The following graph from the Congressional Budget Office shows the projected output gap between actual and potential GDP with and without stimulus spending, i.e., the American Recovery and Reinvestment Act (see full CBO presentation). The CBO presentation highlights the implementation lags of fiscal policy, and illustrates why a stimulus package that stretches over 2 or 3 years seemed justified given that the CBO expected the GDP output gap to persist for longer than one year. Projections have only 24% of the money being disbursed in fiscal year 2009, 74% disbursed by the end of FY 2010, and 91% disbursed by the end of FY 2011.

Source: Congressional Budget Office

Given the back-loading of spending, and the realization that the recovery is not taking hold as quickly as most would want (except possibly by politicians up for re-election next year and looking for an election year boost), this is creating a problem now for both the administration and Congress. On the one hand, quicker, and more front-loaded stimulus seems warranted, yet data such as that provided by the CBO has been used to justify the huge delayed spending in coming years. Therefore, if the projections are correct, then patience is in order, but something tells me that is not going to fly as unemployment nears 10 percent.

So how do you speed things up? As outlined by the CBO, you could waive environmental reviews, award contracts without competitive bidding, or simply not dole out money by jurisdictions, but instead give money to those who can most efficiently spend it (shovel-ready project). The first one is a non-starter given the environmental shift of the current administration, the second is going to be difficult given the criticism that no-bid projects received in the last administration, and the last one is simply unacceptable to anyone in Congress - given their parochialism and the fact that it actually makes some sense (and of course, you need shovel-ready projects on a rather large scale - most are probably already funded).

So on the short-term, what needs to be done? The quickest way is through changes to taxes. This could come in rebates (which are relatively quick in non-tax months, but also somewhat ineffective when people are scared and the savings rate is increasing), or through lowering withholding (currently tried with the middle class, but not having the desired effect). This leaves suspending some income taxes for a period of time, or lowering income taxes on everyone, including the wealthy and corporations. Suspension is difficult to sell given the state, or perceived state, of social security and medicare needs, not to mention the growing deficit (even though lower rates can bring in higher receipts), while reducing taxes on corporations and the wealthy is anathema to most of those currently in power.

The limited real and political choices available has now caused the discussion to come full circle - backed to considering another stimulus. I forget - what was that definition about doing the same thing again and expecting different results? If President Obama is not able to convince the American public and Congress to be patient, we may find out the answer rather quickly.

The Inspector General for the Commodity Futures Trading Commission (CFTF) has begun to investigate an earlier report on the commodity markets (see Reuters article). At question is the CFTC's role in an inter-agency task force report that came to the conclusion that supply-and-demand and not speculation was responsible for the increase in energy prices. Since the report came to a conclusion that some in Congress did not like, and came at a time that was a few days ahead of a Senate vote on the bill, various senators, including some on the Energy and Natural Resources Committee, allege that: "the CFTC knowingly included "seriously flawed" data and the timing was "suspicious." Interesting. The Senate is debating an important issue, a major regulator provides a report and data in a timely manner, and yet the reaction is to question the timing of the report because it came to a conclusion that did not support their initial assertions. Of course, none of this is surprising, and the report may in fact be flawed, but you have to wonder whether if they had come to another conclusion if an investigation would be occurring. Of course, usually when action is finally taken, it often is too late. Maybe this is just another indication that crude oil prices have indeed peaked, Gustav notwithstanding.

Reuters and other outlets are reporting that a House of Representatives committee has started considering opening up a formal investigation into energy market speculation. Hedge funds and investment banks are expected to take the most blame during the investigations. Word is that some representatives are discussing the possibility of changing the margin requirements for crude oil and other energy commodities as a way to curb speculation. As with most things Congress gets involved in, the best we can often hope for is that they consider the unintended consequences of any new laws and/or regulation. Even something as simple as raising margin requirements would have the effect of reducing the amount of leverage available to speculators, causing some to move to greener pastures, but it could also have the unintended consequence of making it more costly for companies that truly need to hedge their energy cost exposure. Not only would higher margins potentially tie up more capital for these companies, keeping it from being deployed for more useful purposes, but the increase could also have a negative effect on liquidity - after all, someone needs to take the other side of the trade. It is true that speculators can overtake and artificially drive a market, but they are also necessary to help provide a market for those looking to take a hedging position. As price fluctuations increase, margin requirements should reflect sustained increases in volatility. Nonetheless, simply increasing margin requirements in a hope to eliminate speculation may do nothing more than drive out those who need the market the most.

Every three months after the release of quarterly data, we start to hear Congress talk about how Big Oil is making too much money and how we need to initiate some kind of windfall profits tax. Of course, when you look at the data, you see that profit margins for oil companies on a percentage basis are not stellar, or at least not exceedingly high. Compared to other industries, they are quite average. To see the data, check out Mark Perry's blog at Carpe Diem, or do a simple sector/industry sort at Yahoo! Finance.

I do sometimes wonder how many of our leaders talking about windfall profits are even looking at the data (or care to). I also wonder if they realize that when you tax something you tend to get less of it. The issue is obviously more complicated than this, but it is important to also make sure we consider the unintended consequences of our actions and decisions. Ethanol is a good example. Right or wrong, it is affecting commodity and food prices. Of course, as a trader or investor, what is important is not only noticing the obvious, but also considering the consequences. In doing so, one can use their insight to hopefully profit from the changes in the regulatory, tax, or program mandated landscape.

Just recently, those investors and traders that realized fertilizer companies would do well given the need for more corn production, or that chip makers would benefit from tax breaks to solar companies, or that the railroad companies would do better given high trucking fuel cost - along with the need to transport increased commodity production, have all profited from their knowledge and foresight. Looking out for the next "consequence" can sometimes make us profits, while easing the additional burdens we may be incurring in the rest of the market and economy. In a sense, smart investing and trading can allow us to act more like a hedge fund by increasing our returns while reducing our overall level of exposure to the market and those that control prices and policy making.