A Rationalist in an Irrational World

Here is poor Paul Krugman taking on his enemies one more time. Sadly, they don't want to listen. Politics in the US is a dialog of the deaf:

Why did I criticize Bush’s deficit-increasing policies, then call for more deficit-increasing policies from Obama?

Part of the answer is the difference in economic conditions. Deficit spending is expansionary when the economy is in a liquidity trap; it does nothing but crowd out other spending when you’re not up against the zero lower bound, and the Fed will just raise rates to offset fiscal expansion.

The other part of the answer is that although the Bushies were happy to use Keynesian arguments to justify their tax cuts, those cuts were all designed to be permanent — that is, they were irresponsible precisely because they weren’t temporary. None of what Obama has done commits that sin: his long-term spending, basically on health reform, is paid for, and everything else, like aid to state and local governments or expansion of unemployment benefits, was both designed to be temporary and has proved temporary in reality.

Ah well — just another day in political Bizzaroworld.

Sylvia Nasar's "Grand Pursuit"

This book is an intellectual history of economics with a focus on a handful of names: Karl Marx, Alfred Marshall, Beatrice Webb, Irving Fisher, Joseph Schumpeter, John Maynard Keynes, Friedrich Hayek, Joan Robinson, Milton Friedman, Paul Samuelson, and Amartya Sen.

As you can see, those choices are idiosyncratic. Most modern economists would not include Marx, Webb, and Robinson since they are off in the dead end of Marxist "economics". But for me they are part of the spice of this book. This isn't a text to teach you economics. It is really more of a history of personalities and circumstances. The stories are delightful. The sketches of economics are thin gruel, so don't come here to understand economic theory. Come to savour history, personalities, and ideas.

What I found delightful is that the book reinforced my prejudices. Economics is not a "science". It is a liberal art with the pretension of science through its mathematicization of its arguments. The formalism doesn't make the models and arguments any more right. They do provide a bit more formal clarity but they also lead to obscurantism with dithering over details and ridiculous "simplifying" assumptions. I had a mathematician as a friend who made this point by arguing about cows by first stating "consider a sphere". Yep... mathematics does some wonderful leaps in simplification to make the mathematics "tractable".

Here are some snippets to give you a feel for the writing style:

Before resuming his journey north to the Scottish highlands, Alfred Marshall, a twenty-four-year-old mathematician and fellow of St. Hohn's College in Cambridge, spent hours walking through factory districts and the surrounding slums "looking into the faces of the poorest people." He was debating whether to make German philosophy or Austrian psychology his life's work. These were his first steps away from metaphysics and the beginning of a dogged pursuit of social reality. He later said that these walks forced him to consider the "justification of existing conditions of society."

In Manchester, Marshall found the smoky brown sky, muddy brown streets, and long piles of warehouses, cavernous mills, and insalubrious tenements -- all within a few hundred yards of glittering shops, gracious parks, and grand hotels -- that novels such as Elizabeth Gaskell's North and South had led him to expect. In the narrow backstreets he encountered sallow, undersized men and stunted, pale factory girls with thin shawls and hair flecked with wisps of cotton. The sight of "so much want" amid "so much wealth" prompted Marshall to ask whether the existence of a proletariat was indeed a "necessity of nature," as he had been taught to believe. "Why not make every man a gentleman?" he asked himself.

...

He took great pains to demolish Socialists' claim that but for oppression by the rich, the poor could live in "absolute luxury." England's annual income totaled about £900 million, he told the women. The wages paid to manual workers amounted to a total of £400 million. Most of the remaining £500 million, Marshall pointed out, represented the wages of workers who did not belong to the so-called working classes: semiskilled and skilled workers, government officials and military, professionals, and managers. In fact, an absolutely equal division of Britain's annual income would provide less than £37 per capita. Reducing poverty required expanding output and increasing efficiency; in other words, economic growth.

One of the points that Nasar makes is that modern societies organized around liberal economic principles has unleashed productivity and wealth. But as I read the above I keep picturing the billionaire tycoons on Wall Street and the masses in the street with their Occupy Wall Street protests. Sure there has been progress, but the economic injustice is still just as bad. The greed and indifference is there which exacerbates the pain. The fact that the billionaires can buy the politicians means that nothing will ever change. The fact that the rich are pushing to cut education and social services while cutting taxes on the rich as their "solution" to the current Lesser Depression is very depressing.

Sylvia Nasar's story points out that the same humbug and foot-dragging that blocked a real solution to the Great Depression was very, very similar to the humbug and foot-dragging of today:

Despite his financial straits, damaged reputation, and advancing age, the sixty-five-year-old Fisher seemed more energized than depressed by the economic calamity. In 1932 he published an extraordinary number of scientific papers and newspaper pieces. He bombarded the Hoover administration and the Federal Reserve with advice and organized other economists to do the same. His chief objective was to convince President Hoover to take the United States off the gold standard, if not de jure then de facto by having the Federal Reserve do nothing to prevent the foreign exchange value of the dollar from falling. He met with the bankers at the Federal Reserve to urge them to adopt an aggressive program to buy bonds from the banks and the public in order to pump money into the banking system. To his frustration, the "Federal Reserve men thought it would be 'safer' if they waited!" as he later complained. "That waiting, in my opinion, cost the country the major part of the depression."

In January 1932, Fisher attended a second meeting of monetary experts at the University of Chicago. This time, he organized a telegram urging the president to permit the federal budget deficit to rise, pump reserves into the crippled banking system, slash tariffs, and cancel inter-allied debts. Thirty-two prominent economists from Chicago, Wisconsin, and Harvard universities signed the statement, in which Fisher pointed out that Sweden, Japan, and Britain were recovering after going off gold the previous year. The signatories reflected the extent to which Fisher and Keynes's view of the crisis with its emphasis on its global nature, monetary causes, forecasts of its future course, and the need for concerted monetary intervention had gained adherents. On the other hand, theirs was still a minority view.

Sadly, today Obama ignores neo-Keynesian solutions. He shows himself to be uneducated about economics and has surrounded himself with the same fanatical deregulation libertarian economists who created this Lesser Depression. There has been absolutely no progress in economic "science" in 80 years. The same humbug and "morality play" rationalizing goes on to protect bondholders at the expense of the 25 million unemployed, the 10 million who are losing their homes, the youth who have given up on education because it is too expensive, and those nearing retirement who are desperate because their savings are exhausted. It is a social disaster, but Obama is acting like a modern Hoover and the 2012 Republican presidential candidates would make Hoover look like a bleeding-heart liberal. Tragic.

Sylvia Nasar traces out Keynes' thinking:

As the Great Depression dragged on, Keynes's faith in the effectiveness of monetary policy ebbed further. By the time A Treatise on Money appeared, he was beginning to pose a theory of the causes of unemployment. Cambridge undergraduates were his first audience. The nub of the new theory was that, as he put it in an article published in the American Economic Review in December 1933, "circumstances can arise, and have recently arisen, when neither control of the short-rate of interest nor control of the long-rate will be effective, with the result that direct stimulation of investment by government is a necessary means."

In a severe depression, prices fell even faster than interest rates. So reductions in nominal rates did not prevent real rates from climbing. Once nominal rates fell to zero, there was nothing further that the central bank could do to make borrowing cheaper or to ease debt burdens and thus to end the depression -- with incalculable political consequences, what Keynes called The Liquidity Trap. As he had once observed, "The inability of the interest rate to fall has brought down empires." Once monetary policy was rendered ineffectual, the only option for shoring up demand was getting money into the hands of those who could spend it.

...

As Herbert Stein, the economist, pointed out, Keynes asked a very different question from the one posed by Hayek and Schumpeter. In explaining depressions, in terms of the preceding booms, the Austrians were trying to figure out how the economy had gotten there. Keynes was less interested in the genesis of slumps than in the more basic puzzle of how high unemployment and slack capacity could persist for long in a free market economy with unrestricted competition.

...

Thus what made the General Theory so radical was Keynes' proof that it was possible for a free market economy to settle into states in which workers and machines remained idle for prolonged periods of time -- that there were depressions that, unlike the garden-variety ones, were not brief and didn't end of their own accord as a result of falling prices and interest rates, or, at an extreme, that free market economies tended naturally to stagnate even when there were idle workers and machines available. In such depressions, unfreezing credit flows through monetary policy didn't provide a sufficient stimulus, because even zero-percent interest rates could not tempt businesses to borrow while prices were falling and there was [no] reason to think that demand would recover. The only way to revive business confidence and get the private sector spending again was by cutting taxes and letting businesses and individuals keep more of their income so that they could spend it. Or, better yet, having the government spend more money directly, since that would guarantee that 100 percent of it would be spent rather than saved. If the private sector couldn't or wouldn't spend, then the government had to do it. For Keynes, the government had to be prepared to act as the spender of last resort, just as the central bank acted as the lender of last resort.

This is the same intellectual landscape that has policy makers hung up today. Bernanke and the Federal Reserve have been too timid in using monetary policy and now the only tool left is fiscal stimulus, but you have right wing nuts screaming about "inflation!" and "debt!". Obama is too timid to properly stimulate the economy and instead falls into the trap of Hoover and FDR in 1937 of worrying about deficits and debts. They ignore the ruined lives and the lost production that can never be retrieved while the country stays mired in a depression. The arguments of 80 years ago are lost to policy makers today because they are illiterate about history and economics. Oh, and they are blinded by their ideology, an ideology bought and paid for by the billionaire ultra-rich who are quite happy to leave the system just as it is, a system that has let them exploit it for billions in personal gain. This is a tragedy for the bottom 99%. The top 1% are laughing, but the bottom 1% are paying in ruined lives... and they will also pay through taxes to cover the lost monies and even provide the billionaire bonuses for the frauds and cheats who created the mess. Sorrows heaped on woes, and smothered with injustice.

This is a good read and it is highly relevant. This book will give you useful background to understand the economic arguments of today and the tragedy that today is a maddening repeat of the 1930s.

A Day Late and a Dollar Short

The "poltics" in America is pathetic. Nobody is addressing the real needs. The major parties are playing a three card monte game with posturing and distractions. This day late and a dollar short politics has got to end.

Here's a bit from a relevant Robert Reich post:

Republicans are debating again tomorrow night. And once again, Americans will hear the standard regressive litany: government is bad, Medicare and Medicaid should be cut, “Obamacare” is killing the economy, undocumented immigrants are taking our jobs, the military should get more money, taxes should be lowered on corporations and the rich, and regulations should be gutted.

Four years ago the most widely-watched TV debate among Republican aspirants attracted 3.2 million viewers. This year it’s almost twice that number. And for every viewer assume a multiplier effect as he or she shares what’s heard with friends and family.

Americans are listening more intently this time around because they’re hurting and they want answers. But the answers they’re getting from Republican candidates – tripping over themselves trying to appeal to hard-core regressives – are the wrong ones.

The correct ones aren’t being aired.

That’s partly because there’s no primary contest in the Democratic party. So Republicans automatically get loads of free broadcast time to air their regressive nonsense while the Democrats get none.

But even if the President had equal time, the debate about what to do about the crisis would still be frighteningly narrow.

That’s because the President’s answers don’t nearly match up to the magnitude of the crisis.

Without bold alternatives, Americans desperate for big solutions are attracted to bold crackpot ideas like Herman Cain’s “9-9-9” proposal, which would raise taxes on the poor and cut them for the rich.

This is where the inchoate Occupy Wall Street movement could come in. What’s needed isn’t just big ideas. It’s people fulminating for them – making enough of a ruckus that the ideas can’t be ignored. They become part of the debate because the public demands it.

The biggest thing the President has proposed is a plan to create 2 million jobs. But that’s not nearly big enough. Today, 14 million Americans are out of work, and 11 million more are working part-time who’d rather be working full time.

The nation needs a real jobs plan, one of sufficient size and scope to do the job – including a WPA and a Civilian Conservation Corps, to put the millions of long-term unemployed and young unemployed to work rebuilding America.

I'm reading material from the 1930s and we've been down this path before. The politics is a distraction. We know how to fix the economy. It takes a big jolt of spending to fix the huge number of people caught in a credit squeeze. Pussyfooting around only stretches out the pain. Most politicians know this, but they aren't honest with the public. They would rather play their games and go for personal gain rather than do their duty and build a better tomorrow.

Krugman Ticks Off a List of Obama's Mistakes

Paul Krugman has a post on his NY Times blog that responds to a blog post by Ezra Klein that lets Obama off the hook for mistakes in handling the economy. This is an excellent list of Obama's failings:

Yet I think he lets Obama and company off the hook too much. A few specific points:

1. I think too much is being made of the fact that subsequent revisions have shown that the economy was in even worse shape in early 2009 than we knew at the time. There was already plenty of evidence that it was in terrible shape and needed a much bigger boost than the administration proposed. And as regular readers know, this isn’t 20-20 hindsight: I was frantic about this at the time.

2. The forecast that assumed rapid recovery even without stimulus has been a deep source of embarrassment, and remains inexplicable to me. We had lots of reason to believe that this was going to be a prolonged slump — not just Reinhart Rogoff, but also the evidence of the last two US business cycles. Again, I was warning about this at the time.

3. This in turn means that the focus on fast-acting policies was misplaced. Shovel-ready wasn’t as important as it was made out to be. And the stimulus would have been a lot closer to adequate if more of it had consisted of infrastructure spending rather than tax cuts.

4. Politically, the administration was wildly naive in believing that it could easily come back for more if the initial stimulus proved inadequate. Again, this isn’t hindsight; I was frantic about this too, right from the beginning. If they thought this likely — as they should have — they should have laid the legislative groundwork for a second round, through reconciliation if necessary, right at the start.

5. Even without that groundwork, my sense is that there was a window for additional action in the fall of 2009, and that the administration sheered off from even trying.

6. Relatedly, the insistence of the administration that the stimulus was just right, long after it was obvious that it had been too small, did a lot of political damage. Remember the “summer of recovery”?

7. The political response to the new jobs bill has been pretty good — which in turn strongly suggests that the “pivot” from jobs to deficit reduction in early 2010 was a big mistake. Maybe — probably — nothing could have passed; but the White House might have been able to make a better case by accusing Republicans of blocking job creation rather than adopting their rhetoric.

Now, Ezra may be right that none of this would have made much difference. But the White House was weak and confused in the face of a political and economic debacle, when it should have gone all out.

And you know what? It should still go all out. The chances of success are lower than they would have been if it had taken a strong position two years ago, but it ain’t over until it’s over.

To really appreciate the above, you need to read Ron Suskind's book Confidence Men that spells out in gory detail just how Obama failed to lead his administration, failed to make the necessary decisions, and failed to live up to his campaign rhetoric about "change" and "hope". It ends up that Obama is really a centre-right politician who managed to win as a centre-left Democratic campaigner but once in office dropped the pretense and moved to the right. Even today when Obama is running for "fair taxation" of the rich, he is lined up with Reagan and not on the left. Obama is not willing to strongly go after the corruption of the American political system. He isn't willing to lead in a legislative agenda to turn around the Lesser Depression of 2008-??.

Update: Here is the Dean Baker reaction to the Ezra Klein article:

Ezra Klein on the Stimulus and After

Ezra Klein has a seriously researched piece in the Post on why the stimulus was inadequate and what else could have been done. The major item missing in my book is any discussion of the overselling of the stimulus after its passage.

By all accounts, Obama's economic team knew that the stimulus they got through Congress was inadequate for the task. They needed a stimulus that was at least twice as large as what Congress passed and quite possibly three or four times as large. Nonetheless, President Obama was quickly running around touting the "green shoots of recovery" and talking about the need to focus on deficit reduction.

By overselling the stimulus and putting deficit reduction at the top of the agenda, Obama was virtually shutting the door on the possibility of getting further stimulus. Since they knew that additional stimulus would almost certainly be necessary, why did they dig themselves into this hole?

It would be interesting to some explanation of this situation. Nonetheless, the piece is well worth reading. The Post deserves some credit for running it.

Baker points out the same thing as Krugman: Obama believed his stimulus was "adequate" and ran around selling this idea even when it was utterly obvious that it was too small. Rather than correct for this mistake and go for a second stimulus, Obama turned his attention to the Republican theme of deficits and the debt, i.e. he turned towards austerity in the midst of the 2008 Lesser Depression. A horrible, horrible mistake! A mistake that to this very day he hasn't admitted to making. That is the very definition of "bad leadership".

Update: Click here to see commentary by Paul Krugman and Randy Steve Waldman.

How Obama Misjudged the Great Recession

Ezra Klein has a post in his blog at The Washington Post detailing how Obama's administration got the size of the 2008 recession/depression wrong:

By that point, the shape of the crisis was clear: The housing bubble had burst, and it was taking the banks that held the loans, and the households that did the borrowing, down with it. Romer estimated that the damage would be about $2 trillion over the next two years and recommended a $1.2 trillion stimulus plan. The political team balked at that price tag, but with the support of Larry Summers, the former Treasury secretary who would soon lead the National Economic Council, she persuaded the administration to support an $800 billion plan.

The next challenge was to persuade Congress. There had never been a stimulus that big, and there hadn’t been many financial crises this severe. So how to estimate precisely what a dollar of infrastructure spending or small-business relief would do when let loose into the economy under these unusual conditions? Romer was asked to calculate how many jobs a stimulus might create. Jared Bernstein, a labor economist who would be working out of Vice President Biden’s office, was assigned to join the effort.

Romer and Bernstein gathered data from the Federal Reserve, from Mark Zandi at Moody’s, from anywhere they could think of. The incoming administration loved their report and wanted to release it publicly. Romer took it home over Christmas to double-check, rewrite and pick over. At 6 a.m. Jan. 10, just days before Obama would be sworn in as president, his transition team lifted the embargo on “The Job Impact of the American Recovery and Reinvestment Act.” It was a smash hit.

“It will be a joy to argue policy with an administration that provides comprehensible, honest reports,” enthused columnist Paul Krugman in the New York Times.

There was only one problem: It was wrong.

The issue is the graph on Page 1. It shows two blue lines sloping gently upward and then drifting back down. The darker line — “With recovery plan” — forecasts unemployment peaking at 8 percent in 2009 and falling back below 7 percent in late 2010.

Three years later, with the economy still in tatters, that line has formed the core of the case against the Obama administration’s economic policies. That line lets Republicans talk about “the failed stimulus.” That line that has discredited the White House’s economic policy.

But the other line — “Without recovery plan” — is more instructive. It shows unemployment peaking at 9 percent in 2010 and falling below 7 percent by the end of this year. That’s the line the administration used to scare Congress into passing the single largest economic recovery package in American history. That line is the nightmare scenario.

And yet this is the cold, hard fact of the past three years: The reality has been worse than the administration’s nightmare scenario. Even with the stimulus, unemployment shot past 10 percent in 2009. (See the updated graph here.)

Click to Enlarge
To understand how the administration got it so wrong, we need to look at the data it was looking at.

The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; they didn’t know that it had been run over by a truck.

Go read the whole post.

Ezra Klein goes on to paint a determined effort by the Obama administration to get on top of this "bigger than expected" recession. But I just don't buy Klein's story. I've read Ron Suskind's Confidence Men. That paints a picture of confusion and temerity on the part of Obama, a slowness to react. This agrees with what I saw. From March 2009 until early 2011 Obama kept putting on the front that his stimulus had been "just right". But as the above shows, even when the stimulus was passed in March 2009 it was obvious that it was going to be far too small! Rather than react and go bigger, Obama remained passive and pretended he had done "just enough". This created the political poison of today where the Republican poke at him saying his "stimulus didn't work".

Here's what Obama never faced up to:

The stimulus was a bet that we could get out of this recession through the one path everyone can agree on: growth. The bet was pretty much all-in, and it failed. Reinhart and Rogoff are not particularly surprised. It’s hard to get through a debt-driven crisis without doing anything about, well, debt.

In our crisis, the “debt” in question is housing debt. Home prices have fallen almost 33 percent since the beginning of the crisis. All together, the nation’s housing stock is worth $8 trillion less than it was in 2006. And we’re not done. Morgan Stanley estimates there are more than 2.2 million homes sitting vacant, and 7.5 million more facing foreclosure. It is housing debt that has weakened the banks, and mortgage debt that is keeping consumers from spending.

...

The Obama administration, perhaps cognizant of the politics, was not nearly so bold. It focused on stimulus rather than housing debt. The idea was that if people could keep their jobs and pay their bills, they could pay their mortgages. But today, few on the Obama team will mount much of a defense of its housing policy.

Its efforts to heal the troubled market at the core of the financial crisis are widely considered weak and ineffective. The Home Affordable Modification Program, which proposed to pay mortgage servicers to renegotiate with financially stressed homeowners, couldn’t persuade the servicers to play ball and so has left most of its $75 billion unspent. The Home Affordable Refinance Program was projected to help 5 million underwater homeowners. It has reached fewer than 1 million.

Even so, the administration rejects the more radical solutions that are occasionally floated. The problem, it says, is that the choices are mostly between timid and unworkable.

What Klein doesn't face up to is the fact that Obama came in "green" and simply doesn't have good "management skills" and failed to understand the economics of the situation. He mismanaged the problem. He failed as a leader. FDR would admit his mistakes and try and try until he got something right. Obama dithered, acted late, and then failed to accept that his attempt had fizzled and instead stonewalled any attempt to recognize the failure and try something else. That is pathetic in a leader.

I criticize Obama for getting stuck in the ditch instead of rescuing the economy. The Republicans would have (and if elected will) drive the economy over a cliff and destroy it. So America has no future worth getting excited about. The 2012 election will be between an ineffective leader and an absolutely incompetent leader. Hopefully Americans choose ineffective and not the "nuclear option" of an incompetent Republican leader.

Update 2011oct09: I've posted some reaction by Paul Krugman and Dean Baker here.

The following is a bit from a blog post by Steve Randy Waldman in his Interfluidity blog:

Ezra Klein is a wonderful writer, but I don’t love his retrospective on the financial crisis. (Kevin Drum and Brad DeLong do.) The account is far too sympathetic. The Obama administration’s response to the crisis was visibly poor in real time. Klein shrugs off the error as though it were inevitable, predestined. It was not. The administration screwed up, and they screwed up in a deeply toxic way. They defined “politically possible” to mean acceptable to powerful incumbents, and then restricted their policy advocacy to the realm of that possible. The administration could have chosen to fight for policies that would have been effective and fair rather than placate groups whose interests were opposed to good policy. They might not have succeeded, but even so, as Mike Koncazal puts it, they would have lost well. We would be better off with good policy options untried but still on the table than where we are now, with policy itself — monetary, fiscal, whatever — discredited as both ineffective and faintly corrupt.

There is a lot in Klein’s piece that I could react to, but I want to highlight one point that is particularly misguided:

But when talking about what might have worked on a massive, economy-wide scale — that is to say, what might have made this time different — you’re talking about something more drastic. You’re talking about getting rid of the debt. To do that, somebody has to pay it, or somebody has to take the loss on it.

The most politically appealing plans are the ones that force the banks to eat the debt, or at least appear to do so. “Cramdown,” in which judges simply reduce the principal owed by underwater homeowners, works this way. But any plan that leads to massive debt forgiveness would blow a massive hole in the banks. The worry would move from “What do we do about all this housing debt?” to “What do we do about all these failing banks?” And we know what we do about failing banks amid a recession: We bail them out to keep the credit markets from freezing up. There was no appetite for a second Lehman Brothers in late 2009.

Which means that the ultimate question was how much housing debt the American taxpayer was willing to shoulder. Whether that debt came in the form of nationalizing the banks and taking the bad assets off their books — a policy the administration estimated could cost taxpayers a trillion dollars — or simply paying off the debt directly was more of a political question than an economic one. And it wasn’t a political question anyone really knew how to answer.

On first blush, there are few groups more sympathetic than underwater homeowners or foreclosed families. They remain so until about two seconds after their neighbors are asked to pay their mortgages. Recall that Rick Santelli’s famous CNBC rant wasn’t about big government or high taxes or creeping socialism. It was about a modest program the White House was proposing to help certain homeowners restructure their mortgages. It had Santelli screaming bloody murder… If you believe Santelli’s rant kicked off the tea party, then that’s what the tea party was originally about: forgiving housing debt.

This all sounds very hard-nosed. There were debts. There were economic losses, such that the debts could not be serviced at initially agreed terms. The consequences of leaving those unserviceable debts in place — frozen household spending, bankruptcy courts and litigation, blown up banks — were intolerable. Therefore, the losses were going to have to be socialized, borne by taxpayers, one way or another. Ultimately, in this view, it is all a matter of dollars and cents. The taxpayer is going to eat the loss, so what’s the best sugar to make the medicine go down?

But human affairs are not about dollars and cents. Santelli’s rant and the tea party it kind-of inspired were not borne of a financial calculation — “Oh my God! My tax bill is going to be $600 higher if we refinance underwater mortgages!” Santelli’s rant, quite legitimately, reflected a fairness concern. The core political issue has never been the quantity of debt the government would incur to mitigate the crisis. It was and remains the fairness of the transfers all that debt would finance. A fact of human affairs that proved unfortunately consequential during the crisis is that people perceive injustice more powerfully on a personal scale than at an institutional level. Bailing out the dude next door who cashed out home equity to build a Jacuzzi is a crime. Bailing out the “financial system” is just a statistic. So the anger Santelli channeled led to economically stupid bail-outs of intermediaries rather than end-debtors.

Once you understand that the problem is a fairness issue rather than a dollars-and-cents issue, the policy space grows wider. Holding constant the level of expenditure, one can make bail-outs more or less fair by the degree to which you demand sacrifice from the people you are bailing out. TARP was deeply stupid not because it meant socializing risks and costs created by bankers. TARP was terrible public policy because it socialized risks and costs while demanding almost no sacrifice at all from the people most responsible for those risks. The alternative to TARP was never “let the banks fail, and see how the bankruptcy system deals with it.” The alternative would have been to inject public capital (socialize risks and costs!) while also haircutting creditors, writing-off equityholders, firing management, and aggressively investigating past behavior. It was not the money that made TARP unpopular. It was the unfairness. And the unfairness was not at all necessary to resolve the financial problem.

If the Obama administration, or any administration, decided to encourage principal writedowns by having the government simply cover half the loss, that would be unfair. The Rick Santellis of the world might object more than I would, but that would be to my discredit more than theirs. Fairness should never be a policy afterthought. Widely adhered norms of fair play are among the most valuable public goods a society can hold. A large part of why the financial crisis has been so corrosive is that people understand that major financial institutions violated these norms and got away with it, which leaves all of us uncertain about what our own standards of behavior should be and what we can reasonably expect from others. When policy wonks, however well meaning, treat fairness as a public relations matter, they are corroding social infrastructure that is more important than the particular problems they mean to fix.

The good news is that there are lots of ways to craft good economic policy without doing violence to widely shared norms of fairness. See, for example, Ashwin Parameswaran’s “simple policy program“. On a less grand-scale, you’ll find that very few fairness concerns arise if underwater borrowers enjoy principal writedowns in the context of bankruptcy. Such “cramdowns” are consistent with a widely shared social norm, that society will grant (and creditors must fund) some relief from past poor choices to individuals who go through a costly and somewhat shameful legal process. Including mortgages and student loans in that uncontroversial bargain will piss-off bankers who wish to avoid responsibility for bad credit decisions. But it won’t provoke a revolution in Peoria.

The Obama administration campaigned on “cramdowns”, but ultimately decided not to push them. I wonder why? Perhaps Ezra Klein will explain how research by Reinhart and Rogoff shows that this too was inevitable.

Go read the original Waldman post to get the embedded links.

A Sensible Viewpoint from the Political Right

Two things...

First, Bruce Bartlett is an old Reaganite Republican who has woken up to the dysfunction in American politics and understands the current economic mess. Here is gives sensible answers despite media types trying to create sound bites and phony "issues":



Notice that he distinguishes on entitlements: Medicare spending is out of control, but Social Security is not a problem despite what the right wing fanatics who want to kill the program are saying.

Bartlett does an excellent job of fending off the idiocies that the "journalists" throw at him. I'm quite happy with what Bartlett is saying. I especially love the bit at 10:35 when he says Bush was "buying votes" with Medicare Part D and that "they are all damn liars" because people like Ryan voted for Medicare Part D but now is on a high horse about deficits and debt.

Second, Here is a list of things that George W. Bush speech-writer David Frum identifies as errors in Republican thinking (from here):

On the most urgent economic issue of the day – recovery from the Great Recession – the Republican consensus is seriously wrong.

It is wrong in its call for monetary tightening.

It is wrong to demand immediate debt reduction rather than wait until after the economy recovers.

It is wrong to deny that “we have a revenue problem.”

It is wrong in worrying too much about (non-existent) inflation and disregarding the (very real) threat of a second slump into recession and deflation.

It is wrong to blame government regulation and (as yet unimposed) tax increases for the severity of the recession.

It is wrong to oppose job-creating infrastructure programs.

It is wrong to hesitate to provide unemployment insurance, food stamps, and other forms of income maintenance to the unemployed.

It is wrong to fetishize the exchange value of the dollar against other currencies.

It is wrong to believe that cuts in marginal tax rates will suffice to generate job growth in today’s circumstance.

It is wrong to blame minor and marginal government policies like the Community Reinvestment Act for the financial crisis while ignoring the much more important role of government inaction to police overall levels of leverage within the financial system.

It is wrong to dismiss the Euro crisis as something remote from American concerns.

It is wrong to resist US cooperation with European authorities in organizing a work-out of the debt problems of the Eurozone countries.

It is wrong above all in its dangerous combination of apocalyptic pessimism about the long-term future of the country with aloof indifference to unemployment.

Conclusion... more people on the right need to rebel. They need to say "enough!" Stop the obstructionist politics and get down to business to solve America's problems.

Brad DeLong has a Plan to Reflate the US Economy

From a post on UC Berkely professor economics Brad DeLong's blog Grasping Reality with Both Hands:

Helicopter Drops: Does the Treasury Have Authority to Lend $10,000 Interest-Free to Every 2011 Taxpayer?

by J. Bradford DeLong

Mint ten $1,000 platinum coins for each 2011 taxpayer. Lend them to each 2011 taxpayer--at zero percent nominal interest for a hundred year term, so that each taxpayer or their heirs and assigns will be liable for paying the money back in 2111.

Does the Treasury have authority to do this right now? I think it might--or that the same lawyers who say that what we did in Libya was not "hostilities" would be able to claim that the Treasury has such authority.

And if the Treasury doesn't, I am pretty confident that the Federal Reserve does. (Every taxpayer might have to first fill out a form incorporating him or herself as a bank holding company, however.)

I agree that the above would work. I agree that is is fully as legal an action as the Bush legal team's assertion that "enhanced interrogation" techniques like waterboarding were legal because they are not torture. I wish Ben Bernanke would act immediately on this. This is even better than John Maynard Keynes' prescription to cure the Great Depression:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

If only Bernanke of Obama had the guts to make a dramatic move like this to rescue the world from 10 years of a Japan-style "lost decade"...

The New Right's Drive to Starve Us All to Death... for our Benefit

The crazy right has this moralistic vision of economics. They feel that the "free market" is the hand of God and God's divine judgement. They feel that money is filthy lucre and that debts are evil. They want a new Puritanism.

Here is a bit from an interview with Paul Allen McCulley, a former managing director at PIMCO. He coined the terms Minsky moment and Shadow banking system which became famous during the Financial crisis of 2007-2009:

Click to Enlarge

Of course, the proponents of austerity are worried that this country’s debt load is already too much for future generations to handle.

“We have to go on a diet for our long-term well-being. The only question is how severe of a diet?” — That is the question being asked. As opposed to what we should be discussing, which is, “Gosh, we’re talking about someone who is underweight here! Why do we need to be on a diet? Maybe we should have more food!” Incredibly, to suggest such a thing is to be considered a heretic these days. Paul actually gets more wound up about it than I do. I enjoy reading him now with the luxury of doing it whenever I get around to it during the day. I just smile. Though on any given day, I have to admit to a bit of envy, from the standpoint of thinking Paul’s piece was really good, but that if I were still in the arena, I could have upped his ante. But his is a really good ante, in just calling out the silliness. That’s what worries me the most about the domestic economic scene — and the global economic scene, too — this presumption that seems to be in currency that government is the problem. Therefore, if we can simply reduce the government, the problem will go away. That is not the case at all, when the problem is actually the combination of a liquidity trap and the paradox of thrift. If you take the government out of the picture, you exacerbate the pre-existing conditions. Yet that seems to be where the body politic conceptually has gone.

Are you implying that the Tea Party has been sold a bill of goods?

Yes, they have. I mean, the historical parallel that a lot of us point to would be 1931, when Andrew Mellon said, essentially, liquidate, liquidate, liquidate and assets will be transferred to moral hands, and we’ll live a more moral life.

Until we starve to death.

Right — but we will live a moral life.

Mellon was quite the Austrian—

Absolutely, that was in 1931. Then in 1937, when it looked like the economy might have been having “a decent” economic recovery, we decided to slap it in the face with monetary and fiscal policy tightening.

And it only took World War II to lift us out of that extension of the Depression.

Yes. What I mean is that the war in effect forced the application of the government’s balance sheet to a deficiency of aggregate demand — and it worked. Some might call that Keynesianism, and I would. But you could describe it more simply by saying that the government’s balance sheet — including the central bank’s balance sheet (because the Fed was subordinate to the fiscal authority during WWII) — was used to stimulate aggregate demand. And it absolutely worked, although I don’t think anyone would applaud going to war to accomplish that. However, it is interesting that after World War II the biggest concern in economic policy circles was that we would fall back into a depression because we were taking away all of the government demand, for the war machine. But what we found out was that this didn’t necessarily have to be the case. Partly, the postwar recovery came about because of the infrastructure and the technologies, etc., that had been developed during the war. But another important ingredient after the war was the GI Bill.

The GI Bill and the Marshall Plan basically saved the West.

And they both used the government’s balance sheet, I’ll point out. My dad went to college on the GI Bill. He was one of the youngest WWII veterans — he’s 85 now but he went into the service in ’44.

Same as mine.

So he went to college on the GI Bill, bought his first house on the GI Bill — and he didn’t consider either one of those to be welfare.

No doubt, he thought he earned it.

Yes, and the payoff to society of the Marshall Plan and the GI Bill were absolutely monstrous. The private sector simply can’t internalize the rate of return on that sort of thing. So this presumption that somehow government investment is bad and private sector investment is good—

Hold on, you’re using the term “investment” and that’s not politically correct. You’re supposed to call it, “spending, waste and fraud.”

Okay, so my dad’s education and the house that I grew up in were, what were those words? “Waste and fraud”?

Yes, according to the conservative meme, it was “wanton government spending” allowing your family to live above your means. The argument that a family has to live within a budget and therefore so does the government, is so specious—

Absolutely. The irony of all this is that I now hear my dad ranting and raving about “big government” at 85 years old— and it was big government that paid for his education and put him into his first home. The real notion that people have is that government is bad — unless it’s helping me!

That’s clearly endemic and epidemic. My dad did the same, until he passed away.

There obviously are a lot of inconsistencies that we have to deal with in a democratic society. But what really puzzles me is how the concept of public investment is being perceived as an oxymoron. That’s just wrong. The notion that if we just would quit subsidizing idleness, that the unemployed would go to work, is another thing that is just ludicrous. I don’t know a lot of people who want to be subsidized in idleness. Nor do I know a lot of who want to subsidize it. But there are just no jobs out there. There aren’t jobs because we had a bubble in housing. We went from 2 million housing starts to half a million housing starts. The notion that you could monetize equity in your home with a second mortgage is an oxymoron. Nonetheless, we had a housing sector bubble and everything that goes with it. Actually, if housing starts were our only problem, that wouldn’t be a big deal. But the house became the magic genie that made up for the fact that we’ve had stagnant real wages in our country for a long time — and then the genie died.

The housing ATM is definitely busted!

It ain’t there anymore. And now, if you happen to have a factory job making boat trailers, you’ve got a problem. Because the guy who had been buying a boat trailer was able to buy it — and the boat that went on it — only because he took a second on his “appreciating” home. He could have never afforded a boat otherwise. Now most likely the guy at the trailer factory has lost his job because people can’t buy boats in that fashion. That’s reality. And we’re not going to restimulate the housing market so that people can take out seconds to buy boats.

Not when the problem is too much debt.

That’s true. It wouldn’t make a lot of sense. We need to deleverage the private sector and we can do that without a depression if we are not afraid of levering the government sector. And from my perspective, there’s no reason to be afraid because we have a huge output gap and the risk that public investment will overheat our economy is a risk that I’m more than happy to underwrite. Overheating of our economy and too few workers for available jobs would be very high-quality problems. So I’m not worried about overheating from an inflation perspective at all.

What? Despite all the money that’s been created? All the debt we’re piling on future generations?

Monetary claptrap! Money is as money does, as the famous economist Forrest Gump once sort of said. And it ain’t doing nothing. So I don’t worry about inflation and I don’t worry about interest rates. In fact, the lower the interest rates go, the more I worry — because the easiest way to have super-low interest rates is to have a depression. Interest rates are low, but they’re low in many respects for unhealthy reasons. There’s absolutely no private-sector demand for credit and so there is no crowding out. I mean, that’s the old textbook notion —you aren’t supposed to want to add government debt because that supposedly would crowd private sector investment out of the market. But, excuse me, exactly what are we crowding out right now? Where is the evidence that the marketplace for credit is tight and that government borrowing is displacing private sector borrowing? There’s zero evidence for it. Yet this “crowding out” dogma keeps being invoked when people claim that we can’t have government deficits because they’re going to crowd out private sector investment. God, I wish it were so, because that would mean that private sector investment was doing fine, just fine. And that we were going to overheat the labor market. As I said, that would be a very high-quality problem.

What about the argument that our foreign creditors are going to stop lending to us?

That’s the notion that if we run deficits, the rest of the world will refuse to fund us. But we have a shortage of global aggregate demand and nobody wants their currency to go up. Therefore, the idea that we are going to suffer a buyer’s strike for dollar-dominated debt is preposterous.

...

So tell me, is there a way to address the housing problem within this liquidity trap?

I think there is. It’s been pretty clear cut for a long time that we need to reset the mortgages that are massively under water. This is sometimes known as “principal forgiveness” and the words are usually uttered with a pejorative lisp.

But wouldn’t that be terribly unfair to everyone who has faithfully made their mortgage payments?

Yes, exactly. I can’t argue with the proposition that it would be unfair. But the only way that I can respond is that life is not necessarily always fair.

Indeed, sometimes foolishness is rewarded.

It is — and as long as we hold to the existing pretense that a large chunk of our housing stock is worth the debt on it, we’re going to be stuck in this liquidity trap. So the reason we’re going to be stuck here is this issue of moral hazard. There’s a reluctance to do anything because, you know, restriking mortgage terms would be letting people off the hook. There’s a moral overtone that we can’t deal with, so therefore we will just live with it. Actually, in that camp, you also have those who are genuine liquidationists. But society is not going to stand for the wholesale liquidation of 25 million families in America, so they’re not going to follow the Mellon prescription. In other words, if you’re not going to recast the mortgages to get rid of the negative equity, and you’re not going to force people out of their homes and liquidate them, then the market gets stuck in suspended animation. And that’s where we are.

Go read the whole interview. Instead of getting your "economics" from the Tea Party fanatics or billionaire ideologues (the Koch brothers). It is worthwhile to listen to a guy who actually worked in the industry and knows where the bodies are buried.

I'm currently reading Ron Suskind's Confidence Men: Wall Street, Washington, and the Education of a President. It is pathetic how timid and incompetent Obama has been in dealing with the greatest financial crisis since the Great Depression. He had a chance to be a great leader but has shown himself to be a clever fool, a guy who spends more time debating himself and analyzing the angles than actually confronting real problems and leading a desperate people to a better tomorrow. I highly recommend the book to anybody who wants to understand the mess we are in. The complaints about the "accuracy" of the book are overblown. The book is sound. It gets the outline of the story right and most of the details. He miffs a bit here or there but that's to be expected when you are trying to follow such a complex tale in real time.

The Voice Not Being Heard

There are all kinds of articles and interview, videos and radio reports about the economy and how Obama is a socialist Kenyan Marxist determined to destroy America in one last mau-mau jihad.

There are precious few items in the media that honestly assess what is going on. I enjoy reading Dean Baker's articles on his blog Beat the Press over at the CEPR (Center for Economic and Policy Research, a progressive economic policy think-tank based in Washington, DC, founded in 1999):

Robert Samuelson's Con Job

Robert Samuelson devoted his column today to decrying the lack of confidence in the U.S. economy. While confidence is indeed low, this largely reflects the prolonged downturn. Contrary to what Samuelson suggests, there is nothing surprising about the lack of confidence given the most prolonged period of high unemployment since the Great Depression.

In fact, given the weakness of demand, consumption and investment are both surprisingly high. The saving rate is hovering near 5.0 percent, well below the pre-bubble average of more than 8.0 percent, suggesting that consumers are more willing to spend relative to their income than was the case in the 50s, 60s, 70s, and 80s. The share of GDP devoted to investment in equipment and software is almost back to its pre-recession level.

The obvious problem in the economy, including the low rate of start-ups that is troubling Samuelson, is a lack of demand. This is best met by government stimulus, since government spending puts money in people's pockets and, contrary to what many politicians assert, people do work for the government, which means that the government can create jobs. If the government created enough demand in the economy, as it did during World War II, there is no reason to believe that firms would not invest more and that more start-ups would come into existence.

Measuring public "confidence" is a backward looking indicator. When times are good, confidence is high. When times are bad it is low. A low confidence isn't telling you something about the future. It is telling you about the past. And the wonderful thing about the American media is that the 2001-2008 Republican government under Bush has magically disappeared. He crashed the economy but you would never guess it. Instead, the media is busy selling the idea that the alien imposter with horns growing out of his head, the Kenyan, crashed the economy as part of his socialist jihad against red-blooded Americans.

By the way... have you noticed that Obama has been killing leaders of al Qaeda right, left and centre and getting precious little positive press for it. But when the blowheart Bush did his gunslinger routine of "get him dead or alive" the press fell over itself telling Americans what a swell leader they had. Nuts! Bush wasn't a "leader". He was a fool who created some of the biggest foreign policy mistakes in America's history and topped that off with business and regulatory decisions that destroyed $11 trillion worth of wealth.

I personally think Obama falls short as a leader, but he is head and shoulders above Bush. I can disagree with Obama but at least feel he is trying to do the right thing. Bush was a phony. He lied. He destroyed. He ran the military into the ground. He wrecked the economy. But Bush gets a pass from the media while they gang up on Obama.

Were is the voice of reason, or policy debate, in the American media? It has been quashed by right wing fanatics who spew propaganda and lies. Even the "mainstream" media is so far right that if it were taken back fifty years people would find it outrageously partisan.

Robert Reich on America's Vicious Circle

From a post by Robert Reich on his blog, he points out the vicious circle in which the US is trapped:

The Reverend Al Sharpton and various labor unions have announced a March for Jobs. But I’m afraid we’ll need more than marches to get jobs back.

Since the start of the Great Recession at the end of 2007, America’s potential labor force – that is, working-age people who want jobs - has grown by over 7 million. But since then, the number of Americans who actually have jobs has shrunk by more than 300,000.

In other words, we’re in a deep hole and the hole is deepening. In August, the United States created no jobs at all. Zero.

America’s ongoing jobs depression - which is what it deserves to be called - is the worst economic calamity to hit this nation since the Great Depression. It’s also terrible news for President Obama, whose chances for re-election now depend almost entirely on the Republican party putting up someone so vacuous and extremist that the nation rallies to Obama regardless.

The problem is on the demand side. Consumers (whose spending is 70% of the economy) can’t boost the American economy on their own. They’re still too burdened by debt, especially on homes that are worth less than their mortgages. In addition, their jobs are disappearing, their pay is dropping, their medical bills are soaring.

Consumer spending slowed again in August as incomes dropped.

Businesses, for their part, won’t hire without more sales. So we’re in a vicious cycle. The question is what to do about it.

There is much more. Go read the whole post and access the embedded links. You will find gems like this:

Republicans say America can’t afford to spend more. In truth, we’ll be in worse shape if we don’t. If the economy remains dead in the water, the ratio of public debt to the total economy balloons.

Besides, the United States can now borrow money from the rest of the world at fire-sale rates. Interest on the ten-year Treasury bill is now under 2%. That’s an almost unprecedented deal. With so many Americans unemployed and so much of our infrastructure in disrepair, this is the ideal time to get on with the work of rebuilding the nation.

And this:

For more than 30 years, the median wage in America has barely increased, adjusted for inflation – even though the economy is twice as large as it was three decades ago. Almost all the gains have gone to the top - especially the top 1%, who now receive over 20% of total income (it was just 10% in 1980).

Morality Trumps Economics

Here is an excellent post by Dean Baker in his Beat the Press blog:

Robert Samuelson has a piece today arguing that China's intervention is necessary to save the world economy. He of course is right in arguing that China has enough economic strength to save the euro and prevent a downward spiral that would throw the world economy back into recession, as some of us have argued.

However, the fact that China may have to play this role is due to the failings of the political leadership in both Europe and the United States. It is essential to remember that this is a crisis of a lack of demand, not supply. For this reason, it is ungodly stupid that so many people are being made to suffer from unemployment and declining living standards.

We know how to get out of this mess, we have known how for 70 years. We just need the government to generate demand. That means spending money. Ideally it would spend money on useful things like education, health care, and infrastructure, but even if it spent money in wasteful ways it would still create jobs and put people to work.

In the 30s we got much of the way back to full employment with the Works Progress Administration and other programs. Much of what was done was useful -- look around, you won't have to go far to find infrastructure built by depression-era programs. However, it took the massive spending associated with World War II to get the economy back to full employment. There is no magic associated with war that makes military spending more effective in creating jobs. The only difference was that the threat to the nation from the Axis powers removed the political obstacles to the necessary spending.

The same situation applies today. We just need to spend money. That applies to both the United States and the euro zone countries. The problem is that we have more people in political leadership positions who want to be morality cops and lecture about balancing budgets rather than focus on policies that will restore economic growth. This includes the top officials at the European Central Bank, many of the voting members of the Federal Reserve Board's Open Market Committee and much of the political leadership in the euro zone countries, the United Kingdom and of course here.

The reason why the world might need China to come to the rescue is that our economic policy is being designed by people who prefer to impose their warped sense of morality rather than pursue serious economic policy. The real humiliation of turning to China is not that we actually need China, it's that our political leaders are prevented us from saving ourselves.

The level of economic ignorance and the sheer audacity of pushing austerity in the face of large scale suffering is astounding and demoralizing. When I was a kid in the 1950s and 60s, all things seemed possible. Today the world is many times more productive and technologically advanced, but the it is infested with politicians who want to preach "limits" and "restraint" and the need to stand by while innocents are being mugged by an economy that was created by the very moralizers who say that their "hands are tied". Nuts!

Unraveling the Complexity of US Politics

What people say is not what they mean, especially politicians in the US. But even the electorate is sending mixed messages. Here's an attempt to unravel the complexity. Read these bits from an article by James Surowiecki in The New Yorker looking at Obama's "jobs plan" and the current political reality in the US:

There is no truer truism in American politics than James Carville’s catchphrase from the 1992 election “It’s the economy, stupid.” When people discuss Barack Obama’s current approval rating, which is at its lowest level ever, they may invoke his supposed lack of toughness or his tendency toward moderation, but the only really important factor is the dismal state of the U.S. job market. The American Jobs Act, which Obama is now promoting across the country, is an attempt to change this, by giving the economy a temporary boost with a mixture of tax cuts and government spending amounting to $447 billion. It’s an excellent idea: many independent analysts suggest that it could boost G.D.P. growth over the next year by 1.5 per cent or better, and create as many as one and a half million jobs. And it’s ideologically canny. A hefty chunk of it comes in the form of tax cuts, which Republicans typically love, and much of the rest would go toward more spending on infrastructure, which House Majority Leader Eric Cantor has expressed support for. Even so, it’s unlikely that House Republicans will pass the bill, and there’s a good chance that they’ll stop it even from coming up for a vote.

...

But people are underestimating a number of factors that could allow the G.O.P. to pursue an obstructive line without being much punished for it. To begin with, studies show that voters are more likely to hold politicians accountable for economic conditions when there’s “clarity of responsibility”—and responsibility for the economy now belongs to Obama and the Democrats. The recession started long before Obama took office. But, from a voter’s perspective, he had two years with sizable majorities in Congress to do something about it. While the 2009 stimulus plan succeeded in making the recession less awful than it might have been, you rarely get credit in politics for what didn’t happen. More important, in launching the plan, the President effectively took responsibility for the result. If you try to fix it, it’s yours.

...

It’s not that the Republican approach is popular: one recent Bloomberg poll found that forty-five per cent of those surveyed think congressional Republicans are responsible for the gridlock in Washington. But it seems to be working: for the past year and a half, the Party has consistently gone for a do-nothing approach and voters have consistently rewarded it. In the run-up to last year’s midterms, Republicans were explicit about their opposition to past, present, and future stimulus programs. They won a landslide victory. And, just last week, in two special elections for the House, Republican candidates who campaigned largely against Obama’s policies won seats in Nevada and New York by margins that were much bigger than expected. Americans may be saying that they want the government to use fiscal policy to get the economy moving again, but the way they vote tells a different story. Perhaps fourteen more months of economic stagnation and no job creation will change that. But, for now, it’s not only our representatives who are to blame. It’s ourselves.

So the story is complex. The Republicans profess a deep love of country but they are willing to block any attempt to revive the economy. The Democrats claim an eagerness to fix the economy but they put in place a stimulus which is too small and call it "adequate" and ignore the suffering. And to top it all off, the electorate wants to "send a message" but they use election results which will be read by the Republicans as a pat on the back and a "job well done!" when in fact the electorate is boiling with rage and feeling impotent. What a mess.

The Continuing Mistakes of the Obama Administration

Here is a bit from an article by Joe Weisenthal in the Business Insider that looks at why Obama put together a stimulus that fell so far short of what was needed. This bit which looks at who had Obama's ear (and Obama's own proclivity for conservative economic ideology) spells out the problem:

Brad DeLong posts another revealing aspect of the book: The index listings for the top people who advised Obama:

133 Lawrence Summers
131 Tim Geithner
59 Peter Orszag

On the other hand, check out economists who have been super-forceful advocates of big spending...

11 Paul Krugman
6 Robert Reich
5 Joe Stiglitz
4 Jared Bernstein

Bottom line: From the very beginning, Obama was advised by those favoring a "balanced," deficit-mindful approach, while he himself bought into self-defeating structural arguments. And so the stimulus turned out to be a wet blanket that leaves the economy faltering today.

And really, not much has changed in terms of the administration's thinking. They're still ceding ground on deficit reduction, failing to make the forceful case for stimulus (much to the chagrin of sidelined economists like Krugman and Bernstein).

What truly amazes me is that a smart guy like Obama shows himself to be such a slow learner. Has his brain atrophied since his Harvard Law School days or did he fake his way to high marks and great praise in the university?

Bruce Bartlett on Obama's Ills

Here is a bit from the start of an article by Bruce Bartlett in The Fiscal Times:

There is still a deep reservoir of good will among the American people for Barack Obama. Every poll shows that he is well liked personally. But even Democrats are starting to wonder whether he is up to the job of dealing with the most economically challenging environment since the 1930s. I think his lack of focus, more so than the failure of his policies, is responsible for this perception, which may prove to be politically fatal.

Central to Obama’s political problem is the failure of his economic policy, the 2009 stimulus in particular. When I call the stimulus a “failure,” I am not echoing the Republican critique that it was ill-conceived in the first place. There is no question in my mind that the Republican alternative of doing nothing or only cutting taxes would have made matters worse. Rather, I am referring to the size and structure of the stimulus.

By way of analogy, suppose you went to your doctor for an illness and he prescribed the correct medicine. But for some reason, you were given a dosage only half as big as necessary to cure your condition. Consequently, while you got better, you were not cured and continued to suffer. Under these circumstances, it is clear that the problem was not the medicine itself, but the dosage. Had you been given the correct dosage in the first place you would have been cured.

I think this accurately describes the problem with the 2009 stimulus. We now know that Obama’s economic advisers wanted a package twice as large as the $787 billion bill that was enacted. But his political advisers opposed it on the grounds that it would have been impossible to enact anything larger than what they got.

Go read the whole article.

Not only did Obama try to be politically slick and go for an undersized stimulus, he caved to Republican tax cutting and consequently:

...it is now clear that the 2009 stimulus was poorly structured to deal with what appears to have been the economy’s core problem. Too much money was wasted on tax cuts that did no good whatsoever. It’s now forgotten that 40 percent of the stimulus went for the Making Work Pay Credit, which was so ineffective that Democrats jettisoned it for a temporary cut in the payroll tax last December. And much too little of the spending went for public works and other measures that would have stimulated spending and employment.

There is a lot to chew on and think about in the Bartlett article. I agree 100% with what he says. Obama took his eye off the ball. Funny, because the big lesson of Clinton was "It's the economy, stupid".

Shadow Boxing with Obama

Obama is rigorously exercising his ability to box shadows. He's on the road pounding the message home -- two years and 8 months after becoming president -- that jobs is "issue #1" and is a crisis.

Funny... he didn't notice this crisis back in January 2009 when 800,000 jobs a month were being lost. He didn't notice it during the two years after March 2009 while he crowed that his stimulus was "just right" and that America was on the road to "recovery".

But now he's working on his left jab and his powerful right uppercut. Ready to lay out anybody who would complain that he wasn't "on the job".

Sadly... while he boxes shaddows, the real government in the US is going about slicing and dicing peoples' future. Here's Robert Reich's take:

If governors try hard enough, though, they can create lots of lousy jobs. They can drive out unions, attract low-wage immigrants, and turn a blind eye to businesses that fail to protect worker health and safety.

Rick Perry seems to have done exactly this. While Texas leads the nation in job growth, a majority of Texas’s workforce is paid hourly wages rather than salaries. And the median hourly wage there was $11.20, compared to the national median of $12.50 an hour.

Texas has also been specializing in minimum-wage jobs. From 2007 to 2010, the number of minimum wage workers there rose from 221,000 to 550,000 – that’s an increase of nearly 150 percent. And 9.5 percent of Texas workers earn the minimum wage or below – compared to about 6 percent for the rest of the nation, according to the Bureau of Labor Statistics. The state also has the highest percentage of workers without health insurance. Texas schools rank 44th in the nation in per-pupil spending.

The Perry model of creating more jobs through low wages seems to be catching on around America.

According to a report out today from the Commerce Department, the median income of U.S. households fell 2.3 percent last year – to the lowest level in fifteen years (adjusted for inflation). That’s the third straight year of declining household incomes. Part of this is loss of jobs. Part is loss of earnings.

The problem with America is too many politicians are busy getting their own job security and not given a damn about the "average Joe". Too many politicians are at the beck and call of billionaires but are missing in action for the bottom 90%.

Robert Reich is Perplexed

Robert Reich spots an oddity in Obama's behaviour:

On Monday the President will offer ways to pay for his $467 billion American Jobs Act mostly by increasing taxes on the wealthy.

I’m all in favor, but it’s an odd strategy. If any Republican was prepared to vote for the jobs bill, this will send him or her scurrying.

So if the President was never really serious about getting Republican votes in the first place — if his jobs bill and the tax increase on the wealthy were always going to be part of his 2012 election year pitch — why didn’t he make his jobs bill big enough to do the job?

I think the solution is that Obama is a closet Republican. He ran as a dyed-in-the-wool Democrat, but in reality he is centre-right in a lot of his thinking. When he said "change you can believe in" he really meant "change that the Republicans have been believing in".

Listen the Republicans Talking Out of Both Sides of Their Mouth

Here is a bit from a post by Ezra Klein in his WonkBlog in the Washington Post. Klein has dug up the evidence that the Republicans are hypocrites about "stimulus". Just 10 years ago it was excellent politics and just what the economy needed. Today it is "socialism" and is to be fought tooth-and-nail

Want to know why President Obama is going to have such a hard time persuading Republicans to support his jobs proposals this week? Don’t ask a pundit, or a politician, or a pollster. Ask a psychologist.

It has become common for Republicans to deride the very concept of stimulus as absurd, to mock Keynesian economics as an ivory-tower fantasy, and to oppose temporary tax cuts as a recession-fighting measure. But during the Bush administration? All that was orthodox conservative policy.

In 2001, Grover Norquist called a national sales-tax holiday “exactly the kind of immediate stimulus our shell-shocked economy needs now.” Norquist went on to quote George W. Bush’s chief economist, Glenn Hubbard, saying we needed stimulus “sooner rather than later.” Sen. Olympia Snowe (R-Maine) introduced a bill to that effect.

Around the same time, Rep. Paul Ryan (R-Wis.) held a hearing in which he invited Kevin Hassett, a conservative economist based at the American Enterprise Institute, to make the case for a fiscal stimulus. “The economists who studied this were quite surprised to find that fiscal policy in recessions was reasonably effective,” Hassett testified. “It is just that folks tried a first punch that was too light and that generally we didn’t get big measures until well into the recession.”

All the old lawyer jokes apply to the Republicans:

Want to know how to tell when a Republican is lying? His lips are moving.

They have sold their soul to the Devil. They will lie about anything to win elections. They have no principles other than greed and "looking out for Number One".

Strong on Tone, Short on Substance

Here is a chat by Felix Salmon with a another reporter at Reuters providing their instant reaction to Obama's "jobs" speech:



I liked the bit:

Not enough direct hiring to make a dent in unemployment.

Yep... so much for "jobs".

I Can't Believe It... Maureen Dowd is Accusing Politicians of "Faking It"

Here's a bit from a NY Times op-ed by Maureen Dowd:

WOW, what a relief.

The president was strong and House Republicans were conciliatory.

There was only one teensy-weensy problem: The president is weak and House Republicans are obstructionist.

Congressional Republicans, heeding polls indicating that their all-out assault on President Obama was risky, finally tempered their public comments after the jobs speech on Thursday and stopped acting like big jerks.

Obama, heeding plummeting polls and beseeching voices from his despairing base, finally deigned to get tough.

In the capital of political tactics, it was just another fine day of faking it.

Oh my gosh... Maureen Dowd thinks the politicians may be faking it.

I feel Obama really does have fire in his belly. He really feels the need to get jobs for the unemployed. Why else would have have waited for over two years to finally get up and give "the big speech"? Why would he have waited for the summer recess before getting around to giving his impassioned cry? Why would he have decided that he could cool his heels for 24 hours while Republican presidential candidates had a love fest in California? He knows this is an urgent issue with 25 million unemployed and underemployed waiting for action. So he's planned his moment.

Oh... and he's decided to respond with big numbers and big action. There's a $10 trillion hole. So Obama has given it his all and decided to call on Congress to belly up with $450 billion. Yep... that's 4.5% of the missing spending in the economy. That should fill that hole nicely. Oh... and rather than just go out and hire people. Obama has decided those darn Republicans did such a bang-up good job of managing the economy over the last 30 years and left the bottom 90% with so much loose cash and happy times, that he has decided to continue with the "most of this stimulus will be tax reductions for business" because we all know that "trickle down" economics is really, really effective.

Since Obama has now officially "caught fire" in a jobs, jobs, jobs push. He has decided he can best show off his leadership style with his renowned "lead from behind" so he put this challenge to the populace:

A re-energized Obama urged students at the University of Richmond to lobby lawmakers: “I want you to call, I want you to e-mail, I want you to tweet, I want you to fax, I want you to visit, I want you to Facebook, send a carrier pigeon.”

Right. Why send a man to do a man's job when you can send some fresh-faced youth out to fight your fight? That's shows the leadership savvy of Obama. He knows that a general always leads from behind.

Yep... this is the bold brassy Obama, the promised one:

As always, the same questions persist in our long, fruitless effort to pierce the Obama opacity. How long can the president sustain the sizzle before the fizzle? Does he get it together when the country’s in trouble or when he’s in trouble?

Certainly, Obama cares that Americans are in pain. Yet he has been unable to move away from his academic disdain for hardball and his alpha addiction to buzzer-beating wins.

So while the country has grown ever more scared, miserable, broke and broken, the president has too often been absent, quiet, ambivalent, impenetrable and inscrutable.

The master of his own narrative in print let the Republicans define the narrative in politics. And Obama likes to come in late, after the other players have staked out positions. It’s a strangely risk-averse tact, given the fact that he took two of the boldest risks in history — jumping into the presidential race in the first place and giving the kill order on Bin Laden on sketchy intelligence.

But when his polls plummeted, the Sleeping Beauty President roused himself to transform back into a semblance of the 2008 electrifying phenomenon.

He always must be chided and cajoled before he gets re-engaged.

...

Each time Obama goes through a period of lying doggo, his opponents — from Hillary in the primaries to the Tea Party in the summer of 2009 to the House Republicans during the debt-ceiling debacle — get an infusion of oxygen.

The reawakened Republicans are no longer the loyal opposition. They’re revolutionary Bolsheviks who want to eat Obama alive.

When the president stays insulated with his little circle that doesn’t know how to push his messages, and he lets the nihilist Republicans go unchallenged in their crazy claims to be saving the country they’re hurting, he sets the stage for Rick Perry.

It’s still impossible to sum up what Obama’s presidency is about right now, except saving his own job.

Yeah... there's nothing quite as inspiring as a "leader" who only shows up with his fight face on when his job is at stake. It shows his deep "commitment" to the American people.

A Solution to the US's Economic Doldrum

Robert Shiller is a smart economist. He spotted the "irrational exuberance" of the late 1990s before others. He spotted the housing bubble before others. And he now comes forward with a plan to do stimulus without deficits. He should be the man of the hour. Washington should be singing his praises and falling over each other to enact his suggestion. But it won't because Washington is a fool's reserve. A place where blowhearts can pontificate and never bother getting any facts or use sound theories to establish policy. It is a graveyard of good intentions killed by mean-spirited partisanship.

For what it is worth, here is the heart of Shiller's suggestion from an article in The New Republic:

We first have to come to grips with the fact that we need stimulus because we’re facing a problem of inadequate aggregate demand, a concept that we owe to the work of John Maynard Keynes. Keynes pointed out that a national economy can get stuck in a bad equilibrium—as it had in the Great Depression in 1930—where unemployed people really wish to supply their labor to some employer, but employers won’t hire them because they don’t think that the extra product they would make could be sold. Why not? Because of all the unemployed people trying unsuccessfully to supply their labor who can’t afford to buy anything. And why aren’t they working? Because no one will hire them.

That sounds circular, but that was exactly Keynes’ point. The whole depression situation is just an absurd circularity that we get stuck in from time to time, and can stay stuck in for a very long time. The core idea of Keynes’ theory is that there’s no fundamental reason to be in such a weak economy except the fact that we’re in it.

The problem is essentially one of communication: Somehow the unemployed have to communicate—not just in words but in the marketplace—their desire both to supply their labor and also to buy the excess of goods they would produce with the income from that labor. Part of Keynes’ idea, not always explained in the subsequent discussions of the theory, is that what has to be communicated is not any objective facts or information, but an intuition—a sense of confidence, a sense that the worst is over, a sense that the people’s animal spirits are back. If we think confidence is returning, then confidence will return.

The medium through which that communication largely needs to occur is collective action. We need to assert as a nation our will to get out of the bad equilibrium and get moving. And the way to do that is through government stimulus: We need to increase government expenditure for as long as it takes to break out of our rut. And there’s no use denying that those government expenditures will need to increase substantially in order to reduce the unemployment rate measurably.

That brings us to a critical fallacy that has crept into our thinking: We have become habituated to the idea that Keynesian fiscal stimulus has to take the form of deficit spending. After a credit downgrade by S&P, there’s a strong argument to make that the U.S. government is in no position to make a massive further increase in the national debt—but that's not an argument against stimulus as such. The fallacy is to think that stimulus necessarily needs to run up the national debt.

In reality, stimulus can easily take a balanced budget form: The government can simply raise taxes and raise expenditures by the same amount. The idea that balanced budget increases could save an economy stuck in a bad equilibrium goes back to the work of economists Walter Salant and Paul Samuelson in the 1940s, and it’s been taught in introductory economics courses ever since, though somehow it has been absent from public discussion of the current economic situation. Salant and Samuelson argued that in a very weak economy the balanced budget expenditure increases would translate into a one-for-one increase in national income.

In fact, the returns on a balanced budget stimulus are likely to be even greater than that. If the government raises taxes to hire the unemployed, then the unemployed who now get jobs will likely quickly spend all the money they earn on new consumption, since they have been strapped and now have jobs. The currently employed, who will see their taxes go up, will likely not cut their expenditures as much because they are habituated to their current level of consumption. And it is unlikely that a balanced budget stimulus would “crowd out” private expenditures on goods and services by pushing up interest rates. The Fed has already committed itself to keeping interest rates at zero until 2013.

The big problem with balanced budget stimulus is political, namely that there is a huge opposition to tax increases right now, primarily among Republicans.

A generation from now the American public will look back over the period from 1980 to 2020 as a disaster in public policy, a scorched earth fought over by (mostly Republican) fanatics without regard for the public interest. A battlefield of fanatical ideas by partisans deaf, dumb, and blind to reason and compromise.