• Jeff Matthews

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.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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