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Archive for February 17th, 2010

Why The Stimulus Plan Failed: Exposing The Keynesian Fiscal Myth

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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

Link to original article below…

http://nrd.nationalreview.com/article/?q=MTViNmZiZmQ4NmMxM2Y5NmEzNWIwYWRmNmNhMWJlY2I=

Another Tsunami Of Foreclosures Is Forecast By The End Of 2010

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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

http://www.thinkbigworksmall.com/mypage/player/tbws/23088/1472743

Link to original article below…

http://www.latimes.com/business/la-fi-mortgage-mods17-2010feb17,0,7573498.story

Three Huge Corporations Leave The US Climate Action Partnership

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February 17, 2010: Judson Berger / FOX News – February 16, 2010

The sudden pullout of three corporate giants from a leading alliance of businesses and environmental groups could be the death knell for climate change legislation languishing on Capitol Hill…

ConocoPhillips, BP America and Caterpillar announced Tuesday they will pull out of the U.S. Climate Action Partnership, citing complaints that the bills now in Congress are unfair to American industry. BP spokesman Ronnie Chappell said Tuesday’s announcements are not a statement on the likelihood that climate change legislation will fail. “I would never speculate as to what would happen with a pending piece of legislation,” Chappell said. But he said the bills on the table no longer “conform” with what USCAP envisioned for a climate change bill. He said the legislation — including one bill that passed the House but is stalled in the Senate — does not provide adequate protections to U.S. refineries. If any bills are passed, they will result in more oil imports, the closure of U.S. refineries and the loss of U.S. jobs. Plus he said it’s too hard on the transportation sector. 

“We do not believe that the bills now pending in Congress conform to the USCAP blueprint, in that a disproportionate share of the emissions reductions and disproportionate share of the cost fall on the transportation sector and on transportation consumers and motorists,” he said. Both BP America and Caterpillar were founding members of the group.

ConocoPhillips CEO Jim Mulva also said in a statement that the House and Senate bills “disadvantaged the transportation sector and its consumers” and “unfairly penalized” domestic refineries that would have to face international competition on an unbalanced playing field. “We believe greater attention and resources need to be dedicated to reversing these missed opportunities, and our actions today are part of that effort,” he said. 

The companies described their withdrawal from the group as a way to advocate for climate change legislation in other ways. “We believe that U.S. action on energy and climate legislation in 2010 will preserve and create American jobs, secure our energy future and generate new investment in the global clean energy economy,” the statement said. The statement noted that while three companies were leaving, others have recently joined and USCAP “expects to add new members in the coming months.” 

The push for climate change legislation has been hampered by more than just concern over its impact on the U.S. economy. The record snowfall this year in Washington, D.C., and other areas of the country has fueled skeptics who see the snow-covered capital as evidence that global warming is a myth, though scientists argue that temperatures have risen over the long term and that extreme weather — even snow — can be a symptom of climate change. 

The U.N. Climate Change Conference in Copenhagen in December ended with a non-binding agreement. And that was preceded by controversy over leaked e-mails from a British climate research center that appeared to show scientists discussing ways to obscure certain climate data. Add to that Republican Scott Brown’s election to the U.S. Senate from Massachusetts in January — a win that broke the Democrats’ 60-vote filibuster-proof majority. 

The conservative Competitive Enterprise Institute seized on the departure of the three companies from USCAP as a sign that “cap-and-trade legislation is dead in the U.S. Congress and that global warming alarmism is collapsing rapidly.”

The Tonka Report Editor’s Note: This could very well be a ruse to signify that Big Oil is not on board with the climate change cap and trade scam, when in fact they have been funding it all along. Al Gore is the major stock holder in Occidental Oil founded by his father, which is the fifth largest oil company in the world… – SJH 

Link to original article below…

http://www.foxnews.com/politics/2010/02/16/major-firms-pull-climate-change-alliance/