Thursday, December 10, 2009

We’re From the Government and We’re Here To Help

“Can 535 politicians, heavily influenced by lobbyists, make better spending decisions than the other 220 million adults in the United States?” – Joseph Y. Calhoun II, Alahambra Investments

Basic economic theory says that individuals in free market economies make better decisions about the allocation of limited resources than do government entities. Government intervention is needed to serve as a “referee” to make sure participants follow the rules (the referees watching the financial crisis “swallowed their whistles” this time.)

The financial crisis has motivated the government to get very involved in the economy and institute several programs intended to help. The major problem is that most of our congressmen are either lawyers or career politicians, or both. Politicians are experts at getting reelected, not solving business problems.

Most of the programs involve giving away “free money” in one form or another. “Game Theory” states that after the government writes the rules for these programs, the participants will act in a way to maximize their own benefit. Or scam the system if possible.

Let’s see how well the government programs are working so far:

Troubled Asset Relief Program (TARP)

The Plan: The government was supposed to purchase or insure up to $700 billion of "troubled" assets to stabilize the financial system and rejuvenate the credit markets.

Free Money: Given to big banks the government likes for the purpose of stabilizing the banks and encouraging them to resume lending.

The Game: The banks take the money and stabilize their balance sheets. Their stock prices go up and ---- yes, big bonuses for everybody. The lending increase to help boost the economy? Not going to happen. And as soon as the government wanted to exert more control over the banks, suddenly the money was no longer free and they sent it back.

The Result: The TARP was greatly needed at the time to stabilize the financial system, but implementation was inefficient and tainted by politics. It failed miserably in attempting to loosen the credit markets.

American Recovery and Reinvestment Act of 2009 (Stimulus 1)

The Plan: I'm not really sure there was a plan. It was an unfocussed, hodge-podge of tactics involving $787 billion. There was some safety net spending and some aid to states for key services support. There was only $100 billion allocated for infrastructure. Jobs were supposed to magically appear keeping the unemployment rate under 8.5%.

Free Money: Much of the free money flowed to politically important states and to politically important workers and basically anyone who could spend it and claim that jobs were saved or created.

The Game: Gimme some of that stimulus money. Such as $31 million for renovating two small Canadian border posts in Montana and $3.5 million for an under road tunnel so turtles and alligators can cross the road safely in Florida. For more examples: See Article

The Result: Money is spent for many wasteful projects and few jobs are created. Unemployment topped 10%. Only 25% of the money had been spent through September but it did help increase GDP in Q3. If this program would have been submitted as a project in a business class, it would have received an “F” grade.

The General Motors and Chrysler Takeover

The Plan: Temporarily take over two bankrupt car companies until they can become profitable on their own

Free Money: Not so free to the car companies since they are under government control. Tons of free money to the United Auto Workers union and retirees.

The Game: Really not much of a challenge. The UAW didn’t give up much and received plenty.

The Result: The government is now trying to run car companies when the government can’t even run the government. This should turn out well.

Cash For Clunkers

The Plan: Give people money for trading in their old gas guzzlers for a new more fuel-efficient, less-polluting, ride. This would stimulate car sales and clean the air.

Free Money: $4,500 for anyone needing or wanting a new car. Politicians were amazed that so many people would take advantage of them handing out free money. So many people took the deal that the program initially ran out of money. This should have been a major red flag that something was wrong and the amount was too large. No, they didn’t get this and allocated even more free money for distribution.

The Game: The biggest users of this deal were Ford F-150 owners who turned in their slightly used F-150s to buy new F-150s. When people who drive pick-up trucks can figure out how to scam the system, the program has some real problems. (Just kidding)

The Result: Auto sales spiked during the program and then fell afterwards. It looks like the program didn’t generate many marginal sales and had negligible effect on air quality. A very expensive program with lackluster results. Also, is it any coincidence that the first industry to get a targeted stimulus is the one the government now owns a piece of? Surprise, surprise, surprise.

First-Time Home Buyer Tax Credit

The Plan: A tax credit for first-time home buyers intended to stabilize house prices and reduce inventory.

Free Money: $8,000 for first time home buyers. Again the free money is very popular.

The Game: Anyone that was considering buying a home in the next 12 months bought it now. This means many sales were pulled forward with no guarantee that sales will continue after the program ends (that is why it was extended). However, the number of eligible buyers for the program is shrinking.

The Result: It has stabilized prices and reduced inventory in the low-priced segment, but has not helped the rest of the housing market. Economists would argue that the program was unnecessary because depressed housing prices combined with historically low mortgage rates already offered a tremendous incentive to buy.

Stimulus – Part 2

As congress considers “Stimulus Part 2”, let’s hope it’s much more job focused than Part 1.

Here are some ideas:

- After the Minneapolis bridge collapse in 2007, the buzz was that all older bridges in the country needed to be replaced. So do it now! It will create jobs and save lives. Win – Win.

- In 10 years it is expected that the highways and railroads won’t be able to handle the increase in traffic and freight. Expand the infrastructure today when there is less traffic and it will create jobs now and lead to economic growth down the road.

- There is also expected to be a strain on the electrical supply and grid sometime in the near future. Upgrade it now. Build some new nuclear plants too.

- And since there is a move to renewable energy, how about building some wind farms and promoting solar panel use and production.


  1. Dan, Great post. So many of the items you mentioned are right on target. How about the gov't give everyone over 50 $1M, have them retire so jobs become available, They pay off their mortgage which helps the banks, and each buy a new American car which would help the auto industry. Put the money in the hands of the people and they will do right by their families and be responsible. NO, the gov't knows best, example, Postal Service, Medicare & Medicaid, all need subsidies. Amtrack, same way. Why does the gov't continue to do the same thing and get the same result? Sounds like the defin ition of insane!

    Dan, keep up the good work,

    Rich Hulick

  2. Dan:
    Amen!! As soon as I read the title of your post...and stopped laughing my head off...knew that I was going to agree wholeheartedly. As you pointed out, 'favorites' of those in power got cash infusions while their competitors got nothing, putting them in positions where they had to be bought up by the 'favorites'. The GM/Chrysler 'deal' was a nice payback to the unions who elected this administration...those who loaned the money to keep this train wreck going, took the risks, signed the contracts were left on the sideline so that the UAW could become significant owners of the companies. Does this mean that when we go out and sign contracts with anyone for anything, they are of no consequence and can be ignored? We're on the edge of a very, very slippery slope.

  3. Great explanation!! I agree with every all your conclusions. But we do drive an F-150. Ha. (Well it is the Wild West here). I thought cash for clunkers was a terrible program - taking perfectly good cars that low income people could afford and pouring chemicals in the engine to ruin them..what a huge waste!!!