Archive for July, 2010

It’s Working

Wednesday, July 28th, 2010

More evidence today from Princeton and Moody’s documenting that government actions to stimulate the economy are accomplishing their goals. A depression was averted and the economy is recovering. They don’t support continued massive spending, but they do support continued relief for the jobless as a direct form of ongoing stimulus.

They peg the total cost of the financial meltdown at $2.4T and state that it would have been considerably higher if the government did nothing.

“We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 6½% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.” Their figures indicate that we would be suffering an unemployment rate of 16.3 percent by next year, and 15 percent by 2012 had no stimulus been passed. (We’re projected to have 9.8 percent unemployment next year and 8.3 percent in 2012.)

So yes, the government spent a lot of money. And yes some amount of it was certainly wasted. And yes, it was needed. And finally yes, it did work.

The Kids are Alright

Sunday, July 25th, 2010

Conservatives and Tea Party advocates are fixated on the size of the deficit. They claim the government is consigning us and future generations to indentured servitude by irresponsible spending. They have been successful in frightening those inclined to distrust the government to begin with by talking about government fiscal policy within the context of a household budget. The problem is that a government is NOT a household. There are times (like now) when governments should run a deficit and there is plenty of academic support for that point of view.

More importantly, there is also evidence that this approach is working.

The bailout of the autos and their supply chain is a poster child for the Tea Party. They don’t argue that these companies were in trouble. They are simply upset that “their” money was misspent. They would have preferred that the domestic auto industry collapse in a “let it burn” fit of pique that would have punished both the arrogant domestic auto manufacturers and the greedy unions that work for them. They also object to the level of control that the Obama administration imposed on those who took government money suggesting that it was an example of socialism or worse.

Well guess what happened on the rocky road to socialism?

The plan worked. The domestic auto industry survived leaner, meaner, and more competitive than ever.

A recent Free Press article projects that $74B of the $86B provided by the government will be repaid. The $5B package put together for suppliers has already made a profit. Further, GM and Chrysler are promising a complete loan repayment and public offerings which will allow the government to divest their holdings at a profit, though no independent analysts yet agree with that forecast.

If you start to count the indirect benefits, this is already a big win. Roughly 3M jobs in the industry were saved. Just using rough math, the average income tax rate is 12%, assume an average income of $50K, which works out $18B in income tax revenue.

Ford just announced second quarter earnings of $2.6B. Though they didn’t take any money from the government, they said that they would have had to file for bankruptcy if GM and Chrysler were allowed to collapse, because the supply chain that they all depend on would have also collapsed. The effective federal tax rate for corporations ranges from 15%-39%. Again with just simple math, if Ford continues to make money at this rate they are looking at $10B in profits this year and will pay somewhere north of $1.5B in Federal taxes.

The recovery of the auto industry will also lead a recovery in the overall job market. For the first time in what seemed like a decade, the unemployment rate in Michigan actually went down.

TARP in general disbursed $385B. $198B has been repaid and another $25B was earned through interest payments. This is well ahead of forecasts from last year. Current estimates are that loses over the life of the program will be around $100B.

So was it worth it?

By comparison, Reagan’s Savings and Loan bubble cost the taxpayer $124B to clean up and caused considerably less damage to the economy. If you are just counting bang for the buck, this recovery has been purchased at bargain basement prices.

I guess it all depends on what the state of the economy would have been without the aggressive efforts of the federal government. Government officials projected that unemployment would have risen to 25% and we would have entered a full scale depression.

In either case, the US economy would have also pulled down the rest of the world. That would have made our recovery that much more difficult, since we wouldn’t be able through currency manipulation to use exports as an economic spark. That could have led to a decade of stagnation similar to what Japan experienced after their real-estate bubble burst in 1991.

The international political repercussions of a world-wide depression are much more disturbing. A depression in China could spark domestic instability. Combine that with a weak United States and you have all of the ingredients for an invasion of Taiwan or a land grab of Siberian oil fields in the Russian Border States. That could have led to a third world war.

A weak United States could have also encouraged both Isreal and Iran to feel as though they were free to take things into their own hands. That could lead to the first use of nuclear weapons since WWII.

None of that happened because this government had the courage to act.

Zombie Politics

Sunday, July 18th, 2010

The Republican Party was in a shambles after the election of Barak Obama in 2008. The American voters had roundly rejected the Bush administration and indicated that they trusted Obama and the Democrats to lead us out of the financial crisis caused by Bush policies.

It was in this crucible that leaders of the Republican Party hatched their strategy to regain control. They will throw sand in the gears of government and attempt to grind everything to a halt and then blame it on the President. Render government ineffective, and by inference, those running the government will appear weak. Oppose at every turn and some will start to question the ability of Obama and Democrats to govern rather than criticize the nature of the opposition. Energize the lunatic fringe with a seemingly endless stream of conspiracy theories surrounding the President and eventually you may be able to affect the level of trust that the larger population has in an inexperienced African American to lead.

What’s more, when asked what they would propose as an alternative to the ideas coming from the Obama administration, the best the Republicans can come up with are the same policies that Bush used to drive us into the ditch.

What’s worse – it’s working.

Here’s a quick summary for those who have forgotten the first part of this decade.

Ten years ago the Republicans set their plan in motion to transform society. Under the guise of trickledown economics they enriched the wealthy at the expense of the middle class through tax cuts. They slashed regulations and eviscerated the agencies charged with oversight of Wall Street, Big Oil, and Big Insurance in the name of the free market. Lobbyists ruled the halls of Congress.

The result – reckless Wall Street banks purposefully grew to a size that they could not be allowed to fail, collapsed the economy, and cost eight million Americans their jobs. Health care costs exploded, drug company profits soared, and average American incomes declined $2,000 per family. The Bush administration became bin Laden’s best recruiter by invading Iraq on trumped up WMD claims while allowing Afghanistan to fester.

The last Republican administration created exactly zero net private sector jobs. They spent a surplus like drunken sailors and rolled up more debt than all previous administrations in the 200 years of American history combined. They were chased from office by the most serious financial crisis since the Great Depression.

Even though the Democrats have made dramatic strides by preventing economic collapse, passing healthcare reform to start to bring us on par with the rest of the industrialized world, and financial reform to prevent a repeat of the last crisis – the American people are upset at the slow pace of the recovery and the special interests that profited from their pain.

Republicans are trying to take advantage of this anger by claiming not only that the Democrats are responsible for the mess, but aren’t cleaning it up fast enough.

They will do everything they can to prevent the American people from focusing in this upcoming election on the failed policies that drove us into the ditch to in the first place. The drama of filibusters, the doomsday prophecies about the deficit, the whole tea party movement – they are all just smoke screen and theatre intended to distract from the real question. Is the American public ready to give the keys back to the party that caused the most serious financial pileup in 60 years?

Let’s just look at what might happen if the Republicans gain control of house.

Paul Ryan will become Chairman of the House Budget committee. He wants to repeal Medicare and replace it with a private voucher system. That would turn one of the most popular and successful government programs into one administered by the very industry that caused the program to exist in the first place. These are the same guys who in the past decade have driven premium prices up at three times the rate of wages and racked up record profits.

Joe Barton will become Chairman of Energy and Commerce. Joe was the guy who most recently apologized to BP because the Obama administration was being too tough on them.

The whole Republican crew has revived the Bush plan to privatize Social Security. Apparently they figure that American public has forgotten that their 401k’s have yet to recover. They have also said that they want to repeal healthcare reform, reduce the minimum wage, and reduce unemployment benefits to encourage the jobless to find work faster.

The Republican Party has been successful in rendering government ineffective while simultaneously undermining the public’s trust in the institution. They have kept Democrats on the defensive by unleashing the loony Tea Party and its stream of fear and doubt. But at the end of the day, they are still going to have to dust off their corpse of an economic policy, put a suit on him, and parade him in front of the American people as the preferred choice. The sooner the Democrats can force that discussion, the sooner the American people will have a chance to realize that the future that Republicans have planned for them is not pretty.

Common Sense

Sunday, July 11th, 2010

We’ve been living through a heat wave in the Midwest which recently broke.

That’s not unusual.

What is unusual is the silence from climate change skeptics who were out in force during the pervious snowy winter. Folks like Republican Senator James Imhoff built an igloo on the capital hill and labeled it Al Gore’s New Home. But the way that this thing goes, Al Gore doesn’t have the opportunity during the latest heat wave to put a similar public sign out next to a thermometer at the same location saying “Hot enough for you yet?”.

Even the e-mail controversy that grew to be called Climategate has closed with a whimper.

A recently released report from a British investigation revealed that scientists are just as susceptible to petty and vengeful electronic correspondence as the rest of world. But there was no deliberate or unintentional cover-up of data. Just the normal sorts of debates that are an essential part of the scientific process of getting to the truth.

Scientists at the National Oceanic and Atmospheric Administration reported that “the combined global land and ocean surface temperature” in May were the warmest on record. In fact, NOAA reported, the whole period from January through May, on average, was the warmest since recordkeeping began in 1880.

The problem is that some people these days don’t trust science. In fact they don’t trust anyone or anything that calls their world view into question. This is called self-serving perception bias.

We also have all manner of politicians, pundits, and media taking advantage of this bias. They do that by appealing to what they call common sense, when they know the actual solutions to the problems are actually counter intuitive. Here are some examples.

Common sense says that in tough financial times you should reduce your spending and save your money because you may need it.

There are lots of conservatives bleating about the size of the federal deficit and objecting to any spending that adds to it. Unfortunately, for governments, this is exactly the WRONG thing to do. During a recession, unemployment and under-utilized capacity are the problem. Governments need to spent massively in the short term to help get the economy going again. When the economy is booming and individuals are spending money is when Governments need to raise both taxes and interest rates. This brings down the debt accumulated during the period of stimulation, slows inflation, and prevents the sort of market bubbles that cause recessions.

Common sense says “how hard can it be?”. There is a broken pipe, just plug it up. This sort of stuff happens all the time to oil drillers. Why is this so different?

What is particularly disturbing about this line of reasoning is the corollary – the reason this isn’t being fixed is because the Obama administration wants to prolong the spill in order to gain support for their socialist alternative energy agenda.

The reality is that this particular well is so deep under water that the reliable ways of fixing oil well blowouts just don’t work. Which calls into question why BP was allowed to drill this deep to begin with when the known ways of remediation were also unproven. Unfortunately, the “drill baby drill” crowd are just as silent these days about their claims that offshore drilling was safe as climate change skeptics have been during our hot summer.

Common sense says that is has to cost more to insure more people. So the healthcare reform bill is just another big government giveaway to the poor.

The reality is that insurance rates go down as the number of insured goes up. That’s because most people are healthy and the more healthy people you have paying insurance, the more sick people you can afford to cover. So the way to get the best rates for everyone is to require that everyone have some sort of insurance.

The other reality is that sick people are going to receive care in one form or another. If they have no insurance, they will be cared for in emergency rooms which is the most expensive care our system has to offer (at least $1000 per visit). If they have insurance, they have the option to receive care from community physicians ($50 per visit). This care could prevent a trip to the emergency room.

Common sense says that if someone comes to this country illegally, they are a criminal and as a result a threat to society.

Statistics suggest that illegal immigrants are more law abiding that the average citizen. They come here to work. They avoid trouble because they don’t want to be deported. They pay their taxes and use less services than the average citizen. They are also willing to take huge sometimes life-threatening risks to work here because they believe that America is the land of opportunity. The only citizens we ask to take similar risks are in the military. Most of the rest of us would not work the jobs these folks are willing to work and would not take the risks these folks are willing to take just to have a job. They are teaching their children the value of hard work in much more effective ways than the average American family.

Statistics also say that children of these immigrants blend just as quickly now into society as they did during the European immigrations of the past. These immigrant populations are keeping our country young, because they have larger families. That’s important because our economy is based on the assumption that people will buy things. Kids drive the consumer economy. Fewer kids = slower growth.

Common sense says that the planet can’t be warming because we had a cold snowy winter.

The reality is that the planet’s weather system is vast and complex. One person’s perception of weather is only one data point among billions. We have to rely on experts who have devoted their lives to climate study to get a clear picture of what is happening. Even then, the best picture will only come from the majority opinion – since science also encourages dissent and debate. The majority opinion is that the earth is warming at an alarming rate that exceeds all previous natural causes – which only leaves our activities at the root of this dramatic increase.

There is much to be said for common sense. But when it ignores science and experts, it has stopped being common sense and has morphed over into populism. Just like the Luddites who tried to stand in the way of the Industrial Revolution, those who have joined this tea-party populist movement are driven by fear of change. There are powerful forces feeding this fear with distrust of any opposing view, regardless of how well researched that view might be. The result is a mob mentality that is deaf to reason and intolerant of dissent.

That is rarely if ever a recipe for success.

Bayonet the Wounded

Tuesday, July 6th, 2010

There is virtually no connection between short term deficit spending and long term financial instability.

Douglas Elmendorf, the director of the non-partisan Congressional Budget Office, recently put it, “There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.”

We’ve seen the bond vultures drive the Greek government down because they had long-term financial problems.

The reason those same forces would attack the United States is that we fail to deal with Medicare and Social Security obligations.

When the current flock of deficit hawks squawk in the Congress, they predict financial ruin based on growth in our national debt. What they don’t bother to explain is that the debt growth is primarily the result of deficit spending to fulfill Medicare and Social Security obligations. That debt projection is based on the current funding models and the demographic shift caused by baby boomer retirement.

We have Europeans drawing down their stimulus spending because they want to increase the financial market’s confidence in their countries.

What instills confidence in markets is growth, not fiscal austerity. Iceland and Latvia are good examples. They imposed severe spending cuts, but the markets are still treating them the same way they are treating profligate countries like Greece.

Here at home, we have the spectacle of Republicans blocking extensions of unemployment insurance because of fear of increasing the deficit. We also have wingnuts like the Nevada tea party candidate Sharron Angle saying that unemployment benefits are too generous and discourage people from looking for a job.

While that may be true in some cases, a recent study by the Federal Reserve shows that there was virtually no difference in the duration of joblessness between those receiving benefits and those whose benefits had expired.

During times of robust economic growth when there is a shortage of labor, it might make some sense to roll back unemployment benefits to provide some incentive for people to get back into the work force and support continued growth. During times of high unemployment, it’s important to get money into the market to stimulate purchasing and create new jobs. The CBO estimates that unemployment benefits are one of the government’s most effective tools to stimulate the consumer economy because those receiving benefits have to spend every dollar just to put food on the table and pay the rent.

The truth is that in today’s economy there are five job seekers for every available job and the average duration of joblessness for those actively looking for work has risen to 35 weeks. That’s the longest period since the inception of unemployment record keeping in the sixties.

The economic arguments aside, there are good people who want to work and have found themselves in desperate straits through no fault of their own. It is our obligation to share what we can with them until they are able to support themselves. In this country, that’s what we do.

We have to do whatever we need to do to get people back to work. If that means ongoing government spending, that’s what we need to do. Long term we have to finish healthcare reform and begin work on Social Security. Those reforms and a growing economy are the path to financial stability, not short sighted austerity.

Political Strategy

Saturday, July 3rd, 2010

Funny thing happened to the Republicans on the way to the November mid-term elections.

Remember that healthcare bill that they said would power them to regain control of at least the house if not also the senate?

What the Republicans have been portraying as a bitter pill that was passed over the objections of the American public, now seems to be sweeter than they anticipated.

A recent poll by the non-partisan Kaiser Family foundation confirms previous polls that show the bill now has the support of a plurality of those polled.


There is still a lot of confusion and division, but as people gain a greater understanding of how the bill is actually going to affect them, more and more of them like what they see.

Republicans, of course, aren’t going to let reality stand in the way of a campaign issue, so they are targeting the pro-life Democrats whose votes assured final passage of the bill.

The leader of that group, Bart Stupak of Northern Michigan, has announced his retirement, but others are the target of attack ads that call their vote the “ultimate betrayal”. The Republican attack is based on a claim that even though the President signed an order affirming the Hyde amendment, he or another President at some point in the future could rescind that order. Seems a silly argument to me, but we’ll see whether it has sufficient substance to convince pro-life independents and Democrats to vote for the Republican candidate.  My suspicion is no because in essense this is a credibility argument.  Who has more credibility, the incombant with a history of pro-life votes or the Republican candidate from the party who said the world was going to end when the healthcare bill passed?

Bottom line is that, just as the Democrats predicted, the major components of the healthcare bill are changing people’s lives in positive ways and the apocalyptic predictions of Republicans haven’t materialized. While Republicans have successfully scared some people to the point that they seem no longer capable of forming a rational thought, my bet is that by November enough will return to reality that pro-healthcare votes will at least cancel any remaining anti-healthcare votes.

The November elections are going to turn on unemployment, the economy, and the oil spill.  On that count, the Republicans are going to have to explain their recent opposition to extensions of the unemployment benefits. They are going to have to do this while at the same time explaining how their economic plan of reducing spending is going to be a bigger help to the unemployed than those terminated benefits.   They are also going to have to defend their support of off-shore drilling while also reducing government regulation.

It is going to be an interesting time.