STAMPEDE OF THE FISCAL FOLLIES:
THE $800 BILLION OBAMA STIMULUS
I had been part of a new administration that moved way too fast on a grand plan, but the Reagan-era fiscal mishap didn’t even remotely compare to the reckless, unspeakable folly represented by the Obama stimulus plan. In exactly twenty-two days from the inauguration, the new administration conceived, drafted, circulated, legislated, and signed into law an $800 billion omnibus package of spending and tax cutting that amounted to nearly 6 percent of GDP.
But the package was not a rational economic plan; it was a fiscal Noah’s ark which had welcomed aboard every single pet project of any organization in the nation’s capital with a K Street address. Most items were boarded without any policy review or adult supervision, reflecting a rank exercise in political logrolling that had proceeded straight down the gang plank to the bulging decks of the ark.
Indeed, the calamity of the Obama “stimulus” was not merely its massive girth, but also the cynical, helter-skelter process by which the public purse was raided. Nothing like this could have been imagined by even the most wizened Washington power players twelve months earlier. But during the BlackBerry Panic in September-December 2008, the nation’s capacity for fiscal governance was eviscerated by Bernanke’s depression call and by the frenzied maneuvers of an emotionally unglued and hysteria-gripped treasury secretary.
So by February 2009, when the Keynesian first team had become ensconced in the Washington seats of power, the very idea of hearings, deliberation, and diligent review of fiscal decisions had been suspended; the only thing that mattered was to fling tax cuts and spending “stimulus” toward the economy at breakneck speed and in massive array.
Bernanke’s false depression call was thus a gift to K Street that didn’t stop giving, and a green light to Capitol Hill politicians to gorge on budgetary giveaways like they had never before imagined. Worse still, the diligent work of decades by fiscal warhorses like Senate Republican Pete Domenici or Democrat Kent Conrad was flushed down the drain in a matter of days.
This unhinged modus operandi undoubtedly accounts for the plentitude of sordid deals that an allegedly “progressive” White House waived through. Thus, home builders were given “refunds” of $15 billion for taxes they had paid during the bubble years; manufacturers got 100 percent first-year tax write-offs for equipment that should have been depreciated over five to fifteen years; crony capitalists got $90 billion for solar, wind, and electric vehicle subsidies under the thin fig leaf of “green energy;” insulation suppliers got a $10 billion handout through tax credits to home owners to improve the thermal efficiency of their own properties; congressmen on the public works committees got $10 billion earmarked for pork-barrel water and reclamation projects in their home districts; the already bloated budget of the Department of Defense was handed $10 billion for facilities it didn’t need; and that was only the tip of the iceberg.
The real crime is that the American economy had already bottomed before these projects and the rest of the stimulus programs hit the spending stream. The giant Obama stimulus, therefore, amounted to a naked exercise in borrowing from the future on Uncle Sam’s credit card to artificially inflate current spending and income. There was no permanent national wealth gain at all, just a higher mortgage of taxes on future generations.
Since there was no looming depression to forestall, the helter-skelter process and most of the $800 billion substance of the Obama stimulus were a drastic mistake. What was actually happening was that a “new normal” was unfolding; namely, the debt-bloated US economy was undergoing an unavoidable deflation that would actually shrink the size of the nation’s economy, and therefore its fiscal carrying capacity.
Accordingly, the stimulus bill was not an “investment” which would jump-start a cyclically stunted economy and thereby pay back the debt later in a Keynesian version of the Laffer curve. In fact, since the American economy had been permanently weakened by its overload of debt, there would be no cyclical “payback” at all—just more permanent federal debt.
DICK CHENEY’S SECRET DEFICITS
That prospect was especially lamentable because the fiscal fundamentals inherited by the Obama White House were actually far worse than they appeared to be. In fact, the massive red ink from the Bush administration’s unfinanced wars and tax cuts was only the visible layer of fiscal decay; lurking down below were Dick Cheney’s hidden deficits temporarily obscured by the second Greenspan bubble. So the new administration was starting in a much deeper fiscal hole than it imagined, and within two weeks was frantically and recklessly digging itself in deeper.
Cheney had petulantly insisted deficits don’t matter during the Bush tenure because the Federal budget was being temporarily flattered by windfall revenues from capital gains, bonus payments, and swollen payrolls and incomes. But these tax revenues were not sustainable once the debt binge ended. Likewise, spending for safety-net programs had unnaturally abated owing to the faux prosperity of the housing and consumption booms. Overall, the pre-crisis deficit was being reported at about $500 billion, but red ink was actually running not far from $1 trillion when the windfalls from the bubble economy were removed from the numbers.
Needless to say, it was exactly those windfall revenue and spending elements which were swiftly erased when the US economy abruptly down-shifted during the nine-month adjustment after the Lehman crisis. The Great Recession, therefore, did not generate a temporary swelling of the fiscal deficit, as the Keynesians insisted; it simply uncovered the true structural deficit that had been there all along and that Dick Cheney had fecklessly denied.
The data for realized capital gains and the resulting tax collections cogently illustrate this shift. During the three decades prior to the mid-1990s, realized capital gains averaged about 2 percent of GDP and rarely deviated far from that trend. However, during the first Greenspan bubble realized capital gains soared to about 6 percent of GDP (1998–2000) and then boomed again during the second bubble, reaching nearly 7 percent of GDP in 2007.
The unsustainable financialization and speculation fostered by the Greenspan Fed thus generated a step-change in realized capital gains amounting to about 5 percent of GDP. When the financial bubble reached its peak in 2007, therefore, capital gains realizations soared to nearly $1 trillion, or roughly $650 billion more than the historic trend.
Even at the low 15 percent tax rate, capital gains revenues were artificially swollen, and had reached $140 billion during 2007. Not surprisingly, when the second Greenspan bubble collapsed, these windfall revenues plunged to only about $40 billion in 2009. Likewise, collections of ordinary income and payroll taxes dropped by about $150 billion as inflated commissions, bonuses, and other bubble jobs and incomes disappeared.
Incremental outlays of $250 billion also showed up in the form of a rapid acceleration in Social Security disability and early retirement claims and soaring food stamp and unemployment insurance payouts. None of these impacts were extraordinary and temporary; they reflected the true permanent fiscal cost of current law tax and spending policies once the bubble-era bloat had been purged from the US economy.
So, two powerful realities were obscured by Washington’s Great Depression 2.0 panic in February 2009. First, the true run-rate of the federal deficit was already nearly $1 trillion annually. The policy task at hand was to shrink the deficit forthwith because there would be no conventional “cyclical recovery” to automatically alleviate it or justify delaying action into the indefinite future.
Secondly, safety net spending had been structurally increased by upward of $250 billion per year owing to the loss of bubble-era income and jobs and the rising number of human casualties from the failing US economy. This suddenly swollen safety net needed to be reformed to minimize leakage to the non-needy, and the outlays which remained needed to be financed with sustainable tax revenue, not borrowing.
Due to these realities, fiscal discipline, efficiency, and prudence were imperative. There was no fis
cal headroom left for boondoggles, scattershot uplift projects, or for income transfers which were not stringently means tested. But spurred on by the depression hysteria, the Obama stimulus went in exactly the opposite direction.
Its $250 billion package of measures to aid families amounted to a helicopter drop, while its $50 billion of incentives to business were a pure grab bag of items harvested by K Street lobbies. Likewise, the massive $250 billion package of Medicaid, education, and other grants to state and local governments was simply an exercise in government finance by credit card. And its $150 billion for infrastructure and energy projects amounted to an excuse for more Keynesian-style deficit finance, not a sensible case for publicly funded investment.
THE OBAMA MONEY DROP: KEYNESIAN FOLLY
While none of these components were appropriate, the stimulus plan’s centerpiece—a $250 billion money drop to American households—was especially egregious. It featured a pure handout ranging between $250 and $800 that went to about 140 million income tax filers and 65 million citizens who got checks from Social Security, the Veterans Administration, Supplemental Security Income (SSI), and other benefit programs.
Needless to say, the grandly titled “Making Work Pay” (MWP) portion of this vast largesse had nothing to do with work since it went to income tax filers, whether they worked or not and whether they even owed tax or not. Likewise, it had virtually no relationship to need: tax filers with incomes up to $200,000 were eligible, or about 95 percent of the population; and among the 65 million entitlement recipients who got “Economic Recovery Payment” (ERP) checks, only the 6 million SSI recipients were even means tested in the first place.
Additionally, about 35 million tax filers got an extra $1,000 per child tax credit on top of the standard allowance. And about 25 million tax filers received an average of $3,000 each based on an especially unique qualification. This $70 billion handout went to taxpayers who had excessively exploited loopholes and would have otherwise been required under current law to pay a minimum tax!
The justification for such indiscriminate handouts by a government already $1 trillion in the red came straight from John Maynard Keynes’s current vicar on earth (and White House economic czar), Larry Summers. According to the professor’s financial model, American households were not spending enough on goods and services out of their actual faltering incomes. But not to worry. Through MWP and ERP the government would supply them with make-believe income, hoping they would use it buy a lawnmower, flat-screen TV, goose-down comforter, dinner at the Red Lobster, or a new pair of shoes.
The Obama money drop was thus not based on productive effort or need. Instead, it was dispensed to the vast bulk of the citizenry in their capacity as economically robotic “consumption units.” Plying “consumers” with deficit-financed handouts was a pointless theft from future taxpayers, but the White House professors insisted there would be a “multiplier” effect and that the money drop was actually an “investment” in economic recovery.
Yet when the Keynesian multipliers didn’t show much kick in 2009–2010, the MWP tax credit was simply given a life extension do-over. On Christmas Eve it morphed into a $110 billion “tax holiday” for 2011, providing a 2 percent reduction in payroll tax rates on 165 million workers. Yet, even though the money drop now averaged about $1,000 for a median wage worker, there was still no sign of “escape velocity” from the Keynesian multipliers; real GDP growth in 2011 of 1.8 percent was actually lower than the anemic “recovery” year growth of 2.4 percent recorded in 2010.
Accordingly, the tax holiday was extended again through 2012. And when the predicted hearty cyclical rebound still did not appear, Professor Summers’ heirs and assigns (he had fled the White House by then) summoned help from the contrafactual. Peering into a realm visible only to Keynesian true believers, they espied an economy that would have grown even more anemically, save for the $500 billion of MWP, ERP, and payroll tax handouts that had been added to the national debt over 2009–2012 to induce citizens to buy more shoes and soda pops.
In truth, this ever-extendable consumption stimulus was not only futile in the face of a debt deflation, but it also did violence to the progressive policy principles so loudly proclaimed by the Obama White House. As a conventional distributional matter, the payroll tax holiday would have been worth $4,000 to a two-earner household at the top of the payroll tax scale compared to $300 to a minimum wage worker. The payroll tax holiday, therefore, stimulated purchases of several Coach bags by households that didn’t need the help and barely a full Wal-Mart shopping cart by those who did.
In the aftermath of the financial crisis, however, there was a far more consequential equity issue; namely, that the Obama money drop was inherently anti-progressive. It wasted the state’s now radically diminished balance sheet capacity. In truth, the era of chronic deficit finance triggered by the Reagan Revolution thirty years earlier had taken the national debt from 30 percent to 100 percent of GDP.
Accordingly, it was no longer prudent to borrow in order to fund expensive money drops because there was very little runway left on Uncle Sam’s balance sheet. Indeed, the very real risk of a runaway debt service spiral loomed just over the horizon. So Washington faced an unyielding requirement to eliminate current deficits and to target scare federal dollars tightly and unfailingly on the truly needy.
That was the objective reality, but the “progressives” in the Obama White House never got around to discovering it. Petrified by the Bernanke depression call and badly advised by its cadre of antiquated Keynesian professors, it hastily embraced the greatest money dump ever concocted on the banks of the Potomac. The party which claimed to champion the down-and-out and which advised itself to “never let a good crisis go to waste” failed on both counts.
FISCAL FOLLY FROM THE VICAR’S NAPKIN
On the surface, the $160 billion in grants for Medicaid and education programs appeared to be better aligned with needs-based transfers. Yet the fact that these funds might support low income households through classroom instruction or outpatient medical services was only incidental. They still amounted to a deficit-financed money dump in the form of a temporary funding bridge to state and local governments.
The actual objective at hand, once again, was the Keynesian project of borrowing money on Uncle Sam’s credit card and pumping “demand” into the American economy. And like most of the stimulus package, this misdirected purpose was taken hostage by powerful special interest groups, thereby immeasurably deepening the nation’s fiscal crisis.
The flaw was embodied in the White House’s overall predicate; namely, that the Obama stimulus would generate a conventional cyclical rebound. This, in turn, would cause recession-swollen expenditures to decline and the state and local revenues to recover. The $160 billion funding bridge for Medicaid and education would thus be self-liquidating.
This predicate was not remotely accurate or plausible, however. The Medicaid and education funding crisis was structural and permanent, not a transitory artifact of recession. If these expenditures were vitally necessary as a social policy matter they needed to be funded out of taxes, not deficits. By going the latter route, the stimulus package was merely setting up yet another fiscal booby trap that would be lurking a few years down the road.
What happened during the bubble years was that state and local budgets were flattered by windfall revenues from swollen incomes, sales, and property values, and from one-time fees and taxes scalped from bubble hot spots such as new shopping centers and subdivisions. Accordingly, between 1990 and 2008, state and local revenues from their own sources (i.e., not federal grants) more than tripled from $700 billion to nearly $1.9 trillion, thereby raising their revenue take from 12.2 percent to 13.6 percent of GDP.
This gain in the revenue take (percentage) from GDP amounted to $200 billion, but as it happened the education and public welfare spending (mostly Medicaid) burden relative to GDP increased even more. During the same eighteen years, state and local spending for these purp
oses rose from 6.8 percent of GDP to 8.6 percent. This translated into $250 billion in incremental spending by the bubble peak in 2008, and meant that state and local governments had used up their entire revenue windfall, and then some, just on these items.
It was in this context that the Keynesian vicar in the White House handed Nancy Pelosi and Harry Reid a piece of paper on which was scribbled the simple term “$800 billion.” Professor Summers’ writ thus rivaled the Laffer napkin as the kind of foolish macroeconomic nostrum that could only incite politicians to spectacular feats of abuse. In this instance, the education lobbies, the nursing home operators, home health agencies, and legions more lined up outside the Speaker’s office volunteering to help fill in the blank on Summers’ napkin.
As indicated, this $160 billion exercise in filling in the vicar’s stimulus target created a giant fiscal trap. On the one hand, a significant portion of the revenue gain from the bubble era has evaporated during the Great Recession. By 2010, for example, the state and local revenue windfall had shrunk by half, to $100 billion.
At the same time, total spending for education and public welfare has continued to rise dramatically, fueled by both growing need and the temporary federal money drop. State and local spending for these functions thus reached 9 percent of GDP by 2010, meaning that the expenditure burden gain relative to the 1990 GDP benchmark was now $300 billion per year.
Needless to say, the resulting gap will generate excruciating pressure for new Washington bailouts and fiscal transfers; that is, for relief of the state and local fiscal gap that was recklessly widened by the Obama stimulus. The original “good crisis” was thus wasted. Facing the evaporation of their bubble-era revenues, state and local governments should have been forced to make hard choices; namely, to raise new taxes to pay for these swollen programs or to enact deep program reforms and spending cuts.
Along the periphery, in fact, some modest instances of that occurred. During 2010, for example, Arizona drastically cut nonclassroom education funding while also approving by statewide referendum a sales tax increase earmarked for education. So doing, it proved that voters were willing to face the music if presented with honest choices.
The Great Deformation Page 81
