Defenestrating Thoughts from the Bivouac

After writing yesterday’s criticism of Obama’s “American Recovery and Reinvestment Plan”, I came across some news that makes it even clearer that Obama’s plan stinks:

President-elect Barack Obama said his two-year plan to boost the U.S. economy will generate as many as 4 million jobs, higher than his previous estimates, the biggest portion of them in construction, manufacturing and retail (source).

So the plan went from creating 3 million jobs to creating 4 million jobs without increasing the cost. I see two possible explanations:

• The plan has a lot of waste and fat in it, so it’s trivial to make a small change that creates 33% more jobs.
• Obama has no idea what he is doing and making it up: “Um, yeah, it will cost, um, $800 billion, and make, um, 4 million jobs. Um, yeah, that’s what the plan is.”

So he’s either just another politician who loves waste and pork or he has no idea what he’s doing.

Obama thinks he can create something out of nothing. If his plan can really magically create 4 million jobs, why not spend 4 times that amount and create 16 million jobs?

Again, we are faced with the reality that government cannot “create” anything. All it can do is forcibly re-allocate capital, which is usually a malinvestment.

Now getting to the guts of it, Ticker Guy astutely points out that the foundation of Obama’s plan is completely wrong:

We considered multipliers for the case where the federal funds rate remains constant, rather than the usual case where the Federal Reserve raises the funds rate in response to fiscal expansion, on the grounds that the funds rate is likely to be at or near its lower bound of zero for the foreseeable future. (Source: Appendix 1 of the American Recovery and Reinvestment Plan)

In plain English, Obama thinks the Fed can keep rates at 0% for years and people will still buy US bonds, which in turn, will allow Obama to run record deficits.

Who’s going to be continually buying 0% bonds? Especially if the economy is recovering as Obama claims it will.

In the steady state, it’s an invalid assumption that people will buy 0% treasuries for years.

Now, if we assume Obama’s plan starts to work, money will flow out of Treasuries and into the recovering economy, which will necessitate increasing rates.

In summary, the stated goal of Obama’s plan invalidates the base assumption. Therefore, there is no way it could work as claimed!

In fact, here’s what Obama’s advisors say:

We confess to considerable uncertainty about our choice of multipliers for this element of the package. (Source: Appendix 1 of the American Recovery and Reinvestment Plan)

Would you spend $800 billion if you had “considerable uncertainity” on whether the plan would work?

Apparently Obama would.