Monthly Archives: March 2010

Flunking Arithmetic

In his address to the Brookings Institute today, President Obama was proud to claim that the American Recovery and Reinvestment Act “Stimulus Bill” has “created or saved” at least 1.6 million jobs.

Do the math: $787,000,000,000 / 1,600,000 jobs “created or saved” = $491,875 per job.

Of course that does not yet include interest on all that borrowed money to pay for those short term temporary jobs that will be payed out over the indefinite future of endlessly increasing federal debt.

I have to wonder how much those jobs actually pay in wages and benefits to the people who “got or kept” them and what else has been “stimulated” in the process.

Even if there are still many more jobs to be “created or saved” before those funds are completely gone, what future revenue stream will support all those people in all those publicly funded jobs? Do folks in government really believe that this is the way the economy works and that massive long term borrowing for poorly conceived short term spending is the way to “stimulate” prosperity?

The president’s speech had all sorts of great rhetoric about the private sector and entrepreneurs. But unfortunately his actions speak much louder than his words.

Today’s news also includes stories regarding AT&T, Caterpillar and John Deere taking massive charges against the cost of complying with the new federal health care legislation. Security and Exchange Commission regulations require publicly traded companies report such write downs the same quarter that changes in tax laws that impact them are enacted. Many more such reports should be coming in the next couple days. While it is obviously very well intentioned from a social perspective,  despite the smoke and mirrors in the official projections, it isn’t difficult to anticipate what kind of federal budget impacts we will see from the health care bill. Unfortunately the legislation doesn’t address the underlying causes of rapidly rising health care costs and doesn’t promise to be economically “stimulating”.

The news today also described new legislative proposals from the White House intended to encourage banks to write down mortgage principles for homeowners underwater on their loans and delay foreclosures. Megan McCardle offers a good overview of the concerns with such legislation. If the legislation ultimately includes sticks along with carrots for incenting lenders to comply, then one really doesn’t have to wonder how it will impact banks perspectives on evaluating risk or their inclination to lend in the future. If it is all carrots, and really just another bailout for banks in disguise, with taxpayers taking on liabilities for bad loans written during the boom years, then it isn’t hard to anticipate how that will impact federal deficits. Again, while clearly well intended from a social perspective, the economics of such policies are hard to reconcile and don’t promise to be “stimulating”.

Is it unrealistic to expect that at least a few of the officials in Washington D.C. might have paid attention during some economics, finance or accounting courses in school or at least during sixth grade arithmetic?

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Debt And Productivity

Interesting Chart from Nathan’s Economic Edge.

[Diminishing+Productivity+of+DEBT+(2).jpg]

Here’s how Nathan explains it:

This is a very simple chart. It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.

Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!

Frankly, I am not sure what this chart indicates for the future, though I doubt it can be anything good.

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