Stimulus Plan

Stimulus Plan

January 23, 2008 0 Comments

(January 23, 2008) A subscriber wrote today asking why, after years of constant bickering, Washington has suddenly erupted in a love-fest, with everyone in government falling over themselves to send us money. Did somebody put something in the water?

If they did, I certainly hope they publish the source on the official congressional website. I want to get some of that water.

Bottom line: the stimulus package is a dud.

First the politics. All the leaders in Washington in both parties have one thing in common: they are all incumbents. The urgency they are showing is to make sure voters don’t walk into the voting booths in November in the middle of a recession. It’s bad for business.

Crafting the stimulus package is also a great political opportunity for getting credit for $150 billion in “targeted,” i.e., earmarked, handouts. Although my personal taste runs to tax cuts, this applies to both the spending and the tax cuts under discussion. Every politician has their people and will be trying to carve off as much of the $150 billion for their people as possible. This applies to both Republicans and Democrats.
The package itself will likely be a stew that is part checks to taxpayers, part checks to people who are currently not paying taxes at all, and part business cuts in the form of accelerated appreciation for capital purchases. Something for (almost) everyone.

A cynic? Me? Nah!

I think there is enough urgency in Washington to get it done, and in a matter of weeks. The question is, will it work?

And then there is the economics. The packages being talked about are all old-fashioned, textbook, prime-the-pump fiscal amphetamines. their objective is to get people to spend more money. They never work. The stimulus package won’t do any material good for the economy. The numbers are just too small. As I wrote yesterday, GDP is over $14 trillion; and Americans own about $200 trillion worth of real and financial assets. Sending $12.80 to every man, woman and child in America will not be detectable in the numbers. Of course, being small, it won’t do a lot of direct damage either.

That may be why the stimulus package was such a dud when it hit the television.

The indirect damage could be more severe. By trying to solve the wrong problem our leaders are ignoring the right one. It’s like being wheeled into the emergency room while you are having a heart attack and having the doctor come in wanting to discuss whether you should have a face lift or a tummy tuck.

The economy’s real problem is not how to get consumers to spend more money–they have proven they are good at doing that. It’s how to get investors to own the stock of outstanding bonds and equities in the asset markets. The stock market and mortgage market issues are issues of visibility and valuation in the capital markets–investors do not feel capable of estimating and valuing the cash flows from existing securities–not consumer spending or mortgage payments. These problems can only be fixed by giving investors some comfort and visibility over those cash flows.

One way to do that would be announce that White House and Congressional leaders have together decided to block all of the witch hunt legislation that has been introduced in recent weeks that targets investors as scape-goats for the mortgage market collapse. That would include proposed revision of the bankruptcy laws to allow judges to rewrite mortgage contracts in any way they want and special measures encouraging people to sue the ultimate owners of mortgage securities–pension funds, insurance companies, banks, and individual investors. Witch hunts are making the problem worse.

The best way to encourage investors to own securities again, of course, would be to give them visibility over the tax rates, and therefore after-tax income, over the life of the securities. That means making the 2003 capital gains and dividend tax cuts permanent so they can set prices. This issue is worth more than 20%–or $3 trillion–to the stock market and more than that to the bond market. That is what the markets were waiting to hear when the President announced the stimulus package. The production economy–GDP–cannot stabilize until the capital markets go back to clearing again.


John Rutledge


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