Tuesday, February 17, 2009

Stimulus Plan Part I: What Would Sears Do?

“We have a once in a generation chance to act boldly, turn adversity into opportunity, and use this crisis as a chance to transform our economy for the 21st century”
—Barack Obama

We have written on these virtual pages, and in a chapter titled “What Would Warren Do?” in “Pilgrimage to Warren Buffett’s Omaha,” about the fact that most of the questions asked by shareholders at Berkshire Hathaway’s famous shareholder meeting—the “Woodstock for Capitalists” of which Buffett himself is exceedingly proud—have nothing to do with Berkshire itself, or any of its “76 or so wonderful darn businesses,” as Buffett likes to describe them.

Instead, shareholders ask questions about Buffett himself: how he invests, what books he reads, even—we are not making this up—what he eats.

“What should I do with the rest of my life?” a young student from Germany earnestly asked at the May 2008 meeting, to the considerable discomfiture of those of us in attendance who, at that same age, weren’t thinking much beyond breakfast.

Consequently, individuals expecting to come away from the Berkshire meeting with a full understanding of what the future holds for that company (both in the short run and in the longer run, after Buffett himself is no longer on the scene) might be sorely disappointed if not for the fact that listening to Buffett discuss how he invests, what books he reads, and, yes, what he eats—not to mention hearing Berkshire Vice-Chairman Charlie Munger offer pithy and, for the most part, politically incorrect commentary on the world at large—is well worth the trip to Omaha.

Now, Buffett’s profile has been elevated far beyond that small stage in the Omaha Qwest Center to a world political stage in recent years. He has been advising both Hillary Clinton and President Obama on economic matters for some time, and was part of the economic advisory team trotted out for the cameras shortly after the election.

One might have hoped, therefore, that a kind of “What Would Warren Do?” sense of long-term thinking and sound fiscal management would have informed the stimulus package now on its way through Congress—particularly given President Obama’s above-quoted determination to “act boldly” in the face of the current economic crisis.

It did not.

So mediocre, so full of more-of-the-same is the $787 billion package passed by the House that it appears Congress has attacked the economic crisis by asking itself not “What Would Warren Do?” but, more like, “What Would Sears Do?”

Just take a gander at the three largest components of the $787 billion spending bill from two points of view: “boldness” and stimulus.

First, about $300 billion goes for existing programs and existing infrastructure: $87 billion for state Medicaid programs; $54 billion to subsidize state budget deficits; $40 billion to extend unemployment benefits; $27 billion for highways and bridges; $26 billion to schools for special education; $20 billion to increase food-stamp benefits; $21 billion for laid-off workers’ health insurance; and a $17 billion increase in Pell Grants.

There is also—our personal favorite—$5 billion in aid to states to do whatever they want with.

Worthy as that $300 billion may be, and we express no opinion on the merits of any of these particular programs, not one dollar of this $300 billion is even remotely transformational, nor is it “acting boldly.” Nor does it stimulate much.

It is more like $300 billion worth of running-in-place.

A second $200 billion of the $787 billion House bill is comprised of various tax cuts: $115 billion in $400-per-worker tax credits; $70 billion to taxpayers hurt by the alternative minimum tax; $14 billion in one-time payments to the elderly and poor.

Transformational? Hardly. Stimulative? Well, without, again, reflecting on their merits, we point out that Congress granted tax rebates last year in excess of the $115 billion in this bill, and consumer spending stabilized for a month or two, but that’s about all it was good for.

Now, given that these first two slugs of the $787 billion—which add up to $500 billion—do little more than keep things where they are, the third slug is, therefore, where you might expect to see some “bold” thinking.

You’d be wrong.

A measly $8 billion for mass transit, but $10 billion to construct NIH buildings.

A rounding error's worth of $1.3 billion for Amtrak, which needs more like $130 billion and some real management if America is ever to move off highways.

Then there's $7 billion for broadband Internet to rural areas, which Google could probably figure out how to do for $70 million.

Oh, and Congress wants $1 billion for airport screening equipment: apparently we need more of those GE “puffers” that sit unused at West Palm Beach airport because, as one screener told us, the only time these explosive-dust-sensing devices actually sound an alarm is when they malfunction.

Then there's $3 billion to defray new car taxes, and $5 billion in accelerated depreciation for business. And a whole lot of pork.

Indeed, anybody looking for “boldness” in a stimulus plan ought to look not at our Congress, but at China’s, whose $587 billion stimulus plan allocates a full 15% of its funds, or $88 billion, to adding 5,150 kilometers of new track and five high-speed passenger lines, in one year.

China can do this because, among other things, that country implemented a long-term rail plan four years ago, when our Republicans and Democrats were too busy conjuring up tax breaks to encourage ethanol production—as a sop to the farm lobby, the oil lobby, the highway lobby, and every other lobby that helped write this $787 billion “stimulus” bill—to bother with long-term thinking about anything so mundane as breaking America's addiction to fossil fuels.

Nancy Pelosi, as much a part of the problem as any of ‘em, had perhaps the most archetypically banal comment on the whole thing:

“By investing in new jobs, in science and innovation, in energy, in education ... we are investing in the American people, which is the best guarantee of the success of our nation.”

By our calculations, less than one-twentieth of the $787 billion House “stimulus” package relates to anything like science and innovation and energy and education outside the public-school-monopoly this bill enforces.

Mainly it goes to existing institutions, doing their mediocre, Sears-like thing.

Almost nothing goes for truly “bold” initiatives of the type China is pursuing, and our President insisted needed to be done:

“We have a once in a generation chance to act boldly, turn adversity into opportunity, and use this crisis as a chance to transform our economy for the 21st century”
—Barack Obama

We agree with that sentiment. But Congress didn’t do anything even close.

Worse, it looks like the former Senator from Illinois is going along with his erstwhile colleagues for the ride.

In Part II, we will look at how the so-called stimulus money will actually get spent. (Hint: badly.)

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Anonymous said...

Jeff, Washington is like Citigroup on steroids. It's simply too large, its culture is too backwards, its incentives are permanently disaligned with voters', and worst of all, it's all irreversible. You have to realize that this atrocious stimulus bill is the only thing they were capable of producing, the structure of government wouldn't allow anything else. Adn yes, it's really, really depressing.

Ben said...

Very well put. Quite discouraging that Obama has shown no leadership whatsoever, has put a bunch of hasbin Clinton cronies in as his advisors and cabinent members, and has just gone along for the ride with his left-wing nut buddies in Congress. It seems that our system, or at least the leaders who run our current system, are completely corrupted.

Anonymous said...

The tragic thing is that more of the American people didn't see Obama for what he is---just another politician and one who grew out of the odious Chicago machine. All of the "transformational" and "hope and change" rhetoric was just that---mere rhetoric, useful only to get elected and dumped as soon as the votes were in. Now that Obama has to actually do something, rather than just make speeches, it seems that some are starting to see that the emperor might have no clothes.

Anonymous said...

The bill truly is a missed opportunity.

On the upside, it will effectively reduce government entanglement in financial institutions. The onerous restrictions on executive pay, coupled with removal of the requirement that banks replace refunded TARP capital with third-party capital, pretty much ensures that the Wall Street firms that can will give back the tainted money and go back to being non-governmental enterprises.

Surely not what was intended, but it will be a good outcome none the less.

Kieran said...

This is the best analysis of the stimulus I've read. Sadly, it seems that we're putting all of our financial resources into propping up what was this country (failed banks, failed auto industries) rather than allocating our resources toward what this country could be.

Anonymous said...

So, after Congress and the Administration screw this up royally, will Eddie L. try a take-over?

Seriously, you raise very, very good points. Scary stuff.

Hayseed said...

united states of america, sic transit gloria. this bill has now placed us in the perfect storm of the century. this was nothing less than the hijacking of the american economy by some left wing loons who want nothing more than the usa becomes socialist and/or destroyed. not only will it do nothing transformational (we are really trying to get overlevered americans, to borrow more to buy more???), it has now saddled us with a debt that can only be 1) printed away, or 2) paid for by future tax revenue. now the economy will recover, as it always has, yet this time may take 10+ years, but BECAUSE of the bill it will take 10 yrs. if we would let the markets act in their darwinian way,, we may be out of the woods in a year or two. not now, we are OFFICIALLY SCREWED. the consumer is now secularly changing his modis operandi: he is scared for his livelihood, his country and his family, and is now a saver, a MAJOR saver. this is good in the long run, but will probably take $1 trillion, yes trillion, out of the economy EVERY YEAR, assuming he cuts spending by just 10%! we are slouching toward socialism and obama may in fact end up being the second lincoln... the only thing growing quickly in texas is the secession movement.

Anonymous said...

Amen Jeff. Simply could not believe the amount of non-stimulating items in the bill. You didn't comment however on the fact that the majority of the spending won't even occur until 2010-2012 (with some notable ramp ups in 2011/2012 heading into the next election cycle. Frightening stuff.

Anonymous said...

Jeff, I am shorting BRK today. Add me to the 2765 shares short list. I believe Buffett blowing up will be the story of the year. After it's all over, I'll say hello in Starbucks and let you know who I am. I'll buy. Love your blog.

Anonymous said...


Oh please, give the left wing conspiracy stuff a rest. I agree with you that we should let free markets determine the winners and losers, but the left doesn't want to destroy America any more than the right does.

Your silly arguments amounts to nothing more than name calling and is about as useful as the politicians on Capitol Hill grilling the bank CEOs.

Anonymous said...

Great post. I think it is funny that our leaders in Washington (Obama included) all think that the bigger the bailout package is, the better it will be received - when in fact, those in the know are looking for the opposite. The politicians seem to get some sick satisfaction / perverse joy in their belief that the government is needed to save all of these people - so they like to inflate the numbers and exaggerate their importance. A true recovery is a long way away...

Anonymous said...

Jeff: I know what Eddie Lampert at Sears would do with part of the stimulus plan. He'd force every working American taxpayer to spend $800 this year on "blue light specials" at both K-Mart and Sears. Now there's a stimulus plan Americans could really get "fired up" about (not)!

progressive pete said...

Jeff, you say

"It is more like $300 billion worth of running-in-place."

When the ground is slipping out from under your feet, running in place is a positive thing.

Anonymous said...

Jeff, I was in an actual Sear store yesterday to look at a 10" band saw I saw online at Sears.com for $159. In the store it was $199. I went home to order it with in store pick-up but the website told me the store was out of stock,even though I had just been there staring right at one. Turned out not to matter though because they offered free shipping on any tool over $125.

I think your comparison of the Stimulus with Sears is very apt, and if you add a half dozen zeros to my example above and switch the words "10 inch band saw" with something like "Clean Coal" and you'll get the same sort of result.

Mike said...

As a former Naval Officer who entered the investment management world several years ago following business school, I know that in a war we would place our most capable military leaders in charge - those who had spent their entire lives training and studying for every imaginable scenario from low level regional peacekeeping to global conflicts. We do this because to do otherwise would put our nation at risk, and result in avoidable deaths on the battlefield. This philosophy squares with tested business theory - knowledge of risks, experience, and planning for the unimaginable are the foundations for having the capability to execute quickly. This is why, when we are now being faced with an economic blitzkreig, I have lost confidence in the Washington structure to react effectively. While I would not advocate a military style rule of the country, I'm dismayed that there is no requirement for any elected leader to know anything about economics or finance, only to gain the votes of the electorate. There is also no requirement for any of their plans or decisions to be reviewed by anyone with truly relevant knowledge. It would also seem that the contingency planning (imagining the "unimaginable") desperately needed was almost non-existent in this case. The "stimulus" seems to have been put together like a bunch of 19 year old freshman students cramming for final exams after partying their way through the rest of the school year! Is this really the way in which we safeguard our economic safety? Do Americans realize the power they give to these people when they elect them?