Back in March, I called for an end to Obamanomics. Months of happy talk about "green shoots" have yielded little real improvement. Instead, nearly all we’ve got is a lot of hope and some lousy ownership stakes in big corporate losers like GM and AIG (NYSE: AIG ) .
Some Democratic leaders (as well as high-profile Keynesian economists, and even Berkshire Hathaway’s (NYSE: BRK-A ) (NYSE: BRK-B ) Warren Buffett, who threw in a pretty awesome Viagra metaphor) are agitating for a second stimulus package. But given the lackluster effects of economic interventions thus far, and our shaky fiscal situation, isn’t that the last thing we need?
So far, the controversial $787 billion government stimulus package has been less than stimulating. A recent audit from the Government Accountability Office showed that states have used funds supposedly meant for long-term projects like infrastructure and school construction to instead fund short-term projects, such as paving roads. Faced with eroding tax revenue and major budget shortfalls, the states are simply trying to tread water. That's not a cure for economic ills; it's barely even a Band-Aid.
Granted, the stimulus package was designed to dole out money over an extended period of time. However, there's also evidence that the small amount of money that has been getting into our economy -- through tax cuts, for example -- is being saved, not spent. We could accuse consumers of saving themselves to death -- Keynes’s favorite bogeyman, since excess saving does nothing to stimulate an ailing economy -- but in truth, far too many were too deeply indebted in the first place.
When forecasts go bad
Earlier this year, the Obama administration seemed to believe things would be looking much better once summer rolled around. But those rosy second-half predictions now look ever more unlikely.
First-quarter real GDP plunged by 5.5% pace, following a 6.3% drop in fourth-quarter GDP. Historically speaking, that's seriously bad news; apparently, the economy has never contracted by more than 5% for two consecutive quarters. The possibility that growth will remain sparse to nonexistent over the next few months bodes even worse, given the Obama administration's ambitious spending plans.
Meanwhile, the unemployment rate keeps reaching increasingly uncomfortable heights. It’s currently at 9.5% -- shattering previous government expectations of an 8.5% ceiling -- and expected to worsen even further. The Obama administration had expected its stimulus efforts to create or save 600,000 jobs by summer. The paltry 150,000 jobs the stimulus has thus far managed to save or create stand in stark contrast to those optimistic visions.
And if the government's guesses about the economy have proved so wrong, what about its assessments of our banking system? The stress tests passed by banks such as Citigroup (NYSE: C ) , Bank of America (NYSE: BAC ) , Wells Fargo (NYSE: WFC ) , and JPMorganChase (NYSE: JPM ) came with built-in assumptions of how our economy would fare. If those scenarios were off -- or completely wrong -- it's not crazy to think that some banks could still be insolvent, especially as delinquencies and defaults continue to rise.
Deep in the debt hole
I have to give the Obama administration credit for resisting growing demands for a second stimulus, and asking for patience. Whether or not you believe the initial stimulus will pan out as planned -- I have my doubts -- why should we keep throwing funds down a hole?
Here’s more reason for discomfort. Our budget deficit for 2009 is expected to hit $1.7 trillion, the highest deficit (as a percentage of GDP) since World War II. Calls for the government to keep on borrowing run contrary to the very real concerns that we could eventually face extreme inflation, if not hyperinflation.
And where will the trillions our government needs to borrow come from? Recent analysis from John Mauldin and others points out that the U.S. needs to borrow $3 trillion, bringing the world estimate to $5.3 trillion in new government financing. As Mauldin ominously noted, “There is simply not enough available capital under current conditions to do it all.”
Is all this “help” really helping at all?
Spending more money we don’t have on initiatives that don’t seem to work as expected seems like paving the way for even more disaster down the road. Our government's arguably gone too far already in bolstering zombie banks and companies that haven’t passed the market test. (It’s currently considering giving CIT Group (NYSE: CIT ) a helping hand, too.)
Maybe the buck should stop here. Maybe we should say to our government leaders, "Guys, you can stop helping now." At some point, the creative energy of individuals and the marketplace trumps all the supposedly helpful, wrongheaded ideas governments and academics can come up with.
I’m sure plenty of you disagree, though. Feel free to chime in on whether a second stimulus is warranted or not in the comment boxes below.