What may be its potential size and composition?  As seen in the following video interview of Christina Romer:

her view on the matter of additional stimulus is that “We’ll do whatever it takes.” 

I found the “We’ll do whatever it takes” phrase to be very interesting.  First, do we, as a nation, know “what it will take?”

Second, this “We’ll do whatever it takes” phrase naturally begs the question as to what, if any, limit there may be on the size of any additional stimulus efforts.   Even if there is no presumable size constraint on additional stimulus efforts from a legislative perspective, might there be constraints imposed by such things as market reaction to additional indebtedness?  As well, there are many other issues, of a complex nature, that would accompany further large-scale stimulus efforts.

Perhaps the most apropos way to end this series of posts on further stimulus is to say “Stay tuned.” (lol)

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SPX  at 878.38 as this post is written 

Copyright 2009 by Ted Kavadas

As mentioned in the last post, there are varying perceptions as to its effect-to-date.

I would like to go back to earlier this year, before the stimulus was enacted. I would like to briefly discuss the plan at that point, as it, as well as the analysis that accompanied it, ostensibly represented (at the time) our national understanding of the economic situation, as well as the solution.

A report was published on 1/9/09 titled “Job Impact of the American Recovery and Reinvestment Plan,” commonly called the “Romer and Bernstein” report.  At the time, I found the report to be very unconvincing with regard to support of the proposed stimulus action.  The analysis, in my opinion, was very tenuous.

Even if one were unabashedly pro-stimulus, one would find some serious faults with the $787 Billion stimulus plan, as enacted.  Perhaps the biggest problem is that it is relatively slow to disburse funds.  If it were “front-loaded” it would be delivering funds at a much greater pace – and presumably be more helpful to the economy now, not later. 

There is another issue that this slow disbursement causes – that of measuring the effectiveness of the stimulus.  At this point, the stimulus is plainly lacking in effectiveness vs. plan, as measured by the unemployment rate.  However, some supporters of the stimulus are quick to point out that only a fraction of the funds have been disbursed; therefore, it is too early to assess the viability of the stimulus plan, as its benefits have largely yet to be realized.   Thus, a question forms:  is the stimulus ineffective, or will it just take longer to attain the benefits?   This question creates a conundrum in the following sense:  if the stimulus is ineffective, presumably (according to stimulus proponents) we should then quickly do more stimulus; however, if the existing $787 Billion stimulus has yet to largely “kick in”, then it would be premature to do additional stimulus.  Another conundrum can then be seen:  if we now assume that the $787 billion stimulus will work with time, but are later proven wrong, from a pro-stimulus viewpoint we will have wasted both time, and the ability to proactively stem further economic decline because we have passed on the current opportunity to do additional stimulus.  Thus, as one can see, this timing of the benefit issue has created a difficult and tricky situation, especially for those who are stimulus proponents.

Other problems I have found with the $787 billion stimulus (again, assuming the stimulus should be done) is that much of the theory and practicality of the stimulus is flawed; and the “pork” is very objectionable in both size and (lack of) quality.

Ostensibly, this $787 Billion stimulus represented a “best effort” attempt to improve our economic situation.  If one is of the opinion it is not working, or not working as planned, is it not working because it is poorly designed, or because the inherent concept of stimulus holds little or no validity?

For those that have not seen it, I wrote an article titled “Intervention’s Potential Blind Spots” as I believe that various facets of intervention (including stimulus efforts) deserve further attention.  It can be found here (under the Articles heading):

http://www.economicgreenfield.com/prosperitybypencom-directory/

SPX at 884.88 as this post is written

Copyright 2009 by Ted Kavadas

http://www.economicgreenfield.com/prosperitybypencom-directory/

Do we understand the problem?  I will leave that question unanswered, for now.  However, some aspects to consider:

1. We seem to continually underestimate the complexity and/or severity of our economic situation in that each stimulus is billed as the “solution” to our problems, yet each fails to stem further economic weakness.   This problem has occurred with the $150 billion tax rebate stimulus in 2008; TARP in 2008, and now, based upon results vs. plan (to date), The American Recovery and Reinvestment Act of 2009.
2. As mentioned in yesterday’s post, “An Interesting Chart on Job Losses,” the length and severity of this purported recession are outsized, on a historical basis, despite the very large aggregate intervention steps taken.
3. There is widely varying conclusions as to the effect of the $787 Billion American Recovery and Reinvestment Act.  As mentioned in this Wall Street Journal article (which does a good job of summarizing the current calls for more stimulus): 
   http://online.wsj.com/article/SB124692229711302683.html ”Depending on your perspective, the stimulus plan:
   a. Isn’t working.
   b. Is preventing unemployment from being even worse, or
   c. Hasn’t had enough time to really kick in yet.”
4. The rather disconcerting reality that despite official large-scale interventions (including stimulus plans) since at least mid-2007, the economy is, at best, not getting any worse.  But as mentioned in the following Wall Street Journal editorial,

   http://online.wsj.com/article/SB124657739768489217.html

   “The real question is how strong and sustained any expansion will be. If the “stimulus” were working as advertised, it ought to be very strong.”

5. Add to this list an array of disturbing economic statistics and other “outlier” behavior that I have previously discussed. 

As listed above, as well as for other reasons, there is much to consider when one attempts to answer the question “Do we understand the problem?” 

Part III to follow…

SPX at 880.38 as this post is written

Copyright 2009 by Ted Kavadas

As I believe this issue deserves significant analysis and discussion, the next few posts will address various facets of this issue.

I would like to start addressing the issue by calling attention to an article I wrote in January.   It is titled “My Overall Thoughts on the Stimulus Measures, Bailouts and Interventions”.

I wrote that article based, in part, on a series of proprietary models I had developed to analyze our economic situation.  Sadly, our economic situation appears to be tracking “like a bloodhound” what I referred to in that article.  The implications of such are enormous.

Now onto Part II…

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As I have stated previously, I would like readers of this blog to be cognizant of the site disclaimer (which is found under the “Pages” section, titled “Comment – Special” on the right hand side of the homepage):

http://www.economicgreenfield.com/a-special-note/

SPX at 881.03 as this post is written

Copyright 2009 by Ted Kavadas