Economics

by

Some Thoughts on President Obama’s First Month

I realize I’ve been neglecting my blog recently, but my excuse is that I had the flu last week.  I know that having a flu shot is supposed to prevent this, but as the nurse practitioner said, “It probably made a 5 to 7 day event into a 3 to 5 day one.”  Didn’t make me feel better, but at least I only missed 3 days of work.  Have to be there to help the City of Boston spend the stimulus bucks, you know.

So, how is the new President – and he is new even though it seems forever already – doing?  As Eugene Robinson wrote in the Washington Post on February 17

This is a presidency on steroids. Barack Obama’s executive actions alone would be enough for any new administration’s first month: decreeing an end to torture and the Guantanamo prison, extending health insurance to more children, reversing Bush-era policies on family planning. That the White House also managed to push through Congress a spending bill of unprecedented size and scope — designed both to provide an economic stimulus and reorder the nation’s priorities — is little short of astonishing.

I do wish that the Recovery Act (aka Stimulus Bill) had fewer tax cuts and more infrastruture, education, and arts money, but as Chris Hayes wrote in The Nation

Whatever its shortcomings, there is a lot of good stuff in the bill. As just one example: my parents were visiting this weekend and the whole time my dad, who works in public health in poor neighborhoods, was receiving promising updates on  his blackberry about just how much potential funding there would be for some of their programs.

As I said, there is money to spend.  So what of the Republican argument that taking the money means that there will be the expectation that programs – which the states can’t afford – will continue after the two years of the Recovery Act?  The main point of contention seems to be extention of unemployment benefits.  I’m afraid I don’t undertand the argument.  Hopefully in two years, other parts of the Recovery Act will have created jobs and there will no longer be a need to have massive unemployment benefits.

I have to admit that I worry about the Obama administration’s reluctance to consider prosecuting Bush administration officials.  I worry that we will somehow backslide on things like extraordinary rendition and the right of the prisoners to come to trial.  But then I am reassured by articles like Alexander Zaitchik’s recent post on AlterNet titled 5 Great Progressive Moves by Obama You Might Have Missed.  Zaitchik lists high speed rail funding, arms control, review of faith-based initiatives, broadband, and a reform minded drug czar.

Beyond all these concrete actions is political savvy.  I believe that Obama’s getting out of Washington to sell the Recovery Act and explain it to ordinary people in a setting where people were not pre-screened for their political views, was a smart move and may have saved it as Congress saw the reactions of those in the audience.  While it didn’t get any Republican votes, I think it helped with some of the Blue Dog Democrats.  We also saw his attempts to be bipartisan which were rebuffed by the Republicans.  As Chris Hayes points out

On the politics side of the ledger, Ben Smith notes Obama’s emphasis on the tax cuts in the bill. I’m not necessarily a fan, though politically it’s true that every single Republican member of congress can now be accused of “Voting against the biggest tax cut in history” come next election.” Clearly, this hasn’t escaped the White House’s notice.

by

Lessons from FDR

Tony Badger had an interesting article in the January 26 print edition of the Nation which I have just finished reading.  The history lesson and the review of the politics FDR had to deal with are instructive, but the lessons he draws for President Obama are to the point and worth noting.

First, in an economic emergency, however distasteful it may be, you have to bail out the bankers and corporations. Second, any economic recovery package has to be bold–to create jobs, you have to spend a lot. Third, infrastructure investment works–as the New Deal’s public works programs showed in highways, education, cheap electrical power and flood control. Fourth, while you do not have to postpone much-needed reforms, you don’t have to get all your reforms passed at once. Finally, you cannot expect a recovery program, no matter how well prepared, to sail through unchallenged. You have to be nimble enough to accept some of the things Congress will insist on that you may not like. But there may be new and unexpected crises that can, as in 1933, offer opportunities to a president willing to take them.

Badger is the author of the new book FDR: the first one hundred days which I have not read yet, but I believe I heard or read somewhere that Barack Obama was reading it.

by

Republican Stimulus

I have Chris Matthew’s Hardball playing in the background.  He is interviewing two Republicans are still pushing business tax cuts and the same old Republican agenda.  One of them wanted to know what the money for the arts will do to create jobs. The answer is every musical or theatical production, every symphony orchestra, every movie employs people other than the artists.  Look at the jobs created- and the lasting contribution made –  by the art projects funded by FDR.  Arts money can also be used to maintain arts programs in the schools – which will employ teachers.  Jobs.

The whole “this is a Democrat bill” drives me nuts.  Didn’t the Republicans lose the election?  Luckily Paul Krugman had some advice in his column from January 26:

…So as a public service, let me try to debunk some of the major antistimulus arguments that have already surfaced. Any time you hear someone reciting one of these arguments, write him or her off as a dishonest flack.

First, there’s the bogus talking point that the Obama plan will cost $275,000 per job created. Why is it bogus? Because it involves taking the cost of a plan that will extend over several years, creating millions of jobs each year, and dividing it by the jobs created in just one of those years.

It’s as if an opponent of the school lunch program were to take an estimate of the cost of that program over the next five years, then divide it by the number of lunches provided in just one of those years, and assert that the program was hugely wasteful, because it cost $13 per lunch. (The actual cost of a free school lunch, by the way, is $2.57.)

The true cost per job of the Obama plan will probably be closer to $100,000 than $275,000 — and the net cost will be as little as $60,000 once you take into account the fact that a stronger economy means higher tax receipts.

Next, write off anyone who asserts that it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.

Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.

Today Bob Herbert calls the Republican arguments “The Same Old Song“:

What’s up with the Republicans? Have they no sense that their policies have sent the country hurtling down the road to ruin? Are they so divorced from reality that in their delusionary state they honestly believe we need more of their tax cuts for the rich and their other forms of plutocratic irresponsibility, the very things that got us to this deplorable state?

The G.O.P.’s latest campaign is aimed at undermining President Obama’s effort to cope with the national economic emergency by attacking the spending in his stimulus package and repeating ad nauseam the Republican mantra for ever more tax cuts.

My favorite line of the Herbert column is

The truth, of course, is that the country is hemorrhaging jobs and Americans are heading to the poorhouse by the millions. The stock markets and the value of the family home have collapsed, and there is virtual across-the-board agreement that the country is caught up in the worst economic disaster since at least World War II.

The Republican answer to this turmoil?

Tax cuts.

They need to go into rehab.

by

Recovery and Reinvestment

Dean K Baker has posted an interesting story on Alternet about Republican motivations for blocking Obama ‘s American Recovery and Reinvestment Plan.  Baker’s theory?  The Republican fear of 20 years out of power.  Baker argues that despite evidence that the New Deal helped millions Republicans now think no intervention would have been better policy.

At least some Republicans are starting to muster an anti-stimulus drive, claiming that President-elect Obama’s package will not help the economy. Their drive is centered on what they claim is a careful rereading of the history of the New Deal. According to their account, President Roosevelt’s policies actually lengthened the Great Depression.

In their story, we would have been better off if we just left the market to adjust by itself. New Deal programs that directly employed people, or in other ways supported living standards, created an uncertain investment climate. They claim that this uncertainty slowed the process of market adjustment that was necessary for returning to high levels of employment.

The Wagner Act, which created the legal framework for the union organizing drives of the era, stands out as being especially pernicious in their story. The Fair Labor Standards Act, which created the 40-hour workweek and established the first national minimum wage, also gets singled out for criticism. In this new reading of history, what most people consider the great successes of the New Deal simply worsened the Great Depression.

We are hearing Republicans (and some Blue Dog Democrats) worrying about the size of the deficit.  Even though Many economists, including Paul Krugman, argue that the proposed Recovery and Reinvestment dollars are still too little.  Krugman explains what he calls the output gap.

Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.

And the Obama plan is nowhere near big enough to fill this “output gap.”

….

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.

Both Baker and Krugman worry that we are not planning enough public spending.  Baker again

Roosevelt was too worried about the whining of the anti-stimulus crowd that he confronted. He remained concerned about balancing the budget when the proper goal of fiscal policy should have been large deficits to stimulate the economy. Roosevelt’s policies substantially reduced the unemployment rate from the 25 percent peak when he first took office, but they did not get the unemployment rate back into single digits.

It took the enormous public spending associated with World War II to fully lift the economy out of the depression. The lesson that economists take away from this experience is that we should be prepared to run very large deficits in order to give the economy a sufficient boost to generate self-sustaining growth.

The bottom line is that President Obama and the Democrats in Congress need to get over worrying about deficits and get on with the business of closing the output gap.  As Dean Baker explains, part of the Republican objection is that is the Democats are sucessful is turning around the economy, the Republicans could spent the next 20 years out of power.

However, from the standpoint of Republicans, the more ominous lesson of the New Deal policies is that it left the Democrats firmly in power for more than 20 years. The Republicans did not regain the White House until 1952, 20 years after President Roosevelt was first elected.

Imagine how terrifying the prospect of 20 years of Democratic presidencies must be for the current generation of Republican leaders. This would mean that they would not retake the White House until 2028, just 20 years before the Social Security trust fund is first projected to face a shortfall.

In 2028, Newt Gingrich will be 85 years old; Mitt Romney will be 81; Mike Huckabee will be 73 and Senator McCain will be 98. Even Sarah Palin will be a less than youthful 64. In short, if President-elect Obama is allowed to carry through with his stimulus package and the rest of his ambitious domestic agenda, most of current leadership of the Republican Party can expect to spend the rest of their political career in the political wilderness, far removed from the centers of power

Krugman’s bottom line

… is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

Krugman suggests that spending on items like health care can help if there are not enough “shovel ready” projects to spend on right away.  Is the current Obama plan really only the first installment?

Obama’s reaction to Krugman’s column was telling:  He’s probably going to end up meeting with Krugman and listen to his ideas.  What a refreshing change from George W.  who didn’t need to talk to anyone or to consult with others because he knew what they thought.  Obama said he had “no pride of authorship”, just didn’t want the debate to hold up action.

President Elect Obama, don’t worry about the deficit.  Get us out of this mess, close the output gap and over the next twenty years we will have another Bill Clinton come and reduce the deficit.  You don’t have to do it all – and you certainly don’t have to do it all right away.

 

by

Federal Aid for the Local Economy

I’m off work until the end of the year, but my friends in the budget office are working hard to try to figure out how to cut the city operating budget by 10% because the state will likely cut local aid by that amount.  The state has already made cuts in things like pay raises for direct care workers – the folks who provide care for the disabled and elderly who work for non-profits.  Some of our affordable rental housing construction is not beining constructed because there is no funding either from loans or from tax credits. I think state and local workers may be laid off before this crisis ends.  And, jokes about inefficient govenerment workers aside, do we really need more people with skills and education, unemployed?

Paul Krugman wrote about all this in Fifty Herbert Hoovers.  I know that the governors I know, Deval Patrick and Tim Kaine, do not like the comparison.  I’m sure they understand that cutting spending right now is the worst thing they could do but as Krugman explains

In fact, the true cost of government programs, especially public investment, is much lower now than in more prosperous times. When the economy is booming, public investment competes with the private sector for scarce resources — for skilled construction workers, for capital. But right now many of the workers employed on infrastructure projects would otherwise be unemployed, and the money borrowed to pay for these projects would otherwise sit idle.

And shredding the social safety net at a moment when many more Americans need help isn’t just cruel. It adds to the sense of insecurity that is one important factor driving the economy down.

So why are we doing this to ourselves?

The answer, of course, is that state and local government revenues are plunging along with the economy — and unlike the federal government, lower-level governments can’t borrow their way through the crisis. Partly that’s because these governments, unlike the feds, are subject to balanced-budget rules. But even if they weren’t, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt, and those states that can borrow at all are being forced to pay punitive interest rates.

I agree that the state and local governments need help.  Funds to help pay for construction projects, funds for social service programs, funds to help pay for health care and unemployment.  And now for my rant.   But those funds need to have less rigid guidelines than normal Community Development Block Grant (CDBG) and other federal programs.  If AIG, Citi Bank, and the other large lending institutions have no oversight or reporting requirements, state and local governements have too many.  Take the new Neighborhood Stabilization money which is to help purchase, rehab and otherwise get foreclosed properties back online.  I will have to learn an entirely new federal reporting system (the email I got with my password says that there are “navigational problems” with the system) and monitor owners and renters for the next 10 to 15 years, with no increase in staff or administrative costs past the first 3 years.  Does this make any sense? 

Krugman again

What can be done? Ted Strickland, the governor of Ohio, is pushing for federal aid to the states on three fronts: help for the neediest, in the form of funding for food stamps and Medicaid; federal funding of state- and local-level infrastructure projects; and federal aid to education. That sounds right — and if the numbers Mr. Strickland proposes are huge, so is the crisis.

I agree with Governor Stickland with one addition:  money should also go into mass transit and intercity highspeed rail.  This could be part of the green solution at the same time.

If you also want to see and hear Paul Krugman, he was on the Rachel Maddow  show.