Sunday, October 23, 2011

"Mother Jones" Theories Debunked

So it's been a crazy few days in my house, from dealing with a break into our car to my son being sick I've been tied up.  For those of you who follow my twitter however, you should know what's coming as I promised Thursday that my post would be dedicated to refuting, point by point, an article written by Kevin Drum, of  This article pushes forward as fact several economic assumptions perpetuated by liberal politicians in an attempt to make the current administration look good.  I have no problem with the current administration (except that their "Jobs Bill" will do anything but create jobs) but I'm also not blindly in favor of them, so I'd like to take a look at these statements without a democratic (or republican) tinted set of glasses on...  So let's look at these "myths' Mr. Drum tries to expose for us, and see what the real truths are.

Okay so first of all Mr Drum asserts that not only is it a myth that the economic stimulus package of Obama's failed, but that it worked and worked well.  This is a fallacy, not only did the stimulus not work on a long term basis-it was never going to, the system simply is no longer constructed for such an idea to work.  Did it create a few jobs?  Perhaps, but what the stimulus did ultimately, was apply a band-aid where a tourniquet was needed.

The writer supports his claims by citing 1937 and how the infrastructure spending worked then, and also uses the graphic displayed to the right.  While this graphic displays a nice bit of "evidence" in favor of Mr. Drum's opinion, it is not fact.  In fact, it is pretty much the opposite of fact, it's damn close to a bald-faced lie.  Let's address the GDP growth here-and pardon me if I don't cite statistics from 70 years ago in support of my point and instead go with actual numbers.  In 2009 according to the Bureau of Economic Analysis and this article, real GDP decreased 2.4% in 2009.  Granted the real hard quarter was Obama's first in office, but regardless, this was a direct reaction to the stimulus which was created and passed in his first quarter. Addtionally, Trading Economics shows the US GDP to be growing this year at only a 1.3% rate.

Furthermore, Joe Biden himself this morning on CNN's "State of the Union" claimed 3 million jobs added by the stimulus package.  The huge range of 4.2-11.1 million jobs added should be the indicator-that shows true on both statistics played off as facts here-but the words of the Vice President's own mouth prove it to be inaccurate today.  Furthermore, analysts show that there are actually 1.5 million fewer jobs today than when Obama took office.  Even if one bill created 3 million jobs, if 4.5 million are lost in other places the 3 million jobs created doesn't really mean much does it?

It drives me nuts to keep hearing people refer back to the 1930's and 1940's and the plans that helped usher us from the Great Depression when they talk about why infrastructure spending and stimulus packages will work to turn this economy around.  It's simply not true, when you compare the economies of the 30's and 40's to today's economy you're comparing apples to oranges.  Hell, you're practically comparing apples to...I don't know, hamburgers.  The two simply are nothing alike.  The global economy has changed drastically in the 70 years that have passed since the Great Depression, and with the costs of logistics dropping while regulatory costs and taxes increase exponentially, things simply aren't being made here any longer.  Since that remains true, any money spent here sees only a portion stay here, while other dollars go overseas to pay for the construction of the product you've bought.  The point is, when you spent on infrastructure in the 30's, the greater portion of that money-if not all of it-was injected into the US economy through spending by construction workers involved in the infrastructure spending.  Today only a portion is injected into the economy while the rest goes overseas.  That's just the way today's "global village" works.

The second "myth" Mr. Drum tries to uncover is that the United States' debt is not a real problem, just a perceived problem the Republicans are trying to highlight in an effort to trick us all.  The only question inspired by this statement?  Was Mr. Drum able to type it without laughing?  Because I wasn't.  Mr. Drum even goes on to say "Apparently the financial markets think we're a pretty good credit risk".  Of course that's in lieu of the fact that on August 6 of this year Standard and Poors downgraded the United States' credit rating, and this morning it's being reported by Business Insider that a Bank of America analyst expects the US's credit rating to be downgraded again in the near future.  Now I'm no Wall St. banker, but I'm thinking a downgraded credit rating IS NOT a resounding vote of confidence in how much of a credit risk we are.

Mr. Drum furthers defends his position by saying things like "no one turns down free money" and asking if you'd take money if it were offered to you.  This is a foolish point, as the saying goes there is no such thing as a free lunch (or free money).  He says that as a result of the tax income created by spending 1 trillion, the cost would only be $400 billion.  This is faulty.  He actually says 60% of what is spent will be generated in tax dollars.  Really?  I doubt 60% of what is spent even ends up within our borders, let alone being generated as tax revenue.  These figures make zero sense (regardless of the fact they were invented-yes invented-by a Berkley economist, they're senseless, baseless, clearly left-leaning, and designed for one purpose: to further a liberal cause.  The numbers themselves are almost circular, and Mr. Drum doesn't provide a link to the study, I'll have to find it myself and pick that apart someday.

Mr. Drum's third "myth" is that lower taxes generate growth in the economy.  Let's look at this based solely upon logic shall we?  Again, let's remember that we're living in a new global economy these days, that logistics and technology these days make it easier and easier to live wherever you want, to produce wherever you want, it costs very little to move people, products, etc.  Add in our emerging competition in the far East in India and China as the two countries with the world's largest work forces, and increases in taxes and regulatory costs might not only hurt our economy, it could cripple it, causing companies to move in droves overseas where they could be more profitable.  While many hate corporate American these days, corporations bring jobs and bring products, even if they're just jobs in sales or customer service.  The huge problem with our current economy is that jobs have been leaving and going overseas-do we really want to push more out of the country?  Americans seem so set in the fact that we're the top nation in the world, but really how hard would it be for corporations to turn to India or China, move their headquarters there and essentially recreate the 1900's with a much larger workforce and experience in watching one country (us) fail so they know what NOT to do next time?  I'm not saying that's going to happen next week, but what is there to prevent it from happening?

Mr Drum's fourth "myth" is that regulatory uncertainty is clogging the economy.  This makes me wonder if Mr. Drum has ever been involved with any business in any way other than as a customer.  Let's look at a few things here, starting with Mr. Drum's own chart, shown on the left.

While Mr. Drum is correct that based upon this survey the biggest problem small business owners worry about is poor sales, look at the next two concerns: taxes and regulations/red tape.  Combined, 36% of small business owners cited these two issues as their foremost concern, compared to 20% who were worried about sales.  Look, concern about potential taxes and regulation aren't as much of a problem as current taxes and regulatory costs are.  I've personally seen dozens of businesses that have existed for decades pushed out of business due to these increased costs.  Still other companies are reportedly sitting on nearly $2 trillion in cash, kind of waiting to see how things play out and not using that cash to create jobs.  So, while I only have a few points written here to point out the inaccuracy of Mr. Drum's points, corporations in America have roughly 1.8 trillion bits of evidence.

Mr. Drum's fifth fact is one that frankly, I'm not ready to refute-or even state whether I think it should be refuted or not-although I suspect I will given the prior points and his defense for this point.  He cites Bernarke's printing of money to the recovery from the Great Depression again, comparing apples and frosted donuts, or hamburgers, or whatever highlights the vast difference between our economy now and our economy 70 years ago the best.  Comparing these two times does only one thing; highlight the lack of knowledge the writer of this article clearly has regarding real business, the economy, and finance.

I want to take a minute to go back to "myth #1" for a second, and talk about the stimulus.  The stimulus was a band-aid, that's all it should have been even designed to be.  It basically enabled the government to extend unemployment benefits and further accommodate those unable to find a job.  It supported people during this record 40 week average layoff from full time work, but hand in hand with that package needed to come a long term plan, and that plan never came, in fact the opposite happened, things got worse as a result of inaction.

I spent last year working with a concrete company.  They were fairly small-about $15-20 million in annual revenue-and depended heavily on government contracts and government projects to operate. After several years of profitability and joyfully seeing Obama's economic stimulus package pass (thinking it was linked to infrastructure spending) the company began to go downhill.  Our biggest problem?  Job quote turnaround time-in other words the time that elapsed from the minute we started talking about a job until when we started pouring concrete-more than doubled from 6 months to 12.  Jobs started drying up, and while we had many jobs lined up, the money from the government to fund those projects simply wasn't there, hadn't been released yet and so we never were able to start them.  Eventually after a year of underemployment for the company as a whole, and gradual crumbling through piece by piece lay-offs, the company folded and was forced to lay everyone off and file for bankruptcy.  Those that we laid off were able to stay on unemployment longer sure, but they'd have preferred that spending actually happened and that we were able to start working again.

I look forward to hearing your thoughts below.

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