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June 20, 2009

Stimulating America's Decline

By Alan Aronoff
Barack Obama signed the Stimulus bill on Feb. 18, 2009 amid much fanfare. Proponents of the bill stated that it would save or create 3.5 million jobs. Now, four months have passed since the passage of the stimulus package, its time to take a first look at the stimulus. 

By the president's own words, the stimulus should improve employment in America and make us more prosperous. Prosperity can be measured as growth in GDP, growth in asset values such as real estate and stocks, and growth in personal income. 

"I have every confidence that if we are willing to continue doing the critical work that must be done - by each of us, by all of us - then we will leave this struggling economy behind us, and come out on the other side, more prosperous as a people,"    - Barack Obama
 
The Stimulus spending allocated for 2009 is $140B. Of that amount, $40B has been spent, which is in keeping if the spending is linear over the course of the fiscal year. 

The Bureau of Labor Statistics (BLS) reported the unemployment rate at 9.4% for May 2009. The table below shows that the trend in the unemployment rate has not changed since late 2008.

Figure 1 - (Seas) Unemployment Level

Figure 1
Furthermore, when the BLS considers the aggregate unemployed, which includes marginally 
attached workers and workers employed part-time for economic reasons, the unemployment 
rate reached 16.4% in May 2009. Also reported for May, non-farm payrolls dropped by 
395,000. 

On the bright side, the continuing claims by people out of work for more than one week 
fell by 148,000 to 6,687,000. Obama's claim that the Stimulus created or saved 150,000 
jobs is not only immeasurable but also not believable in the context of the current economic 
downturn.  Jobs growth is a lagging economic indicator and does not improve until recovery 
is well under way.  The government is hiring to fill jobs created by the Stimulus, and many 
of these jobs carry the title ‘czar'. This Administration has more czars than the Romanov 
family. The Stimulus is temporary, so the jobs created today in the government may not 
remain. Furthermore, the federal government's closing of 789 Chrysler dealerships and 
1100 GM dealerships will result in the potential loss of 63,000 jobs. In keeping with the 
Obama administration being the most transparent administration in history, can we expect 
that these 63,000 lost jobs will be deducted from the jobs saved or created by the Stimulus?


According to the Case Schiller US home price index, the average American home 
fell  7.5% in value during the first quarter of 2009. Housing inventory is at 3.16 million units 
(existing homes) which at the current sales rate is a 9.3 month supply. Housing prices will 
not stabilize until the excess inventory is removed and the foreclosed or about to be 
foreclosed properties are placed in strong hands, that is, in the hands of people who can 
carry the property and take it off the market.  The Office of the Comptroller of the Currency 
has already issued a report on mortgage modifications of mortgages in default, and the 
re-default rate on these modified mortgages is 65 %.  With the administration plan to prolong 
the agony of the inevitable foreclosures, housing will be a negative for the US economy longer 
than need be.  To make matters worse for the housing market, the Federal Reserve 
has not been able to keep mortgage rates down recently through its program of buying US 
Treasuries.  By buying Treasuries, the Fed is increasing the money supply since it has to 

print the money with which to buy the bonds. Countries such as China, Japan, and Saudi Arabia 
which hold a large amount of US treasuries are concerned about the value of the dollar 
declining. China, Russia, Brazil, and India are negotiating bilateral trade deals that will avoid 
the use of the US dollar for trade. These countries are concerned that the dollar portfolios 
they have will decline in value as the US is creating unprecedented deficits.
The GDP for Q1/2009 decreased at an annual rate of 5.7%. Economic growth is not just a function of the Stimulus, but will also be affected by Obama's efforts to restructure healthcare, impose a carbon tax, and his new call for PAYGO that requires every spending increase to be paid for with the notable exceptions of healthcare, the Stimulus that was passed, and the current entitlement behemoths of Medicare and Social Security.  The themes for the future global economy are de-levering or debt reduction, more regulation, and reduced consumption according to Bill Gross, Managing Director, PIMCO Investments. Compound these factors with the government's reach into running automotive and financial  companies, and healthcare, and growth rates as measured by GDP will not reach the 3% rate previously achieved in the US. As the US comes to look more and more like Europe, the US will see GDP growth and employment that looks like the Continent as well.  As the table below shows the US has bested the EU 15 nations from the period of 2001 to 2005 in both GDP growth as well as employment growth.

chart 2

Figure 2 - US vs. EU 15 Economic Comparison

The Stimulus was passed quickly with the call that if something wasn't done quickly, unemployment would reach 8%. It is now 9.4% and rising. Furthermore, the actions taken by this Administration are driving up interest rates and driving down the dollar. Health care, carbon tax, the Stimulus, and the private industry bailouts are all actions that will reduce growth, delay the bottoming of the real estate market, and extend the economy's weak performance.

Obama should declare the Stimulus a success and immediately cancel future payments under this abominable legislation. Wisdom is being able to look at the results and change course as needed.

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