Yesterday I wrote about austerity versus deficits as the right approach to curing the world’s economic slump. I should note, as I did yesterday, that the slump affects the developed countries. In contrast the less developed countries, in general, are still growing well. I said that there is nothing in the key statistics to suggest that either approach has been more successful.
Today I will review the two major instances of huge deficit remedies taken by the US Federal Government to combat the “Great Recession,” the TARP program implemented by the Bush Administration and the “Stimulus” program of the Obama Administration.
I consider the TARP program to have been one of the most brilliant actions ever taken by the Federal Government. This bill was rammed through the Congress by the Bush administration in a matter of weeks. Then Treasury Securetary Paulson implemented it in an imaginative and creative way totally different from the intent stated in the bill. The results:
The “Great Financial Meltdown” was stopped in its tracks and our financial sector was restored to solvency, as measured by the famous “stress” test, in less than six months.
The TARP plan did not cost the US tax payer one thin dime. The funds were all borrowed at an average 1% interest and lent to financial institutions at up to 14% interest. All the loans have been repaid and the US Government has made big money on the deal.
In another imaginative action President Obama used the TARP funds to restore the US auto industry to a sound basis. Again, all the funds lent to the industry gained a profit for the Feds and Uncle Sam is still selling the shares he acquired in GM back at a profit.
The “Stimulus” plan took much effort to get it trough a Congress controlled by the same party as the president. It was billed as a kick start for the economy focused on the famous “shovel ready” projects. However, instead of investing the funds in construction and other investments, about 90% of the funds were spent as transfer payments, to extend unemployment compensation, to states to maintain public employees such as teachers and policemen, and to maintain public health insurance programs, Cobra and Medicare. The results were mixed.
The economy was stabilized. The spiral down was stopped and the economy leveled off at a modest 1-2% growth.
Growth in unemployment was stopped and held at 8%.
However, growth and unemployment have remained static for the last three years. They have become the “new normals” of 1.8% growth and 8% unemployment, in contrast to the “old normals” of an average 3% growth rate and 5% “full employment” rate.
And, unlike the TARP program that did not cost the tax payer a dime, the “Stimulus” plan comes out of the tax payer’s pocket.
In sum I would give the TARP program an A++ while the “Stimulus” plan would rate a C.
Tomorrow: US Deficits Versus Germany’s Austerity