The Congressional Budget Office has thrown its two cents in and their conclusions are not going to make anyone very happy. They have looked at the various elements of the plan that relate in some way to the infrastructure part of the plan and have concluded that no more than half of the money allocated will have been spent by 2010. That will do very little in the short run to push the economy forward and by some estimations this money would come cascading into the economy at precisely the wrong moment – as recovery has started to take place on its own. If the government surge coincides with a recovery it will flood the system with cash at just the moment that cash is coming from other quarters and this could well fuel serious inflation.
Analysis: The overall CBO conclusion is that there are too many barriers and limitations to fast tracking most of these programs. The Democrats who have worked on the bill have countered that the CB only looked at the slower moving parts of the package and failed to consider the more rapid aspects like increased unemployment payments, health care for the poor and tax cuts. This logic is a little hard to follow however. It is true that unemployment benefits will be spent rapidly but for the vast majority of recipients, these funds will go to bills and immediate needs – not the kind of consumer spending that boosts the economy. The contribution that health care for the poor makes to the overall economy is even less. Tax cuts will likely be treated like the last set of tax cuts were and the impact will be negligible. The CBO report makes it very clear that those efforts designed to create jobs that allow people to become reengaged in the economy will take time to develop. The report doesn’t assert that this stimulus attempt will fail but it is not likely to be a quick impact. The GOP critics are therefore asserting that something else be tried or at least – added. There are many suggestions but none have seemed to make the cut thus far.
Sunday, February 15, 2009
The Many Faces of the Stimulus Package
There is nothing that focuses the mind like the ability to spend close to $1 trillion. The stimulus package now has an official name and it is the American Recovery and Investment Act of 2009. It is moving through the various committees of the House at a pretty rapid clip and is expected to be hitting the floor for a vote within a matter of a week or so. The assessments of this plan have been as intense as can be expected given that most of the details are only now coming to light and for the most part there are elements that please everybody and elements that have engendered some sharp criticism.
Most economists have taken a safe position on either side of the issue with one cadre asserting that it isn’t nearly large enough to accomplish the task and the other camp asserting that it is so massive that the mere attempt will distort and damage the US economy for generations. The average person is perplexed by the complexity but simply hopes that it will work and that the recession will come to an end.
There are some important caveats that have been sounded by those close to the process. The first is to recognize that talk of a quick allocation of funds is a relative thing. The outlay of funds may indeed be much faster than is the norm in the US but that still means towards the end of the summer at the earliest. Caveat number two is this outlay is a one time deal. The budgets for next year and the year after will be back to normal levels and that means the same vicious competition for scarce funds that have taken place in the past.
Analysis: At this juncture this is how the money is supposed to be allocated. The largest number is destined for tax cuts - $275 billion. After that it becomes highly fragmented. $87 billion for a temporary increase in the Medicaid matching rate, $79 billion for state fiscal relief, $43 billion for increased unemployment benefits and job training,$41 billion for local school districts, $39 billion for healthcare for the newly unemployed (extensions of Cobra), $32 billion for transforming the nation’s energy transmission, distribution and production systems, $31 billion to modernize federal and other public infrastructure, $30 billion for highway construction, $20 billion for health information technology, $20 billion for food stamps, $19 billion for clean water, flood control and environmental restoration investments, $16 billion to repair public housing and make key energy efficiency retrofits, $5.6 billion in Pell grants for college students, $10 billion for science facilities, research and instrumentation, $6 billion for higher education modernization, $6 billion to weatherize modest income homes, $6 billion to expand broadband internet access, $4.1 billion to expand preventative care and $4 billion for state and local law enforcement. That leaves at least about $32 billion unspoken for at the moment.
Most economists have taken a safe position on either side of the issue with one cadre asserting that it isn’t nearly large enough to accomplish the task and the other camp asserting that it is so massive that the mere attempt will distort and damage the US economy for generations. The average person is perplexed by the complexity but simply hopes that it will work and that the recession will come to an end.
There are some important caveats that have been sounded by those close to the process. The first is to recognize that talk of a quick allocation of funds is a relative thing. The outlay of funds may indeed be much faster than is the norm in the US but that still means towards the end of the summer at the earliest. Caveat number two is this outlay is a one time deal. The budgets for next year and the year after will be back to normal levels and that means the same vicious competition for scarce funds that have taken place in the past.
Analysis: At this juncture this is how the money is supposed to be allocated. The largest number is destined for tax cuts - $275 billion. After that it becomes highly fragmented. $87 billion for a temporary increase in the Medicaid matching rate, $79 billion for state fiscal relief, $43 billion for increased unemployment benefits and job training,$41 billion for local school districts, $39 billion for healthcare for the newly unemployed (extensions of Cobra), $32 billion for transforming the nation’s energy transmission, distribution and production systems, $31 billion to modernize federal and other public infrastructure, $30 billion for highway construction, $20 billion for health information technology, $20 billion for food stamps, $19 billion for clean water, flood control and environmental restoration investments, $16 billion to repair public housing and make key energy efficiency retrofits, $5.6 billion in Pell grants for college students, $10 billion for science facilities, research and instrumentation, $6 billion for higher education modernization, $6 billion to weatherize modest income homes, $6 billion to expand broadband internet access, $4.1 billion to expand preventative care and $4 billion for state and local law enforcement. That leaves at least about $32 billion unspoken for at the moment.
Construction Sector Still Digging New Lows
For the last six months there has been an expectation that the housing sector was finally going to reach bottom. It seemed logical to assume that the dramatic drop in the price of homes coupled with lower mortgage rates would finally allow the market to stabilize. Unfortunately the bottom continues to recede and each month brings more bad news in terms of the whole construction sector. For the sixth month in a row there has been a reduction in the number of new homes started. Homebuilders are seeing the worst period of their history since 1991. Starts in December were down by 15.5% and in November the decline was 15.1%. The number of starts in all of 2008 was under a million – a little over 900,000. Analysts had expected to see a drop of 4% in December so the 15.5% number came as a real shock.
The reasons for the dip are not hard to see. Despite the low prices in the housing sector and the lower mortgage rates – every other factor that affects the housing market has been negative. The banks are not in the mood to lend for the most part so the lower mortgage rates are not doing anybody much good. The potential borrowers are worried about their jobs and their financial futures and that has been keeping them away from the lenders. Homebuilders are not able to get financing for their projects and many are stuck with an inventory of unsold homes that will take seven to nine months to eliminate – under the best of conditions. Much of the problem for builders as well as for those that are trying to sell existing homes is that the foreclosure issue continues to accelerate. This flood of homes has made it all the more difficult to attract attention in the current real estate market.
The impact in the sector has also shifted from the areas that were the worst hit to those parts of the country that had been relatively immune. Essentially the damage has been done in the Western states and now the problem is expanding. Starts were down by 2.2% in the West but dropped by 22.2% in the South and 24.5% in the Midwest. Only in the Northeast has there been an increase (12.7%).
Analysis: In all this gloom there is a little, tiny ray of statistical hope. It lies in the demographics that normally govern the housing market. Analysts have pointed out that the housing boom that took place in the middle of this decade was not fueled by the usual motivations. There was not a push from young families seeking bigger quarters, there was not a major influx of retirees seeking to downsize, there was not a great deal of internal migration from people seeking jobs or being transferred. The motivation was almost entirely financial and within a short time the push was towards making a killing in real estate, flipping houses and “every man a real estate mogul”.
By the time 2010 and 2011 arrive the demographics start to favor a traditional housing boom. There are young families starting to build pressure and at some point they feel the need to make that move – especially those that elected to start life in the world of condos and lofts. The retiree population was not feeling intense financial pressure until now and this is pushing them towards down market options. Finally there is the pressure of nationally high unemployment as it forces people to relocate for job opportunities. What all of these motivations have in common is that they favor the construction of smaller and less expensive homes.
The reasons for the dip are not hard to see. Despite the low prices in the housing sector and the lower mortgage rates – every other factor that affects the housing market has been negative. The banks are not in the mood to lend for the most part so the lower mortgage rates are not doing anybody much good. The potential borrowers are worried about their jobs and their financial futures and that has been keeping them away from the lenders. Homebuilders are not able to get financing for their projects and many are stuck with an inventory of unsold homes that will take seven to nine months to eliminate – under the best of conditions. Much of the problem for builders as well as for those that are trying to sell existing homes is that the foreclosure issue continues to accelerate. This flood of homes has made it all the more difficult to attract attention in the current real estate market.
The impact in the sector has also shifted from the areas that were the worst hit to those parts of the country that had been relatively immune. Essentially the damage has been done in the Western states and now the problem is expanding. Starts were down by 2.2% in the West but dropped by 22.2% in the South and 24.5% in the Midwest. Only in the Northeast has there been an increase (12.7%).
Analysis: In all this gloom there is a little, tiny ray of statistical hope. It lies in the demographics that normally govern the housing market. Analysts have pointed out that the housing boom that took place in the middle of this decade was not fueled by the usual motivations. There was not a push from young families seeking bigger quarters, there was not a major influx of retirees seeking to downsize, there was not a great deal of internal migration from people seeking jobs or being transferred. The motivation was almost entirely financial and within a short time the push was towards making a killing in real estate, flipping houses and “every man a real estate mogul”.
By the time 2010 and 2011 arrive the demographics start to favor a traditional housing boom. There are young families starting to build pressure and at some point they feel the need to make that move – especially those that elected to start life in the world of condos and lofts. The retiree population was not feeling intense financial pressure until now and this is pushing them towards down market options. Finally there is the pressure of nationally high unemployment as it forces people to relocate for job opportunities. What all of these motivations have in common is that they favor the construction of smaller and less expensive homes.
Subscribe to:
Posts (Atom)