.comment-link {margin-left:.6em;}
Visit Freedom's Zone Donate To Project Valour

Tuesday, January 27, 2009

Before This Gets Even Sillier

The US citizenry might want to stop and think about what is being proposed with this latest stimulus. Mind you, the stimulus bill is on top of additional TARP spending and major recent Treasury buys of securitized debt, so we are already tossing a lot of money into the barrel. Too much? Maybe, because increasing signs of commodity interest are in evidence, such as companies spending money to keep tankers full of oil floating around. My hunch is that we will see most hard commodities run up in the next few months. That takes money.

But there is no doubt that the US economy is hard-hit, as the latest regional unemployment figures for December show. The US unemployment rate was 7.2% in December. (Percents in parentheses are the population percentage of the state as of 2008.)

States with unemployment in the 10s:
  1. Michigan: 10.6% (3.29%)
  2. Rhode Island: 10.0% (0.35%)
States with unemployment in the 9s:
  1. California: 9.3% (11.95%)
  2. Nevada: 9.1% (0.84%)
  3. Oregon: 9.0% (1.23%)
  4. South Carolina: 9.5% (1.44%)
So 19% of the US population is in states with unemployment 9% or above.

States with unemployment in the 8s:
  1. DC: 8.8% (0.19%)
  2. Florida: 8.1% (5.97%)
  3. Georgia: 8.1% (3.12%)
  4. Indiana: 8.2% (2.07%)
  5. North Carolina: 8.7% (3.08%)
So 33.53% of the US population is in states with unemployment 8% or above.

There are ten states with unemployment below 5%, but these are mostly small states:
  1. Iowa: 4.6% (0.98%)
  2. Nebraska: 4.0% (0.58%)
  3. New Hampshire: 4.6% (0.43%)
  4. New Mexico: 4.9% (0.64%)
  5. North Dakota: 3.5% (0.21%)
  6. Oklahoma: 4.9% (1.18%)
  7. South Dakota: 3.9% (0.26%)
  8. Utah: 4.3% (0.87%)
  9. West Virginia: 4.9% (0.59%)
  10. Wyoming: 3.4% (0.17%)
These ten states represent 5.6% of the US total population. They are also concentrated in farming and most have higher than average proportions of government/private employment. This is not a good sign.

Thus, I don't know that anyone would disagree that stimulus is warranted. Unemployment at levels of 8% or above produces overall income drops, and then a secondary wave of employment drops from retail industry, which sets up a rather nasty feedback effect.

However we need to spend our stimulus dollars carefully, because we are going to be paying interest on it forever. Before I proceed on to a discussion of the current stimulus, I would like to give you some peg for comparison. In December 08, total US Treasury tax receipts were 225.4 billion. Total WIET (includes withheld income and SS/Medicare) was 167.6 billion. Corporate income taxes were 51.4 billion.

Thus, if we wanted to borrow 825 billion at 4% and pay it back over 30 years, it would cost us 3.9 billion a month, or 7.6% of monthly corporate income tax in December. Paying only the interest on it would cost us 2.75 billion a month. Do this very much and raising corporate income taxes 10% produces absolutely no extra net revenue. Remember, we already added about 1.2 trillion to the overall deficit last year. At 4%, just the interest on 2 trillion is 6.6 billion a month, or 12.8% of December's corporate income taxes. To pay that 2 trillion at 4% back over 30 years would cost us 9.5 billion a month, or 18.4% of December's corporate income tax revenue, and 4% is an unrealistically low rate. So we're not going to pay it back. We're just going to pay the interest through your and my lifetimes.

The second factor to remember is that as soon as the panic dies, our overall interest rate on the public debt is going to shoot up. (For more background, please see this post.) If we add 800 billion to the deficit this year, we begin next year with publicly held debt over 7 trillion. At 4%, that's 23.3 billion a month, or 45% of December's corporate income tax. At 5% (more the long term average), it's 29.1 billion a month, or 53.7% of December's corporate income tax revenue. We can't cover the difference from corporate taxation - we'd move lots of jobs out of the country and wind up dropping corporate income tax revenue. So we are going to cover the difference in excise taxes and individual income taxes.

This is what the citizens of America have to get through their thick heads quickly. When the politicians are giving you stuff, you are going to wind up paying for it. Year after year after year.

Any of this money that isn't spent quickly will probably turn into a net drag on the economy over a few years, so let's think twice.

Washington Post published a piece on the latest CBO analysis, which pointed out that most of the infrastructure program wasn't going to be spent when it was needed:
The total package -- including tax cuts and direct aid to the poor and unemployed -- won significantly better marks for speed than the portion of the package devoted to highways, schools and other infrastructure projects, which are among the Democrats' top priorities. The CBO report predicts that only about 40 percent of the $356 billion dedicated to those projects would be spent by the end of 2010.
That's only 40% spent of the infrastructure portion in two years, and much less spent this year. In light of our overall debt, how will this prove to be a stimulus? Remember, the increased retirement benefits paid will be a strong stimulus to support overall incomes by 2010, and that too is money spent from tax revenues. Aren't we larding this up with stuff that will do little to address the current situation? How is this justifiable?

Cutting payroll taxes this year would cost less and do more. The food stamp allotments and unemployment benefits will stimulate immediately.

Please, think it over.

Comments: Post a Comment

Links to this post:

Create a Link

<< Home

This page is powered by Blogger. Isn't yours?