The Economic Destruction Plan remains the biggest news story this week as the Senate failed to pass its version of the “stimulus” bill last week. Though Majority Leader Reid missed his goal of a Senate vote on the bill last Friday, he telegraphed that he has the votes to pass a compromise bill tomorrow. The compromise reduces the stimulus from $900 billion to an austere $838 billion (sarcasm intended). Apparently that was enough to persuade three Republican senators (Arlen Specter, Susan Collins, & Olympia Snow) to jump ship and betray the best interest of the country. But then again, this is not new behavior for these three.

Even at $838 billion, it severely understates the amount of government stimulative spending. In actuality, the economic stimulus activity began two years ago. Since then, the Federal Reserve, the Treasury Department, and the FDIC have lent or spent $3 trillion and have telegraphed their intent to shell out another $5.7 trillion. Doing the math, their less-than-successful efforts will cost us $8.7 trillion. Add to that the amount the Senate plans to spend in their Economic Destruction Plan and we the people are on the hook for $9.5 trillion. A trillion here, a trillion there, and pretty soon we are talking about real money! I’d like to be in charge of that spending spree!

How big? According to Bloomberg, the government could use the $9.5 trillion to pay off 90% of the nation’s home mortgages. Or the government could buy two-thirds of everything the United States produces in a full year. Now that is starting to sound kind of big!

So it’s big… it might be worth it, right? After all, this is the worst recession in two generations. Without a doubt, the government can and should do something - but whatever they do should have a good likelihood of succeeding. Yet, if we were left to weather the recession without any government action, the market would reach equilibrium and recover by itself. While this alternative would be painful for some and perhaps many, it is a certainty. Another viable option is to implement permanent and long-term tax cuts. This is a tried-and-true method of easing a recession and it has the benefit of helping immediately.

History suggests, though, that when the government tries to spend its way out of a recession, government fails to ignite the economy or does further damage to it. This is especially true when it is widely accepted that the Economic Destruction Plan has much, much more wasteful spending (pork) than stimulative spending. The Washington Times drives home this point:

“President Obama’s economic recovery package will actually hurt the economy more in the long run than if he were to do nothing, the nonpartisan Congressional Budget Office said Wednesday.

“CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing. “

Just as troubling is the precedent this spending level would set. Only twice in the last 60+ years has the government lowered its budget from the previous year. If they hold true to form, and odds are they will, this outrageous spending plan will become the new norm.

Ignoring all that, it might still be  a good idea, one worth trying, right? Consider this: analysis from the CBO shows that most of the spending will not happen in 2009 and not all of it will be spent by the end of 2010. Does that make a lot of sense when the average recession last just 10 months? Say this recession was double the average, lasting until mid-2010. Would it make any more sense?

Underscoring this point, Obama and team are on record saying that they will not be able to raise employment levels back to the 2008 level until 2010 or later. Let’s run this last statement through a sanity check: how often do politicians come in on time? Assuming you answered like I did, “never”, then how long will the “stimulus” really take to be effective?

Well, we can always ask Joe Biden for his thoughts… Speaking of the stimulus plan, Biden said, “If we do everything right, if we do it with absolute certainty, there’s still a 30% chance we’re going to get it wrong.” Sanity check time again. How often does the government do everything right, with absolute certainty? I’m guessing your answer was close to mine. If, in the absolute best scenario, there is a 30% chance we will have squandered $9.5 trillion, what are our realistic odds? That is one thing the Obama team and the Congressional Democrats aren’t answering. If you were wagering your money (and you are), would you take that kind of high-stakes bet?

Apparently Americans are not so convinced that this is the right thing. Rasmussen reports that only 38% of the public (the willfully ignorant among us - editorial opinion) believe that increased government spending would help the economy, whereas 48% believe it would hurt the economy. This is really good news because it means we still have a chance of influencing the outcome.

So, make a difference for you, your children, and your grandchildren. Call your senators now and tell them to kill the stimulus bill and push hard for effective tax cuts. Or, maybe ask them nicely to pay off 90% of your mortgage.

CALL NOW BEFORE YOU FORGET!

• Find your senators’ phone numbers here.
• Senate Majority Leader Harry Reid: (202) 224-3542
• Senate Minority Leader Mitch McConnell: (202) 224-2541

Addendum
I just found a couple of graphics at the Washington Post that paint a very good picture of how the stimulus bill divides up the money and how long it takes to pay out. One provides a higher-level view, the other a more detailed representation. Both worth a look - just click on an image to see it in full size.

High-Level View

Detailed View

“It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their consciences.” So said C. S. Lewis. The robber barons of the past have been reincarnated and are doing their dirty work in Washington D.C. Under the guise of taking care of us, of rescuing us from a disastrous recession, our elected officials (specifically Congress and the President) claim to be rescuing the banks, helping the middle class, creating jobs, and preparing our country for an unimaginably bright future. In reality, these are the omnipotent moral busybodies of our day that would punish profitable companies, reward failing businesses, horrifically expand government programs and spending, control nearly every aspect of our existence, and wreak economic havoc in all of our personal lives.

In my last blog, I discussed the nature of recessions. Today, I’d like to discuss the elements and implications of the current economic stimulus plan.

The Background
In case you haven’t heard, Obama and Congress are aggressively pushing a huge spending plan, claiming it is the only way to save our country from economic demise. Here are the top headlines.

• The House of Representatives approved a $825 billion dollar economic stimulus plan, on top of the previous $700 billion dollar attempted bail out of the banking system. That is $1.5 trillion.
• The US budget deficit scored a new record in 2008: $438 Billion. The projection for the 2009 budget deficit is $1.2 trillion (nearly triple the record) and that is before we add in the cost of the stimulus plan. Afterwards, $2.7 trillion.
• Total national debt in 2008 was $5.8 trillion. It is expected to double by 2015 and triple by 2019.

Government Spending Will Not Help the Economy
Don’t believe the dominant media with their blind love affair with all things Obama. Don’t believe the prophecies of doom or the promises of salvation coming from our elected officials. Instead, learn what history has already proven.

• Government spending (stimulus) is sleight of hand and does not work. It simply takes money out of the economy and redistributes it after removing a big chunk for administrative costs. Government does not create wealth or any new spending. It only redistributes the money and changes who spends it. Ask yourself this question: who do you want spending your money, you, the government, or someone else  whom the government gives it to?
• The chairwoman of Obama’s council of economic advisors states that money policy (the Fed) is fairly effective in ending recessions, but government spending is not.
• The stimulus plan follows the same model used by Japan during its economic crisis. What resulted there was an economy that stagnated for a decade and fell from its position as the world’s leading economy, even falling behind China — and it will soon fall behind India.
• Central planning does not work. Simply look at social security, welfare, US energy policy, and countless other government programs. The best and most current example is the total failure of the recent emergency bank bailout. The government approved $700 billion to rescue the ailing banking sector, authorizing $350 billion for immediate distribution. A couple of months later, when it was time to release the second half, no one could explain how the first half was spent (though there is significant evidence of misuse) and there was no improvement in the availability of credit (loans), which was a primary objective.
• To pay for the stimulus plan, the government will be forced to borrow money. Borrowing means repayment. The only way the government can afford to repay the debt will be to raise taxes or print money, the latter resulting in significant inflation. Keep in mind that inflation works just like taxes in reducing the amount of buying power that individuals have.
• You want proof that government spending doesn’t work? Take a little time to research the topic and you will find mountains of economic data proving that the expansion of government spending cannot work and that it only hurts the economy. Or, consider the mountain of economic stimulus spending the government has shelled out over the last year and how effective it was. Did you know that the federal government:
  • Increased spending by 11% to $3 trillion this last year? (How big was your raise in 2008?)
  • Enacted a $333 billion “emergency” spending bill? (Did it fix the emergency?)
  • Authorized $105 billion in tax rebates/refunds? (Significant evidence has already demonstrated, that reducing/refunding taxes does not work unless the reduction is seen as permanent.)
  • Pushed the budget deficit to a record $455 billion in the name of an economic stimulus? (It looks like that one didn’t work!)
  • Tried massive spending in the 1930’s, 1960’s, and 1970’s? (All failed to help during those recessionary periods.)
• Heavy government spending reduces productivity and future growth by:
  • Raising Taxes. Increasing taxes creates a less motivated workforce and reduces the amount of money businesses have to invest in their operations and create new jobs.
  • Social Spending. Money-for-nothing programs subsidize leisure and unemployment. It reduces incentives to be productive and self-reliant as it shifts money from investments (building future wealth) to consumption.
  • Creating Inefficiencies. The government has a consistent record of economic inefficiencies. When they run a program, it is done more poorly and more expensively than when the private sector runs the same kind of program. Additionally, government overlays the cost of a program with heavy and unnecessary administrative costs.

The Stimulus Plan Has Ulterior Motives
If the economic stimulus plan will not help the economy, why is Congress and the President so anxious to pass it? In short, for the same reasons they have been on a massive spending spree for the last several years. One, spending helps them get re-elected. Two, they are able to reward donors and the special interest groups that supported them. Three, they seek to achieve their ideological objectives (socialism for many). One clear indicator is the President’s strong push for immediate action. This recession was months in the making, and it will last a long time (by his account anyway). In reality, if Congress took one or two months to make smart, reasoned decisions the delay would not cause greater suffering than if they acted now. Yet, the House passed the biggest spending bill ever with just 8 hours of debate, while the leadership banned Republicans from participating in the debate.

By doing so, Congress hopes we won’t observe that:

• Nearly half of the stimulus funds are directed to organizations that sponsor or employ Service Employees International Union, federal, state, and municipal employee unions, or other unions closely associated with Democrats.
• One quarter of the funds will be given to governors, mayors, and local school boards to spend on their pet projects.
• Most of the “infrastructure” projects in the plan won’t pay out this year or next — until after the recession is already over.
• Countless billions of dollars with absolutely no connection to the economic recovery are committed to special pet projects (researching STDs, forcing the military to buy electric cars, stop-smoking programs, environmental programs, education spending, public housing, hunger programs, job protection for government employees, expansion of Medicare and Medicaid, and many more). See for yourself by reviewing the Congressional summary.

This Stimulus Package is Big — REALLY REALLY BIG!
Sure, everyone admits this plan is big money, but everyone seems so at ease saying the word trillion. Let’s take a moment and put the numbers in perspective.

• As a percentage of GDP (the best method of comparing), Obama’s plan is nearly double the amount spent to recover from any other recession. It is more than 4 times greater than what was spent for the 2001/2002 recession.
• It is nearly half of the current annual US budget.
• The plan promises an increase of 600,000 new government jobs.
• The cost to create the 3 million jobs Obama promised is $285,000 per job.
• If the same funds were divided between those unemployed for a longer period of time, each would receive $300,000.
• The Bloomberg News Service has run the numbers on all the Bush/Obama stimulus and bail out plans for the 2008/2009 recession and estimated the final cost to you and me will top $7.76 trillion. To put this in perspective, this is more than all of the following combined (using inflation-adjusted dollars): the old New Deal, the Louisiana Purchase, the Marshall Plan, World War II, the Korean War, the Vietnam War, both Iraq Wars, the S&L Crisis in the ’80s, and every single NASA project (NASA was established in 1958).
• Still, the true cost is grossly understated. Why? Because this emergency spending bill is like every other appropriation bill. The government has never cut real spending - ever. They might cut the rate of growth and call it budget cuts, but they never cut spending. So once this precedent is set, they will certainly continue spending the same amount or more.

Does that help give you an idea of how big this package of pork really is?

You Will Spend Your Life Paying This One Off!
What does this mean to you? Well, if the only cost to us is the payback, you will spend all of your life paying this scam off. Your children will spend their lives paying it off. Likely, your grandchildren will spend their lives paying it off as well. This payback will take the form of much higher taxes and run away inflation.

If the authors of the plan achieve their ideological goals, we will also lose our free market economy, industries and businesses will be nationalized, and the medical system will be run by the government (socialized medicine) with government bureaucrats making your health-care decisions for you. We will see stagnant economies, persistently high unemployment, and stifled innovation much like France and other parts of Western Europe. Our ability to protect ourselves from foreign and domestic threats will be severely diminished. We will live in a very different country.

It is amazing to think we are willing to do this to ourselves simply because we are going through a normal part of an economic cycle, a short term recession that will likely last less than a year.

TAKE ACTION!
The House has passed its version. The Senate is seeing some opposition. We still have some time, though not much. Do two things and make a big difference. 1) Call your senators and the senate leadership. 2) Share your concerns with friends and family (maybe email a link to this blog) and ask them to take action. Please do it today.

• Find your Senators phone numbers here.
• Senate Majority Leader Harry Reid: (202) 224-3542
• Senate Minority Leader Mitch McConnell: (202) 224-2541

We are faced with one of the most serious issues that this country has ever dealt with — and it is not the recession. Don’t misunderstand, the recession is a real problem, maybe even an disasterous problem. However, its seriousness is dwarfed by the horrible implications of the remedies the national government is frantically trying to implement before we catch on to what they are doing.

First things first though. As thinking conservatives, we seek to understand before deciding what action to take. This is in total contrast to the liberal approach, which is act now, act fast, and act radically, because we don’t have time to understand the problem or figure out how to fix it. So, as rational citizenry, let’s pause and consider the problem at hand.

Are recessions common?
The National Bureau of Economic Research (NBER), the organization that determines the official dates for periods of economic expansions and contractions, has identified 32 U.S. recessions since the mid-1850s. Looking at the whole history of America, we have had more than 40 recessions (and just as many recoveries).

What are recessions?
Most experts agree that it is an “official economic recession” only when GDP (gross domestic product*) growth is negative for two consecutive quarters or more. For practical purposes though, a recession is a significant decline in economic activity spread across the economy and lasting more than a few months. The average duration for a recession is 10 months, while the average expansion lasts 57 months, making the average business cycle 67 months. Since these are averages, some recessions/expansions are longer and some shorter.

How do recessions happen?

Nearly all modern economists believe that recessions are unavoidable. As you might expect, a healthy economy goes through periods of rapid growth, slower growth, no growth and retraction/recession (think negative growth). Recessions are a natural part of the cycle and set the stage for another growth period. Even though recessions are common and normal, we really don’t know what causes them, but the experts have a number of theories.

The most common theory says that recessions are caused by events that have a broad impact on the economy, such as high interest rates or low consumer confidence in the economy (people believing the economy is bad, which causes the economy to slow down). The most common “broad impact” is the mismanagement of the money supply. The Federal Reserve (the nation’s central bank, which is responsible for country’s supply of money) tries to maintain an ideal balance between 1) money supply, 2) interest rates, and 3) inflation (things getting more expensive). When the balance is lost, the economy can slip into a recession.

There are times, however, when a recession seems to be triggered by a traumatic incident that impacts a sector of the economy (housing, manufacturing, banking, etc.) or a very large business. When this happens the damage can spread to the rest of the economy. Traumatic incidents can include bad investments, stock market crashes, sharp price increases for critical items (such as oil), and shifts in the normal business cycle (such as manufacturing companies moving to lower-cost countries).

More often than not though, recessions are complex and confusing. The current recession of 2008-2009 (and perhaps beyond) was triggered by a number of factors, including:

• A rapid rise in oil and gasoline prices
• Government policies designed to increase the number of home owners put pressure on lenders to give loans to unqualified borrowers
• Housing prices rising rapidly for many years (also called the housing bubble)
• Rising interest rates
• The injection of lots of money into the economy by the Federal Reserve
• Bad Wall Street investments in “toxic” mortgage loans (sometimes called the greed factor)
• High budget deficits (the US government borrowing money to pay for programs it cannot afford)
• Collapse of the US Dollar (the value of the dollar in the world has dropped dramatically, which means foreigners are less inclined to invest in America)

What are the impacts of a recession?
We all know that recessions are difficult periods for the country, businesses, and often for individuals and families. Depressions typically increase the risk of financial emergencies, unemployment, foreclosures, and bankruptcies. In this climate, lenders also dramatically reduce the availability of loans and other credit, making it hard for people and businesses to financially survive a recession.

There are, however, some good things that result from a recession. Just like a diet helps you lose weight and be healthier, a recession can:

• Cause business and government to be more efficient and cost effective
• Motivate investors to trim their bad investments
• Encourage businesses and consumers to lower their debts
• Rebuild confidence in the dollar

Each of these steps are not only helpful in surviving a recession, but also help build the recovery that has always followed a recession.

How do they get fixed?

Recessions will always end, even without government involvement. Because recessions are painful, governments are rightly concerned about the impact on its citizenry. Since the national government is so large, it can have a huge impact on the recovery from a recession; government is in a powerful position to help speed up the recovery or extend it for years (even causing a depression as it did in the 1930’s) if it takes the wrong action. So what can the government do?

• Lower interest rates to make it easier for businesses and consumers to borrow money. If used well, this extra money helps stimulate spending and the economy, fostering a recovery. If used incorrectly, it can cause serious economic damage. There is a limit though on how low interest rates can go – you can’t lend money at 0% (or less).
• Print money and flood the economy. This will make it easier to get and spend money and could motivate consumers and businesses to spend their way out of a recession. That’s the good side. However, increasing the money supply has a really scary downside: inflation. If the government prints too much money, it can trigger a vicious increase in the prices of everything we buy, which would only threaten the economy further.
• Borrow money and spend it. Plunging the country into debt (budget deficit), the government can generate the funds necessary for it to spend a lot on government projects (think things like highways, bridges, government buildings, government programs, and more). Unfortunately, there seems to be no upside to this action and lots of downside. 1) Government spending is often wasteful spending, 2) Government projects are much more expensive than having the private sector do the same work, 3) Oonce the government spends more, it refuses to cut back to previous spending levels, forcing higher taxes or greater debt on the country, 4) Government projects take a long time to ramp up – often longer than the recession itself, 5) A lot of government spending is for political reasons and does nothing to shorten a recession, 6) The government is left with a huge debt that it must repay with higher taxes – higher taxes hurt the economy and contribute to recessionary tendencies. This debt, if big enough, will take decades to pay off. Spending proposals for the current recession are so huge that our grandchildren and great-grandchildren will still be paying off the debt.
• Use Tax Policy to stimulate the economy. By lowering taxes, businesses and consumers see immediate savings, have more money in their accounts and are free to spend (stimulate the economy) and grow their businesses. This action results in a very quick and powerful response from the economy. If done correctly, tax cuts increase business and income which results in more taxes. To illustrate: if you tax $100 at 40%, the government gets $40. If taxes are cut to 20%, the tax savings can be reinvested and grow revenues. Let’s say revenues grow to $300 because of the tax break. The government in this case gets $60 ($300 x 20%). This is the most powerful, immediate, and successful tool the government has in easing and reversing a recession. It has been used successfully to bring an early end to several previous recessions.

In my next post, I’ll take a look at the economic stimulus package being considered by congress.

*GDP is a measure of national income for a country. The most common way of measuring it is:
GDP = consumption + gross investment + government spending + (exports − imports)