By Chris Buchheit on April 27, 2010

CNN recently published an article on their website claiming what many of us believed anyway: the stimulus bill has had very limited effect on the economy.

According to a recent survey of economists, the stimulus bill “had little to do with the rebound”. First of all, I take principle with the “economic rebound” people keep talking about, but I’ve already beaten that issue more times than I’ve beaten Super Mario World.

I’ve only beaten that game once.

Even though for the first time in two years, according to the article, employers report growth in the private sector, these economists believe the stimulus had very little to do with it.

Instead of feeding the public sector by pumping random amounts of money into it, the government should have provided emergency tax breaks to business-owners to offset the credit crunch created by the collapse of the housing bubble. With this type of funding, businesses might not have had to lay off as many workers.

Alternatively, the government decided to expand the public sector. The administration totes having created nearly 3.5 million jobs because of the stimulus, but many of these jobs are temporary, some of which reportedly only lasting a day in some places.

In fact, in the same survey, the National Association for Business Economics polled sixty eight of its members who own firms in the private sector. A full seventy three percent of them said that only growth they experienced had little or nothing to do with the stimulus bill.

However, even though I’ve said many times that the administration is wrong with its overly optimistic outlook of the economy, the report also claims that industrial demand is increasing, which calls for an increase in the number of jobs. In the same poll, seventy percent of respondents believe the private economy should grow more than two percent by the end of 2010, which seems like a feat in of itself.

One last point the survey mentions is that the credit crunch is still being felt by small businesses. This ties into my last blog, because if Congress were to regulate the credit industry as it plans on doing, the predicted private sector growth could falter.

Read the CNN story here: http://money.cnn.com/2010/04/26/news/economy/NABE_survey/

By Chris Buchheit on April 27, 2010

Two years ago, the housing bubble led to a market breakdown that helped cause a financial collapse. Now, lawmakers are attempting to regulate different sectors of the financial system in order to prevent such incidents from occurring again.

This issue has also been discussed at length in this blog. In a recent one, I said that I have no problem with certain regulations, but what we need is smart regulation – not regulation for the sake of it. The regulations we need should encourage economic growth and create barriers for those who would simply take advantage of economics at others expense. For example, the government should not have encouraged Fannie Mae and Freddie Mac to increase their faulty business practices.

Yes, that was a jab.

Lawmakers, however, are turning to the credit industry, particularly credit raters. Members of Congress are quick to blame raters for labeling risky investments as “safe”. In order to make certain securities seem more competitive, raters are apparently slow to announce when a risky investment begins to turn sour. Senator Carl Levin (D – Mich) is spearheading the movement to make these raters more transparent in their dealings.

This kind of regulation seems fine honestly, but on the other hand, how can the government ensure this kind of oversight? How will it know when raters are being completely truthful? In short, it can’t. This kind of financial overhaul lacks teeth, and the market should be able to phase out credit raters that are known for less-than-transparent. If banks and investors do their research and realize which investments are sounder than others, credit raters should have significantly less power to influence the markets as Congress seems to think they do.

My guess is that Congress will try to find a way to retroactively penalize seedy credit raters. However, the only thing this will accomplish is credit raters finding ways to bend the rules even more. What Congress should do is find a way to incentivize credit raters to be more honest.

Such a financial reform is difficult at best.

As long as there’s a catchy jingle every time there’s a commercial break, I’m okay with credit raters.

Oh, those are the wrong kind of credit raters? Whatever.

Read the AP story here: http://finance.yahoo.com/news/Lawmakers-turn-to-credit-apf-331555961.html?x=0

By Chris Buchheit on April 27, 2010

A few weeks ago, Congress passed the health care reform. This issue has been discussed at length, and the main argument boils down to whether or not our government, already with a staggering national debt, can afford this kind of bill.

Democrats were quick to claim that not only was the bill affordable, but that it would even reduce the deficit.

However, a new report, from CNN of all places, questions the Democrats’ numbers. The story reveals that neutral think tanks and organizations believe that the forced increased coverage of health insurance will cause premiums to skyrocket by thirty-four million dollars. The report also warned that such government spending is unsustainable, and that the bill will raise it by one percent over ten years. This percentage is bound to increase over time as well.

One of the primary sources for funding of the new healthcare bill came from Medicare. The report also believes that the bill will “drive about 15 percent of hospitals and other institutional providers into the red, ‘possibly jeopardizing access’ to care for seniors”.

Members of the Obama administration look down on such analyses, but I have a challenge for them: name one government welfare program that has maintained its budget.

It makes sense that such increases will occur. The bill does not address concerns over rising medical costs, but instead subsidizes them to people who could not afford it. The upside is that more people will have coverage; the downside is that nothing in this world is free. Somebody will be paying for it. Guess who that will be. The bill also forces insurance companies to cover patients who would otherwise be denied. With these two factors alone, premiums will be driven upward.

In other words, the bill does little to reform the actual health insurance system. It does not tackle rising costs by reforming malpractice suits, changing health care protocol, or adding competition to the markets. Instead, the bill simply subsidizes the system. In an economic time such as this, when even CNN is stating that this health care bill cannot be afforded, should Congress be promising so much to so many people?

By Chris Buchheit on April 27, 2010

Can an entire government go bankrupt and be bailed out? As Greece is currently showing us, fiscal and monetary policies are no laughing matter. If government spending does not get reigned in, national debts can cripple more than the governments that cause them.

The Mediterranean nation of Greece has defaulted on several of its loans. Beforehand, it maintained the second highest debt to GDP ratio in the EU. Many northern EU states blame the problem on overexpansion of the EU, and wish for tighter financial control of the other member states.

The Greeks should have looked to GM and the financial industry as an example of how to get out of faulty business practices. Oh wait.

In order to remedy the situation, which has made the Euro drop dramatically since November of last year, the Grecians have requested a bailout package to finance their debts. The vast majority of Germany opposes such action (most of the EU rides on the country’s economic coat tails), but there is little doubt it will participate in the bailout.

As of April 23rd, Germany’s Chancellor Angela Merkel said Greece was discussing the situation with the International Monetary Fund, and that Germany funding would depend on the outcome of such talks. Merkel herself has stated that bailout of Greece is “necessary to ensure the stability of the Eurozone”, but that such assistance will only occur once Greece has finished its talks with the IMF.

If GM is any indicator, it does not matter how many times an organization gets bailed out. Serious budgetary reforms need to be made, and unfortunately a bailout only sets the precedent that faulty business can continue – other people will simply resolve the situation.

Greece should be given gradual aid, conditional upon their improved financial responsibilities. The aid should also be paid back to the EU with interest. In other words, Greece should be punished for its lack of fiscal responsibility, not bailed out.

Perhaps this methodology is not as pragmatic as it should be, but the idea that governments can and do default on their debts is an interesting fact. Our own Congress should look at Greece as an example of what useless government spending can do not only to its own country, but to other nations tied to its currency.

By Chris Buchheit on April 18, 2010

Within the last few months, there have been big wigs talking about how much the economy seems to be improving. However, is this politics or true economic expansion?

According to a news story from the Associated Press, Treasury Secretary Timothy Geithner, the economy is growing much faster than expected. Even though, unemployment remains around ten percent, he claims that the economy is improving more quickly that initially thought.

This statement to me seems troublesome. During the last quarter, most of America’s GDP was driven strictly by government spending. Growth was almost exclusively in the public sector. This, to me, is not a sustainable model for growth. However, if Secretary Treasurer Geithner believes the economy is growing, where are the jobs? If the private sector is expanding, why is unemployment still as high as it is?

The way to sustained job growth is by real tax cuts on small businesses. If business owners have the money to hire more employees, they will. However, the government still feels it necessary to tax that very demographic. As I described in another blog, the recently passed Health Care Reform bill will tax individuals who make $200,000 or greater per year and couples who make more than $250,000. Back in 2006, the average income for small business owners was $233,600, as I cited in the same blog entry. So clearly small businesses are indirectly being taxed by the health care bill. In the long run, how can this series of spending and taxing by the government be sustained?

However, on the other side of things, according to the same article, consumer confidence is up, and people are spending more money. If this is true, then there is more money circulating within the economy. This is indeed a good sign.

If, though, the economic growth is coming from the public sector, it is not a true sign of real growth – just the government throwing money at a problem. If the economy were improving as drastically as the pundits like to tout, jobs would be increasingly present. Even if all the other numbers were going where they need to be going, at the end of the day, almost one in ten people in the country are out of a job.