How federal ‘stimulus’ didn’t help California’s economy

Sept. 13, 2012

By Wayne Lusvardi

How has the stimulus program of President Obama affected California? Have things gotten better?

We can see the answer for the whole state by looking in detail at how stimulus money was spent in Pasadena. City Finance Director Vic Erganian said the city borrowed money at lower than normal interest rates and the funds opened the door for projects and jobs the city otherwise could not support.

Now winding down, the federal stimulus program pumped $133 million into Pasadena in 10 separate bond issues under the American Recovery and Reinvestment Act.

The renovation of the 89-year old Rose Bowl consumed $114 million of the funding by Build America Bonds at a blended interest rate of 4.8 percent.  But the price tag for renovation has now run up to $162 million, leaving the city with a $39 million financing gap.  The Rose Bowl is a revenue generator for the local Old Town restaurant district in Pasadena, as well as for tourism and hotels.

The National Football League may consider “temporarily” locating a team in the Rose Bowl until a new stadium can be built elsewhere.  Speculation is that the Rose Bowl may well become the permanent stadium for whatever NFL team finds a home in the Los Angeles area.

And $7.4 million of stimulus money went to subsidize a 43-unit low-income senior housing project with a total cost of $17 million.  That reflects a whopping cost of $395,000 for each one-bedroom unit, or $296 per square foot of building area. The units now rent at $416 per unit per month. Market rates would be at least $1,200 a month, probably higher.

Other projects funded with stimulus funds include $4.3 million on roads; $2.8 million on employment and training programs; $2.25 million on energy efficient upgrades; $1 million on water and power infrastructure; and $908,000 to homeless housing programs.

Arguably, what the stimulus funded in Pasadena was just more luxury improvements to the Rose Bowl than could have been conventionally financed anyway, a windfall to a low-income housing developer for a financially dubious project, and a smattering of other projects that didn’t do much to generate the local economy on a permanent basis.

Why Stimulus Failed and Eroded Middle Class

Stock and bond traders and small businesspersons consulted by this writer who asked to remain anonymous said the stimulus didn’t work because “it never reached the domestic economy by becoming business loans.”

Banks have no logical reason to lend to small/medium sized businesses when they can make higher returns by reinvesting the money into Treasury bonds or any other investments.

A stock and bond investor explained it this way: “When the Federal Reserve Board lends at a 0 percent nominal interest rate (free money), it’s equal to about 4-5 percent of real return (nominal rate – real inflation = real return).

“Add to that the about a 1.5 percent yield currently offered by the 10-year bond and you end up with an about 5.5 percent to 6.5 percent real return depending on how you account for inflation.”

A small businessperson described how this affects his business: “You can do this without any risk. Why take the additional risk of lending to small business for the same interest rate yield that carries a considerable default rate, especially in the current economy?  Risk-free trading beats risky investments any day. Can’t blame the banks.  I would do exactly the same.  It’s just logical. Blame the policies.  The stimulus wasn’t a Keynesian intervention but a wealth transfer from the U.S. taxpayers.  Be that as it may, it will cause inflation and higher taxes because it was a public expenditure.”

Keynesianism is an economic theory that came about during the Great Depression by John M. Keynes advocating government money and financial policies to increase employment and spending during down cycles in the economy.

The Obama Administration’s low-interest rate monetary policy, combined with the repeal of the Glass Steagall Act in 1999 under President Bill Clinton, has had the intended effect of eroding the middle business class.  The repeal of the Glass Stegall Act permitted commercial banks and investment banks to merge. Thus, big commercial banks solely committed to financing small and mid-size businesses declined. Loan capital was diverted to big investment banks looking for the best return rates at the least risk.

Government gets what it provides incentives for and doesn’t get what it has created disincentives against. It is no surprise that big money is now diverted to government and big investment banks to the detriment of small and medium-sized businesses.

It has been the explicit policies of the Clinton, Bush and Obama administrations to provide less capital to the business middle class (“starve business, feed government and big banks”). This certainly is reflected in stimulus funding in Pasadena.  And it is reflected in new statistics that show a declining middle class. 

Pasadena’s renovation of the Rose Bowl won’t be completed until 2014.  So technically the use of $133 million in federal Build America Bonds positively affected only construction jobs and unions, not necessarily the private sector economy in Pasadena during the depression that began in 2007.  The Rose Bowl renovation contract contains a “hire local” provision but that will not do much to finance private sector business creation in the long run.

City Revenue Growth 6 Percent/Year During Recession

According to Erganian, “revenues at the city are growing but…we’re certainly not at pre-recession levels.”

Pasadena forecasts it will take in $216 million in general-fund revenues in the 2012-13 fiscal year. That is $96 million more than in 2003, before the Mortgage Bubble, when city general fund revenues were $120 million.

The growth of general-fund revenues reflects a compound rate of revenue growth of 6.1 percent per year from 2003 to 2012.

The rate of city revenue growth since before the depression in 2007 to 2012 is an identical 6.1 percent per year.

According to the Bureau of Labor Statistics Inflation Calculator, monetary inflation from 2003 to 2012 ran 2.3 percent per year.

The unemployment rate in Pasadena has gone from 6.7 percent in 2000 to 11.5 percent in 2012:

Pasadena Unemployment Rate, General Fund Revenues, and Stimulus Funding 2000 to 2012

2000 2006 2010 2012
Unemployment Rate 6.7% 8.0% 8.0% 11.5%
General Fund Revenues (in millions $) $120 $161 $157 $216
Stimulus Funding (in million $) $0 $0 Unk. $133

Government and public sector unions are apparently weathering the managed depression fine, despite rhetoric to the contrary.  But private enterprise has mostly been skipped over by big banks connected with financing big government business enterprises such as the renovation of the Rose Bowl.

Where did the money go?

Pasadena’s “stimulus” monies went into the hands of unions, local governments, and big investment banks for politically popular projects that had a small positive effect on the private economy.  And the Rose Bowl Renovation is advancing in 2014: six years after the sudden drop in employment and the shutdown in private lending due to the Mortgage Meltdown and Bank Crisis of 2008.

Pasadena’s Stimulus spending program is like one of those pretty floats in the Rose Parade on New Year’s Day that displays a bridge of flowers, but the float is going nowhere except to the end of the political parade.

Obama’s low interest rate monetary policy, coupled with the repeal of the Glass Steagall Act, has had ruinous consequences to small and mid-size businesses as investors have sought risk-free returns in alternative investments instead of in business and industry.

The federal stimulus was not a “bridge over troubled waters” for the private sector economy in Pasadena.  Now you know why many small and mid-size businesspersons say they are not better off after four years of federal stimulus programs and monetary policies of the Obama administration and high taxation and regulation in California.

 

5 comments

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  1. Queeg
    Queeg 13 September, 2012, 08:37

    Don’t you feel powerless???????

    Reply this comment
  2. Stanley K.
    Stanley K. 13 September, 2012, 10:40

    So now we’re going to do it again?? This morning I heard that Obama’s “Quantitative Easing #3” is coming and with it more destructive “stimulus?”

    This is a deliberate attempt to disable the engine, pull out all the connections, take a sledgehammer to it, throw acid on it, and then set fire to it. I’m sorry, but after you’ve done all that, do you really think that ANYONE is going to believe you when you say you were actually trying to fix the thing?

    Reply this comment
  3. queeg
    queeg 13 September, 2012, 10:56

    Only thing you should fear is fear itself; for we all can get along together; you have spirit, so do we!

    Reply this comment
  4. Dyspeptic
    Dyspeptic 13 September, 2012, 11:13

    “The stimulus wasn’t a Keynesian intervention but a wealth transfer from the U.S. taxpayers”

    This statement by the anonymous small business person is simply false. There is no contradiction between Keynesian countercyclical fiscal policy and wealth transfer. They usually go hand in hand. The assumption seems to be that if fiscal stimulus doesn’t trickle down to small businesses it isn’t Keynesian in nature. Not so. Keynes himself didn’t give a rat’s behind about small businesses. He concerned himself with what he believed to be good for government and society at large as measured by a few simplistic economic aggregate statistics like unemployment rates and GDP. His general attitude toward business was contemptuous and distrustful.

    Keynesian policies have been an abject failure since first implemented in the 1930’s and that failure continues to this day for reasons that are too complex to get into in these comments. Keynesian ideologues like Paul Krugman are so desperate to whitewash the policy failures of the 1930’s that they have resorted to the big lie that World War II was actually a gigantic Keynesian stimulus program! Maybe we should bomb Pasadena back to the stone age so that the Feds can rebuild it to stimulate the economy 🙁

    “The Glass Stegall Act permitted commercial banks and investment banks to merge.”

    This must be an inadvertent misstatement Wayne. As you know the purpose of The Banking Act of 1933 (Glass-Steagall) was to create a firewall between commercial and investment banking to enhance stability in the financial sector and help avoid a widespread banking collapse. To my mind this is just more evidence of the colossal failure of the Federal Reserve Act of 1913, which by itself was supposed to accomplish that along with preventing economic depressions. That’s worked out well hasn’t it!

    Sorry to nitpick your otherwise informative article but what can I say, I’m Dyspeptic.

    Reply this comment
  5. Wayne Lusvardi
    Wayne Lusvardi 13 September, 2012, 13:08

    Dyspeptic
    The sentence should read: “The REPEAL of the Glass Steagall act permitted commercial and investment banks to merge.”

    I believe that was in the original and I don’t know how that happened. I will ask the editor to do a fix.
    Thanks for calling this to our attention.
    WL

    — Note: This has been corrected in the text. — Editor

    Reply this comment

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