Paul Krugman

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Paul Krugman v. Tim Geithner

It is no secret that I’m not an economist.  I have long depended on Paul Krugman to help me understand what was going on.  And given the current state of the world, I seem to be blogging about economics a lot.

So is the Tim Geithner toxic assets plan viable or not?    Larry Summers (against whom I have a grudge because of what he did to Cornel West while president of Harvard) took at slap at Paul Krugman’s op-ed piece saying “I wish he waited for the plan to be announced before he wrote his column.” 

What exactly did Paul write?

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Let’s talk for a moment about the economics of the situation.

Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.

As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

If I understand him correctly, what Krugman is worried about is 1) should we have just gone ahead and nationalized the banks temporarily and gotten it over with and 2) if the plan doesn’t work does it will Congress vote more money to nationalize.

I think Krugman is a great economist, but he maybe underestimating the larger political situation.  I think President Obama believes that health care reform and, to a less extent, eduational reform are additional keys to turning the economy around.  Obama is already hearing the footsteps of those in Congress who are looking at the deficit and wanting to put the breaks on.  Obama wants to pass his budget. Therefore he didn’t want to pick my option 1 and nationalize the banks.  If the plan doesn’t work, option 2 is an unknown.

One thing I do know is that while the market did go up today and that Tim Geithner did do marginally better that his first disasterous press conference, I love Jonathan Mann of Rock Bottom Cookie’s new song, “Hey Paul Krugman”.  Mann extoles Krugman while putting Geithner down.  Great catchy song.  Listen to the song and sing along with the refrain.” When I listen to you it seems to make sense, when I listen to him [Geithner] all I hear is blah, blah, blah.”

At this point all we can do is hope that the Geithner gamble works out.  I’m sure that Paul Krugman will be the first to be happy if it does.

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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.

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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.

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Columbus Day Musings

The economic crisis is driving the election and Paul Krugman, a self-labled Liberal, has won the Nobel Prize. Is this an omen?  Slate Magazine has just republished a old column of his which explains liquidity in terms that even I can understand.  http://www.slate.com/id/2202165/

John McCain was supposed to deliver a new economic plan today, but instead decided to talk about how

“We have 22 days to go,’’ he said. “We’re six points down. The national media has written us off.’’ (At this the crowd booed loudly.) “Senator Obama is measuring the drapes, and planning with Speaker Pelosi and Senator Reid to raise taxes, increase spending, take away your right to vote by secret ballot in labor elections, and concede defeat in Iraq.’’

In a stump speech notable for large paragraphs of pessimism, Mr. McCain said: “These are hard times, my friend. Our economy is in crisis. Financial markets are collapsing. Credit is drying up. Your savings are in danger and your retirement is at risk. Jobs are disappearing. The cost of health care, your children’s college, gasoline and groceries are rising all the time, with no end in sight, while your most important asset — your home — is losing value every day.’’

Mr. McCain then said that he, not Senator Barack Obama, had the experience to turn the crisis around.

He offered no specifics, but at least he didn’t mention Bill Ayres and blame him for the economic crisis

Meanwhile Obama was giving a speech in Toledo, Ohio (the home town of the character, Klinger, from MASH) with a detailed plan of what happens next – after the rescue plan is implemented. 

Senator Barack Obama on Monday expanded his economic platform, including proposals to spur new jobs, to give Americans penalty-free access to retirement savings to help them through the downturn, to urge a 90-day moratorium on home foreclosures and to lend money to strapped local and state governments.

During his remarks here, Mr. Obama gently scolded all Americans for “living beyond their means — from Wall Street to Washington to even some on Main Street.” His audience of supporters applauded as he said it was a moment in the nation’s history to pull together and sacrifice.

(The McCain and Obama quotes are all from the New York Times)

So the big questions remain:  Can McCain once again be the Comeback Kid?  What role will race play?  Will the debate on Wednesday night make the race closer or seal McCain’s fate?