How the Stimulus Works

Despite what you are most likely reading in the press, the folks getting bailout money are pretty sharp. They’re very good at gaming the system.

More about that in a minute. First, the Dow went nowhere yesterday. Gold fell $14 to $939. And Newsweek magazine announced, "The Recession is Over." Newsweek hedged its bets; adding that the recovery won’t be a piece of cake.

Elsewhere in the news is word that the housing bust is over. The papers are reporting the first gain in housing prices in three years — based on the latest Case-Shiller numbers. Hallelujah…right?

Hold on. There’s too much statistical noise in the monthly figures. They just don’t mean anything. A better measure is the annual trend. The Federal Housing Finance Agency says its index for May registered the smallest drop in 10 months…but is still headed down. (More on why it is destined to continue going down…later in the week.)

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Back to the stimulus and how it works…

An article in yesterday’s International Herald Tribune tells the story of one area in Tennessee that has gotten stimulus money.

"The cash that salvaged a county," says the headline. Perry County, southwest of Nashville, must be one of those places you don’t want to stop when you’re driving across the country. With 25% unemployment and no significant industry, it sounds dreadful — at least from an economic point of view. It might be a nice place to live — if you don’t have to work for a living.

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So the county honchos figured the county needed a little stimulus. They managed to lay their hands on cash being passed out by the feds. It doesn’t seem to bother anyone that the money belongs to someone else. Nor does the fact that it is now being frittered away in a bunch of make-work projects that nobody wanted to pay for even when they had some money. Nor that the stimulus-assisted businesses of Perry County now have an unfair advantage over their honest competitors in other parts of the state.

The Armstrong Pie Company, for example, used taxpayers’ money to expand: "New workers [hired with stimulus money] have helped the company triple its pie production and expand its reach through central Tennessee."

A quick question: what happened to the pie companies that lost market share to Armstrong? And another: how is the economy any better off by stimulating one pie company to make more pies at the expense of other pie companies? And a final one: even if total pie consumption goes up — a larger pie! — where’s the benefit?

The whole thing is a scam!

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007).

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