Archive for February 2010
February 17, 2010: Brian Reidl / National Review Online – September 7, 2009
Conservatives have correctly declared President Obama’s $787 billion “stimulus” a flop. In a January report, White House economists predicted the bill would create (not merely save) 3.3 million jobs. Since then, 2.8 million jobs have been lost, pushing unemployment toward 10 percent.
Yet few have explained correctly why the stimulus failed. By blaming the slow pace of stimulus spending (even though it’s ahead of schedule), many conservatives have accepted the premise that government spending stimulates the economy. Their thinking implies that we should have spent much more by now.
History proves otherwise. In 1939, after a doubling of federal spending failed to relieve the Great Depression, Treasury Secretary Henry Morgenthau said that “we have tried spending money. We are spending more than we have ever spent before and it does not work. . . . After eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt to boot!” Japan made the same mistake in the 1990s (building the largest government debt in the industrial world), and the United States is making it today.
This repeated failure has nothing to do with the pace or type of spending. Rather, the problem is found in the oft-repeated Keynesian myth that deficit spending “injects new dollars into the economy,” thereby increasing demand and spurring economic growth. According to this theory, government spending adds money to the economy, taxes remove money, and the budget deficit represents net new dollars injected. Therefore, it scarcely matters how the dollars are spent. John Maynard Keynes famously asserted that a government program paying people to dig and then refill ditches would provide new income for those workers to spend and circulate through the economy, creating even more jobs and income. Today, lawmakers cling to estimates by Mark Zandi of Economy.com that on average, $1 in new deficit spending expands the economy by roughly $1.50.
If that were true, the record $1.6 trillion in deficit spending over the past fiscal year would have already overheated the economy. Yet despite this spending, which is equal to fully 9 percent of GDP, the economy is expected to shrink by at least 3 percent this fiscal year. If the spending constitutes an injection of “new money” into the economy, we may conclude that, without it, the economy would contract 12 percent — hardly a plausible claim.
If $1.6 trillion in deficit spending failed to slow the economy’s slide, there’s no reason to believe that adding $185 billion — the 2009 portion of the stimulus bill — will suddenly do the trick. But if budget deficits of nearly $2 trillion are insufficient stimulus, how much would be enough? $3 trillion? $4 trillion?
This is no longer a theoretical exercise. The idea that increased deficit spending can cure recessions has been tested, and it has failed. If growing the economy were as simple as expanding government spending and deficits, then Italy, France, and Germany would be the global economic kings. And there would be no reason to stop at $787 billion: Congress could guarantee unlimited prosperity by endlessly borrowing and spending trillions of dollars.
The simple reason government spending fails to end recessions is that Congress does not have a vault of money waiting to be distributed. Every dollar Congress “injects” into the economy must first be taxed or borrowed out of the economy. No new income, and therefore no new demand, is created. They are merely redistributed from one group of people to another. Congress cannot create new purchasing power out of thin air.
This is intuitively clear in the case of funding new spending with new taxes. Yet funding new spending with new borrowing is also pure redistribution, since the investors who lend Washington the money will have that much less to invest in the economy. The fact that borrowed funds (unlike taxes) must later be repaid by the government makes them no less of a zero-sum transfer today.
Even during recessions — when total production falls, leaving people with less income to spend — Congress cannot create new demand and income. Any government spending that increases production at factories and puts unemployed individuals to work will be financed by removing funds (and thus idling resources) elsewhere in the economy. This is true whether the unemployment rate is 5 percent or 50 percent.
For example, many lawmakers claim that every $1 billion in highway stimulus will create 47,576 new construction jobs. But Congress must first borrow that $1 billion out of the private economy, which will then lose a roughly equivalent number of jobs. As transportation-policy expert Ronald Utt has explained, “the only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven.” Removing water from one end of a swimming pool and dumping it in the other end will not raise the overall water level. Similarly, moving dollars from one part of the economy to the other will not expand the economy. Not even in the short run.
Consider a simpler example. Under normal circumstances, a family might put its $1,000 savings in a certificate of deposit at the local bank. The bank would then lend that $1,000 to the local hardware store. This would have the effect of recycling that spending around the town, supporting local jobs. Now suppose that, induced by an offer of higher interest rates, the family instead buys a $1,000 government bond that funds the stimulus bill. Washington spends that $1,000 in a different town, creating jobs there instead. The stimulus bill has changed only the location of the spending.
The mistaken view of fiscal stimulus persists because we can easily see the people put to work with government funds. We don’t see the jobs that would have been created elsewhere in the economy with those same dollars had they not been lent to Washington.
In his 1848 essay “What Is Seen and What Is Not Seen,” French economist Frédéric Bastiat termed this the “broken window” fallacy, in reference to a local myth that breaking windows would stimulate the economy by creating window-repair jobs. Today, the broken-window fallacy explains why thousands of new stimulus jobs are not improving the total employment picture.
Keynesian economists counter that redistribution can increase demand if the money is transferred from savers to spenders. Yet this “idle savings” theory assumes that savings fall out of the economy, which clearly is not the case. Nearly all individuals and businesses invest their savings or put it in banks (which in turn invest it or lend it out) — so the money is still being spent somewhere in the economy. Even in this recession, with tightened lending standards, banks are performing their traditional role of intermediating between those who have savings and those who need to borrow. They are not building extensive basement vaults to hoard cash.
Since the financial system transfers savings into investment spending, the only savings that drop out of the economy are those dollars literally hoarded in mattresses and safes — and there is no evidence that this is occurring en masse. And even if individuals, businesses, and banks did distrust the financial system enough to hoard their dollars, why would they suddenly lend them to the government to finance a stimulus bill?
Once the idle-savings theory collapses, so does all the intellectual support for government spending as stimulus. If there are no idle savings to acquire, then the government is merely borrowing purchasing power from one part of the economy and moving it into another part of the economy. Washington becomes nothing more than a pricey middleman, redistributing existing demand.
Even foreign borrowing is no free lunch. Before China can lend us dollars, it must acquire them from us. This requires either attracting American investment or raising the Chinese trade surplus (and the American trade deficit). The balance of payments between America and other nations must eventually net out to zero, which means government spending funded from foreign borrowing is zero-sum.
I’ve purposely ignored the Federal Reserve, which actually can inject cash into the economy, but not in a way that constitutes stimulus. Congress can deficit-spend; Treasury can finance the deficit spending by issuing bonds; and the Federal Reserve can buy those bonds by printing money. Any economic boost is then due to the Federal Reserve’s actions, not the deficit spending — and of course the Federal Reserve will have to raise interest rates, slowing the economy again, to bring the resulting inflation under control.
If government spending doesn’t cause economic growth, what does? Growth happens when more goods and services are produced, and the only true source of this is an expanding labor force combined with high productivity. High productivity in turn requires educated and motivated workers, advanced technology, adequate infrastructure, physical capital such as factories and tools, and the rule of law.
Government spending could boost long-run productivity through investments in education and infrastructure — but only if politicians could target those investments better than the private sector would. And it turns out that politicians cannot outsmart the marketplace. Mountains of academic studies show that government spending generally reduces long-term productivity.
Furthermore, most government programs that could increase productivity don’t work fast enough to counteract a recession. Education spending cannot raise productivity until its student beneficiaries graduate and enter the work force. It can take more than a decade to build new highways and bridges.
The only policy proven to increase productivity in the short term is to lower tax rates and reduce regulation. Businesses can grow only through consistent investment and an expanding, skilled workforce. Cutting marginal tax rates promotes these conditions, by creating incentives to work, save, and invest.
It’s happened before. In 1981, President Reagan inherited an economy stagnating under the weight of 70 percent marginal income-tax rates. Under Reagan, the top rate fell to 28 percent, and the subsequent surge in investment and labor supply created the strongest 25-year economic boom in American history.
Such tax-rate reductions are superior to tax rebates designed to “put money in people’s pockets.” Rebates — like government spending — simply redistribute existing dollars. They don’t increase productivity because they don’t change incentives: No one has to work, save, or invest more to get a tax rebate. The 2001 and 2008 rebates failed because Congress borrowed money from investors and foreigners and redistributed it to families. Not surprisingly, any new personal-consumption spending was matched by corresponding declines in investment spending and net exports, and the economy remained stagnant.
If conservatives wish to provide economic leadership, they must get this argument right. The stimulus is not failing because it is too small or because too much of it is being saved. It’s failing because Congress can only redistribute existing demand, not create new demand. This recession will eventually end. The more serious, long-term danger is that President Obama’s Europeanization of the economy will bring the same slow growth, stagnant wages, job losses, high taxes, and lack of competitiveness that have plagued Western Europe, leaving the United States at an ever-growing disadvantage with Asian countries not so afflicted.
To prevent this, conservatives and free marketeers will need to promote policies that support long-term prosperity. The first step will be articulating why big government does not bring economic growth.
The Tonka Report Editor’s Note: And to be sure, the current fiscal policy of the global bankers and the Federal Reserve is to bankrupt this nation… – SJH
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February 17, 2010: Jim Puzzanghera and Don Lee / Los Angeles Times – February 16, 2010
Reporting from Washington – Experts fear that a new wave of foreclosures will hit this year as prolonged unemployment makes it difficult for millions of homeowners to pay their mortgages — and many of them aren’t likely to get much help from a federal program aimed at keeping them in their houses.
Banks participating in the Home Affordable Modification Program, announced a year ago this week by President Obama, have been slow to turn temporarily reduced mortgage payments into permanent ones. “The overarching sense is that the mortgage modification process has not worked that well,” said Bert Ely, an independent banking consultant.
Obama administration officials acknowledge that the $75-billion program, which offers banks cash incentives to reduce payments, has had growing pains, and they said they were considering revisions to make it more effective.
Still, the program is expected to show continued progress when data from January are released Wednesday after a strong push by Treasury Department officials to get banks to make more of the modifications permanent. For example, Bank of America Corp., the nation’s largest servicer of mortgages, said Tuesday that it had increased the number of permanent mortgage modifications to 12,700 last month from 3,200 in December. BofA said an additional 13,700 permanent modifications were in their final stage.
But that’s a drop in the bucket considering that BofA holds about 1 million mortgages that are at least 60 days delinquent. About 4 million homeowners nationwide are 90 days or more delinquent on their mortgages or in foreclosure proceedings, according to Moody’s Economy.com, which analyzes data from credit reporting company Equifax Inc.
Trial modifications and other delays have kept many of those mortgages out of foreclosure, but by the end of this year, 2.4 million borrowers are expected to lose their homes, said Celia Chen, a housing economist at Economy.com. That would be up from 2.1 million foreclosures and short sales last year and five times the annual numbers earlier in the decade.
It’s unclear when those distressed properties would hit the market, but their large numbers are likely to push home prices back down this year, to a bottom in the fourth quarter, Chen said. And that would make things worse for the 25% of homeowners who already owe more on their mortgages than their houses are worth. The biggest blows will be felt in California, Florida, Nevada and other states where home prices have dropped the most and the ranks of struggling homeowners have swelled.
As of December, 11.4% of California homeowners were 90 days or more late on their loans, according to First American CoreLogic, a Santa Ana real estate data firm. That compares with a delinquency rate of 8.4% nationwide.
Despite an increasing number of foreclosure-prevention efforts, lawmakers and community advocates say they haven’t seen enough improvement. “Outreach isn’t happening,” said Hyepin Im, president of Korean Churches for Community Development, a Los Angeles group that has sought to help hundreds of Asian American borrowers who are struggling to avert foreclosure.
At the outset, banks didn’t screen borrowers before giving them trial modifications, she said. “Then at the end they don’t give very clear answers why they’re not getting permanent modifications. . . . There’s very little transparency.”
A report last week by Moody’s Investors Service called the Obama administration modification program’s effect “underwhelming.” But administration officials said the program was on track to reduce payments for 3 million to 4 million homeowners through 2012. As of Dec. 31, the program had helped get 787,231 home loans modified for three months and had helped make an additional 66,465 modifications permanent.
Officials noted that not all homeowners are eligible — the program is only for owner-occupied homes, and excludes a variety of mortgages, including jumbo loans. And the administration continues to make changes, including a requirement added last month that homeowners document their income before a trial modification is granted.
But the program continues to draw criticism. Banks have complained they’ve had trouble getting homeowners to provide the necessary documents. Frustrated homeowners have complained of bureaucratic runarounds from their servicers. Federal watchdog agencies have criticized the program. And last month the chairman of the House Oversight and Government Reform Committee announced an investigation.
The Tonka Report Editor’s Note: And here is why the banks are not helping homeowners. What a freakin’ scam! Watch the video at the link below… - SJH
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February 15, 2010: Jonathon Petre / Daily Mail – February 14, 2010
Data for vital ‘hockey stick graph’ has gone missing.
There has been no global warming since 1995.
Warming periods have happened before – but NOT due to man-made changes.
The academic at the centre of the ‘Climategate’ affair, whose raw data is crucial to the theory of climate change, has admitted that he has trouble ‘keeping track’ of the information. Colleagues say that the reason Professor Phil Jones has refused Freedom of Information requests is that he may have actually lost the relevant papers. Professor Jones told the BBC yesterday there was truth in the observations of colleagues that he lacked organisational skills, that his office was swamped with piles of paper and that his record keeping is ‘not as good as it should be’. The data is crucial to the famous ‘hockey stick graph’ used by climate change advocates to support the theory.
Professor Jones also conceded the possibility that the world was warmer in medieval times than now – suggesting global warming may not be a man-made phenomenon. And he said that for the past 15 years there has been no ‘statistically significant’ warming.
The admissions will be seized on by sceptics as fresh evidence that there are serious flaws at the heart of the science of climate change and the orthodoxy that recent rises in temperature are largely man-made.
Professor Jones has been in the spotlight since he stepped down as director of the University of East Anglia’s Climatic Research Unit after the leaking of emails that sceptics claim show scientists were manipulating data.
The raw data, collected from hundreds of weather stations around the world and analysed by his unit, has been used for years to bolster efforts by the United Nation’s Intergovernmental Panel on Climate Change to press governments to cut carbon dioxide emissions.
Following the leak of the emails, Professor Jones has been accused of ‘scientific fraud’ for allegedly deliberately suppressing information and refusing to share vital data with critics.
Discussing the interview, the BBC’s environmental analyst Roger Harrabin said he had spoken to colleagues of Professor Jones who had told him that his strengths included integrity and doggedness but not record-keeping and office tidying.
Mr Harrabin, who conducted the interview for the BBC’s website, said the professor had been collating tens of thousands of pieces of data from around the world to produce a coherent record of temperature change. That material has been used to produce the ‘hockey stick graph’ which is relatively flat for centuries before rising steeply in recent decades.
According to Mr Harrabin, colleagues of Professor Jones said ‘his office is piled high with paper, fragments from over the years, tens of thousands of pieces of paper, and they suspect what happened was he took in the raw data to a central database and then let the pieces of paper go because he never realised that 20 years later he would be held to account over them’.
Asked by Mr Harrabin about these issues, Professor Jones admitted the lack of organisation in the system had contributed to his reluctance to share data with critics, which he regretted.
But he denied he had cheated over the data or unfairly influenced the scientific process, and said he still believed recent temperature rises were predominantly man-made.
Asked about whether he lost track of data, Professor Jones said: ‘There is some truth in that. We do have a trail of where the weather stations have come from but it’s probably not as good as it should be. ‘There’s a continual updating of the dataset. Keeping track of everything is difficult. Some countries will do lots of checking on their data then issue improved data, so it can be very difficult. We have improved but we have to improve more.’
He also agreed that there had been two periods which experienced similar warming, from 1910 to 1940 and from 1975 to 1998, but said these could be explained by natural phenomena whereas more recent warming could not. He further admitted that in the last 15 years there had been no ‘statistically significant’ warming, although he argued this was a blip rather than the long-term trend.
And he said that the debate over whether the world could have been even warmer than now during the medieval period, when there is evidence of high temperatures in northern countries, was far from settled.
Sceptics believe there is strong evidence that the world was warmer between about 800 and 1300 AD than now because of evidence of high temperatures in northern countries. But climate change advocates have dismissed this as false or only applying to the northern part of the world.
Professor Jones departed from this consensus when he said: ‘There is much debate over whether the Medieval Warm Period was global in extent or not. The MWP is most clearly expressed in parts of North America, the North Atlantic and Europe and parts of Asia.
‘For it to be global in extent, the MWP would need to be seen clearly in more records from the tropical regions and the Southern hemisphere. There are very few palaeoclimatic records for these latter two regions.
‘Of course, if the MWP was shown to be global in extent and as warm or warmer than today, then obviously the late 20th Century warmth would not be unprecedented. On the other hand, if the MWP was global, but was less warm than today, then the current warmth would be unprecedented.’
Sceptics said this was the first time a senior scientist working with the IPCC had admitted to the possibility that the Medieval Warming Period could have been global, and therefore the world could have been hotter then than now.
Professor Jones criticised those who complained he had not shared his data with them, saying they could always collate their own from publicly available material in the US. And he said the climate had not cooled ‘until recently – and then barely at all. The trend is a warming trend’.
Mr Harrabin told Radio 4’s Today programme that, despite the controversies, there still appeared to be no fundamental flaws in the majority scientific view that climate change was largely man-made.
But Dr Benny Pieser, director of the sceptical Global Warming Policy Foundation, said Professor Jones’s ‘excuses’ for his failure to share data were hollow as he had shared it with colleagues and ‘mates’. He said that until all the data was released, sceptics could not test it to see if it supported the conclusions claimed by climate change advocates.
He added that the professor’s concessions over medieval warming were ‘significant’ because they were his first public admission that the science was not settled.
The Tonka Report Editor’s Note: The global warming fraud is coming apart at the seams. Jones can’t find the data for the already scientifically discredited “hockey stick graph”? Kind of like Donald Rumsfeld stating on September 10, 2001 that the Pentagon could not account for $2 trillion missing just before a missile took out the entire accounting department of the Pentagon the next day on 9/11… – SJH
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