The other night Jay Leno remarked that Congress celebrated President’s Day and George Washington’s throwing a dollar across the Potomac, by throwing $780 billion down a rat hole. If we were to look for a poster-child for the truism, “Haste makes waste,” we need look no further than the recent “stimulus” bill. Let’s clear up the semantics here: this bill is not stimulative to the economy, it’s simply the largest spending bill in U.S. history. The only thing stimulated by it is government growth and control, and further encroachment on states’ rights and individual liberty. States and municipalities that accept funding do so with many strings attached, and the most common one throughout the bill is federal government control.

This bill, as we have already chronicled, included twelve cents of actual stimulus for every one dollar spent, and that will take years to put to work. The rest of the bill reads like a veritable spending wish list for Speaker Pelosi’s pet causes. Pelosi and Senate Majority Leader Harry Reid rushed the bill through without even having a working copy for all the Congressmen to read. Not one legislator in either chamber could have possibly read the 1079 pages in the twelve hours each house had to consider it. Republicans were excluded from the negotiations for the final versions from both the House and the Senate.

Bipartisanship typically means both parties working together for the common good and hammering out compromises. The Obama, Pelosi, and Reid version of bipartisanship obviously means Republicans must abandon their principles in order to even have a place at the table.

As President Obama began addressing the issue of economic stimulus, he made several promises. At least eight of those promises he broke with this spending bill. 1. Make government open and transparent. 2. Make it “impossible” for Congressmen to slip in pork barrel projects. 3. Meetings where laws are written will be more open to the public. 4. No more secrecy. 5. Public will have five days to look at a bill. 6. You’ll know what’s in it. 7. We will put every pork barrel project online. 8. He would wait for five days for public input before signing legislation.

One of the many Trojan Horses in the bill is the reversal of Welfare Reform, the most significant accomplishment of the Clinton Administration (which he didn’t even want to sign) and the Gingrich-led Congress. That 1996 legislation changed how states were funded for welfare case loads, and placed the emphasis on employment assistance to needy families, rather than rewarding states for increasing their welfare case loads. It reduced the number of people on welfare by 60%, and increased employment of the most disadvantaged by 78%, according to the Brookings Institute.

The final form of the new stimulus bill contains a half dozen or more new welfare entitlements or expansions to benefits in existing programs. The pretense that these welfare expansions will lapse after two years is a political gimmick designed to hide their true cost from the taxpayer. If these welfare expansions are made permanent, as history indicates they will, the welfare cost of the stimulus will rise another $523 billion over 10 years, according to economist Robert Rector, credited with the successful welfare reform of thirteen years ago.

Even more startling is how all Americans’ health care will be affected. The bill’s health rules will affect “every individual in the United States” (pages 445, 454, 479). It creates a new bureaucracy, the National Coordinator of Health Information Technology. Part of his department’s responsibility will be to “monitor treatments” provided by doctors to make sure your doctor is doing what the government deems “appropriate and cost effective.” The model is based on Tom Daschle’s book last year on health care, where he asserts that doctors have to give up their autonomy and “learn to operate less like solo practitioners.”

Daschle’s model, which is now law, will affect our senior citizens most dramatically. Daschle says “health-care reform will not be pain free.” And that “Seniors should be more accepting of the conditions that come with age instead of treating them.” In other words, if you’re 78 and have a heart condition, don’t be surprised if some government wonk in D.C. vetoes your doctor’s orders for a stent or a valve replacement.

When the economy recovers, and it will, it will occur in spite of this massive pork-filled spending bill, not because of it. But the pejorative impact on future growth will be felt for years as the weight of the costs will curtail economic growth. So much for “change!” This is just the same old dance, just more corpulent and faster.

By Richard Larsen

Published – Idaho State Journal, 02/15/2009

Last fall with the values of real estate declining, record foreclosures being recorded, diminishing confidence in financial markets and financial institutions, congress passed an emergency “rescue” package. The $700 billion TARP (Troubled Assets Relief Program) was created to stem the tide and was to be administered by the Secretary of the Treasury that had two primary functions.

In significantly simplified terms, the first function of the TARP was to purchase illiquid (difficult to convert to cash) and non-performing assets from banks and other financial institutions. Those assets were primarily securities in the form of collateralized debt obligations, partially comprised of sub-prime mortgages. Sub-prime mortgages are those issued to borrowers with questionable ability to repay the loan based on various criteria, including credit worthiness. By purchasing these illiquid assets the second objective of TARP was realized, as banks and other lending institutions could get those bad loans off their balance sheets, freeing them up to continue lending since that is such a crucial component of our growing economy.

The mortgage bond market is worth about $6 trillion, and is the largest single part of the whole $27 trillion US bond market, bigger even than Treasury bonds. Mortgage bonds consist of mortgages that are securitized and layered into securities that pay monthly interest to the bond holders. The total mortgage market (including mortgages held by banks and other lending institutions) at the end of 2007 was over $12 trillion, according to Federal Reserve data. According to the Mortgage Finance Statistic Annual for 2007, total subprime mortgage originations from 1994 through 2006 was $3.3 trillion.

With that much in subprime mortgages outstanding, and a default rate of nearly 5% of all mortgages, it was clear that the original TARP funding of $700 billion was not going to make much of a dent in removing these risky mortgages from bank balance sheets. That was undoubtedly why then Treasury Secretary Henry Paulsen quit using the TARP funds to buy them up; it wasn’t going to come anywhere close to what was needed.

Consequently, Paulsen changed the focus of the TARP from buying the “toxic assets” of distressed financial institutions, to purchasing the debt (corporate bonds and preferred stock) and equity (stocks) of distressed institutions. This was anticipated to increase the liquidity of those 250 institutions by improving their equity and debt ratios to get them in a position to be able to lend interbank and to customers again. That hasn’t seemed to ameliorate the situation either.

New Treasury Secretary, Timothy Geithner, has now unveiled his plan for implementing the last half of the TARP. He said the new plan will entail “a comprehensive housing program to assist the millions of Americans who have lost their homes, and the millions more who live with the risk that they will be unable to meet their payments or refinance their mortgages.” Paulsen’s plan can potentially return the capital invested by selling those securities at a profit for the taxpayer. Geithner’s plan seems to be a flushing of the remaining TARP funds down a black hole.

Could there have been other options? Undoubtedly yes, but the most logical would have been two-phased. First, temporarily suspend the portion of Sarbanes Oxley Act that requires mark-to-market accounting of all assets on financial institutions balance sheets. This would have allowed those institutions to take those “toxic assets” off their balance sheets and work through their bad mortgages and mortgage-backed securities without having to meet Federal Reserve liquidity or cash requirements. Some banks would have still gone belly up, but the strong ones would have survived, and the massive spending to “bail out” the struggling ones wouldn’t have been added to the federal debt.

The second phase could have included something like the Resolution Trust Corporation (RTC) that was put in place in the 1980s to salvage the savings and loan industry. The RTC, from 1989 to 1995 folded up 747 S&Ls and sold off a portfolio of assets of $660 billion, in current dollars. Total cost to tax payers to do that was $231 billion in today’s dollars, according to Investors Business Daily.

The most critical factors in this mess have yet to be corrected. The Community Reinvestment Act is still on the books and needs to be repealed. This is the program that forced banks to lend to non-creditworthy borrowers. And Fannie Mae and Freddie Mac are still around. The government should have never been in the mortgage business. Bad regulation made this mess, and undoing that bad regulation should be the top priority, not more regulation or non-stimulating “stimulus” plans.

The need for economic stimulus is apparently a consensus in Washington today though how to provide it is heavily debated. President Obama has been pressing Congress for passage of his plan which is being presented as a measure to put a tourniquet on the hemorrhaging of private sector jobs and kick-start the economy. By most objective accounts, the $150 billion Bush stimulus of 2008 did little to stimulate economic activity, even though it placed $700 in most tax-payers, and non-taxpayers, hands. According to the Wall Street Journal, most stimulus check recipients used the checks to pay down debt, rather than engage in new spending to stimulate the economy.

We should learn a valuable lesson from the Japanese who struggled with an anemic economy from 1989 through 1999. Often called the “lost decade,” that ten year period featured eight massive “stimulus” spending programs by the Japanese government. None of the stimulus programs turned their economy around to get them growing again. What it did succeed in doing, however, was to turn a once thriving economy into one that may never fully recover from that decade of spending. Japan still struggles under the massive debt incurred from that period as their debt to GDP ratio still stands at 86%. If the congress approves this $1.1 trillion package (including interest) being debated in the Senate this week, U.S. debt to GDP ratio will stand at 68%. Taxes are the only way to pay off such debt, and taxes constitute one of the greatest deterrents to economic growth.

Thomas Jefferson declared, “Public debt is the greatest of the dangers to be feared.” The House version of the bill which passed last week is nothing more than a massive federal spending package. Over half of the $850 billion “stimulus” bill could be more correctly classified as discretionary spending. And after the interest is added in, the true cost ends up over $1.1 trillion according to the Wall Street Journal.

Let’s examine some of the items included in this “stimulus” bill. $4.1 billion is targeted to community action groups, like ACORN (Association of Community Organization for Reform Now). It also includes $650 million for digital TV coupons, $600 million for new cars for the federal government, $6 billion for colleges and universities, $50 million for the National Endowment of the Arts, $44 million to repair the U.S. Department of Agriculture headquarters, $200 million for the National Mall. And more inexplicably, the House bill includes $136 billion for 32 new government programs. Plus it adds spending to at least 150 different federal programs.

Many of those are worthy areas to consider funding through discretionary appropriation, but their inclusion in the “stimulus” plan, dilutes any potentially stimulative effect the plan may have on the nations’ economy.

More importantly, those projects only expand government spending, and do nothing to create a positive economic climate for creating permanent jobs in the private sector.

The Congressional Budget Office “scoring” of the stimulus package indicated that only 12 cents of every dollar would have a stimulative affect on the economy within the first 18 months. The scoring process has its faults, and is designed to be non-partisan, but in this case their results indicate the impotence of the bill for creating positive economic activity.

During the Depression era, we know that even with a tripling of federal government spending from 1931 through 1939, the U.S. was still in a dire depression, and unemployment was still over 17%. What snapped the country out of the economic doldrums was our involvement in World War II, which saw a dramatic increase in economic activity from the private sector because of high demand for everything from trucks and jeeps, to airplanes and bullets.

The Obama administration has been pressing for passage of the stimulus plan for improvement to our infrastructure and the jobs that would be created with a massive influx of spending to improve it. Regrettably, less than 10%, or only $63 billion of the House version of the stimulus plan was aimed at infrastructure investment, and only $30 billion specifically for roads and bridges. Yet even if the entire $850 billion was spent on infrastructure, while there would be an increase in jobs in construction and construction supplies, they would not be permanent jobs to the tune of 2.5 to 3 million jobs, as desired by the administration.

This is not a typical recession, and without something dramatic, it could easily deepen and last longer than the 10.5 months that U.S. recessions historically average. This one is worsened due to the erosion of real estate values, the number of home foreclosures, and the concomitant failure of many banks because of the mortgage meltdown.

So what will snap the U.S. out of its economic doldrums? Certainly not government spending. The great Nobel Laureate for economics, Milton Friedman, declared a couple of years ago, “unbridled government spending is the single greatest deterrent to faster economic growth in the United States today.” He’s probably rolling over in his grave as he observes the unprecedented spending spree the federal government is engaging in.

The best way to emerge from a recession is to free up capital, or money. Reduction of capital for investment and expansion, and reduced consumer spending are characteristic of recessions. While scoffed at by those who prefer government solutions, the best way to free up capital is to reduce the costs of capital. Forbes economists recommend making the capital gains tax cuts permanent, which would freeze them at 10%, and a 15-20% cut in corporate tax rates. Currently the U.S. has the second highest corporate tax rate in the world, only trailing Japan in that category. No wonder so many companies have been moving operations overseas, to escape the confiscatory taxes collected from companies domiciled domestically. By reducing the tax rates on corporations, companies have that much more of their net profit to reinvest in their companies for expansion, mergers, and increase manufacturing capacity. That translates to more jobs, and the kind of jobs that are more permanent than infrastructure-related construction jobs would be.

And to free up capital for all of us as consumers, the Forbes economists say that rather than send out a one-time stimulus check, what would be much more stimulative would be to declare a month or a quarter holiday from payroll taxes. These are the taxes that employers are required to withhold from their employees pay, as well as those that employers themselves pay which are directly related to employing a worker and are typically linked proportionally to an employee’s pay scale. Such a payroll tax holiday period would free up significant spending cash for everyone who pays taxes. If you are paid $4,000 gross per month, and your tax withholding shrinks that to $3,000 net per month, $1,000 would be freed up for every month the holiday is in force. Now that is change that even I can believe in.

There is a tendency for many Americans to hold corporations in contempt, especially the profitable ones. For example, Exxon Mobil posted record annual profits for 2008 of $45.2 billion. They anticipate maintaining their capital spending of nearly $30 billion next year, which is just less than half of the infrastructure spending of the House stimulus bill, yet the jobs created from that capital spending will most likely be permanent.

We don’t know yet what Exxon Mobil’s tax bill will be for this past year, but in 2007 Exxon Mobil paid $30 billion in total taxes on revenue of just over $40 billion in revenue. Corporations don’t technically pay taxes, people do. You and I paid the majority of that $30 billion that Exxon had to pay out in taxes. If corporate tax rates are lower, you and I pay less for their products and services, and the company is left with more capital to invest in their companies, creating jobs and expanding operations.

Published – Idaho State Journal, 02/01/2009

It appears that our local school district administrators live in an alternative universe where in spite of difficult financial times, they feel justified in asking tax payers for more. On February 10, we have the opportunity to vote on a levy that will add $1.5 million to their $6 million levy already in place. As voters and patrons, we can infuse a hefty dose of reality into the administrative offices by voting no.

Businesses are reducing payrolls, the state is cutting its budget based on revenue projections, municipalities and counties are revising downward their budgets for the coming year, and School District 25 is asking for more. There really seems to be a disconnect from reality.

I don’t know anyone who is not supportive of quality education, but at some point accountability, realism, and budgetary restraint must be manifest by the district. I know there are areas that are underfunded at the district level, and there are costs often referred to as unfunded mandates. Some of those are not “unfunded mandates,” but simply require investments by the district to obtain the funding, as with No Child Left Behind. That makes those “investments” with calculable returns based on performance, not unfunded mandates.

What is required is a system of priorities by which those programs that have the highest impact on learning are funded, while administrative costs, travel, junkets, and “wish list” items are reduced. What should be heavily scrutinized is administrative compensation levels, expense allowances, and staff positions at the central office. When cash flow is tight, all cost centers should be reexamined and priorities reestablished in favor of the teachers who are doing the heavy lifting in meeting the educational mandate of the district.

I fear that the board and administration got a little greedy by tacking on the additional $1.5 million. I probably would have been willing to vote for the levy at the current $6 million level. The district was in line to receive about $1.5 million from the state for increased district headcount of 255 students, since they receive about $6,000 per student. That’s probably negated by the state holdback in funding. It just sends the wrong message that they want to continue to dig deeper into our pockets at a time when our pockets have little in them.

What I fear is that administrators will threaten evisceration of academics and teacher support and supplies rather than make the more difficult yet responsible move to reduce overhead and administrative costs like they should. There doesn’t have to be a causal relationship between reduction of administrative costs and dilution of educational quality as provided by our outstanding teachers. It may be an opportune time to examine how the district Curriculum Director and the Curriculum Coordinator can be merged into one position, for example, without diminishing funding where it really matters most, at the classroom and teacher level. With a 2008-2009 budget of $97 million, certainly there are places to reduce costs without adversely affecting the classroom.

I’m bothered that the superintendant has been meeting with faculty and staff at the various schools throughout the district on school time promoting passage of the levy. That’s not supposed to be done. Of additional concern is the fact that we can vote at any of the locations for the election. I sure hope the integrity of the system is such that they’d catch it if someone chose to vote at all of them.

Certainly these are challenging times for our educational system, as they are for all of us. True leaders rise during such times and make the difficult decisions on reduction of costs and personnel to match revenue. We see the legislature wrestling with those issues as we speak. It would be most refreshing to see school district 25 leaders do the same.