Economics

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The “Recovery”

It is just before 6 am and I logged on to the New York Times.  Two headlines say it all:

“Federal Pay Czar Tries Again to Trim A.I.G. Bonuses”  and  “Still on the Job, But Making Only Half as Much”

The first story is about the difficulties in getting A.I.G to reduce or not pay $198 million to employees of the trading unit.  The same unit that is part of the cause of this recession.

But the Treasury’s special master for compensation, Kenneth Feinberg, is running into legal hurdles because those bonuses fall outside new rules against bonus payments at companies receiving government assistance. The bonus agreements at issue were struck before last year’s emergency rescues by the Treasury and the Federal Reserve, and thus are not directly covered by the new rules.

The problem is a recurring one. A.I.G. payments early this year to the same employees elicited public outrage, though government officials said then that they had little legal authority to rescind pre-existing contracts.

The second story is about people who still have jobs, but have taken deep pay cuts and/or demotions in pay grade to keep their jobs.

In recent decades, layoffs were the standard procedure for shrinking labor costs. Reducing the wages of those who remained on the job was considered demoralizing and risky: the best workers would jump to another employer. But now pay cuts, sometimes the result of downgrades in rank or shortened workweeks, are occurring more frequently than at any time since the Great Depression.

State workers in Georgia are taking home smaller paychecks. So are the tens of thousands of employees in California’s public university system. The steel company Nucor and the technology giant Hewlett-Packard have embraced the practice. So have several airlines and many small businesses.

Let’s face it.  AIG is not solely responsible for the economic crisis.  Many of the rest of us were also riding high and spending beyond our means. The couple in the paycut story is an example.  Both seem to have their self esteem tied up in the amount of money they make. 

But most of the rest of the world must now scale back while a company which played a large role in the collapse still gives out bonuses.  Makes you wonder.  Hope the bonus recipients save the money for their rainy day.

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Updates on Recent Posts

Today’s Wasserman cartoon in the Boston Globe is a perfect follow up to my recent post on Banks and Our Money.

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And then you have even more trending toward Marriage Equality.  This happened today.

The Maine House of Representatives approved a bill to legalize same-sex marriage Tuesday, bringing the state one step closer toward legalizing the practice.After an emotional three-hour debate, the Democratically-controlled House voted 89 to 57 in favor of the bill.

“The country is watching us, to see how a small proud, independent state will stand on issue of equality,” said Rep. Sean Flaherty of Scarborough, who supported the bill.

The State Senate, which is also controlled by Democrats, approved the bill last week in a 21 to 14 vote. The vote was mostly along party lines, though one Democrat opposed the bill and one Republican voted in favor. The body must now give final approval to the bill.

Everyone is now waiting to see what the Democratic governor, John Baldacci, will do.  It seems to be a race between Maine and New Hampsire.  And also today, Washington D.C. City Council voted to recognize gay marriages.  We continue to make progress.

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National Crisis but Local Impact

I’m sure that every community large or small has similar issues.  Development is stalled, often in the midst of construction.  This is what the credit crisis has done to all of us.  Yvonne Abraham writing in today’s Boston Globe articulates what I think many have been feeling.  She calls her piece “Holes in the Heart.”

A lot of people are mighty mad about the giant pit where Filene’s used to be, and rightly so. Ditto the fenced-off disaster that was to have been the South End’s Columbus Center. The stalled megaprojects are ugly gashes in the heart of the city.

But there are other holes in Boston that are just as damaging to the city. They lie at the center of lively and struggling neighborhoods. They are not high-rise luxury hotels or ritzy condos. They are less ambitious than that and more important.

Much of the development she writes about is housing and small commercial space in actual neighborhoods.  I drive by at least two of the sites she writes about several times a week.  They are all large vacant lots in mostly residential neighborhoods.  The housing was mostly designed to be affordable rental housing in a city where many – even those who work for the City – have problems finding places to live.  All are developments my city agency is working with the community organizations to create.  We’ve put in our federal money as has the state.  Now we wait for bank loans and tax credits.  The projects are in all parts of town, but here are the two I see most often.

On Centre Street in Jamaica Plain, plans for the site of the old Blessed Sacrament Church are also stalled. That project was a huge victory for the local community: locals rallied behind a project that would give low-income residents housing and the neighborhood a place to gather, instead of pricey condos in a primo location.

The development, which was supposed to be underway last summer, will include 81 affordable rental units, 16 condos for first-time buyers, and places for 29 formerly homeless men and women.

The JP Neighborhood Development Corporation, which heads the project, is also developing the corner of Centre and Lamartine streets. But those 30 affordable units are also frozen, a yellow earth mover stranded atop a mound of dirt in a fenced-off lot.

Why are they all stalled? Large chunks of the funding were supposed to come from tax credits, which the federal government gives to developers of affordable housing. The developers then sell the credits to profitable companies looking to reduce their tax bills. But the companies’ profits went away, and so did the market for tax credits. It’s a different side of the economic meltdown that has frozen the luxury condos across town.

…Vacant lots make communities feel gutted. Stalled renovation projects leave residents feeling abandoned. Trophy buildings like Filene’s and Columbus Center get ink and outrage, but this is where the real hurt is.

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Credit Card Blues

Like most Americans I use credit cards.  I use them to buy online and to save the hassle of carrying cash.  Mostly these days I use my debit card but credit cards are great if your stove dies and you need to pay a repairperson or buy a new stove.  Or help with expenses if you are going to graduate school late in life as I did.  But they are a trap.  I remember a time when I cringed if I didn’t pay off the balance each month.  Those days are long gone.

James Surowiecki wrote a great piece for the New Yorker’s  Financial Page  in which he explains very clearly why credit cards companies need regulation as badly as the other financial markets.

It’s little wonder, then, that credit-card companies are now scrambling to shed the customers they think are most likely to default, and to limit the amount that others can spend. In effect, they’re trying to follow the advice given by Larry Selden and Geoffrey Colvin in a book called “Angel Customers & Demon Customers.” Not all customers are equal, it turns out: some are tremendously profitable, while others, like the guy who calls customer service six times a day to check his account balance, cost more than they’re worth. To boost profits, you must cultivate the angels and protect yourself against the demons.

That sounds easy enough. But credit-card companies have created a strange business, in which there’s a fine line between good and bad customers. Their best customers aren’t those who dutifully pay off their balance every month; instead, they’re the ones who charge a lot and pay only a little every month, carrying a sizable balance and racking up interest charges and late fees. These are the “revolvers,” and the credit-card business feeds on them. Credit-card companies don’t necessarily want revolvers to pay off their debts; if they did, there’d be no interest or fees to collect. They want their loans to be, in the words of a banking regulator, “a perpetual earning asset.”

One of the things that credit card companies are doing is increasing interest rates – even on money borrowed at a lower rate.

This increase is partly a response to the greater risk of default, but it also takes advantage of the recession. Many cardholders don’t have enough money to pay off their balance in full, so when interest rates rise they aren’t able to just close their account and get a different card. Effectively, they’re captive customers. And since credit-card companies, unlike most lenders, are allowed to change the terms of their loans at any time, people who borrowed a big chunk of money at, say, nine per cent may now be paying seventeen per cent on the loan.

These tactics are not going to improve the credit-card industry’s dismal reputation. They’re also not going to help an economy in recession, since reduced credit lines take away an important cushion for consumer spending, and higher interest rates and increased fees are likely to drive more people to default. But the odd thing is that while less access to revolving credit is a bad thing for us in the short run, having people rely less on credit cards is a good thing in the long run.

Will Congress and the administration step up to help ease this transition?  A good first step would be higher rates only on new balances to let people pay off the old ones at a reasonable rate – both time and interest.

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Inequality in America

The Republicans can scream that President Obama, Nancy Pelosi, and Harry Reid want to move the country toward a European type socialism all they want while the gap between the rich and poor keeps getting larger.   As many have said (including me), the current AIG bonus debacle seems be symbolize the rich getting richer at the expense of the rest of us. 

Dalton Conley, Acting Dean of Social Sciences at New York University has written in the Nation of March 23 about the Human Development Index (HDI) which shows the United States as Number 15 in the world.  The index “The score consists of three dimensions: health, as measured by life expectancy at birth; access to knowledge, captured by educational enrollment and attainment; and income, as reflected by median earnings for the working-age population. ”

Conley writes

The president’s proposed budget will do much to bring progressivity back to the tax code. Upper-income households–which have gained the most over the past three decades–will contribute around 80 percent of federal revenues, and more modest incomes will finally catch some real tax relief. Meanwhile, the vast majority of Americans have applauded the administration’s move to impose limits on executive compensation by attaching strings to bailout money. The reason is one of basic fairness, of course. But it turns out that limiting the windfalls of the few may actually be good for us all. That’s because there appears to be a relationship in the United States between inequality–which is largely driven by an explosive rise in incomes at the top–and overall levels of human development.

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This decline proceeded apace through the Reagan and first Bush administrations, during the go-go Clinton ’90s, and through the regime of George W. Bush. We have slipped in periods of budget deficits and during the largest surplus in US history. So something deeper about the structure of American society is probably responsible.

Of course, there are some pretty good suspects. There is, for example, the issue of nearly 50 million people who don’t have health insurance. There is the fact that college completion rates have been flat since the ’70s despite an increasingly technological economy. And there is the wage stagnation for the bottom half, a problem that has dogged us since the oil shock of 1973. But there is one larger force underlying these trends that has been gaining steam over the past three decades, and that’s income inequality.

So it seems that what the Republicans call “redistribution of wealth” might actually be good for our country.

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AIG, Bonuses, and the Auto Workers

I’m pretty sure that those traders at AIG who are due for massive taxpayer paid bonuses would be insulted being compared to members of the UAW, but I’d like to understand exactly how they are different.   Both work for industries/companies in financial difficulty.  Both companies got help from the taxpayers.  Both the traders and the auto workers had valid contracts.  So those are some ways they are the same.  How are they different?  Only the UAW is being asked to renegotiate their valid contract, to make sacrifices for the good of the country. 

In this morning’s New York Times there is a defense of paying the AIG bonuses by Andrew Ross Sorkin.  Sorkin writes

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

If government officials were to break the contracts, they would be “breaking a bond,” Ms. Meyer says. “They are raising a whole new question about the trust and commitment organizations have to their employees.” (The auto industry unions are facing a similar issue — but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)

And there we have it in the last sentence.  The UAW is negotiating.  So what’s keeping AIG from negotiating with Congress.  With Senator Feingold, Senator Bond, Congressman Frank, and Secretary Geithner.    Senator Russ Feingold wrote to Geithner

I am deeply troubled by reports that the American International Group intends to pay about $165 million in bonuses to its executives. As you know, the federal government has provided AIG with $170 billion in taxpayer money and currently owns 80 percent of the company. I share your outrage that a company which has been bailed out by the taxpayers for its mistakes would turn around and pay its executives such a staggering sum of money. 

Reports suggest that AIG’s chairman claims AIG is legally obligated to pay some or all of these bonuses. I write to ask why any bonuses would be legally required, given the company’s abysmal performance. In addition, I would like to know what legal options have been explored for canceling the bonuses or recouping the money from the recipients, and in particular whether the administration has considered holding AIG executives accountable in court for any breaches of their fiduciary duties to the shareholders

To me the most troubling part of all this is calling what these AIG employees are “legally obligated” to receive a bonus.  I think most people would agree with me and Senator Feingold that a bonus is something one gets for outstanding performance.  As a taxpayer/shareholder in AIG I want to know what the performance level – as judged from some outside auditor- of each person to receive a bonus is before I hand over the money. 

In Politico, Roger Simon  writes what I think many of us wish we had written first

The only real difference between Bernie Madoff and the management of AIG is that when Bernie Madoff got caught, he pleaded guilty. When AIG got caught, it asked the government for $170 billion.

And it got it. Now the American International Group is going to pay $165 million to its executives as a reward for the fine job they did in duping everybody.

The last word goes to Republican Senator Kit Bond

It is outrageous and unacceptable for failed Wall Street executives to receive a bonus after the American taxpayer was forced to bail them out. Policymakers should quit debating how to lower pay for some of these executives who got us into this mess.

Capping pay or taking away corporate jets isn’t enough. Before these companies get any more tax dollars, the failed senior executives and board of directors need to be fired 

The President is angry.  Democrats in Congress are angry.  Even some Republicans are angry.  The UAW is making concessions.  Time for the Wall Street moguls to do the same.

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Why so negative?

Let’s see.  Barack Obama has been President for 50 days today.  Only 50 days. During that time he has outlined a plan for economic recovery and gotten it passed, he has outlined plans to end the war in Iraq, and he has proposals to help some homeowners faced with foreclosures.  He is studying what to do about Afganistan and Guantanamo.  He has said we won’t torture, removed the ban on federal funds to groups who perform and/or counsel about abortion, removed prohibitions on stem cell reseach and etc., etc.  At the one month point, I quoted Eugene Robinson who called this ” an administration on steroids”. 

Politico writes of the first 50 days

It’s been a busy stretch. Obama revisited Bush-era policies on torture and the Guantanamo Bay prison, proposed to remake U.S. health care by year’s end, offered new rescue efforts for the housing and financial services sectors, expanded government stakes in Citigroup and American International Group, put forth a $3.7 trillion budget and announced his education policy Tuesday.

As president, Obama has signed a total of six bills. The most notable was the $787 billion stimulus legislation. He also signed a bill expanding children’s health insurance coverage and another making it easier to file suits alleging gender discrimination in the workplace. Another bill he signed was a so-called continuing resolution continuing temporary funding for federal agencies still awaiting a final appropriation for the current fiscal year. The two other measures were a bill to rename a post office in Illinois and legislation postponing the national conversion to digital television for about four months.

So why is everyone so negative?  Paul Krugman is worried we haven’t done enough.  Some Congressional Democrats are making noises about not wanting to spend any more.  The Republicans are on a vote no kick and want to go back to Bush economics – tax cuts and more tax cuts.  The left thinks he hasn’t done enough about about prosecuting W. and his pals and certainly isn’t withdrawing from Iraq fast enough.  The right thinks he is overturning the entire universe.

I’m certainly not happy with everything that President Obama has done so far.  I think the Tim Geithner appointment is a disaster and he also needs to lose Larry Summers.  I do like Orszag and Christine Rohmer. I don’t think we are planning to withdraw fast enough from Iraq and I’m worried about Afganistan.  I worry that some of the government programs are too complicated for local governments and non profits to administer.  But I’m not negative yet.

Everyone seems to be whining about something without giving things a chance to work.  If we want a large bank to fail – one, Leaman Brothers, already did and it didn’t help the economy much.  We had lots of tax cuts under W. and it didn’t stop the economy from tanking.  So let’s see what happens.  In a few more weeks most of us will get a few bucks more in our paychecks.  The Recovery funds will start hitting the street and projects will be underway in a month or so. 

We can’t let pundit negativity make us lose sight of the fact that is has only been 50 days today.  Give the guy a chance and don’t let negativity become a self-fulling prophecy.  So take a deep breath, relax a bit and notice that the market went up today.

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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.

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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.

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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.