The idea of a federal stimulus in the early parts of 2009 wasn’t necessarily a bad idea. The Dow had just hit rock bottom and companies across the country were hemorrhaging jobs. It was how to go about doing it that was the problem. Across the board tax cuts could have stimulated economic growth, as they had in the beginning of the Bush term when he had to deal with his own “inherited” recession, but Obama had a different goal in mind. Rather than give money back to the people he opted instead to hand it all over to the Democratic controlled Congress and let them decide what to do with it.
The $812 billion American Recovery and Reinvestment Act (ARRA), gifted to the American people by Nancy Pelosi and Harry Reid, was almost the exact polar opposite of the $700 billion Troubled Asset Relief Program (TARP) program instituted by Bush. While Bush chose to invest public funds in successful American businesses that would have a reasonable chance of repaying the money, which many did with interest, the Obama stimulus did nothing more than throw cash at public sector unions and make a $90 billion down payment on the fictional “green energy” economy.
According to the Wall Street Journal, “state and local governments received $132 billion in stimulus grants”. The cash allowed them to maintain their bloated unionized workforces and rich pension benefits, at least for a little while until the money ran out in 2011. Because the government can’t create wealth, only spend it, “the net impact on aggregate economic activity is zero”.
While many conservatives believe TARP was a mistake, Bush had very good reasons to institute the program:
- The federal government, and in particular Democrats, were responsible for the lion’s share of the bad housing loans that poisoned the financial markets in the first place. The Jimmy Carter created Community Reinvestment Act, massively escalated under Bill Clinton, forced banks and the pseudo government entities Fannie Mae and Freddie Mac to underwrite millions of mortgages for people who could not afford them. Gone were the 20% down and proof of income days replaced with quotas for lower income clients and ACORN marches on banks. Any Republican effort to curb excesses by Freddie and Fannie, which issued the vast majority of the bad loans, were met with ridicule by Democrats like Rep. Maxine Waters who insisted they were “trying to fix something that wasn’t broke”.
- The banks weren’t completely crazy. Sure, they were using CDO’s to leverage out their housing portfolio, sometimes as much as a 100 to 1, but they bought insurance to protect themselves against a drop in the marketplace. The only problem was they all bought insurance from the exact same company: AIG. When prices started to drop and AIG was on the hook for billions, the insurance giant quickly ran out of money to pay the claims. Unethical practices at AIG gave many banks a false sense of security.
- TARP was a loan to successful businesses with the intention the investment would be paid back with interest. Banks have a history of profitability and creating jobs, so it was reasonable to expect that once the financial markets stabilized, the government would recover the funds.
- People can talk all they want about evil banks and bankers, but if the financial system were to collapse we all would go down with it. Businesses would quickly run out of money to operate, deposits would disappear overnight and panic would likely ensue. Even with FDIC insurance, it would take weeks if not months to untangle the mess and get people their cash. In the meantime no one would be able to pay their rent, buy groceries or pretty much do anything. It would have been a disaster of epic proportions.
Four years later and there is little question that Bush has been exonerated by instituting TARP. The financial markets stabilized after hitting rock bottom in 2009 and by Mar 2011 over 70% of the funds had been repaid back to the U.S. Treasury with most of the outstanding balance owed by AIG. The U.S. economy had been saved for a bargain basement price of $24 billion. Chump change in the age of Obama.
Of course that’s not counting the trillions the Federal Reserve pumped into the financial industry which peaked in Dec 2008. Over $1.2 trillion in loans were given to 30 of the world’s largest banks including $107 billion for Morgan Stanley, $99 billion for Citibank, $85 billion for Royal Bank of Scotland and $77 billion for Zurich based UBS. The money was used to ensure the short term liquidity of the firms. The lion’s share of that money has also since been repaid. For the same reasons that TARP could be considered a success, the Federal Reserve program headed off a catastrophic financial meltdown that could have devastated the entire world economy.
As for the multiple rounds of Federal Reserve quantitative easing? Well, that’s a different story…
While TARP was a critical and necessary investment in the U.S. economy, the Obama stimulus was a grand social experiment by the Democrats in Washington to massively increase the welfare state along the lines of Europe. They lowered the definition of poverty to include millions more families that didn’t previously meet the requirements, increased funding for food stamps from $39 billion to $75 billion and got rid of the temporary nature of government assistance allowing recipients to remain on the welfare rolls indefinitely. By intention Democrats have created a new permanent underclass that will be forever beholden to the Democratic Party, just like LBJ did with the Great Society that established liberal control of government throughout the 1970s.
While the Obama stimulus has greatly benefited Washington, unemployment in the DC area was 6% in 2011 compared to 9% in the rest of the country, the cost to the private sector has been devastating. After studying the stimulus program economists Timothy Conley and Bill Dupor concluded:
Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment. The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services.
The loss of one million private sector jobs 2009 to 2011 is only the beginning. Because of interest payments on the debt and the additional funding that will be needed to maintain a much larger welfare state, the Obama stimulus can be counted on to drag down the American economy for years.
The stimulus was never an investment in the future of America, but nothing more than institutionalized theft from 88% of non-unionized taxpayers to benefit those least likely to create new wealth. No wonder the White House estimates the cost of each new stimulus job at $278,000. It was never meant to create jobs, only perpetuate government control over our lives.