What's wrong with the stimulus

So, we've been talking about fiscal policy and wall street bailouts, now let's talk about the Democratic "stimulus" plan.

I'm against it.

Taxcuts
Look, I like the taxcuts for lower income people. Especially when the Bush tax-cuts for the upper income people will expire soon, great i think, balances revenue a bit. The problem with tax cuts is two-fold. The last two tax cuts and rebates that Bush pushed for, went to paying down debt, not stimulating the economy. I actually encourage that. This does put more money in the pocket of the American consumer, but 1. they can't spend it and 2. even if they did, it would only temporarily help the economy.

Most people are forgetting is that consumer debt (non-mortgage) is about 2.5 trillion dollars. For the next two decades we are going to whittle this down. Even if Americans get a 10% pay raise, a lot of that money will go to the Wall Street greed mongers to pay back what we borrowed to buy HDTV's, computers, clothes and other things for the last 10 years. The levels of consumption that we have had for the last 10 years, which was the artificial "growth" of the economy was based on consumers taking on more and more debt. It was not real growth. Present and recent historical levels of consumption are financially unsustainable.

The other sink-hole of American wealth, if lining the pockets of wall-street fat cats and credit-lending institutions wasn't enough, is the national trade deficit. Thanks to the promotion of free-trade and outsourcing both mid-high skill manufacturing and low-skill call center jobs the economy exported 4.5 million jobs to Mexico, China, India, Taiwan and all the countries that now make products that used to be made in the US. That probably doesn't include the jobs that would have been created like the eateries that pop up around places of employment and suppliers for those goods.

So the reason the tax cuts won't stimulate the economy is that smart consumers will pay down debt (like the banks did with bailout money) and if they spend that money, a lot of that money will be exported to other countries (Saudi Arabia, China, etc).

Social Policy
There's a good bit of money going into the coffers of state and local governments that doesn't create jobs, it just stops the hemorrhaging of jobs that would be due to layoffs from decreased government revenue. I don't agree that all this 'stimulus' money should go to pay for healthcare, unemployment benefits and the like. I think it much wiser to fund intelligent infrastructure projects that will be coming soon to a road or utility near you. Instead of padding unemployment, the government should fund training programs specifically for the upcoming greening of America. This can range from short-term weatherization to long-term programs to build the capacities to manufacture high-speed trains domestically. We're decades behind Europe and Japan in this respect, and instead of paying people to look for work, pay them to have the skills necessary for the medium-term and long-term infrastructure projects. That's not spending, that's investment.

Infrastructure
Not big enough. If it was up to me, we'd have tax cuts and infrastructure only. I count training programs for skills needed to build infrastructure as part of infrastructure projects. The infrastructure I'd be looking at building is mass transit, high-speed rail, smart grid electricity, large-scale DC power lines from middle-american wind-farms (vastly different from smart-grid technology) and the like. All of the infrastructure projects would be green projects unless it is for road, bridge, water, swere repair. Building new roads to handle capacity would be replaced by installing mass transit systems. Paying billions of dollars so that people can watch TV (converter boxes)? Really? I mean really?

So I'm against the stimulus plan. Just becasue supposedly we have to 'do something' does not mean that we have to do everything. Obama talked about prioritizing. It seems that his priorities is to create something that's palatable to the Democratic base that got him elected. But i didn't vote for that. I voted for someone who wasn't afraid to make the 'hard decisions'. Instead of spending money on Bush's war, you're now spending it on Obama's society. If he was bold, two-thirds of the bill would be in infrastructure spending.

I think he thinks we'll get to that point sometime. I'm pretty sure that he thinks the move to spend on priorities is a gradual process.

It isn't.

Go green, go now.

Trickle Down Obamanomics

So, apparently people have been heeding my warning. I have been saying for a little while on this blog in this post that the disparity in incomes has got to stop. I say the thing to keep an eye on was the multiple. What i mean by the multiple is how much a top-level executive makes as a multiple of how the least compensated person in the company (janitor, etc) makes.

Over all but the last couple of decades, the most highly compensated person made let's say 20 times what the lowest paid worker makes. Now, we see compensation packages of up to 570 times what the average worker makes. You can find good info here , here and here . And you wonder why the rich keep getting richer?

So, recently Emperor Obama has decreed a limitation on the total compensation an executive can get if their company receives bailout money. This is a great slippery slope I detect. I hope, really really hope, that somewhere and somehow that this extends not just to companies who take bailout money, but all companies doing business with the federal government! before we get to that though, let's look at this.

So the companies that take bailout money are restricted from getting extravagant compensation packages for their 'best and brightest'. One consequence of this can be that a company that takes bailout money will shed good, mediocre and bad people like a butterfly sheds its cocoon. Now you have an over-saturation of people who want to be employed as finance gurus who will take lower and lower wages. But their wage demands will compete with one another to lower the bar on compensation.

The other option is for these folks to go abroad, as a friend from Goldman Sachs proclaims, as its easier to make stupid amount of money fleecing the locals. I say good riddance to these robber bankers. So in the short-term, i think executive compensation will reluctantly plummet and the multiplier will drop from some over 500x the average worker's salary to somewhere closer to 100x the average workers' salary. This will then create downward pressure on the luxurious compensation packages of the next lower and lower tiers. this will never reach Peter Drucker's (management guru) 25-1 ratio, but it'll be something significant.

I think to accelerate this trend, what Obama should do is to spread that cap to all companies doing business with the government. I mean if we're really about saving taxpayers' money, how come the CEO of Lockheed Martin gets 24mil a year (757x average) while living off of 80% of the revenue coming from government contracts? I think to really save the government a good bit of money, Obama should spread this ceiling over a wider swath of the economy by extending this ceiling to all companies that do business with the government.

I am against the government bailing out the economy. I think if you really want the economy to pump again, you have to seriously re-design compensation. If the government put a multiplier cap on ALL executive compensation, then there would be a hell of a lot more payroll money to spread towards the bottom of the pile, as well as around. Think, you pay one man the salary of 757 men? What if you cut that in half, you could employ another 300 depending on their skill sets.

Even if driving down the ceiling of executive compensation doesn't immediately spread to employing others. The incresed savings on compensation at least puts money into these banks, which in turn they can lend from.

So I'm all for putting a ceiling on executive compensation. This 'tricke down Obamanomics' would take a serious bite out of the windfall money these executives get. I'm just scared that this has no teeth as no company 'in their right mind' would take anymore bailout money.

Homo Economicus Must Die

So, there's a depression setting in, not just a recession going on. It seems that the news media, business people, economists and everyone reading what they have said are stuck in the same trap. They think money is the problem and money is the solution.

"No problem can be solved from the same level of consciousness that created it" -Einstein

I'm sure that someone else said it before, but he's the one that got the quote. And the way he says it is kinda quippy.

The problem with the recession and all the talk about economics is that it is one-sided. The underlying assumption is that growth is good and so is employment. That may be true, but what industries grow, and what are people employed doing? We know that there are many many problems with out economy. We are losing our manufacturing base, the biggest employer in America is a temp agency! So even if people get put back to work, that's only important in so far as they can buy more stuff. Sure, there's lots of considerations such as food, electricity and clothing. But the assumption of the American isn't just providing himself or herself and their family with basic needs. The assumption of the American is that they'll go out and half-recklessly buy things they really don't need (cable, larger flatscreens, new furniture, trips to hawaii instead of the museum . . )

That's the level of consciousness we're in. We want to employ people, but only so they buy things, not so that they have a sense of purpose in life. We employ them so they spend. We employ them "for the love of money." There's no talk about human development, purpose, usefulness, contribution and the like.

What happened to the Pursuit of Happiness over the Pursuit of Luxury? The media has succumbed to the paradoxical seduction of statistics and talks about development only in economic terms.

We need something else. The green movement hints at this. Their elevation of near aseticism through being energy efficient and low carbon footprint will eventually call into question mass consumerism itself. We will have to ask what will replace shopping and displaying our financial conquests as a national pastime?

I don't know. I figure it would have to be something new, different. Perhaps the old pastime of conversation. You could say that American culture was built in the time between work, when parents talked with and schooled their kids. Where neighbors would have each other over for dinner. Perhaps the death of Homo Economicus will give way to Homo Sapiens.

I'm not saying i have the answer. I'm just looking ahead and seeing something cloudy, trying to convey to you that at sometime the beast Homo Economicus will be slayed and humanity will have a new expression/master. I'd just like to know what it is.

Perhaps for once we will have a conversation about the actual quality of our lives, not just in terms of physical things, but our intellectual, social, moral and spiritual lives. Sounds good to me.

why there is a credit crunch

Money is too cheap.

Let's talk supply and demand. When i sell eggs, let's say they're normally priced at $2. Let's say i go to the market and mark them at $2.50. nobody is going to buy them because they're too expensive. I mean with a dozen eggs, people are price sensitive. If i go to the store, and the grocer says that i have to sell them at $1.50, then i'm not going to sell them because i can't turn a profit on them.

So now what? And what's this got to do with the credit crunch?

Well, the Federal Discount is what, .50%. Which is zero for real. A year ago it was 4%. This is the rate that the fed charges when it lends money to banks. The banks then lend money to everyone else, at prime rate, which was 6.5% a year ago and 4% now.

Now what bank in their right mind would want to lend money at 4%? There's no supply because the banks won't make ANY money at that rate. At 6.5%, those were profit margins they could work with, but 4%? That doesn't qualify anyone for a loan except those who have impeccable credit. Banks charge higher interest rates to people with bad credit, so if they have to write-down money on a loan, they write most of it off. But they make less money on lower interest rates, and can only write down less money.

So the Fed has made money so cheap, that it is unprofitable for banks to lend to people.

The other consequence of this is that the only credit available are the high-interest rates of credit cards. So now you borrow money at 15% instead of 6%. This further taxes the underpaid American worker and consumer. Apparently, the people with all the money consistently want to fleece us broke folk.

I was talking with an old friend on how I think there should be a limit on the percentage of debt a person can take on. Just like new mortgages, you have to have verified income, and when you borrow, you can only borrow enough to spend some proportion of your income (28% i think). I think this should be extended to consumer credit also. That means that no matter how much you earn, you can only borrow unsecured credit to the amount that you repay is no more than 20% (or some number) of your income. This creates a ceiling of debt. I think this will be good for the consumer. This is a pro-consumer measure, not a pro-business measure. A loophole for this is that someone can get a waiver if they borrow against some asset aside from their primary home.

The credit crunch will continue until the fed raises its discount rate to about 3%, then lending could be profitable for banks. When that happens, more businesses will get credit to go into business, selling us crap that we buy with credit cards. I think to prevent our country from disaster again, we need to put a ceiling on the amount of credit a person can hold, indexed to their income. We can also factor in the value of their assets if they need more credit. In effect, they could get a line of credit based on the value of some asset besides their primary home. Oh yeah, did i say that we should abolish home equity lines of credit? Yeah, we should.

houses houses everywhere, but no one to live in them

I read two articles today so i could prove a friend wrong. we had a discussion, on the way to the inauguration, about housing prices. My position was that housing prices have been way above historical averages for the last 20 years and need to be reset to those levels. Her position was that housing bubble doesn't need to be deflated back 20 years, but to the start of this bubble. I felt a little vindicated when i searched on google for the info i was looking for: historical prices of houses. The graph below has them both adjusted for inflation and not.
You'll see that 20 years ago was the little blip right before the stock market crash of '89 and the ensuing recession for the next five years. One of my arguments was that the low interest rates of the last few years fueled a lot of people trying to buy houses that they just couldn't afford, or to use the presence of cheap money to flip houses, further pushing up the price of housing for everyone.

She said that the market needs to correct so that people can buy houses at their current prices. And for this to happen they need low interest rates for them to do this. This was the point in the conversation where i said "if they can't afford it at eight percent, they can't afford it at four". It's my opinion after reading a little from Ludwig Von Mises of the Austrian School of economics that the variation in interest rates is what creates boom and bust cycles. The pedal and brake that Greenspan expertly applied to speed up or slow down the economy caused it to spin out of control.

So it's my opinion that what should be happening is that we actually let the housing market tumble. You may think the alternative is to let the 'economy slide' and unemployment go rampant. Somewhere embedded in trying to stop the fall of housing prices is to stick people with mortgages they can't afford! This can then turn into another bubble being burst. I'd rather stick with one long one than two a couple years apart. The question isn't when we reach the bottom, but do we make a pit stop on the way down?

The other article that i read was about the decline in housing starts. The gist of the article is that we've build way more houses than we have people. We have about 1.3 million vacant homes. that is with no bodies to fill them. Even if everyone bought the home they are in, we'd have the vacant homes. So what we have to do is to stop building so many new houses and let the people we have (through going out on their own and immigration) fill the houses through sheer population growth. This means that with the slide in about 700,000 houses per year, we would expect the contsruction market to catch up at about early 2011.

One thing on this i mentioned to my brother is that our new president should instruct his agencies to give preferential lending and treatment to building for density and not sprawl. With the considerations of energy running rampant, we find it much easier to support urbanization than sprawl (which promotes gas guzzling long trips to stores and work). This may in the short term have as much an impact on hybrids and electric cars.

So what i would like to see in the mean time is a slow pre-emptive creeping back up of the Fed's prime rate. If banks aren't lending because money is cheap, they won't lend if money is expensive. We might as well set a stable number for interest rates for the next five years so people can plan around it.