By Chriss Street

The Great Recession was primarily caused by the collapse in economic demand as 70 million baby boomers born between 1946 and 1964 moved out of their peak spending years in their mid-30s to mid-50s and into retirement in their late 50s and early 60s.  The U.S. government over the last five years squandered $7.6 trillion on Keynesian demand-side stimulus programs, trying to resuscitate this demographically shrinking demand.

With only 23 million born between 1995 and 2012 in Generation Z, this population is just too small for demand-side stimulus to revive the economy.  America is now deep in debt, facing 23 million unemployed, and needs to fund the baby boomer’s retirement.  Consequently, politicians are being forced to abandon demand-side stimulae and re-embrace supply-side economics.

The Revolutionary War was sparked by Great Britain’s demand that the American Colonies pay increasingly higher taxes to support England’s expanding national debt.  Once independent, the new U.S. Constitution’s Commerce Clause established a free-trade zone among the states and passed the Sinking Fund Act of 1795 to require a significant amount of tax revenue be set aside each year to quickly pay off any outstanding national debt.  These policies created an economic boom that allowed the United States to be debt-free by the 1830s.

This concept of encouraging long-term economic growth by lowering taxes on income and reducing regulatory burdens that serve as barriers for people to produce goods and services is referred to as “supply-side economics.”  The Founding Fathers understood that a greater supply of goods and services produced increases demand by lowering prices for consumers.

But during the Great Depression, Washington politicians abandoned supply-side and imported Keynesian “demand-side” economics from Great Britain.  Demand-side economics argues that, in the “short-run,” productive activity is influenced by aggregate demand (total spending in the economy) and that aggregate demand may not always equal aggregate supply (the total productive capacity of the economy), because private-sector decisions often lead to “inefficient market outcomes.” Therefore, government should create demand through targeted spending.  Armed with this smoke screen, U.S. short-term spending has risen every year since 1948, as politicians always found some inadequate market demand that needed more spending.

California revival

California’s own President Ronald Reagan revived supply-side economics in the 1980s with Reaganomics.  The policy ended the oil windfall profits tax to stimulate oil production, passed the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986 to cut taxes and eliminate deductions, and instituted a payroll tax to begin a “sinking fund” to reduce the accumulated liability of Social Security and Medicare.  Although Reagan was never able to reduce total spending, he did start a huge economic boom that lasted until 2001 and led to huge United States Treasury surpluses in the late 1990s.

Most Americans do not realize that Reagan’s biggest ally for his supply-side encouragement of economic growth was the demographics of the baby-boomers.  Studies demonstrate that 50 percent of all durable (cars and houses) and non-durable (food and clothing) expenditures are directly related to household demographics.  Spending tends to peak as families grow and people reach their mid-30s to mid-50s.  Then spending declines rapidly after the mid-50s.

When Reagan began Reaganomics in August 1981, the first baby-boomers born in 1946 were just turning 35 years old.  By the time those first baby-boomers hit 55 in 2001, the NASDAQ over-the-counter index of growth stocks had risen from 190 to more than 5000, a jump of 2,600 percent.  As the boomers hit 55 and begin to retire through 2019, only 30 percent as many Generation Z members will replace them in the work force.

Politicians love demand-side economics because they get to look busy spending lots of money creating “demand” for their crony capitalist friends.  On the other hand, a part-time Congress could manage a supply-side economic policy, because the policy is set once to encourage long-term economic growth.

But as we have been observing, the United States government will go bankrupt long before politicians can “create” enough demand to replace the shrinking consumption spending as the baby-boomers continue to rapidly retire.  Having tripled the national debt since 2001 and recently suffering a credit downgrade, Congress has no other viable option than supporting a return to supply-side economics to encourage growth.

I expect Congress to soon update President Reagan’s playbook for supply-side growth.  The United States has the world’s largest oil and gas reserves and last year those proven reserves rose by the highest amounts ever recorded.  Much of the un-tapped oil is on federal land and Congress will begin deregulating the energy market to capture huge royalty payments on higher energy production.

Congress will also deregulate the utility industry.  This will encourage up to $6 trillion in private-sector capital spending for new pipelines and refineries across the nation to connect and distribute new production.  Corporate taxes and crony tax deductions will be slashed and individual taxes and deductions will be reduced.

America is on the verge of a huge economic expansion.  Enjoy the ride!

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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

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.