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I Knew This Would Happen

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May 27, 2010

It was almost a year ago when I predicted that President Obama would eventually announce the need for a “second stimulus”.  Once the decision was made to drink the Keynesian Kool-Aid with the implementation of last year’s economic stimulus package, we were faced with the question of how much to drink.  As I expected, our President took the half-assed, yet “moderate” approach of limiting the stimulus effort to less than what was admitted as the cost of the TARP program, as well as approving  the waste of stimulus funds on “pork” projects, ill-suited to stimulate economic recovery.  In that July 9, 2009 piece, I discussed the fact that liberal economist, Paul Krugman, was not alone in claiming that $787 billion would not be an adequate amount to jump-start the economy back to firing on all cylinders.  I pointed out that a survey of economists conducted by Bloomberg News in February of 2009 revealed a consensus opinion that an $800 billion stimulus would prove to be inadequate.  The February 12, 2009 Bloomberg article by Timothy Homan and Alex Tanzi revealed that:

Even as Obama aims to create 3.5 million jobs with a stimulus plan, economists foresee an unemployment rate exceeding 8 percent through next year.

As we now reach the mid-point of that “next year”, the unemployment rate is at 9.9 percent.  Those economists were right.  Beyond that, some highly-respected economists, including Robert Shiller, are discussing the risk of our experiencing a “double-dip” recession.  As a result, Larry Summers, Director of the President’s National Economic Council, is advocating the passage of a new set of spending measures, referred to as the “second stimulus”.  To help offset the expense, the President has asked Congress to grant him powers to cut unnecessary spending, as would be accomplished with a “line item veto”.  The Financial Times described the situation this way :

The combined announcements were made amid rising concern that centrist Democrats, or those representing marginal districts, might vote against the spending measures, which include more loans for small businesses, an extension of unemployment insurance and aid to states to prevent hundreds of thousands more teachers from being laid off.

*   *   *

Taken together, Mr Summers’s speech and Mr Obama’s announcement show an administration walking a fine line between the need to signal strong medium-term fiscal discipline and not jeopardising what they fear may be a fragile recovery.

Because they couldn’t get it right the first time, the President and his administration have placed themselves in the position of seeking piecemeal stimulus measures.  If they had done it right, we would probably be enjoying economic recovery and a boost in the ranks of the employed at this point.  As a result, this half-assed, piecemeal approach will likely prove more costly than doing it right on the first try.  With mid-term elections approaching, deficit hawks have their knives sharpened for anything that can be described as an “entitlement” (unless that entitlement inures to the benefit of a favored Wall Street institution).  Harold Meyerson of The Washington Post challenged the logic of the deficit hawks with this argument:

Those who oppose the jobs bills in the House and Senate this week should be compelled to answer some questions, starting with:  Absent more stimulus, what do they see as the plausible engine of economic recovery?  What effect will laying off as many as 300,000 teachers have on the education of American children?  And, more elementally, don’t they know there’s a recession on?

Marshall Auerback of the Roosevelt Institute picked up where Harold Meyerson left off, as this recent posting at the New Deal 2.0 website demonstrates:

In fact, full employment is also the best “financial stability” reform we could implement, because with jobs growth comes higher income growth and a corresponding ability to service debt.  That means less write-offs for banks and a correspondingly smaller need to provide government bailouts.

Fiscal austerity, by contrast, won’t cut it.  Our elites seem think that you can cut “wasteful government spending” (that is, reduce private demand further) and cut wages and hence private incomes and not expect major multiplier effects to make things significantly worse.  Of course, that “wasteful”, “unsustainable” spending never seems to apply to the Department of  Defense, where we always seem to be able to appropriate a few billion, whenever necessary.  “Affordability” principles never extend to the Pentagon, it appears.

The fact that we are still in the midst of a severe recession (rather than a robust economic recovery as is often claimed) accounts for the rationale asserted by Larry Summers in advocating a second stimulus amounting to approximately $200 billion in spending measures.  Here’s how Summers explained the proposal in a May 24 speech at the Johns Hopkins School of Advanced International Studies:

It has in recent years been essential for the federal deficit to increase as the economy has gone into recession and has been severely constrained by demand.

And I cannot agree with those who suggest that it somehow threatens the future to provide truly temporary, high-bang-for-the-buck jobs and growth measures.

Rather, assuring as rapid a recovery as possible strengthens our future economy, our future prosperity, with many benefits, including a greater ability to manage our debts.

On the other hand, those who recognize the fiscal and growth benefits of strong expansionary policies must also recognize that it is simultaneously desirable to provide confidence that deficits will come down to sustainable levels as recovery is achieved.  Such confidence both spurs recovery by reducing capital costs and reduces the risk of financial accidents.

To put the point differently:  It is not possible to imagine sound budgets in the absence of economic growth and solid economic performance.

*   *   *

It is important to recognize that the ultimate consequences of stimulus for indebtedness depend critically on the macroeconomic conditions.  When the economy is demand constrained, the impact of a dollar of tax cuts or expansionary investment will be at its highest and the impact on deficits at its lowest.
*   *   *

In areas where the government has a significant opportunity for impact, it would be pennywise and pound foolish not to take advantage of our capacity to encourage near-term job creation.   This explains the logic of the Recovery Act’s success and the rationale for taking additional targeted actions to increase confidence in our economic recovery.

Consider the package currently under consideration in Congress to extend unemployment and health benefits to those out of work and support to states to avoid budget cuts as a case in point.

It would be an act of fiscal shortsightedness to break from the longstanding practice of extending these provisions at a moment when sustained economic recovery is so crucial to our medium-term fiscal prospects.

So, here we are at the introduction of the second stimulus plan.  Despite the denial by President Obama that he would seek a second stimulus, he has Larry Summers doing just that.  Last year, the public and the Congress had the will – not to mention the sense of urgency – to approve such measures.  This time around, it might not happen and that would be due to the leadership flaw I observed last year:

President Obama should have done it right the first time.  His penchant for compromise — simply for the sake of compromise itself — is bound to bite him in the ass on this issue, as it surely will on health care reform — should he abandon the “public option”.  The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return.  The voting public will perceive this as weak leadership.  As a result, President Obama will need to re-invent this aspect of his public image before he can even consider presenting a second economic stimulus proposal.

At this point, Obama’s “flexibility” is often viewed by the voting public as a lack of existential authenticity, sincerity or — worse yet —  credibility.  As a result, I would expect to see more articles like the recent piece by Carol Lee at Politico, entitled, “Obama:  Day for ‘partnership’ passed”.

Here comes the makeover!






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The Return Of Jeb Bush

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December 4, 2008

I was surprised when I read the December 2 report by Beth Reinhard in the Miami Herald concerning the announcement by Mel Martinez, that he would not seek re-election to the United States Senate in 2010, at the end of his first term.  He has always been such an ambitious guy.  Immediately after the mid-term elections in 2006, Senator Martinez was named Chairman of the Republican National Committee (although he ultimately resigned from that post in October of 2007).  As Martin Kady reported in the November 14, 2006 edition of the New York Times:

Republicans are hoping that Martinez, whose family fled communist Cuba in 1962, will appeal to the pivotal Hispanic voting bloc, which went heavily for Democrats in the Nov. 7 elections.

Beth Reinhard’s article in the Miami Herald quoted the Senator’s explanation for not seeking another term:  the simple desire to spend more time in Orlando with family and friends.  However, Ms. Reinhard provided an alternative explanation for the motivating factors behind this decision:

His slumping poll numbers and lackluster reelection fundraising have fueled speculation for months that he would not seek another term.  But Martinez, a reluctant Washington insider recruited by President George W. Bush, insisted that he wasn’t deterred by the prospect of a tough race.  He added that he announced his retirement early to give potential candidates enough time to build campaigns.

The article went on to disclose that “a close ally” of former Governor Jeb Bush indicated that Jeb “was thinking about the race”.

A December 3 report by Carol Lee and Jonathan Martin on the Politico website bore the headline:   “Jeb: I am considering Senate run”.  They noted the likelihood that in the event Jeb should seek the Senate seat relinquished by Mel Martinez, he would not likely face any Republican opposition.  What really stood out in this piece was Jeb’s strategic vision for the future of the Republican Party in the wake of the 2008 elections.  At a time when many Republicans expressed dread that the only “rising star” in their party might be Sarah Palin, it must have been nice to hear “the smart one” from the Bush family provide an enlightened perspective on the future:

In an interview with Politico immediately after November’s election, the former governor said the Republican Party should take four primary steps to regain favor with voters: Show no tolerance for corruption, practice what it preaches about limiting the scope of government (“There should not be such a thing as a Big Government Republican”), stand for working families and small business, and embrace reform.

Bush said conservatives should “do the math of the new demographics of the United States,” explaining that the Republican Party “can’t be anti-Hispanic, anti-young person — anti many things — and be surprised when we don’t win elections.”

Jeb let everyone know that there is at least one Republican who “gets it” and can provide change the Republicans can believe in.  The obvious next question is:  When is he planning on a run for the Presidency?  If his plan is to run in the 2012 Presidential election, he would have to begin campaigning immediately upon being sworn in as a Senator in January of 2011.  That simply would not make sense.  He would more likely spend a few years in the Senate, re-defining himself as a centrist and demonstrating the capacity for bipartisanship that his brother lacked.  He would then likely set his sights on the 2016 Presidential election, when President Obama’s term expires.

In the mean time, the Democrats need to focus on nominating a worthy opponent for Jeb in the Senatorial election.  Their best chance for victory would be the nomination of a Latin-American woman as their candidate.  Jeb’s wife, Columba, is a native of Mexico and this has always endeared him to the Latin-American voters in Florida.  A female candidate could attract the votes of independent female voters.

The Democratic Party’s response to Jeb’s likely senatorial bid is already taking shape.  The Politico website ran a second article on Jeb’s Senatorial aspirations on December 3, written by Amie Parnes and Charles Mathesian, entitled:  “Will voters elect a Bush again?” They quoted the response from Congresswoman Debbie Wasserman Schultz about the prospect of a Senator Jeb Bush:

“I don’t think Jeb Bush’s leadership style is a good fit for the US Senate or any legislative body. He governs with ‘my way or the highway’ politics. He was literally the most inflexible public official I’ve ever encountered in my 16 years in office,” said Wasserman Schultz. “I think they’re very similar in terms of his leadership style. When they decide that they are correct there’s no telling them that they are not.”

Who would have thought that before George W. Bush could move out of the White House, there would be serious discussion of another Bush candidacy?