Chinese Stimulus Passes, U.S. Stimulus Fails First Test!

Nearly 3 weeks after the passage of the Economic Recovery and Reinvestment Act, the U.S. and Global markets have passed their initial judgement on the expected effectiveness of the the act. Yesterday provided a stark reminder of how a stimulus package should first and foremost inject confidence into markets and into the public eye. After announcing their own stimulus package on Tuesday night, Chinese markets, followed by every global index and U.S. markets responded to the packages with a global rally. Markets have long expected China to put forth a stimulus plan built upon their socio-economic structure and aimed at trade growth between the Chinese and other nations. The Chinese delivered on the expectation and although the stimulus plan is built up their modified capital-communist economy; the fact that they put forth a stimulus plan providing immediate relief designed for their economy, sent a round of renewed hope and confidence throughout global markets.

Unfortunately, the positive reaction to the introduction of a Chinese stimulus package provided a stark reminder to the disappointment that global markets have displayed in regard to the U.S. Stimulus package. After the signing of the US recovery package, markets sunk as investors and much of the public expressed doubt over the size, targeting and institution of the package. In the eyes of non-partisan economic groups, the US "Spending" package would not pump money into the economy for a period of 6-12 months as money would trickle down through the Federal, State and Local Governments. In addition, the US Stimulus package provided no immediate consumer relief as small changes to the tax code would provide families little more than a McDonald's Extra Value Meal on a weekly basis.

Nearly three weeks after the passage of the Economic Recovery and Reinvestment Act, the markets have failed to respond and the administration has all but stopped the selling of the bill as they focus on new initiatives and further government expansion. Let me make clear, that the first and foremost objective of any stimulus plan is to inject confidence in to consumer and investment markets. If a plan fails to curb a degrading consumer confidence, then no amount of government spending will help the economy. Furthermore, most economists are now questioning the very recovery timeline and economic predictors used by congressional leaders and the administration in regards to the stimulus package. The administrations basis for job creation and economic recovery are in large part based upon expected contraction and subsequent growth of the economy. However, as the administration releases their internal calculations, many economists are beginning to wonder where they are getting their numbers from. For instance, this weeks released statistics showing the economy contracted at a rate nearly twice the expected rate raised the eyebrows of most economists. Moreover, the administrations internal numbers we're based upon a contraction less than what analysts initially predicted and their long term economic growth rates are greater than analyst predictions including that of the Federal Reserve. If the administrations internal calculations continue to prove more optimistic than realistic then the potential job creation of the stimulus package will end up closer to the 1.2 million job mark put forth by the CBO. If time proves this to be true, the the package will fail to stem rising unemployment.

The bottom line is that only time will allow a clear judgement to be passed on the President's Economic Recovery and Reinvestment Act; but, for now it is fact, that the Stimulus package has utterly failed it's first and perhaps largest test. Yesterday's global rally only highlighted this.

The Watchdog

Stimulus Unemployment Extension Likely To Raise Business Taxes

The Economic Recovery and Reinvestment Act provides for the largest single extension of Unemployment Benefits in US history. The provisions which effectively end the Bi-Partisan welfare reform of the mid 90’s, is likely to expand the unemployment insurance rolls by 500,000 - 1,000,000 previously ineligible and low-wage workers. However, little discussion has taken place concerning the impact of the proposed changes beyond the next two years. Although an extension of the benefit period and temporary increase in the benefit amount are considered necessary measures, the CBO, economic think-tanks, a select group of Governors and economists nationwide are deeply concerned over the impact of two unemployment provisions included in the stimulus bill.

The stimulus bill offers a multi-billion dollar carrot out to individual states for use in offsetting unemployment benefits. However, like all federal money, Congress and the Obama Administration have attached strings to the funds.

The first 1/3 of the money offered to the states requires that the accepting state revise their current Unemployment Insurance guidelines to base qualification upon not only employment but also quarterly income. A handful of states such as New York have similar provisions in place and will become eligible for the funds immediately. However, a majority of states including California have avoided such changes in Unemployment Benefits qualifications in the past out of budgetary concerns.

The remaining 2/3 of the ‘Stimulus Carrot’ will become available to any State that adopts two of the following four expanded qualifications for benefits.

A) States must include workers only seeking Part-Time Employment
B) States must include workers who VOLUNTARILY terminate employment due to compelling reasons such as a family illness or domestic abuse.
C) States must include those in "training programs".
D) States must include those who request additional funds for dependents who qualify.

The Obama Administration expects the above qualification changes to provide Unemployment Benefits to an additional 500,000 to 1,000,000 Americans. However, many economists fear that the number of individuals on unemployment may balloon as some states adopt the more liberal qualifications.

The deep concern with this expansion of unemployment benefits is the long-term ramifications of such changes. By design, Federal funding forcing these changes is only sufficient to cover the additional expenses to the states for a period of 18-30 months. With many states such as California already facing shortages within Unemployment Benefit funding, many State Comptrollers expect that this block of federal stimulus money will dry up within months; without providing long term solutions or stimulating anything.

The concerns as outlined by the CBO and most economists are simply: How do states pay for these additional benefits when the stimulus money is gone? The only solutions are that the Federal Government must continue to provide billions per year in additional unemployment funding, State’s must abolish the changes, or States must raise the unemployment tax. The concerns have already prompted the State of Oregon to begin consideration of a raise in their current unemployment insurance premiums assessed on statewide employers. With a average nationwide unemployment tax hovering around 1.75% of payroll on US employers (varies by state), many states will be forced to increase taxes on local employers, in some cases raising the maximums and doubling fees.

The expansion of Unemployment qualifications is not stimulative, rather it only provides a short term fix that will require billions of dollars a year for states to maintain. If the federal government wishes to mandate major expansions of unemployment, then long term funding should first be considered. The way that the unemployment expansion is being implemented is nearly identical to how the federal government has mandated expansions of Medicaid benefits and qualifications in the past; and those unfounded Medicaid benefits have created increased taxes and major shortfalls within state budgets. It looks like business carries on as usual in Washington, with this administration, just like others before it, failing to challenge the lack of fiscal responsibility within our government.

Behind The Stimulus Plan Claims Of 3.5 Million Jobs

How do you measure Job Creation?

Many questions surround the job creation numbers put forth by partisan's in Washington, and primarily the rhetoric put forth by the Obama administration. As a result, the question we should be asking is where do these numbers come from and how might they be affected?

First of all, let me point out that the 3.5 million Jobs that the administration has settled on comes directly from a CBO analysis that determined that the stimulus plan could produce 3.5 million jobs. However, just like Paul Harvey would state, now let's hear the rest of the story...


Job numbers are determined by utilizing Economic "multipliers" built upon economic variables and historical re-creation. The margin of error built into these formulas is measured in the hundreds of thousands and even the millions. In layman's terms, an accuracy rate that mirrors your accuracy in predicting lottery numbers. Moreover, these multipliers are built upon historical data, which in many economic sectors just doesn't exist or existed during a period in which are economy was structurally different. For instance, within the Energy sector, the Economic Recovery and Reinvestment Act predicts the creation of 26,000 mining jobs nationwide. However, because these numbers are built upon historical impact studies taken during periods of continuous sector growth, the numbers are 'wishful thinking' at best. The creation numbers do not take into account the ongoing shriveling of this industry, the impact of environmental regulation promised by congressional and administration leaders, nor the unmeasurable impact of alternative energies. As a result, the question becomes how do you drastically expect the expansion of an industry that has consistently shed jobs due to an attack on domestic natural resources.


Along the same line, consider the tens of thousands of "Green" jobs promised by the bill. Those numbers carry an even greater margin of error, as there is no historical data available and the public's willingness to utilize such services cannot be measured. Additionally, take for instance the thousands of jobs expected to be created through the Energy Efficiency Tax Credits. On paper, the tax credit is attractive, but in reality successful creation of jobs within the industries affected by the tax credit are premised upon Americans making the decision to upgrade their homes with the qualified windows, air conditioning units or furnaces. The "multipliers" are unable to consider real world factors, such as: How likely are Americans to invest hundreds or thousands of dollars to replace their windows, AC units or furnaces in order to receive a 30% tax credit? That is unless they have no other choice.


The truth is that when you throw such a large sum of money at the economy it will inevitably create some jobs. However, the current administration, who have commended themselves for honesty, have failed to mention that their 3.5 million jobs are based upon the literal best case scenario. In reality, the non-partisan CBO report, which the administration has used for the estimation, actually estimated that in the best case scenario the bill would create 1.2 Million-3.5 million jobs in the short term (also warning of a negative long-term economic impact). The administration and congressional leaders have simply left off the lower end of that estimate for political gain.


Even more disturbing however, is the administrations allocation of Jobs across the United States, whereas the administration is promising specific numbers of jobs in each State with no empirical evidence to support such numbers. The "multipliers" used by the administration are based upon national historical data and census built demographics, without any regard to the economic or regulatory variables that exist from state-to-state. As a result, the administration basically extrapolated local impact based upon the current production of geographical areas. As an example, once again look at the mining industry. For hypothetical reasons lets assume that West Virginia accounted for 12% of the US mining production. Therefore the administration allocated 12% of the funding and theoretical jobs to the state of West Virginia. This extrapolation does not take into affect any regulatory or economic conditions that exist in that state. If you live in a state where the industry is dying out due to a lack of resources or regulation, these numbers are simply not attainable. As a result, money does not necessarily arrive in the regions where it will best be spent. For instance, let's assume that $6 billion dollars (not an actual figure) was to flow into the mining industry within West Virginia, a state that is friendlier to the industry and which has seen an increase in it's percentage of national production. On the other hand, let's assume $1 billion was to flow to the mining industry in California, which has consistently shed jobs within the industry and chosen to push the industry out of the state. The national job estimates do not factor in the regional variables, as a result, the money allocated to California is less likely to produce as many jobs as if a larger share of the money were re-allocated to West Virginia.


Even more detrimental to the reliability of the government produced Job numbers are the real-world variables that the administration cannot account for. For instance, the administration has openly tauted that the Economic Recovery and Reinvestment Act will create 400,000 jobs by investing billions in infrastructure and technology (broadband) industries. However, the 'multipliers' used to determine these numbers cannot account for real world variables, such as the economic responsibility of most small business owners. For instance, assume that you were a road contractor and as a result of this stimulus plan your company received a contract to repave a substantial amount of roadway. The government, based upon the amount paid to you automatically assumes that you will now create new jobs. However, as a business owner, you have a responsibility to make decisions that look beyond a single contract and do not put your business or current employees at risk. As that business owner, you are going to consider the fact that this influx of cash is only temporary, with no reasonable assurance that long-term growth is achievable within the industry. As a result, these business owners will first and foremost try to maximize the production of their current employees and only hire new workers on an as needed basis, setting aside billions for a rainy day. With economic uncertainty looming, every industry and business will operate in this mode. Unfortunately our government is unable to comprehend that concept, considering that they spend every tax dollar and more that flows in the door.


The important thing for all Americans to recognize is that the rhetoric out of Washington is based upon the 'best case scenario' when it comes to job creation; and even then the 'best case scenario' isn't all together reassuring. If a single variable should occur when real world principles meet the government's hypothetical 'multipliers', the results could mean far fewer jobs than what the administration is promising. If the government's best estimate provides for a margin of error of 2.4 million jobs then perhaps it would have been smarter to pass this stimulus through a series of smaller targeted appropriations rather than a single all-encompassing bill. All things considered, a single economic, political, human behavior or other variable could throw the estimate off by hundreds of thousands of jobs; and there is one variable that could be the most detrimental: If financing of $1 trillion dollars cannot be found, will our government turn to the even worse option of simply printing the necessary funds?

We provide the facts and monitor the spending; we'll let you draw your own conclusions.

Recovery.gov - BIG ON GRAPHICS, short on substance

For weeks we have heard the administration direct the public to their "special" website, Recovery.gov , and I imagined that with the passage of a final bill that the site would undergo a transformation into an information portal on the Economic Recovery and Reinvestment Act. Now that the legislation has been signed into law, that transformation has yet to appear.

Recovery.gov is a beautiful site, full of well placed graphics, but short of substance and details. In fact, visiting the site, most people would be hard-pressed to find any details outside of the Presidential Rhetoric that we have heard in speeches.

At a minimum, you would expect a summary of the bill's provisions, after all, this was a bill that was designed to avert "catastrophe". Perhaps the White House just hasn't had enough time to read the 1,500 page bill. After all, if over 300 members of the Senate and House can vote on a bill without reading it, then why should we expect any more from the White House.

Recovery.gov is filled with graphs telling you about expected job creation and how many Billions were committed to Energy, Tax Breaks, State Relief, etc... However, there is no break down, nothing to show how this stimulus plan will help the average family and nor how the money is being spent.

Recovery.gov was intended to demonstrate the need of the bill and provide transparency to the public as to how the money was being spent. Recovery.gov was supposed to show a distinction between the Bush Administration and Obama Administration so far as accountability and transparency were involved. Yet, informing the public that $59 Billion is being spent on Health Care and $111 Billion on Infrastructure and Science without providing any details as to how the money is intended to or being spent can hardly be defined as an exercise in transparency.

Visit the site, but don't waste too much time, outside of a few colorful graphs, the site is the equivalent of an ambiguous political speech that sounds great but lacks substance. Hopefully, Recovery.gov will improve, but for now it appears to be relegated to the halls of mediocrity and nothing more than a cheering section for the current administration.

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