Michael Choate Associates CPA

Obama Stimulus Plan Passes on Friday the 13th. Will it Work?

Congress has passed President Obama’s Economic Stimulus Bill with much fanfare and joy from the political left and much fear and loathing from the political right… the political center is still undecided and just hoping for the best. The $787 billion bill is heavily weighted toward government spending with minimal tax incentives/rebates to jump start the economy, save and create jobs and end the current economic recession, hopefully in 2010. (As a side note, most recessions last about a year anyway.) But the opportunity for swift government action was there and the Obama administration took it. (the legislation is over 1000 pages and as Ross Perot wisely once said “the devil is in the details” ). The bill passed with only 3 Senate Republicans voting “yes”. Now what?

Well, in the past, government spending has not been the remedy of choice for getting out of a recession. Tax cuts were successfully used by Presidents Kennedy, Reagan and Bush II to stimulate the economy. Tax cuts, much to the surprise of the political left, even resulted in MORE tax revenue being collected by the government. Of course, additional tax revenue only leads to additional spending in Washington, so tax cuts were wrongly part of the criticism of government deficits. “How will you pay for those tax cuts” and “Pay as you go” were the catch phrases in Washington over the past 25 years. The deficit hawks were extremely quiet this time.

How Did We Get Here

The deficit for fiscal year ended September 30, 2008 was only about $(450) billion. Remember, in 2008, we had a slowing economy, oil prices jumped to $145/barrel and gas to $4/gallon in the summer, and then we had a mortgage/credit crisis in the fall and a stock market plunge. Corporate greed, lack of government oversight and intrusive government interference were the primary causes of the “Credit Crisis”. President Bush initiated the first credit bailout plan to avoid a bigger meltdown. FDIC insurance was increased from $100k to $250k to prevent a bank run. But little explanation of the cause of the problem has been provided. Will it just repeat itself? Did we learn anything? Can we assign blame?

Apparently exposing the oil speculators and just the threat of the US actually increasing domestic oil production has solved the oil “crisis” ( gas is now below $2/gal). But the bank and credit market crisis is still on. What does Obama’s Stimulus Bill do for that? Nothing. That bank/credit bailout bill is still to come.

Spend and Borrow Strategy

The projected deficit for fiscal year ending September 30, 2009 was about $(1) trillion before the Stimulus Bill. With the Stimulus Bill, the bank/ credit market bailout, and maybe more, the deficit for 2009 is over $3 trillion! Can we borrow this much money and restore economic prosperity? How can we pay it back? If we just print more money, we may get high inflation. If we raise taxes or interest rates, the economy will tank again. Do you remember 1979? High inflation, high interest rates, high taxes and high unemployment. President Carter called it a “Malaise”. President Reagan called it “Liberalism”.

Obama’s strategy for dealing with these economic problems is definitely a break or change from the past. But it is not new. President Franklin Roosevelt’s “New Deal” helped end the depression of the 1930s (talk about, let’s move on) but it also left us with bloated government programs for 50+ years. The “spending stimulus” has also been tried in Europe and Japan without success. It resulted in the “Nanny State”. A free market economy cannot be government controlled thru central planning. That is why our economy has always been the envy of the world. Dependence on government is a prescription for failure. Tax cuts and less government spending is the proven prescription for success. Maybe the next four years will be a good test case. Stay tuned.

Send comments to mike@choatecpa.com.