Think Small Lose It All: Assessing ARRA

Numbers, we have numbers, we have lots and lots of numbers...and when it comes to discussing the American Recovery Relief Act “little is clear” as to how many jobs have been saved or created in Nevada. [LV Sun] The article comes quickly to the point: “Not only do the numbers not match up, but instead of representing real bodies in actual jobs, the numbers are estimates — the result of different state agencies using different formulas to calculate stimulus results.” The confusion also impairs the process by which we judge success. If the sole measure of success is to be the number of jobs created or saved, then the generalized calculations may never prove satisfactory; which leads us to the difference between thinking like bookkeepers or like economists.

A Question of Perspective

If we, or Senator Bill Raggio (R-Washoe), persist in observing the recovery efforts like bookkeepers focused on the micro-management of individual enterprises or specific programs and projects we can easily lose sight of the forest for the trees. Raggio opines that the “original intent of the stimulus was the creation of jobs,” placing himself firmly in the bookkeepers camp. On the other hand, the White House has maintained a broader focus, included in the President's comments on October 31, 2009: “On Thursday, we received a report on our Gross Domestic Product, or GDP. This is an important measure of our economy as a whole, one that tells us how much we are producing and how much businesses and families are earning. We learned that the economy grew for the first time in more than a year and faster than at any point in the previous two years. So while we have a long way to go before we return to prosperity, and there will undoubtedly be ups and downs along the road, it’s also true that we’ve come a long way. It is easy to forget that it was only several months ago that the economy was shrinking rapidly and many economists feared another Great Depression. Now, economic growth is no substitute for job growth. And we will likely see further job losses in the coming days, a fact that is both troubling for our economy and heartbreaking for the men and women who suddenly find themselves out of work. But we will not create the jobs we need unless the economy is growing; that’s why this GDP report is a good sign.” [White House] This sounds perilously close to the stern advice measured out by Washington Post columnist Steven Pearlstein.

“The truth is that robust growth and job creation will happen only once we've completed the painful and disruptive process of deleveraging, restructuring and rebalancing the economy so that we consume less than we produce, and put something away for the future. The government can, and has, taken steps to smooth that process and make sure that it does not spin out of control, while providing some support for those who have lost the most. But unless we reinflate the credit bubble and the bubble economy that it spawned -- a big mistake -- there is no way to avoid an extended period of uncomfortably slow growth with uncomfortably high unemployment as a large, complex, dynamic market economy heals itself.” In short, what Pearlstein is saying is that we can have a short ride back into bubble land (if we are willing to ignore what happened in the fall of 2008) or we have to exercise more patience and do those painful things necessary to rebalance our economic system.

Persistent Problems

If a person were to listen to all the blather about “tax credits” to create jobs, then it could be concluded that all government would have to do to restore employment is to dump all business taxation. While ideologically pure, the suggestion is practically foolish. Taxation supports infrastructure, and infrastructure supports conducting commerce. Without educational institutions, transportation programs, and police powers (in the most general sense) all business reverts to localized trade. Secondly, it's been argued here before that businesses do not make hiring decisions based on tax relief, people will be hired if (and only if) the business has a demand for its products or services beyond the capacity of its current work force to meet. Only the most marginal personnel decisions may be informed by a tax credit scheme because hiring people just to get a tax break without calculating the necessity of the hire in terms of demand is a recipe for bankruptcy. The answers, as suggested by Pearlstein, lay elsewhere.

What Pearlstein calls “deleveraging” applies to the employment situation because those companies and individuals saddled with debts they are hard pressed to pay will not increase their spending for additional goods and services. Now we enter the realm of the Credit Dilemma. If we keep credit cheap, and people start buying goods and services on credit, demand increases and employment numbers improve. However, if we keep getting into debt to pay for those items then we are essentially right back where we started – flailing along buying what we cannot afford and watching our savings rates plummet once more. The Seattle Times summarized: “Complicating the problem is that even people with good jobs are likely to remain tighter with their money for years to come. Having suffered deep losses in their home equity and stock portfolios, and still stuck with heavy debt loads, Americans will not spend as freely as they did before the recession.” This, in a nutshell, is what's wrong with a economy heavily weighted toward consumer spending and lacking counter balance in the manufacturing sector. Re-enacting the Bubble based economy predicated on negative savings rates and overleverage at every point in the economic continuum from individual home owners to major banking institutions is to learn absolutely nothing from our current experience.

Manufacturing has been declining since the boom years in the post World War II era (circa 1953). Worse still, all too many of the jobs created during the housing/credit bubble were themselves dependent on the inflation of that bubble. Approximately 25% of all jobs created between 2001 and 2006 were in construction, real estate, and mortgage finance sectors. [CBS] By January 2008 the MortgageMag was reporting approximately 100,000 jobs lost in the real estate financial category. Unless we're willing to re-inflate the bubble, those jobs are gone. A 'balanced' economic policy should seek to restructure our system to create business opportunities in manufacturing, infrastructure, and energy. The energy issue isn't solely related to environment concerns, it's a major factor creating the imbalance in our economy.

In at least one category we appear to be “eating our own.” Our exports have been increasing since last May, and our sales of American automobiles, aircraft, and industrial machinery were up. This would be very good news for the labor intensive manufacturing sector were it not for the fact that we wiped out our advantage by importing 5.8% more in September than we did in August mostly for foreign oil. [AP] [BEA] The Economic Development Administration has a global climate change mitigation incentive program in the works, and is seeking grant applications for renewable energy production, energy efficiency programs, reuse/recycling/and restoration products and services, and green building construction and renovation. [EDA] Congressional appropriations for these activities seem woefully inadequate to the task. [CSW] Worse still, the bill appropriating the funding is stalled as of 11/05/09 in resolving differences between the House and Senate versions of H.R. 2847. The bill was passed in the House on June 18, 2009 259-157 [rc 408] and passed the Senate November 5, 2009 71-28 [rc 340]. The sooner the bill can be reconciled the better, even if the appropriations don't come near the amount we'd need to invest as a nation to curb our excessive importation of foreign oil.

Whether we're discussing energy or manufacturing policy, the money has to come from somewhere, and that 'somewhere' is our financial sector, which has been buffeted by convection currents in its own over-heated environment. In order to 'rebalance' our economy as Pearlstein suggests, we must shut down the casino. Senator Chris Dodd (D-CT) has introduced a bill, which while stronger than its House counterpart, may still face watering down as the American Bankers Association lobbies vigorously for its defeat. The Republican opposition is predictable: “They argue that the agency would hurt innovation, lead to job losses, result in higher product fees and create unnecessary additional bureaucracy.” [NYT] If by curbing “innovation,” the opponents mean that the investment houses wouldn't be able to create another alphabet soup of exotic derivatives – then tossing a bit of cold water into the mix might not be a bad thing. “Resulting in higher product fees” is an intriguing argument – are the bankers saying that if they are more stringently regulated they would have to access more fees, thus generating more income and bonuses for their employees? Or, rephrased: “If you regulate us then we'll just have to charge more and give out higher bonuses? “Job losses?” Jobs have already disappeared from the mortgage finance segment because of the outlandish derivative trading of subprime and other inappropriately inflated mortgage products. And, of course, there's the perpetual whine that oversight equates to “burdensome bureaucracy.” We might suggest that the “burden” could as easily be referred to as “oversight,” and the protection of taxpayer dollars pumped into the financial sector to bail them out after their casino failed abysmally.

Looking at the effects of the ARRA (stimulus package) requires taking a broader view than merely carping over the micro-management of a single piece of legislation designed to put the skids to a free fall of the American economy. Instead of thinking like bookkeepers we need to approach the problems as economists; seeing broader patterns of inter-related energy, manufacturing, infrastructure, and regulation as part of a seamless whole in which every factor affects every other component – all, in turn, affecting our own personal economic well being.