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Economic Stimulus Plan Lacks Backbone

Economics / Economic Stimulus Mar 06, 2009 - 03:20 PM GMT

By: Jennifer_Barry

Economics Best Financial Markets Analysis ArticleInfrastructure falls below most investors' radar, but it's a globally important theme. Developing nations have to replace crumbling structures built by former colonial rulers, as well as construct new pipelines and mass transit to serve their exploding populations. In nations like China, millions have moved from rural to urban areas, requiring a huge expansion of infrastructure. Even with the economic crisis, the middle class is a powerful force in developing nations. Newly prosperous citizens want more than just basic sanitation and transportation, however. They desire First World quality infrastructure, and they can increasingly afford to pay for it.

This investment theme is not limited to poor nations. Eastern Europe is modernizing its infrastructure to compensate for undercapitalization under the Soviet regime. Canada's water mains have started to fail, causing urban sinkholes. The UK suffers from crumbling roads and sidewalks. The United States may be the most neglected of all the rich countries, as the American Society of Civil Engineers (ASCE) gives U.S. infrastructure a “D” in it's latest report. To upgrade the United States to an adequate, or “B” grade would cost an estimated US$2.2 trillion.

When the economic stimulus bill was originally proposed by the Obama Administration, it was advertised as a large investment in infrastructure, with comparisons to the Roosevelt-era Works Progress Administration. There was a great deal of rhetoric about “green jobs” and investing in America. I was hopeful President Obama's plan would substantially address the problems caused by decades of neglect.

Unfortunately, the reality is very different. President Obama harangued the Congress, pressuring them to pass the hefty 1,073 page bill the legislators only had a few hours to read. Any objections were derided as minor quibbles, and the vote was decided by the majority of Democrats outvoting the Republican opposition.

The new package totals US$787.2 billion at last count, with the final bill projected to cost over $1.1 trillion after compounding interest. As one would expect from a hastily constructed law, it's full of nods to special interests. Although some of the “pork” was removed at the last minute, it still includes everything from education bonus grants, to coupons for TV converter boxes, to research on carbon storage. It's unclear to me how these items will help fix the U.S. economy.

In my scan of the contents of the American Recovery and Reinvestment Act (ARRA), I found about $93 billion in infrastructure spending. Even with my generous definition of infrastructure, including categories like broadband rollout, hazardous waste cleanup and national park maintenance, it totals less than 12% of the entire law. It's sadly just a sliver of the actual need for public works projects identified by the ASCE. Such a small sum spread across the nation will probably just compensate for the last few years of deferred maintenance. Some analysts predict 30-50% cuts in infrastructure spending in fiscal 2010, as most states struggle under huge deficits.

The Democrats claim the law contains 36% tax cuts, but the bipartisan Congressional Budget Office (CBO) disputed that assertion on closer study. The CBO finds the number is closer to 20%, as many of the “tax cuts” are actually credits to be refunded to citizens who pay no taxes. While I am in favor of tax breaks in general, and think they are necessary in a sick economy, these credits are not much different than sending a stimulus check. When President Bush tried this gambit last year, its effects were short-lived.

Congress was pressured to pass the law quickly to address the economic crisis as soon as possible. Obama lauded the Act, stating that “a new wave of innovation, activity and construction will be unleashed all across America.” 1 The White House has optimistically asserted that funds will start flowing in a month or so. However, the CBO challenged this statement as well, predicting that only 23% of the money will be spent in fiscal year 2009, with a total of 74% appropriated in 18 months time. This is hardly the economic kick-start the American taxpayer was promised.

In order to force the rapid spending of funds, the ARRA requires states to have “shovel ready” development plans in place within 180 days. States that miss the deadline will not be eligible for transportation infrastructure grants under the stimulus. Unfortunately, this doesn't allow time for innovation or complex planning. The law will funnel money towards maintenance or worse, outdated or unneeded projects that are collecting dust on a shelf.

I fear few real jobs will be created by the stimulus, as a patched roadway doesn't translate into increased retail trade. Even those drawing a paycheck from infrastructure spending are largely pulled from the same pool of workers who are already in the sector. We no longer use shovels in public works projects, so these jobs require specialized skills. An unemployed real estate agent or even a carpenter is not qualified to repair a bridge.

Even worse, the CBO also projected in February that the new law will stimulate the economy in the next two years, but hurt the U.S. in the longer term more than doing nothing at all. The torrent of government money will displace private capital, causing a lower GDP over the next decade and depressed wages. Many of the tax cuts are temporary, and when they are rolled back, consumer spending will be newly impacted. Not surprisingly, negative repercussions of the stimulus haven't been widely reported in the media.

Shovel ready profits?

My study of the American Recovery and Reinvestment Act has uncovered some strong investment opportunities.

Despite the drubbing the infrastructure sector has taken, I still believe this area will be a big winner in the intermediate term. I expect a windfall from this law for one of the companies recommended to my subscribers.

If you are a U.S. taxpayer, the ARRA has just increased the slice of the national debt you're responsible for repaying. In fact, if Obama's 2010 US$3.552 trillion budget passes, your share will be $25,573.48. It's wise to get whatever benefits you can out of the new tax changes. The stimulus will probably not affect your return this year, as most items apply to the 2009 fiscal year. However, as the tax laws change so quickly, you should check if you are eligible for any credits like the first-time homebuyer credit before filing. You may want to consult with an accountant or other qualified advisor to plan your strategy for next year, so that you can take full advantage of the ARRA.

by Jennifer Barry
Global Asset Strategist

Copyright 2009 Jennifer Barry

Hello, I'm Jennifer Barry and I want to help you not only preserve your wealth, but add to your nest egg. How can I do this? I investigate the financial universe for undervalued assets you can invest in. Then I write about them in my monthly newsletter, Global Asset Strategist.

Disclaimer: Precious metals, commodity stocks, futures, and associated investments can be very volatile. Prices may rise and fall quickly and unpredictably. It may take months or years to see a significant profit. The owners and employees of Global Asset Strategist own some or all of the investments profiled in the newsletter, and will benefit from a price increase. We will disclose our ownership position when we recommend an asset and if we sell any investments previously recommended. We don't receive any compensation from companies for profiling any stock. Information published on this website and/or in the newsletter comes from sources thought to be reliable. This information may not be complete or correct. Global Asset Strategist does not employ licensed financial advisors, and does not give investment advice. Suggestions to buy or sell any asset listed are based on the opinions of Jennifer Barry only. Please conduct your own research before making any purchases, and don't spend more than you can afford. We recommend that you consult a trusted financial advisor who understands your individual situation before committing any capital.

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