Stimulus package breakdown.

Here's a detailed breakdown of the legislation signed by the President this morning.

American Recovery & Reinvestment Act of 2009

Source: Speaker of the House of Rpresentatives Office (2009)

Despite the tremendous amount of excellent commentary out there on the stimulus, I've received quite a lot of requests for my opinions on the stimulus package, recently passed congress and expected to shortly be approved by the President.

About 1/3 of the package includes tax cuts that are either continuations of existing "temporary fixes" or were heavily advocated by both parties in the recent election (e.g. AMT reindexing, R&D Tax Credit, etc). For all intensive purposes, the absence of these "cuts" would have been anti-stimulative, because they were already expected. What this means is that there are unlikely to be too many surprises come tax time for people receiving incentive stock options, who are dependent on special exemptions or whose income places them in AMT.

Another 1/3 is devoted to welfare (unemployment, health insurance focused, not any specific enhancements for TANF) programs and financial support for municipalities. It is likely only the beginning. Due to demographic factors and an unwillingness to make hard choices, most municipalities are in difficult situations where they will either be forced to cut services or increase taxes. While each state and city will have their own unique experience, there will be generally difficult choices for most governors and mayors. I expect to see future fiscal crises emerge, with the most extreme cases receiving federal assistance.

These funds aren't likely to have a substantial impact on this recession. The money will likely be spent after it's over. The basis for the argument that the stimulus package will generate activity ("create jobs") is that it will generate expectations which will stimulate investment and spending. Given the relatively small sums of money involved (it's a $14 trillion economy), it's hard to imagine the package having that much impact under any circumstances.

Thus, it is difficult to find much of significance from an investment standpoint regarding the current spending package.

In my opinion, what is of much greater significance, and requires a much more clear direction, is the US Treasury's strategy of restoring investor confidence in the financial sector.

As Bad as the 1958 Recession?: That works...

As we look back at the preliminary GDP reports from the 4th Quarter, it's easy to see that we're in a recession. It appears that in the last two quarters, there was negative economic growth. Growth in the 3rd quarter was somewhere around negative one percent and the economy contracted somewhere between 3 and 5% in the 4th. As the pattern of unemployment shows, we're looking at a particularly ugly environment with unemployment north of 7% and it's hard to imagine it getting much better for at least another quarter or so. Unadjusted for inflation, this is probably the worst since recession since the one in 1957 and 1958.

Unemployment 2006-2008

Source: Bureau of Labor Statistics

A google of "1958 Recession" gives you pretty little to go with, so I was inclined to start researching a period that is surprisingly little discussed and has been little discussed recently. Data collection was perfectly fine during the period (all of the major economic institutions from whom we get data today existed at the time) and most easily accessed data series goes back to the 20s, but there aren't many stock indexes that go back that far, so I suppose that it's not as interesting to most of my colleagues. So, after a series of frustrating discussions with people who worked on Wall Street through the 1957-1958 period, but who seemed to regard the period as unremarkable, I began to review some of the literature.

The similarities between that and the current recession are downright remarkable. Like ours, the 1957-1958 recession was truly global. The downturn was experienced virtually everywhere and was hardest felt in emerging economies, like today. It appears to have largely originated a rapid retrenchment of the consumer in response to higher levels of household indebtedness, which led to a dramatic drop in the real estate markets - and which spread to other sectors.

1957: Tough Year

As one reviews the 50s, one of its most striking characteristics of the era was it's economic volatility. Despite its' reputation for "swellness", the 1950s were actually dominated by choppy economic growth and what would (at least by today's standards) be considered periods of uneven growth and unemployment. Why it's remembered so fondly is probably relative. To a population, most of whom could remember the Great Depression, regular 1-3% shifts in employment were probably a bit more palatable than they would be to those of us living through two decades of moderation.

By '57, the country's postwar energy and consumer expansion was effectively spent. A certain amount of over-investment was to be expected in the 13 years following World War II. Americans had built the first wave of Levittowns and the cars to get there. Suburban sprawl was producing tremendous negative effects, necessitating new environmental regulations and reducing demand for new real estate. (Various indignities like the elimination of backyard incinerators were weighing heavily on the national psyche by forcing Los Angelinos to actually pay to dispose of garbage.) The geniuses at Ford had released their new flagship vehicle for their 1958 line; the Edsel. Auto sales declined 31% and unemployment in Detroit reached a whopping 20% in 1957.

On October 14th 1957, American technological leadership came in to question, and it's foreign policy policy position was dramatically reduced by the Soviet launch of Sputnik. The device was more than a beeping steel ball - it was a message to the world - the United States is no longer the sole superpower. By the end of the year, housing was in full collapse, the economy contracted at a 4.2% rate in the 4th quarter and a staggering 10.4% in the first three months of 1958. (It's important to note that the most recent decline was a reported 3.8%)

Obviously, this was viewed with a great deal of alarm by virtually everyone - particularly a population and congress whom could remember the stock market crash and the Great Depression.


The political pressures were no different than today. As a Time magazine article written at the end of 1958 observed:

The immediate reaction of many politicians and businessmen was to call for the classic remedies. They cried for tax cuts, a mammoth government make-work program, many more billions for old-age pensions and unemployment aid.

But unlike the previous and current administration, the response by the President Eisenhower and then Chairman William McChesney Martin was pretty much cold-hearted, refusing to engage in any kind of fiscal stimulus. Eisenhower presented a fairly modest (a slight deficit) budget in 1957 and even instructed Treasury Secretary Humphrey to make a statement about the importance of balanced budget at the press conference for it. Despite the top income tax bracket being 91% (vs. 35% today), neither Senate Majority Leader Lyndon Johnson or Ike considered tax cuts.

Again Time:

All year long the Eisenhower Administration staunchly resisted temptations to buy its way out of recession, although it speeded (sic) up and enlarged present housing and social security programs as antirecession measures. It gave the economy's carefully built-in stabilizers a chance to work and relied on the nation's own basic good health to recover from the slump.

The view expressed at the time was that recession was a part of the natural order. Martin actually had the cajones to observe to journalists;

During a boom, waste and inefficiency creep in naturally. It's hard not to believe that recession does a lot of business a lot of good.

It's difficult to imagine any major politician expressing that view today without being thrown in the same pit as former Senator Phill "Nation of Whiners" Gramm.

Regardless of whether the best thing to do was to engage in a dramatic level of deficit spending to rescue the economy, what followed all this inaction and insensitivity was that unemployment, after peaking at 7.4% in 1958, began to rapidly drop - before settling at a rate that was about 1% above the pre-recession rate of ~4%. Inventories came down, and growth resumed.

Unemployment 1956-1959

Source: US Bureau of Labor Statistics

In short, things got better without a stimulus package.

The parallels aren't perfect. Another difference between the 1957-8 recession and that of 2007-present was that stock market performance remained solid throughout the period. Part of this was equity valuations remained high. In 1958 the P/E ratio of the S&P 500 was 21x earnings, as opposed to the 14x in the current market. What was the difference? Leadership and the public opinion that it engenders. In many ways, the recession of fifty years ago is what we all hope this one will be, but we don't seem to be learning much from that experience.

There are important differences between the recession of 1957-8 and the one of 2008-9(?), particularly the presence of the financial crises and the ineffectiveness of monetary policy. Certainly some of what has been done has been required. But, I must admit to being disappointed that there aren't more people observing this period and discussing whether the best thing might be to follow Ike and Martin's lead -- to do nothing, but evoke confidence in what what what referred to at the time as the "built in stabilizers" of the system - unemployment insurance, patient monetary policy and the inherent predisposition of our system to growth. Certainly, at this point, this perspective deserves some consideration.