Economic stimulus as narcotic

Some business teachers and managing consultants still use their yellowed notes about Japan’s economic success, but that is way out of date.  For decades, Japan’s economy has been in the doldrums.  Why?  And why hasn’t their economy ever bounced back?   Economics columnist Robert J. Samuelson says the problem is that Japan has relied on  government stimulus.  Which is basically the strategy our government wants to follow. [Read more...]

Why the government makes a poor investor

A chronicle of the failure of Solyndra–a “green energy” company that received half a billion dollars worth of government “investment”–demonstrates the larger point that government bureaucracies are just too ponderous to function as venture capitalists:

The Obama administration’s vaunted initiative to catalyze the U.S. clean-energy industry — under attack for betting half a billion dollars on the solar-panel manufacturer Solyndra, which closed last month — has become a case study of what can go wrong when a rigid government bureaucracy tries to play venture capitalist and jump-start a nascent, fast-changing market.

[Uwe] Schmidt [whose company scored a similar loan but turned it down] concluded in early 2011 that the influx of inexpensive flat solar panels was undercutting his company’s year-old proposal to use a field of mirrors that concentrated sunlight on a thermal tower. Despite market changes, however, the terms of the federal loan guarantee wouldn’t let Solar Trust switch in midstream to flat panels. So Solar Trust sought private financing.

“We look at a lot of technologies, and I don’t care which one we build — I want to build the one that makes the most financial sense,” Schmidt said.

The inflexibility of the terms for Schmidt’s project was just one of the troubles that have plagued the Energy Department’s $38.5 billion loan-guarantee program from its beginning in 2009. . . .

Solyndra, a solar-panel maker that went bankrupt in August with $535 million in federally backed loans, was riskier than many other proposals, industry executives say. Its cylindrical tubes captured a high percentage of the sun’s energy and its panels were easy to install, but they were expensive to make.

Silicon prices hurt, too. When Solyndra first sought financing during the Bush administration, which picked its proposal as one of 16 finalists, the price of silicon was soaring. Solyndra’s tubes didn’t use silicon, an advantage then. Since 2008, however, silicon prices have collapsed and Solyndra’s costs haven’t come down as much.

“The Solyndra project . . . assumed that the cost of materials, silicon, would remain high and that the cost of panels would not go down as fast as they did,” said a senior executive at a renewable-energy financing fund. “In the end, those assumptions were wrong.”

Many industry experts said the Energy Department should have anticipated that because projects were underway to bring more silicon onto world markets.

via Some clean-energy firms found U.S. loan guarantee program a bad bet – The Washington Post.

Tim Pawlenty’s economic plan

GOP presidential candidate Tim Pawlenty, the former governor of Minnesota, laid out an ambitious and unusually specific plan to get the economy going again:

“Growing at 5 percent a year rather than the current level of 1.8 percent would net us millions of new jobs, trillions of dollars in new wealth, put us on a path to saving our entitlement programs,” Pawlenty said in his first detailed speech on economic policy since he formally declared his White House ambitions a little over two weeks ago.

The economy averaged 4.9 percent growth between 1983 and 1987, and grew at a 4.7 percent rate between 1996 and 1999. A sustained annual growth of 5 percent for a decade would be unprecedented in modern times. . . .

Pawlenty said such growth eventually would translate to $3.8 trillion in new tax revenue that would reduce the deficit by 40 percent.

Pawlenty’s plan also would simplify individual tax rates to just three options and cut taxes on business by more than half. His cuts go further than House Republicans’ recent proposal, which the Tax Policy Center said would cost about $2.9 trillion over the next decade. . . .

In a speech heavy on specifics, Pawlenty proposed a three-tier income tax system:

• The estimated 45 percent of U.S. households that did not pay income taxes in 2010 would see no change in their tax rates.

• Individuals would pay 10 percent tax on the first $50,000 of income. Couples earning $100,000 would also pay that rate.

• “Everything above that would be taxed at 25 percent,” Pawlenty said.

He said he wants to cut business taxes from the current rate from 35 percent to 15 percent, and he called for dismantling vast pieces of the government.

“We can start by applying what I call the Google Test,” he said. “If you can find a service or a good on Google or the Internet then the federal government probably doesn’t need to be doing that good or service. The post office, the government printing office, Amtrak, Fannie Mae and Freddie Mac were all built for a different time in our country and a different chapter in our economy when the private sector did not adequately provide those services. That’s no longer the case.”

via Pawlenty’s economic plan aims for 5 pct. growth – Yahoo! News.

Democrats are savaging the plan, calling it “ridiculous.”  But what do you think?

Stimulus jobs are just about over

An illustration of the futility of creating jobs by just spending government money for construction projects.  Once the projects are finished, we are back to unemployment.  And all of those “shovel-ready” construction jobs are just about finished.  From The Washington Post:

The stimulus was here.

Those words should be embossed on a stretch of Route 29 outside of Charlottesville, where paver operator Clifford Carter poured hot asphalt one year ago.

The $885,000 project, funded by federal stimulus dollars, took two days in November 2009. A few weeks later, he was laid off – temporarily, he thought, until paving season resumed in the spring. But in April, he received his first permanent layoff notice. Without a job, he couldn’t afford to keep paying for life or health insurance, so he let both lapse.

“When they kicked me out the door, I lost everything,” he said.

The end of the stimulus – the $787 billion that Washington approved last year in an effort to forestall another Great Depression – is more than a year away. But for Carter and thousands of other workers in the road construction industry, it has already arrived.

Road construction workers were among the first to benefit from the 2009 American Reinvestment and Recovery Act, which pumped hundreds of millions of dollars into “shovel-ready” road resurfacing projects in order to save or create millions of jobs.

The bulk of highway-related work will be done within a year and more than half of the funds for it have been paid out, said Ken Simonson, chief economist for the Associated General Contractors of America, an Arlington County-based trade group.

But with the economy continuing to lag, private-sector work has all but disappeared, and many states have cut back on road work in an effort to plug gaping deficits.

Without the stimulus, thousands of workers who build and maintain America’s roadways could soon join the 1.6 million construction workers who are unemployed. The construction industry lost an additional 5,000 jobs in November, the latest U.S. Labor Department data show, bringing the sector’s unemployment rate to 18.8 percent.

via After stimulus, construction industry seeing private-sector and state projects drying up.

Creating money out of thin air

The Federal Reserve has taken some major action in an effort to stimulate the econnomy:

The Federal Reserve escalated its efforts to get the U.S. economic recovery back on track Wednesday, again entering the realm of risky and untested policy in response to the worst downturn in generations.

The plan to pump $600 billion into the financial system is designed to stimulate the economy in large part by lowering mortgage and other interest rates.

Although the approach carries significant risks for both the economy and the central bank’s credibility, the steps announced by Fed policymakers could represent the nation’s best hope for breaking free of sluggish growth, especially with bold initiatives unlikely from a newly divided Congress.

Fed officials concluded that growth is too slow to bring down the 9.6 percent unemployment rate and is at risk of staying that way for some time absent new action. They were also concerned that inflation has been running too low and were looking for a way to encourage modest price increases, which would give consumers and businesses more reason to spend money before its value declined and help energize the economy.

“The pace of recovery in output and employment continues to be slow,” the Fed’s policymaking panel, the Federal Open Market Committee, said in a statement. “Employers remain reluctant to add to payrolls. Housing starts continue to be depressed.”

The Fed usually manages the economy by adjusting short-term interest rates. With those rates already near zero, Fed officials had to dust off a strategy for boosting the economy that debuted during the darkest days of the financial crisis. The Fed plans to create money, essentially out of thin air, and then pump it into the economy by buying Treasury bonds on the open market.

via Fed to buy $600 billion in bonds in effort to boost economic recovery.

I am neither an economist nor an economist’s son, so could someone explain how creating money out of thin air could possibly be a good idea?


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