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Thread: 'A Busted Formula' - gov't bailouts ...

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    Banned Melonie's Avatar
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    Default 'A Busted Formula' - gov't bailouts ...

    (snip)"A Busted Formula, by Eric Sprott and David Franklin

    There’s nothing wrong with throwing a little money at a problem to make it go away. There’s equally nothing wrong with throwing a little borrowed money at a problem to make it disappear, as long as you have the means to pay that borrowed money back.

    But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away? If you’ve ever experienced a situation like that you can probably understand how Europe feels right now. It just unleashed a magnificent $1 trillion euro bailout and the market responded with a selloff by the end of the week! So what happened? That money was supposed to make the problem go away, after all. And it was a lot of money. Why did the market respond to it with such disdain?

    We believe the market’s reaction is confirming what we have long suspected: that these bailouts provide next to no long-term value. They don’t produce real jobs. They don’t improve productivity. They just prolong the precarious leverage game played by the financial sector, and do so at tremendous cost to taxpayers. "Bailout and Stimulate" has been the rallying call for governments and central banks since the beginning of this financial crisis – and it has certainly had its impact over the last two years, but not the type of impact we need to propel real, sustainable growth. There are three recent, glaring examples of this busted "Bailout and Stimulate" formula in action:

    Exhibit A: The United States

    From the outset of this financial crisis, the US Government and Federal Reserve have spent prolific amounts of money to save its banks and stimulate its economy. According to Neil Barofsky, special investigator general for the Troubled Asset Relief Program, the United States has now spent approximately $3 trillion on various programs to stem the financial crisis.1 This figure is expected to be updated again in July.

    This $3 trillion expenditure includes stimulus programs like ‘cash for clunkers’, the extension of unemployment benefits, infrastructure spending, the "Making Home Affordable" program, as well as the activities of the Federal Reserve. To measure what the fiscal stimulus has actually accomplished we looked to the US Federal budget outlays/receipts to gauge the impact of the stimulus on GDP.
    Table A presents current dollar GDP increases year-over-year alongside current dollar budget deficits. Comparing the two in current dollars provides a sense of the hard dollar impact that stimulus spending has had on the economy. As the chart illustrates, the net impact of the stimulus contributions and promises made since 2008 have resulted in a combined budget deficit of close to $2.5 trillion dollars and an incremental net increase in GDP of $200 billion. A $200 billion return for a $2.5 trillion increase in debt represents a terrible return on investment. It implies that the net impact of the stimulus on GDP since 2008 has been a mere 9 cents for every deficit dollar spent. Buying dimes with dollars is bad business, government-funded or not.

    Another troubling statistic relates to the cost of job creation for the American Recovery and Reinvestment Act (that’s the $787 billion program designed to produce real jobs in the United States). The White House estimates that it takes approximately $92,000 of government spending to create one job in the US. The White House justifies this exorbitant amount by stating that at the current employment level, each job in the US economy generates $105,000 in GDP, thus resulting in good "bang for the (taxpayer) buck".5 Spending $92,000 to generate $105,000 in GDP seems justifiable on the surface. But further digging reveals that the actual cost to save or create one job in the US was $117,933 per job from February to December 2009.6 That’s well over $92,000, and more than the $105,000 "return" each job is supposed to provide in GDP. If this metric is correct, it means the US government is actually suffering a negative return from its job stimulus.

    To further convolute the issue, one must also consider that the supposed $105,000 GDP return for each new job doesn’t incorporate the fact that the $92,000 (or $117,933) spent to create it was BORROWED. Why does this aspect of government expenditure never make it into the analysis? Spending $92,000 for a $105,000 pop in GDP represents bad logic when that $92,000 isn’t yours to spend. If we incorporate the interest costs required to borrow the $92,000, are we really producing value or just digging a deeper hole?

    Numerical discrepancies aside, the fact remains that GDP is a terrible metric to measure the return of a job program. GDP is technically the value of all finished goods and services produced in an economy. From a business perspective, GDP is akin to revenue, which isn’t an asset, and is different from ‘earnings’ or ‘profits’. Businesses don’t hire additional workers for their marginal increase to ‘revenue’ – they hire to increase their marginal ‘profit’. The White House approach to job stimulus will maximize spending, not profit. Rather than maximize spending, why not maximize actual employment by finding a way to produce a job for less than $92,000?"(snip)

    from

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    God/dess Zofia's Avatar
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    Default Re: 'A Busted Formula' - gov't bailouts ...

    My other problem with justifying spending on jobs is the whole notion of spending $92,000 for $105,000 in GDP just does not make financial or economic sense. We don't have a 100% tax rate, or even 90%. At worst, combining federal, state, local, and employment taxes you come to a maximum of about 50% tax rate. Thus, if all the $105,000 bump in GDP was taxable (and it's probably not) we just spent $92,000 for $46,000 in taxes. So, the appropriate calculation requires us to determine the payback period for the $92,000 investment. That then becomes two years. So, the "investment" really does not start paying us back until year three, assuming a rather high tax bracket for those dollars of GDP. Then we have to ask, will the job last into year three? That also affects the payback period.

    Z

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    Banned Melonie's Avatar
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    Default Re: 'A Busted Formula' - gov't bailouts ...

    ^^^ and now try adjusting your payback on investment analysis based on the $92,000 cost per created job being BORROWED MONEY with a forward rolling interest cost !

    Then we have to ask, will the job last into year three?
    The obvious answer where gov't contract jobs are concerned is no. Most infrastructure projects will wrap up this year in the absence of another huge 'Stimulus 2' gov't spending package. However, the US treasury bond principal and interest payments necessary to create those soon to be defunct gov't contract jobs will continue for many years to come !

    The more subtle answer where 'green jobs' are concerned is maybe - depending on whether or not the gov't also continues to spend money on the subsidies / tax credits necessary to make 'green industries' appear profitable ( but in this case the true cost of the created jobs continues to grow each year due to the continued need for gov't subsidies ). And even if the subsidies / tax credits continue, your 50% tax revenue recovery postulate is unrealistic due to the offsetting effects of production tax credits for 'green energy' investors being applied against other tax obligations.

    Your observation is absolutely correct that any objective mathematical analysis shows that the jobs created by the 'Stimulus 1' gov't spending package were a 'bad' investment. And the more complete the analysis, the worse the return on investment appears to have been !

    The 'gold foil hat' crowd would point out that the unfortunate truth of the situation is that 'Stimulus 1' was more or less analogous to taking out a 10 year loan in order to finance a 'working vacation' ! Yes, in the short term, it appears that some positive 'profit' might have been generated. But in the longer term, the additional 'profit' quickly evaporates while the loan / interest payments go on and on (subtracting from future year 'profits')!

    ~
    Last edited by Melonie; 05-31-2010 at 07:48 PM.

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    Default Re: 'A Busted Formula' - gov't bailouts ...

    Quote Originally Posted by Melonie View Post
    The obvious answer where gov't contract jobs are concerned is no. Most infrastructure projects will wrap up this year...
    Glad you brought that up because around the Raleigh-Durham area there have not been that many infrastructure jobs created. Why? The simple reason is there were not that many "shovel ready" projects that were un-funded before. I have the suspicion that a lot of the stimulus jobs were very short term indeed because planning big government projects takes time. One of the ruses used by our local politicians to grab onto some stimulus money was to claim the new I-540 was stimulus funded. Pooh. The thing was on the books for a decade or more and funding had been approved years before for the phases that are now being completed. So, did we gain stimulus money at the expense of the funding that was already in the pipeline? Or, did politicians in Raleigh and Washington simply wink and call previously committed dollars by a new name? I don't know the answer, but I do know that the deficit is trending in the wrong direction and we have no new highways to show for it.

    The more subtle answer where 'green jobs' are concerned is maybe - depending on whether or not the gov't also continues to spend money on the subsidies / tax credits necessary to make 'green industries' appear profitable
    Another good point. For example, shortly after we moved into our new house a couple of years ago, BF lost his job. He became very much the good house "husband". He did the laundry, he hung our clothes out on the line. We reduced our electricity bill. He researched new washers, and bought a fancy front loader that reduced our water consumption. Instead of watering the lawn, he took time to re-landscape with plants that required less water. He installed rain barrels to collect water runoff from our roof. Today, our water usage is down significantly. (Hooray for us!) But wait, now the city says that once it gets its software bugs worked out, they are going to charge us more for our water because we aren't using enough. (GRRRRRRRRRRRRRR) While conservation is generally a good thing, there are trade offs.

    Z

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    Banned Melonie's Avatar
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    Default Re: 'A Busted Formula' - gov't bailouts ...

    But wait, now the city ... are going to charge us more for our water because we aren't using enough
    Well, unfortunately, this is yet another example of gov'ts not cutting their spending in response to falling revenues. In this particular case the high cost of city water necessary to pay the salaries and benefits of the union city water dep't workers prompted people to use less water. But without reducing spending on those salaries and benefits, all that happens is that the the gov't will attempt to raise (tax) rates the following year to try and collect the same dollar amount of revenues from a declining 'pool'. Same principle is true of property taxes, gasoline taxes, income taxes, sales taxes etc.

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    Default Re: 'A Busted Formula' - gov't bailouts ...

    ^^^ Join the club ! I've been getting screwed by the NYC Water Board for years. My water consumption keeps going down ( I started the rain barrel thing this year for my garden ) but my water bill keeps going UP ! Why ? The Water Board has to pay for all the overpriced, overbudget and overtime infrastructure projects like Water Tunnel Number 3 and a Federally mandated water purification system when NYC already had some of the best and purest tap water in the country !

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    Default Re: 'A Busted Formula' - gov't bailouts ...

    Quote Originally Posted by Eric Stoner View Post
    ^^^ Join the club ! I've been getting screwed by the NYC Water Board for years. My water consumption keeps going down ( I started the rain barrel thing this year for my garden ) but my water bill keeps going UP ! Why ? The Water Board has to pay for all the overpriced, overbudget and overtime infrastructure projects like Water Tunnel Number 3 and a Federally mandated water purification system when NYC already had some of the best and purest tap water in the country !
    It's funny but in some parts of the country rain barrels are illegal. You see, the water belongs to the state. Same theory as just as one cannot cut down trees on public property, one cannot collect water from public skies.

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    Default Re: 'A Busted Formula' - gov't bailouts ...

    Quote Originally Posted by Deogol View Post
    It's funny but in some parts of the country rain barrels are illegal. You see, the water belongs to the state. Same theory as just as one cannot cut down trees on public property, one cannot collect water from public skies.
    Just like in France when it was illegal for both rich and poor to sleep under the bridges ?

    I'm not in a "watershed" area. It wouldn't surprise me if the overpaid assholes at the Water Board tried to make private rain barrels illegal. The whole thing is getting bizarre. For decades, NYC residents were told to "Conserve" water. They did. And got hammered with higher rates for their trouble.

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