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.
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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.
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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.
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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”.
I include myself among those who are astonished by the number of people who believe that the economy is well on the road to recovery. The cheerleaders on television never seem to have trouble convincing a certain number of people that all is well. Nevertheless, the recent stock market activity, particularly on Thursday, April 29 – when the specter of debt contagion from Greece sent many to Walgreen’s for their first-time purchase of Depends – provided evidence that there is plenty of denial about our uncertain economic situation. It seems as though most people are convinced that America can money-print its way out of any problem that comes along. They must believe that if Ben Bernanke’s printing press beat the financial crisis it can defeat everything from climate change to terrorism. But what about the economic impact from the recent oil rig disaster in the Gulf of Mexico? Do people believe that Ben Bernanke can just print more fish and save the seafood industry?
David Kotok is the Chief Investment Officer for Cumberland Advisors. His grim outlook concerning the consequences from the Deepwater Horizon tragedy are obviously too painful for the magical thinking crowd to consider for more than a nanosecond. The Business Insider website provided us with some glimpses of what Mr. Kotok sees resulting from what many people prefer to view as simply “another oil spill – possibly as bad as that caused by the Exxon Valdez”. From Mr. Kotok’s perspective, there is a dimension of economic turmoil about to result from the recent catastrophe that could send our precariously-situated economy into a double-dip recession:
Thousands of small and independent businesses as well as larger public companies in tourism are hurt here. This is not just about the source of half the nation’s shrimp. That is already a casualty. It’s also about the bank loans for the $200,000 shrimp boat and the house the boat owner and/or his employees live in and the fact that this shock piles on a fragile financial system that is trying to recover from a three-year financial crisis.
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Federal deficit spending will certainly rise by tens, and maybe hundreds, of billions as emergency appropriations are directed at larger and larger efforts to clean up this mess. At the same time, federal and state revenues tied to Gulf-region businesses will fall.
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We expect to see the deterioration of the economic statistics for the US to reveal the onset of this oil-slick crisis in May, and the negative impact will intensify during the summer months. A “double-dip” recession probably has been made more likely by this tragedy.
As the great multitude of media outlets spin the story to fit the usual narratives (“lessons learned”, “finger pointing”, “Obama’s Katrina”, “Halliburton’s latest controversy”, etc.) the most important story – the likely economic consequences of this event – is being ignored by the mainstream media for as long as possible. As usual, Wall Street’s favorite chumps – those who believe that macroeconomic events are irrelevant to what happens in the stock market – are poised for another bloodbath. This time, Ben Bernanke’s printing press won’t serve as the ultimate panacea. Fish can’t be printed.
On the anniversary of the stimulus law (a/k/a the American Recovery and Reinvestment Act of 2009 — Public Law 111-5) there has been quite a bit of debate concerning the number of jobs actually created by the stimulus as opposed to the claims made by Democratic politicians. For their part, the Democrats take pride in the fact that John Makin of the conservative think-tank, the American Enterprise Institute, recently published this statement at the AEI website:
Absent temporary fiscal stimulus and inventory rebuilding, which taken together added about 4 percentage points to U.S.growth, the economy would have contracted at about a 1 percent annual rate during the second half of 2009.
A few months ago, I had a discussion with an old friend and the subject of the stimulus came up. My beefs about the stimulus were that it did not offer the necessary degree of immediate relief and that a good chunk of it should have gone directly into the hands of the taxpayers.
I recently read a blog posting by Keith Hennessey, the former director of the National Economic Council under President George W. Bush, which expressed some opinions similar to my own on what the stimulus should have offered. Although Mr. Hennessey preferred the traditional panacea of tax cuts as the primary means for economic stimulus, he made a number of other important points. With so much fear being expressed about the possibility of a “double-dip” recession, our government could find itself in the uncomfortable position of considering another stimulus bill. If that day comes, we have all the more reason to look back at what was right and what was wrong with the 2009 stimulus.
Keith Hennessy began with this statement:
Unlike many critics of the stimulus law, I think that fiscal policy can increase short-term economic growth, especially when the economy is in a deep recession. In other words, I think that fiscal stimulus is a valid concept. This does not mean that I think that every increase in government spending, or every tax cut, (a) increases short-term economic growth or (b) is good policy.
At the end of his second paragraph, he got to the part that was music to my ears:
If the Administration had instead put $862 B directly into people’s hands, you would have seen more immediate spending and economic growth than we did, even if people had saved most of it.
In contrast, government spending is powerful but painfully slow. If the government spends $1 on building a road, eventually that entire $1 will enter the economy and increase GDP growth. Your bang-for-the-deficit-buck is extremely high. The problem is that bang-for-the-buck doesn’t help us if that bang occurs two or three or four years from now.
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I would instead prefer that people be allowed to spend and save the money how they best see fit. My preferred path also has less waste and bureaucracy.
A bit later in the piece, Hennessey said some things that probably caused a good number of the CPAC conventioneers reach for the Tums:
I agree with the Administration that last year’s stimulus law increased economic growth above what it otherwise would have been. I agree that employment is higher than it would have been without a stimulus.
Of course, Hennessey complained that “The law was poorly designed and inefficient” — in part because the money was funneled through federal and state bureaucracies — another valid point. Then, he got to the important issue:
Given a decision last year to do a big fiscal stimulus, I would have preferred, in this order:
1. putting all the money into a permanent reduction in income and capital taxes;
2. putting all the money into a temporary reduction in income and capital taxes;
3. putting all the money into transfer payments;
4. what Congress and the President did.
Given the policy preferences of the President, his team’s big policy mistake last year was to let Congress turn a reasonable macroeconomic fiscal policy goal into a Congressional spending toga party. Given his policy preferences, the President should have insisted that Congress put all the money into (2) and (3) above. He would have had a bigger macro stimulus bang earlier.
In case you’re wondering what “transfer payments” are — you need to think in terms of “wealth transfer”. In this case, it concerns situations where the government gives away money to people who aren’t rich. A good example of this was the stimulus program that took place under President Bush. Individuals with incomes of less than $75,000 received a $300 “stimulus check” and households with joint incomes under $150,000 got $600.
My own stimulus idea would involve a “tax rebate” program, wherein the taxpayers receive a number of $50 vouchers based on the amount of income tax they paid the previous year. The recipients would then be instructed to go out and buy stuff with the vouchers. So what if they spent it on imported merchandise? The American retailers and shipping companies would still make money, finding it necessary to hire people. The vouchers would display the person’s name and address. In order to use the vouchers, identification would be needed, so as to prevent resale. The maximum amount of cash change one could get back from a voucher-funded purchase would be $10.
Hopefully, we won’t need another stimulus program. However, if we do, I suggest that the government simply give us vouchers and send us shopping.
As the year and the decade come to a close, we are being bombarded with a slew of retrospectives about what was “important” during this crazy time. Those of us who are capable of directing our attention to intellectually stimulating subjects, have found the increasing availability of information from internet-based sources to be life-changing. Now that we are no longer stuck with a focus on the handful of news stories deemed “important” by mainstream media outlets, we have familiarized ourselves with the ever-expanding marketplace of ideas to be found online. We all have our favorite websites, where we go first when we want to find out the latest and most attention-grabbing news events of the day. From there, many of us take a closer look at a particular topic by going to a more specialized, subject-oriented website. I keep a blogroll at the left side of this page, which is offered as a diverse aggregation of sources and perspectives on subjects usually covered in this blog. Lately, I’ve found myself spending more and more time reading the great material by Edward Harrison of Credit Writedowns. As a result, I’ve added a link to that site on my blogroll.
Edward Harrison explained the reason why he chose such a gloomy name for his website:
I named my blog “Credit Writedowns” because I anticipated an historic wave of credit writedowns in the global banking system which would lead to a wave of deleveraging, systemic risk, and bank failures — in short, a massive financial and economic bust to rival the Great Depression.
Mr. Harrison has an MBA degree in Finance from Columbia University and he works as a banking and finance specialist for Global Macro Advisors. One of his noteworthy efforts from the first year of Credit Writedowns came about on September 24, 2008, when he published “The Dummy’s Guide to the US Banking Crisis”.
I have been particularly impressed by the “year in review” series, presently underway at Credit Writedowns. On December 23, Mr. Harrison published a great essay about how “kleptocracy” (rule by thieves) has become the status quo. The premise for this piece was originally included in one of Harrison’s early postings on Credit Writedowns, from March 24, 2008. At that time, he explained the subject this way:
First, let’s use a theory from Guns, Germs, and Steel by Jared Diamond as the center-piece for this little theory. In Chapter 14, entitled “From Egalitarianism to Kleptocracy,” Diamond postulates that more stratified societies are by definition less egalitarian, but more efficient and are, thus, able to eradicate or conquer more egalitarian, less stratified societies. Thus, all “advanced” societies with high levels of GDP are complex and hierarchical.
The problem is: these more stratified, more complex societies are in essence Kleptocracies, where those in power re-distribute societal wealth to themselves. Those at the bottom of the society’s pyramid accept this unequal, non-egalitarian state of affairs because they too benefit from their society’s relative advancement. It’s a case of a rising tide lifting all boats.
Back in March of 2008, Edward Harrison was one of just a small handful of thinkers capable of facing up to the ugly reality of where the credit bubble brought us:
The United States has been living beyond its means for some time. Since the 1960s, we have run up a massive federal debt and current account deficit, while debt levels have doubled on a percentage of GDP basis. Our present levels of consumption are simply not justified by our current levels of productivity, if we want to maintain our present standard of living in the future.
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The fact is our day of reckoning is upon us. We will soon realize that our massive debt and an outsized credit bubble have not only saddled us with debt, but it has also misallocated capital so that we are less productive than we believed. We have built miles and miles of telecom dark fibre when we could have invested in schools. We have built massive numbers of new homes, when we could have repaired our bridges and roads. The last 35 years have been an illusion of extreme productivity and wealth because we have artificially pulled forward demand by misallocating resources in order to consume today, what could have been consumed tomorrow. In essence, we are consuming today, while unwittingly making it more difficult to consume tomorrow because we believe we are wealthier than we truly are.
The recent sneaky move by Treasury Secretary “Turbo” Tim Geithner on Christmas Eve, lifting the $400 billion restriction on bailouts to Fannie Mae and Freddie Mac (sidestepping the need for Congressional approval because it was done before the end of the year) is drawing attention to the kleptocracy’s strategy of relying on distraction of public attention in order to get away with skullduggery. Harrison’s point from the December 23 posting: that the kleptocracy anesthetizes the public with television, which has become “our own modern-day agent of mental anesthesia”, struck a chord with me.
The latest entry in the “year in review” series at Credit Writedowns concerns the subject of crony capitalism. Here’s how Edward Harrison described the piece:
In this post, I want to talk about Obama’s economic policies in the context of what I perceive as a crony capitalism which is now endemic in Washington. As I see it, Americans are angry because the economy is still quite fragile and the personal financial situation for many ordinary Americans is still quite dire. Yet, the so-called fat cats seem more pigs eating at the trough of government largesse. This juxtaposition is galling and undermines any success that the Obama Administration has achieved.
A key theme of that essay is expressed in this passage:
The evidence, therefore, tends to demonstrate that we have witnessed an orchestrated campaign by the Bush and Obama Administrations to recapitalize too big to fail institutions by hook or by crook, bypassing Congressional approval if necessary. And when it comes to healthcare, both Congress and the White House have bent over backwards to keep the lobbyists onside. As I see it, our government has favored special interests in the past year of Obama’s tenure to our detriment.
As more economists voice agreement with the opinion expressed by Joseph Stiglitz, that there will likely be further economic contraction in the second half of 2010, the inevitability of a dreaded “double-dip” recession will become more apparent. Mr. Harrison pointed out that this scenario could result in some disdain for President Obama, which might impact the 2010 election results. Perhaps President Obama should start reading Credit Writedowns — and stop listening to Larry Summers.
TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.
I Knew This Would Happen
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:
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 :
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:
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:
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:
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:
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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