Support Wanes For Obama’s Huge Stimulus Plan

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 10, 2009

IN THIS ISSUE:

1. Public Support For Trillion Dollar Stimulus Plunges

2. Senate Passes $838 Billion “Stimulus” Package

3. Republicans’ Propose Alternative Stimulus Package

4. Problems With Obama’s Trillion Dollar “Stimulus”

5. Final Stimulus Bill Will Be Higher Than $838 Billion

6. Frustrated Obama Says Spending IS Stimulus

7. 50% of Americans May Pay Zero Income Taxes

8. Geithner Announces $2-$3 Trillion To Rescue Credit Markets

Introduction

Our new president called upon Congress to come up with a giant stimulus package. And there was never any doubt that the members of the House and the Senate would deliver. There’s little in life they enjoy more than spending our money! The huge stimulus bill passed in the House on January 28, and the one the Senate passed today will cost American taxpayers over $1 trillion including interest.

Public support for the so-called “stimulus” plan was at 75% just a couple of weeks ago as reported by Gallup. However, as the American people got a good look at the massive $820 billion package passed by the House, and saw that apprx. two-thirds of the money would be spent on liberal spending programs rather than stimulus, support plummeted. As this is written public support for the huge rescue package is down to only 37% and falling.

Republicans introduced alternative spending packages in the Congress that were smaller and included a much higher percentage of stimulus versus spending, but they were ignored by the Democrats who were determined to pass their much larger, pork-laden bills.

It may surprise long-time readers that my oldest and most respected source for economic and market forecasts actually agrees that the government should pass a huge stimulus bill, and even a lot more if necessary to head-off deflation. They agree with the “Bad Bank” plan I discussed last week, whereby the government would reportedly loan banks up to $2 trillion as well as taking “toxic assets” off the banks’ hands. In fact, they think the government should do whatever it takes to get the credit markets functioning again, including insuring bank loans if necessary, and it should do it sooner rather than later.

Whether we believe the bailouts and the stimulus package(s) are going to be a colossal failure that could lead to hyperinflation, or whether we believe they are likely to work – it doesn’t matter. President Obama got his way, and we are about to see the largest government bailout in world history.

Public Support For Trillion Dollar Stimulus Plunges

Given the business I am in, I get lots of questions from friends, relatives and business associates about the huge bailouts and stimulus packages in the wake of the recession, the financial crisis and historic stock market meltdown last fall. Interestingly, almost everyone I talk to is against the government bailouts to banks, investment houses, AIG, automakers and the like. And now that President Obama and Congress are hell-bent on a new trillion dollar “stimulus” package, most people I talk to are livid!

But while most people I talk to are opposed to the bailouts, Obama had widespread public support for a large stimulus package just a few weeks ago. A Gallup poll in late January found that 75% of Americans polled wanted Congress to pass a big economic stimulus package. Yet that was before the House of Representatives passed its $820 billion “stimulus package” on January 28.

Many Americans who had been for a big stimulus package were not happy when they learned that almost two-thirds of the House bill was mostly pork-barrel spending, while only apprx. one-third went for tax cuts. Many in the national press are already referring to the bill as the “SPENDULUS” package.

As of late last week, the latest Rasmussen poll found that public support for the rescue package had plunged to only 37% for the bill and 43% opposed! Public support is falling by the day, and Rasmussen reported yesterday (Monday) that 62% of Americans now want more tax cuts and less spending in the stimulus bill. That explains why President Obama pulled out all the stops last week to get it passed quickly in the Senate, which will apparently happen later today.

Senate Passes $838 Billion “Stimulus” Package

Last Friday night, a compromise (if we can call it that) was reached between Senate Democrats and the three “moderate” (read: liberal) Senate Republicans: Olympia Snowe (R-Maine), Susan Collins (R- Maine) and Arlen Specter (R-Pennsylvania). Why they switched and agreed to vote for the Senate stimulus bill at the last moment is not known, as their meeting with Democrats was behind closed doors. But it is no surprise that these three “RINOs” (Republicans In Name Only”) voted with the Democrats to give them a filibuster-proof 61 votes to enable passage of the Senate stimulus package.

As veteran political observers knew, the final Senate stimulus package would not be far from the House version – that’s just how things work in Congress. Both the House and Senate Democrats wanted to give President Obama something in the ballpark of what he asked for, and they did, as they are in the majority, with a little help from the three liberal Republican senators noted above.

The Senate stimulus bill came in at apprx. $780 billion as a baseline, plus several amendments passed earlier to add another $55-$60 billion or more to the final price tag. While the final number is not yet clear as I hit the “send” button, it is estimated to be apprx. $838 billion, slightly higher than the House version.

The Senate version, we are told, has a slightly larger portion devoted to tax cuts, and a slightly lower portion going to spending programs than the House bill. Supposedly, the Senate version has apprx. 40% in tax cuts and apprx. 60% in spending programs, versus apprx. 33% and 66% in the House version, respectively.

The bottom line is, President Obama asked for, and the Congress provided, the largest spending bill in the history of the world by far, even though no one on the planet knows if it will work. And there is another $3 trillion on the way, as I will discuss at the end.

Now the US is committed to spending well over one trillion dollars (including interest) over the next several years on an economic rescue package, with no assurance that it will work.

Senate Stimulus Amendment To Help Automakers

Last Tuesday, the Senate passed an amendment aimed at helping both automakers and car buyers that will be a part of the $838 billion stimulus package. The amendment would allow most car buyers to claim an income tax deduction for the cost of automobile sales taxes and interest payments on car loans.

The amendment would permit qualified car buyers to deduct the sales tax on the purchase of new cars up to $49,500 in price. Individuals with incomes of up to $125,000 and couples earnings as much as $250,000 could qualify, including those who do not itemize their deductions. This tax break applies to new car purchases between last November 12, 2008 and Dec. 31, 2009. The cost is estimated at $11 billion.

While this amendment was hailed as a tax cut for consumers, it was probably more intended to help the struggling automakers and their union workers. Of course, there is no guarantee that car buyers will “Buy American.”

Republicans’ Proposed Alternative Stimulus Packages

As I wrote last week, the giant stimulus package requested by President Obama and drafted and passed by the House totaled appx. $820 billion. Unfortunately, the bill included only about one-third in tax cuts (stimulus) and two-thirds in pork barrel spending, with relatively little for “infrastructure” projects. So much for Obama’s campaign promise to end wasteful spending in Washington!

The Senate stimulus bill, by comparison, includes apprx. 40% for tax cuts and apprx. 60% for spending programs. While an improvement, the Senate bill still has well over half of the money going to spending projects, with less than half going to direct stimulus in the form of tax cuts.

Given the very negative reactions to the bill proposed and eventually passed by the House, some Senate Republicans offered alternative stimulus bills of their own. One Republican group headed by Senator Mel Martinez (R-FL) introduced an alternative stimulus plan with a price tag of apprx. $713 billion. The proposal included $430 billion in tax cuts, $114 billion for infrastructure projects, $138 billion for extending unemployment insurance, food stamps and other provisions to help those in need and $31 billion to address the housing crisis.

All of these are expenditures that would directly help Americans. This Republican plan would direct 60% of the funds to tax breaks, whereas the Congressional Democrats’ plans have only 33% or 40% going for tax breaks. The McCain alternative plan directed nearly 80% of the money to tax cuts as I will discuss below.

The Democrats’ $820 billion House bill included apprx. $550 billion in spending that is reportedly divided among these areas: $142 billion for education and labor, $111 billion for health care, $90 billion for infrastructure, $72 billion for aid and benefits, $54 billion for energy, $16 billion for science and technology and only $13 billion for housing. Clearly, the Martinez-sponsored GOP stimulus plan would be preferable to the version passed by the House and the Senate bill that will be voted on later today.

Another alternative stimulus plan was offered by a Republican group headed by Senators John McCain and Lindsey Graham. Their alternative stimulus package totaled apprx. $445 billion and was heavily slanted toward tax cuts that I believe make much more sense than either the House or Senate bills.

The McCain plan would cut in half the payroll tax for all U.S. employees for one year to 3.1% at a cost of $165 billion. It would lower the 10% income tax bracket to 5% and the 15% bracket to 10% for one year at a cost of $60 billion. Slash the corporate tax rate to 25% from 35% percent for a year and drop the rate for small businesses filing as individuals to 25% from 35%, all at a cost of $50 billion.

The McCain alternative would also offer homebuyers a tax credit of $15,000 or 10% of the home purchase price, whichever is less, starting immediately at a cost: $20.4 billion. The plan would also extend unemployment insurance benefits and food stamps through 2009 and eliminate taxes on unemployment benefits for the same time period at a cost of $48.15 billion. The plan also includes $11 billion to discourage mortgage servicers and lenders from executing home foreclosures, beginning immediately.

Thus, over $356 billion – or almost 80% - of the $445 billion in the McCain plan would be spent for meaningful tax cuts and other benefits to individuals, and these things would happen in the first year.

The remainder of the $445 billion would be spent on building and repairing roads and bridges ($65 billion), improve, repair and modernize Defense Department facilities, and order and/or repair equipment, vehicles, material and ammunition for combat troops ($17 billion). It also includes $4.1 billion for public transportation systems, airport improvements and other infrastructure projects.

Republican Plans Never Had A Chance, Of Course

As noted above, I liked the McCain plan a lot and it would get the stimulus money spent much faster than any of the other rescue plans propose to do. Yet at the heart of McCain’s plan was lowering key tax rates, including payroll taxes, which the Democrats thoroughly oppose. The $15,000 tax credit for home purchases, which House Democrats also opposed, would immediately boost home sales, which is the epicenter of this economic crisis.

Even the considerably larger Martinez plan discussed above is preferable to either the House or Senate plans which spend less on tax cuts and more on spending programs (on a percentage basis) than the Martinez plan. But neither the McCain plan nor the Martinez plan were even considered.

The Democrats in Congress shunned these plans and gave President Obama what he wanted - the largest spending bill in history with well under half the money going to tax cuts and most going to new and existing federal spending programs. In the end, Congress was all too happy to oblige.

With Democrats holding sizable majorities in the House and Senate, the Republicans had no chance of defeating Obama’s trillion dollar so-called “stimulus” package, even though 11 House Democrats voted against their own plan.

Problems With Obama’s Trillion Dollar “Stimulus”

As should be obvious from the discussion above, I have lots of problems with the giant spending plans passed by the House and likely later today by the Senate. First, they are too big in my opinion. Both of the bills allocate well over half of the money to mostly wasteful spending programs that Democrats have wanted for years. Second, the money will be spent over the next 3-4 years; if it was really a true stimulus package, at least half of the money should be spent over the next year.

The next area of concern is whether or not these new spending levels will become permanent. As an example, let’s say that the Department of Education gets $100 billion in additional money on top of their already oversized budget. Is the $100 billion a one-time infusion, or will it become a permanent part of their “baseline” budget each year? We don’t know, but certainly some Democrats will try to make them permanent.

Another area of serious concern is that the final stimulus bill will become a vehicle for new protectionism policies. The House added “Buy American” protectionism provisions for iron, steel and textiles to its stimulus bill. The Senate stimulus package also includes similar Buy American provisions, but the details are not yet clear.

Almost immediately, criticism was heard loud and clear from all of our major trading partners. The United States has made deals under NAFTA and the WTO to give trading partners such as Canada, Mexico, Japan and the European Union access to our huge “government procurement market.” In exchange, we have received similar commitments from those countries. Hopefully, the final stimulus package will water down or eliminate the Buy American requirements so as not to damage trade relations.

Here is what the Wall Street Journal had to say about the “Buy American” issue:

“On Tuesday the Senate Appropriations Committee added ‘manufactured goods’ to the list of items that must be American-made in order to qualify for stimulus dollars under the American Recovery and Reinvestment Act. Congress is signaling to the rest of the world that U.S. protectionists are in charge. Forcing U.S. contractors to buy domestic goods instead of shopping for the best price available world-wide means that taxpayers risk overpaying for their roads and bridges. And that means capital will be misallocated, fewer projects will be built and the bill will go ever-higher.

There is also the little matter of retaliation by our trading partners. The European steel industry has said that it will urge the EU to challenge the [‘Buy American’] provision at the World Trade Organization. That's the high road. Another course would be for other countries to lock American companies out of the bidding on their projects. China's stimulus is estimated at $600 billion. Caterpillar Tractor says that it has a ‘major initiative to compete in infrastructure projects around the world -- particularly in China -- and this would seriously undermine it’ Congress must want more Caterpillar layoffs.

Increased protectionism didn't stimulate the American economy in 1930 and it won't now. In the post-bubble environment, Americans are likely to save more and countries like China are probably going to have to spend more. Washington should ask whether it wants to close down export markets just when those markets are offering the U.S. economy its best opportunity for recovery. One more thing: Is President Obama going to exert any restraint in this stimulus bill on the worst instincts of Congress?”

The Obama administration thus far seems unconcerned about the danger these measures pose. The protectionism provisions insisted on by the Democrats could undo whatever measured job creation the stimulus plan achieves by provoking US trading partners to reduce purchases of American-made goods. We need to keep a close watch on this.

This protectionist language also begs the question: “Where’s Bernanke?” In 2006 and 2007, the financial media was full of articles about how Fed Chairman Ben Bernanke warned against protectionist policies, saying in a 2007 speech, “In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers.”

Thus, you would think that Chairman Bernanke would be issuing similar warnings now as the protectionist-laden Obama stimulus plan rolls through Congress. Yet, I cannot find any reference of recent comments by Bernanke on this detrimental part of the stimulus plan. It has been reported that the Senate amended the stimulus bill to soften the “Buy American” provisions, so perhaps Bernanke has been exerting his influence behind the scenes to help us avoid repeating mistakes of the past.

Final Stimulus Bill Will Be Higher Than $838 Billion

Early last week, the Senate stimulus bill was actually above $900 billion. RINO Senators Collins, Snowe and Spechter refused to sign on unless the size of the bill was reduced. So Senate Democrats actually reduced the price tag by more than $80 billion, bringing it down to the $838 billion number, at which point the RINOS agreed to vote for it last Friday night.

It is important to note that of the apprx. $100 billion taken out, $40 billion was money directed to go to the state and local governments. One of President Obama’s top economic advisors said on Sunday that the administration would press hard to get that $40 billion back in the stimulus bill when it goes to the Conference Committee later this week.

Lawrence Summers, Obama’s chairman of the White House National Economic Council warned that without the infusion of federal money to state and local governments, the country could face “a vicious cycle of layoffs, falling home values, lower property taxes, more layoffs.” So it is clearly possible, even likely, that the final stimulus bill will be higher than the $838 billion passed by the Senate.

Frustrated Obama Says Spending IS Stimulus

Clearly frustrated, President Obama ditched his teleprompter in a nationally broadcast speech before House Democrats last Thursday night to bash Republicans for opposing his giant stimulus package. In what was the most pointedly partisan speech of his young presidency, Obama rejected Republican arguments that the massive spending in the $819 billion House stimulus bill should be replaced by a new round of massive tax cuts.

At one point, Obama not only chided Republicans for opposing the stimulus, but also for getting us into this economic and financial crisis in the first place. The President also defended the enormous spending in the stimulus package, saying at one point:

“What do you think a stimulus is? It’s spending – that’s the whole point! Seriously.”

Millions of Americans watched this speech last Thursday night. Based on the media reactions, many people were very surprised by the President’s remark above. But if you’ve been reading this E-Letter for long, you should not have been surprised.

50% of Americans May Pay Zero Income Taxes

It is currently estimated that apprx. 40% of Americans pay no income taxes. With the tax cuts, tax credits and tax rebates that will result from the massive stimulus package, millions more Americans will pay no income taxes going forward. Even worse, millions of Americans that pay no income tax will get another round of checks from the Treasury. Numerous articles I have read estimate that once the stimulus bill becomes law, 50%-52% of all Americans will pay no income tax at all.

This can only mean that the 50%-48% of us who do pay income taxes will be paying more, especially those with higher incomes. Obama has said repeatedly that he will only raise income taxes on those making $250,000 or more. But with half or more of the population paying no income taxes, Obama will be forced to tax the wealthy at European rates of 60-70% or more, or he will have to raise taxes on those making less than $250,000 – or both.

Along this line, I fully expect Congress to go after the Bush tax cuts very soon. I predict that Congress will roll back the Bush tax cuts as of the end of 2009 rather than waiting until the end of 2010 when they are set to “sunset” automatically. I also expect President Obama to go along. I have often written about how America’s income tax burden is increasingly falling on those who make the most money and create the most jobs. Apparently, President Obama and the Democrats want them to foot the whole bill.

Treasury Secretary Announces $2-$3 Trillion To Rescue Credit Markets

Earlier today, Treasury Secretary Tim Geithner announced a massive new government effort to unfreeze the credit markets, purchase troubled assets from financial institutions, make loans available to small businesses, etc., etc. Secretary Geithner indicated that the government will spend up to $2 trillion to support these vast rescue efforts.

Geithner also indicated that the government would undertake serious measures to stimulate private investment in the troubled assets it will be buying from financial institutions, but he made it clear that the government will act swiftly in the meantime.

Secretary Geithner also indicated that the government is in the process of organizing another massive project to directly stimulate the housing market. He said the details of this housing revival effort will be announced soon and did not put a number on the amount of money they plan to spend on this project, but the assumption is it will be at least $1 trillion.

I wrote about the likelihood of this massive financial rescue effort last week, so you should not be surprised. Nevertheless, the prospect of the government spending another $3 trillion, in addition to the $1 trillion stimulus package passed by the Congress is simply staggering!

I will have more to say about this latest development as the details are made available. In the meantime, the stock markets are selling off hard following Geithner’s much-anticipated speech. We can only hope that today’s Treasury announcement and the passage of the Senate stimulus package don’t send stocks into a new downward leg in the bear market.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Buy American, Buy Depression (very good)
http://www.realclearmarkets.com/articles/2009/02/buy_american_buy_depression.html

Pelosi’s Indefensible Bill
http://online.wsj.com/article/SB123422399517965573.html

Detailed analysis of the “Buy American” protectionist threat
http://www.realclearmarkets.com/articles/Buy%2520American%2520_%2520Feb%25202009.pdf