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Struggles of a Passive Centrist

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In September of 2010, I wrote a piece entitled, “Where Obama Went Wrong”.  It began with this statement:  “One could write an 800-page book on this subject.”  Noam Scheiber has just written that book in only 368 pages.  It’s called The Escape Artists and it is scheduled for release at the end of this month.  The book tells the tale of a President in a struggle to create a centrist persona, with no roadmap of his own.  In fact, it was Obama’s decision to follow the advice of Peter Orszag, to the exclusion of the opinions offered by Christina Romer and Larry Summers – which prolonged the unemployment crisis.

The following graph from The Economic Populist website depicts the persistence of unemployment in America:

Noam Scheiber’s new book piqued my interest because, back in July of 2009, I wrote a piece entitled “The Second Stimulus”, which began with this thought:

It’s a subject that many people are talking about, but not many politicians want to discuss.  It appears as though a second economic stimulus package will be necessary to save our sinking economy and get people back to work.  Because of the huge deficits already incurred in responding to the financial meltdown, along with the $787 billion price tag for the first stimulus package and because of the President’s promise to get healthcare reform enacted, there aren’t many in Congress who are willing to touch this subject right now, although some are.

The Escape Artists takes us back to the pivotal year of 2009 – Obama’s first year in the White House.  Noam Scheiber provided us with a taste of his new book by way of an article published in The New Republic entitled, “Obama’s Worst Year”.  Scheiber gave the reader an insider’s look at Obama’s clueless indecision at the fork in the road between deficit hawkishness vs. economic stimulus.  Ultimately Obama decided to maintain the illusion of centrism by following the austerity program suggested by Peter Orszag:

BACK IN THE SUMMER of 2009, David Axelrod, the president’s top political aide, was peppering White House economist Christina Romer with questions in preparation for a talk-show appearance.  With unemployment nearing 10 percent, many commentators on the left were second-guessing the size of the original stimulus, and so Axelrod asked if it had been big enough.  “Abso-fucking-lutely not,” Romer responded.  She said it half-jokingly, but the joke was that she would use the line on television.  She was dead serious about the sentiment.  Axelrod did not seem amused.

For Romer, the crusade was a lonely one.  While she believed the economy needed another boost in order to recover, many in the administration were insisting on cuts.  The chief proponent of this view was budget director Peter Orszag.  Worried that the deficit was undermining the confidence of businessmen, Orszag lobbied to pare down the budget in August, six months ahead of the usual budget schedule.      .   .   .

The debate was not only a question of policy.  It was also about governing style – and, in a sense, about the very nature of the Obama presidency.  Pitching a deficit-reduction plan would be a concession to critics on the right, who argued that the original stimulus and the health care bill amounted to liberal overreach.  It would be premised on the notion that bipartisan compromise on a major issue was still possible.  A play for more stimulus, on the other hand, would be a defiant action, and Obama clearly recognized this.  When Romer later urged him to double-down, he groused, “The American people don’t think it worked, so I can’t do it.”

That’s a fine example of great leadership – isn’t it?  “The American people don’t think it worked, so I can’t do it.”  In 2009, the fierce urgency of the unemployment and economic crises demanded a leader who would not feel intimidated by the sheeple’s erroneous belief that the Economic Recovery Act had not “worked”.  Obama could have educated the American people by directing their attention to a June 3, 2009 essay by Keith Hennessey (former director of the National Economic Council under President George W. Bush) which described the Recovery Act as “effective”.

Noam Scheiber’s New Republic article detailed Obama’s evolution from inexperienced negotiator to President with “newfound boldness”:

FOR TWO AND A HALF YEARS, Obama had been hatching proposals with an eye toward winning over the opposition.  In most cases, all it had gotten him was more extreme demands from Republicans and not even a pretense of bipartisan support.  Now, after the searing experience of the deficit deal, he still wanted reasonable, centrist policies.  But he was done trying to fit them to the ever-shifting conservative zeitgeist.  When he finally turned back to jobs in August, he told his aides not to “self-edit” proposals to improve their chances of passing the Republican House.  “He pushed us to make sure this was not simply a predesigned legislative compromise,” one recalls.

Many readers will be surprised to learn that Larry Summers had aligned himself with Christina Romer by advocating for additional fiscal stimulus during the summer of 2009.  In fact, Ms. Romer herself has already confirmed this.  The Romer-Summers alliance for stimulus was also discussed in Ron Suskind’s book, Confidence Men.

As for the stimulus program itself, a new book by Mike Grabell of ProPublica entitled, Money Well Spent? provided the most even-handed analysis of what the stimulus did – and did not – accomplish.  Mike Grabell gave us a glimpse of his new book with an article which appeared in The New York Times.  The piece was cross-posted to the ProPublica website.  Keith Hennesssey’s prescient observations about the shortcomings of that program, which he discussed  in June of 2009, were somewhat consistent with those discussed by Mike Grabell, particularly on the subject of “shovel-ready” programs.  Here is what Keith Hennessey said, while supporting his argument with the observations of Congressional Budget Office Director Doug Elmendorf:

In fact, the infrastructure spending in the stimulus law will peak in fiscal year 2011, which goes from October 1, 2010 to September 30, 2011.  That’s too late from a macro perspective.

The Director further points out that the 2009 stimulus law created many new programs.  This slows spend-out, as it takes time to create and ramp up the new programs.

The Administration has made much of working with federal and state bureaucracies to find “shovel-ready” projects to accelerate infrastructure spending.  All of my conversations with budget analysts suggest this claim is tremendously overblown, and Director Elmendorf asks, “Is this practical on a large scale?”

On February 11, 2012, Mike Grabell said this:

But the stimulus ultimately failed to bring about a strong, sustainable recovery.  Money was spread far and wide rather than dedicated to programs with the most bang for the buck.  “Shovel-ready” projects, those that would put people to work right away, took too long to break ground.  Investments in worthwhile long-term projects, on the other hand, were often rushed to meet arbitrary deadlines, and the resulting shoddy outcomes tarnished the projects’ image.

The Economic Recovery Act of 2009 will surely become a central subject of debate during the current Presidential election campaign.  Regardless of what you hear from partisan bloviators, Messrs. Hennessey and Garbell have provided you with reliable guides to the unvarnished truth on this subject.



 

Government Should Listen To These Wealth Managers

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A good deal of Mitt Romney’s appeal as a Presidential candidate is based on his experience as a private equity fund manager – despite the “vulture capitalist” moniker, favored by some of his critics.  Many voters believe that America needs someone with more “business sense” in the White House.  Listening to Mitt Romney would lead one to believe that America’s economic and unemployment problems will not be solved until “government gets out of the way”, allowing those sanctified “job creators” to bring salvation to the unemployed masses.  Those who complained about how the system has been rigged against the American middle class during the past few decades have found themselves accused of waging “class warfare”.  We are supposed to believe that Romney speaks on behalf of “business” when he lashes out against “troublesome” government regulations which hurt the corporate bottom line and therefore – all of America.

Nevertheless, the real world happens to be the home of many wealth managers – entrusted with enormous amounts of money by a good number of rich people and institutional investors – who envision quite a different role of government than the mere nuisance described by Romney and like-minded individuals.  If only our elected officials – and more of the voting public – would pay close attention to the sage advice offered by these wealth managers, we might be able to solve our nation’s economic and unemployment problems.

Last summer, bond guru Bill Gross of PIMCO  lamented the Obama administration’s obliviousness to the need for government involvement in short-term job creation:

Additionally and immediately, however, government must take a leading role in job creation.  Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.  The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper.  That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities.  Our labor force is too expensive and poorly educated for today’s marketplace.

*   *   *

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is.  Government must step up to the plate, as it should have in early 2009.

In my last posting, I discussed a February 2 Washington Post commentary by Mohamed El-Erian (co-CEO of PIMCO).  El-Erian emphasized that – despite the slight progress achieved in reducing unemployment – the situation remains at a crisis level, demanding immediate efforts toward resolution:

Have no doubt, this is a complex, multiyear effort that involves several government agencies acting in a delicate, coordinated effort.  It will not happen unless our political leaders come together to address what constitutes America’s biggest national challenge. And sustained implementation will not be possible nor effective without much clearer personal accountability.

One would think that, given all this, it has become more than paramount for Washington to elevate – not just in rhetoric but, critically, through sustained actions – the urgency of today’s unemployment crisis to the same level that it placed the financial crisis three years ago.  But watching the actions in the nation’s capital, I and many others are worried that our politicians will wait at least until the November elections before dealing more seriously with the unemployment crisis.

On October 31, I focused on the propaganda war waged against the Occupy Wall Street movement, concluding the piece with my expectation that Jeremy Grantham’s upcoming third quarter newsletter would provide some sorely-needed, astute commentary on the situation.  Jeremy Grantham, rated by Bloomberg BusinessWeek as one of the Fifty Most Influential Money Managers, released an abbreviated edition of that newsletter one month later than usual, due to a busy schedule.  In addition to expressing some supportive comments about the OWS movement, Grantham noted that he would provide a special supplement, based specifically on that subject.  Finally, on February 5, Mr. Grantham made good on his promise with an opinion piece in the Financial Times entitled, “People now see it as a system for the rich only”:

For the time being, in the US our corporate and governmental system backed surprisingly by the Supreme Court has become a plutocracy, designed to prolong, protect and intensify the wealth and influence of those who already have the wealth and influence.  What the Occupy movement indicates is that a growing number of people have begun to recognise this in spite of the efficiency of capital’s propaganda machines.  Forty years of no pay increase in the US after inflation for the average hour worked should, after all, have that effect.  The propaganda is good but not that good.

*   *   *

In 50 years economic mobility in the US has gone from the best to one of the worst.  The benefits of the past 40 years of quite normal productivity have been abnormally divided between the very rich (and corporations) and the workers.

Indeed “divide” is not the right word, for, remarkably, the workers received no benefit at all, while the top 0.1 per cent has increased its share nearly fourfold in 35 years to a record equal to 1929 and the gilded age.

But the best propaganda of all is that the richest 400 people now have assets equal to the poorest 140m.  If that doesn’t disturb you, you have a wallet for a heart.  The Occupiers’ theme should be simple:  “More sensible assistance for the working poor, more taxes for the rich.”

I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  Back in November of 2010, economist John Hussman of the Hussman Funds discussed the consequences of the administration’s failure to do what was necessary:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The plutocratic tools in control of our government would never allow the stockholders and bondholders of those “too-big-to-fail” banks to suffer losses as do normal people after making bad investments.  It’s hard to imagine that Mitt Romney would take a tougher stance against those zombie banks than what we have seen from the Obama administration.

Our government officials – from across the political spectrum – would be wise to follow the advice offered by these fund managers.  A political hack whose livelihood is based entirely on passive income has little to offer in the way of “business sense” when compared to a handful of fund managers, entrusted to use their business and financial acumen to preserve so many billions of dollars.  Who speaks for business?  It should be those business leaders who demonstrate concern for the welfare of all human beings in America.


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Thinking Clearly During An Election Year

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The non-stop bombardment of inane, partisan yammering which assaults us during an election year, makes it even more refreshing when a level-headed, clear thinker catches our attention.  One popular subject of debate during the current election cycle has been the American Recovery and Reinvestment Act (the 2009 stimulus bill).  In stark contrast with the propaganda you have been hearing about the 2009 stimulus (from both political parties), a new book by Mike Grabell of ProPublica entitled, Money Well Spent? brought us a rare, objective analysis of what the stimulus did – and did not – accomplish.

Matt Steinglass of The Economist recently wrote a great essay on the “stimulus vs. austerity” debate, which included a discussion of Mike Grabell’s new book:

The debate we had about the stimulus probably should have been a lot like the book Mr Grabell has written:  a detailed investigation of what does and doesn’t work in stimulus spending and whether the government really can jump-start a promising industry through investments, tax breaks and industrial policy.  But that wasn’t the debate we had.  Instead we had a debate about the very concept of whether the government ought to spend money counter-cyclically during a recession in order to keep the economy from collapsing, or whether it should tighten its belt along with consumers and businesses in order to generate confidence in the financial markets and allow markets to clear.  We had a debate about whether governments should respond to recessions with deficit spending or austerity.

The ProPublica website gave us a peek at Mike Grabell’s book by publishing a passage concerning how the stimulus helped America maintain its status as a competitor in the electric car industry.  Nevertheless, America’s failure to support the new technology with the same zeal as its Asian competitors could push domestic manufacturers completely out of the market:

A report by congressional researchers last year concluded that the cost of batteries, anxiety over mileage range and more efficient internal combustion engines could make it difficult to achieve Obama’s goal of a million electric vehicles by 2015.  Even many in the industry say the target is unreachable.

While the $2.4 billion in stimulus money has increased battery manufacturing, the congressional report noted that United States might not be able to keep up in the long run.  South Korea and China have announced plans to invest more than five times that amount over the next decade.

As Matt Steinglass concluded in his essay for The Economist, current economic circumstances (as well as the changed opinions of economists John Cochrane and Niall Ferguson) indicate that the proponents of economic stimulus have won the “stimulus vs. austerity” debate:

The 2010 elections took place at a moment when people seemed to have lost faith in Keynesianism.  The 2012 elections are taking place at a moment when people have lost faith in expansionary austerity.

Although the oil industry has done a successful job of convincing the public that jobs will be lost if the Keystone Pipeline is not approved, big oil has done a better job of distracting the public from understanding how many jobs will be lost if America fails to earn a niche in the electric vehicle market.

The politicization of the debate over how to address the ongoing unemployment crisis was the subject of a February 2 Washington Post commentary by Mohamed El-Erian (co-CEO of PIMCO).  El-Erian lamented that – despite the slight progress achieved in reducing unemployment – the situation remains at a crisis level, demanding immediate efforts toward resolution:

The longer that corrective measures are delayed, the harder the task at hand will be and the greater the eventual costs to society.

*   *   *

In fact, our current unemployment crisis is a force for broad and disruptive economic, political and social dislocations.

Mr. El-Erian noted that there is a faction – among the opposing forces in the debate over how to address unemployment – seeking a “killer app” which would effectuate dramatic and immediate progress.  He explained why those people aren’t being realistic:

There is no killer app.  Instead, Congress and the administration need to move simultaneously on three fronts that incorporate multiple measures:  those that address the immediate impediments to job creation, including a better mix of demand stimulus and medium-term fiscal reform involving both federal spending and revenue, as well as stronger remedies for housing and housing finance; those that deal with the longer-term enablers of productive employment, such as education, retraining and retooling; and those that strengthen the social safety nets to appropriately protect citizens in the interim.

Have no doubt, this is a complex, multiyear effort that involves several government agencies acting in a delicate, coordinated effort.  It will not happen unless our political leaders come together to address what constitutes America’s biggest national challenge. And sustained implementation will not be possible nor effective without much clearer personal accountability.

One would think that, given all this, it has become more than paramount for Washington to elevate – not just in rhetoric but, critically, through sustained actions – the urgency of today’s unemployment crisis to the same level that it placed the financial crisis three years ago.  But watching the actions in the nation’s capital, I and many others are worried that our politicians will wait at least until the November elections before dealing more seriously with the unemployment crisis.

In other words, while the election year lunacy continues, the unemployment crisis continues to act as “a force for broad and disruptive economic, political and social dislocations”.  Worse yet, the expectation that our political leaders could “come together to address what constitutes America’s biggest national challenge” seems nearly as unrealistic as waiting for that “killer app”.  This is yet another reason why Peter Schweizer’s cause – as expressed in his book, Throw Them All Out, should be on everyone’s front burner during the 2012 election year.


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Ignoring The Smart People

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The clowns in Washington seem to be going out of their way to ignore the advice of respected economists as they focus on deficit reduction while ignoring the worsening unemployment crisis.  The fact that mainstream news outlets are oblivious to the consequences of foolish economic policy doesn’t really help.  President Obama now finds himself wedded to a policy of economic destruction, while at the mercy of his opponents, simply because he ignored the good advice he was receiving back in 2009.

The urgency of our current predicament is lost on the asshats vested with the responsibility and authority to implement a “course correction”.  As I pointed out last month, bond guru Bill Gross of PIMCO made an effort to debunk the myth that balancing the budget “will magically produce 20 million jobs over the next 10 years”.  More recently, Princeton economics professor and former vice-chairman of the Federal Reserve, Alan Blinder, wrote an article for The Wall Street Journal entitled, “Our National Jobs Emergency”.  After discussing the most recent non-farm payrolls report from the Bureau of Labor Statistics, Professor Blinder made this observation:

The horrific June employment number made it two in a row.  With the latest revisions, job growth in May is now estimated to have clocked in at only 25,000 jobs.  So that’s 25,000 and 18,000 in consecutive months.  Given the immense size of total U.S. payroll employment (around 131 million) and the sampling error in the survey, those numbers are effectively zero.  Job creation has stopped for two months.

If we were at 5% unemployment, two bad payroll reports in a row would be of some concern yet tolerable.  But when viewed against the background of 9%-plus unemployment, they are catastrophic.

*   *   *

All this adds up to a national jobs emergency.  Tragically, however, it is not being treated as such.  When is the last time you heard one of our national leaders propose a serious job-creating program?

The operative word here is “serious.”  Every day brings new proposals to slash government spending.  But as I noted on this page last month, those are ways to kill jobs, not create them.  As a matter of fact, despite all the cries of “big government” or even “socialism,” public-sector employment has been falling.

Fortunately, Professor Blinder had some good ideas for private-sector job creation.  One such idea was a tax credit for firms that create new jobs:

As one concrete example, companies might be offered a tax credit equal to 10% of the increase in their wage bills (over 2011 levels, say).  No increase, no reward.

You might think Republicans would embrace an idea like that. After all, it’s a business tax cut and all the new jobs would be in the private sector.  But you’d be wrong.  Frankly, I’m not sure why. Maybe it’s seen as “left-wing social engineering.”

Professor Blinder then proposed an alternative:

Suppose we allow firms to repatriate profits at some super-low tax rate, but only to the extent that they increase their wage payments subject to Social Security.  For example, if XYZ Corporation paid wages covered by Social Security of $1.5 billion in 2011, and then boosted that amount to $1.6 billion in 2012, it would be allowed to repatriate $100 million at a tax rate of 5% or 10% instead of the usual 35% rate.  The tax savings to the company would thus be $25 million-$30 million for raising its payroll by $100 million.  That’s a powerful incentive.

Did anyone in Washington pay serious attention to Professor Blinder’s Wall Street Journal article  . . .  or were they all too busy shorting Treasuries to give a damn?

Oxford-educated economist Martin Wolf wrote a piece for the Financial Times, in which he lamented the antics of those entrusted with the power of managing financial and economic policy:

It is not that tackling the US fiscal position is urgent.  At a time of private sector deleveraging, it is helpful.  The US is able to borrow on easy terms, with yields on 10-year bonds close to 3 per cent, as the few non-hysterics predicted.  The fiscal challenge is long term, not immediate.  A decision not to allow the government to borrow to finance the programmes Congress has already mandated would be insane…. Yet, astonishingly, many of the Republicans opposed to raising the US debt ceiling do not merely wish to curb federal spending:  they enthusiastically desire a default.  Either they have no idea how profound would be the shock to their country’s economy and society of a repudiation of debt legally contracted by their state, or they fall into the category of utopian revolutionaries, heedless of all consequences.

*   *   *

These are dangerous times.  The US may be on the verge of making among the biggest and least-necessary financial mistakes in world history.  The eurozone might be on the verge of a fiscal cum financial crisis that destroys not just the solvency of important countries but even the currency union and, at worst, much of the European project.  These times require wisdom and courage among those in charge of our affairs.  In the US, utopians of the right are seeking to smash the state that emerged from the 1930s and the second world war.  In Europe, politicians are dealing with the legacy of a utopian project which requires a degree of solidarity that their peoples do not feel.  How will these clashes between utopia and reality end? In late August, when I return from my break, we may know at least some of the answers.

At this point, those “answers” are beginning to look pretty scary.  Of course, the Republicans are not the only ones to blame.  Let’s take a look at the wonderful job Mike Whitney of CounterPunch did when he dropped the entire matter back onto President Obama’s lap:

How do you light a fire under Washington, that’s the question?  Is Congress even aware that we’re undergoing a major jobs crisis or are they too busy bickering over tax cuts for fatcats or how much money they can divert from Social Security to Wall Street?

Look; unemployment is over 9% and rising.  The states are firing tens of thousands of teachers and public employees every month because they need to balance their budgets and they’re not taking in enough revenue.  The stimulus is dwindling (which means that fiscal policy is actually contractionary in real terms) And the 10-year Treasury has dipped below 3 percent (as of Monday morning.)  In other words, the bond market is signaling “recession”, even while the dope in the White House is doing his utmost to slice $4 trillion off the deficits.

Does that make any sense?

Maybe if you’re Herbert Hoover, it does.  But it makes no sense at all if you were elected with a mandate to “change” the way Washington operates and put the country back to work.  Obama is just making a bad situation worse by gadding about in his golf togs blabbering about belt tightening.  It’s enough to make you sick.

Get with the program, Barry, or resign.  That would be even better.  Then maybe we can find someone who’s serious about running the country.

As I pointed out on November 4, 2010  . . .  someone has to challenge Obama for the 2012 Democratic nomination and I have someone in mind   .   .   .


 

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Unwanted Transparency

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Immediately after assuming office, President Obama promised to provide a greater degree of transparency from his administration:

Transparency and the rule of law will be the touchstones of this presidency.

Did you really believe that?  Do you remember Jane Mayer – author of that great book, The Dark Side, which exposed the controversial “enhanced interrogation techniques”?  Well, she just wrote an article for The New Yorker, discussing the Obama administration’s use of the Espionage Act of 1917 to press criminal charges in five alleged instances of national security leaks.  At the outset of the article, Ms. Mayer made this observation:

Gabriel Schoenfeld, a conservative political scientist at the Hudson Institute, who, in his book “Necessary Secrets” (2010), argues for more stringent protection of classified information, says, “Ironically, Obama has presided over the most draconian crackdown on leaks in our history – even more so than Nixon.”

Meanwhile, another sort of unwanted transparency is catching up with the Obama administration:  transparent motives.  Many commentators are finally facing-up to the reality that Obama never gave a damn about the unemployment crisis.  I have repeatedly emphasized that President Obama’s February, 2009 decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  In his own “Tora Bora moment”, President Obama decided to rely on the advice of the very people who helped cause the financial crisis, by doing more for the zombie banks of Wall Street and less for Main Street – sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.

A recent interview with economist Tim Duy focused on the inadequacy of the Economic Recovery and Reinvestment Act of 2009:

What went wrong with stimulus?  Why does unemployment remain so high?

I don’t think anything “went wrong” with the stimulus, other than it simply wasn’t enough to fill the depth of the economic hole caused by the recession.  There was simply a lack of political willpower to fully acknowledge the depth of the problem and bring to bear the appropriate resources.  The result is an economy that is not bouncing back quickly enough to close the output gap and create sufficient job growth to drive the unemployment rate down lower at a faster pace.

Is the economy not weak enough to justify more stimulus?  Or do policy makers think that deficit spending is not able to generate more jobs?

Yes, the economy is weak enough to justify additional stimulus, and the persistently low rates of government debt should prove that current fears of deficit spending are unjustified.  Some policymakers appear to believe that a commitment to fiscal austerity will in fact generate more job growth, but this is nonsensical –  austerity would only aggravate the existing challenges (as it has in Greece).  There is currently no constraint that prevents more fiscal stimulus from being effective in promoting additional economic growth.  Longer run, yes, the US federal budget does need to be addressed, but letting growth stagnate now will only intensify that challenge in the future. Policymakers, however, appear enamoured with the idea that these challenges need to be addressed now, and this attitude poses another risk to the recovery.

I want to focus on what Professor Duy described as a “lack of willpower”.  That lack of willpower was rooted in a lack of authenticity.  President Obama was never concerned about what most of us would consider “economic recovery” – reducing unemployment to just below five percent.  Obama’s goal was to do just enough to avoid another Great Depression.  Once that goal was accomplished, it was time to move on to other things.  My cynicism on this subject was validated in a recent essay by Mark Provost for Truthout, entitled, “Why the Rich Love High Unemployment”.  In fact, Provost’s article was met with such widespread enthusiasm that it was republished in its entirety on the following websites:  Naked Capitalism, Angry Bear and The Economic Populist.  Here are some key points from the piece:

Obama’s advisers often congratulate themselves for avoiding another Great Depression – an assertion not amenable to serious analysis or debate.  A better way to evaluate their claims is to compare the US economy to other rich countries over the last few years.

On the basis of sustaining economic growth, the United States is doing better than nearly all advanced economies.

*   *   *

But when it comes to jobs, US policymakers fall short of their rosy self-evaluations.

*   *   *

The gap between economic growth and job creation reflects three separate but mutually reinforcing factors:  US corporate governance, Obama’s economic policies and the deregulation of US labor markets.

*   *   *

Obama’s lopsided recovery also reflects lopsided government intervention. Apart from all the talk about jobs, the Obama administration never supported a concrete employment plan.  The stimulus provided relief, but it was too small and did not focus on job creation.

The administration’s problem is not a question of economics, but a matter of values and priorities.

Mark Provost’s essay featured this infamous quote from a Washington Post article written by Steven Rattner (Obama’s “car czar” during 2009 – whose task force was overseen by “Turbo” Tim Geithner and Larry Summers):

Perversely, the nagging high jobless rate reflects two of the most promising attributes of the American economy:  its flexibility and its productivity.  Eliminating jobs – with all the wrenching human costs – raises productivity and, thereby, competitiveness (the president’s new favorite word).  In the long run, increasing productivity is the only route to superior competitiveness.

*   *   *

That kind of efficiency is perhaps our most precious economic asset.  However tempting it may be, we need to resist tinkering with the labor market.  Policy proposals aimed too directly at raising employment may well collaterally end up dragging on productivity. And weak productivity would exacerbate the downward pressure on wages that caused the last decade to be the first in our history in which wages (after adjustment for inflation) declined.

In other words, productivity is more important than those pesky “wrenching human costs”.  Too bad there just isn’t some kind of spray or ointment for those things!  This attitude exemplified what Chris Hedges discussed in his book, Death of the Liberal Class.  In a recent article for Truthdig, Chris Hedges emphasized how the liberal class “abandoned the human values that should have remained at the core of its activism”:

The liberal class, despite becoming an object of widespread public scorn, prefers the choreographed charade.  It will decry the wars in Iraq and Afghanistan or call for universal health care, but continue to defend and support a Democratic Party that has no intention of disrupting the corporate machine.  As long as the charade is played, the liberal class can hold itself up as the conscience of the nation without having to act.  It can maintain its privileged economic status.  It can continue to live in an imaginary world where democratic reform and responsible government exist.  It can pretend it has a voice and influence in the corridors of power.  But the uselessness and irrelevancy of the liberal class are not lost on the tens of millions of Americans who suffer the indignities of the corporate state.  And this is why liberals are rightly despised by the working class and the poor.

To repeat an important statement from Mark Provost’s essay:

The administration’s problem is not a question of economics, but a matter of values and priorities.

The unemployment crisis is destined to continue for several years – thanks to the administration’s abandonment of those human values discussed by Chris Hedges.


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Why Au-scare-ity Still Has Traction

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Many economists have been watching Britain’s experiment with austerity for quite a while.  Britain has been following a course of using cuts in government programs along with mass layoffs of public sector workers in attempt to stimulate economic growth.  Back in February, economist Dean Baker made this observation:

Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom.  The reason was the new coalition government’s commitment to prosperity through austerity.  As predicted, this looks very much like a path to pain and stagnation, not healthy growth.

That’s bad news for the citizens of the United Kingdom.  They will be forced to suffer through years of unnecessarily high unemployment.  They will also have to endure cutbacks in support for important public services like healthcare and education.

But the pain for the people in England could provide a useful example for the United States.

*   *   *

Prior to this episode, there was already a solid economic case that large public deficits were necessary to support the economy in the period following the collapse of an asset bubble. The point is simply that the private sector is not prepared to make up the demand gap, at least in the short term.  Both short-term and long-term interest rates are pretty much as low as they can be.

*   *   *

From this side of the pond, though, the goal is simply to encourage people to pay attention.  The UK might be home to 60 million people, but from the standpoint of US economic policy, it is simply exhibit A:  it is the country that did what our deficit hawks want to do in the US.

The takeaway lesson should be “austerity does not work; don’t go there.”  Unfortunately, in the land of faith-based economics, evidence does not count for much.  The UK may pursue a disastrous austerity path and those of us in the United States may still have to follow the same road anyhow.

After discussing the above-quoted commentary by Dean Baker, economist Mark Thoma added this:

Yes — it’s not about evidence, it’s about finding an excuse to implement an ideology.  The recession got in the way of those efforts until the idea that austerity is stimulative came along. Thus, “austerity is stimulative” is being used very much like “tax cuts increase revenues.”  It’s a means of claiming that ideological goals are good for the economy so that supporters in Congress and elsewhere have a means of rationalizing the policies they want to put in place.  It’s the idea that matters, and contrary evidence is brushed aside.

There seems to be an effort in many quarters to deny that the financial crisis ever happened.  Although it will eventually become absolutely imperative to get deficits under control, most sober economists emphasize that attempting to do so before the economy begins to recover and before the unemployment crisis is even addressed – would destroy any chance of economic recovery.  Barack Obama’s opponents know that the easiest route toward subverting the success of his re-election campaign involves undermining any efforts toward improving the economy to any degree by November of 2012.  Beyond that, the fast-track implementation of a British-style austerity program could guarantee a double-dip recession, which could prove disastrous to Obama’s re-election hopes.  As a result, the pressure is on to initiate some significant austerity measures as quickly as possible.  The propaganda employed to expedite this effort involves scaring the sheeple into believing that the horrifying budget deficit is about to bite them in the ass right now.  There is a rapidly increasing drumbeat to crank-up the scare factor.

Of course, the existence of this situation is the result of Obama’s own blunder.  Although he did manage to defeat Osama bin Laden, President Obama’s February, 2009 decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  In his own “Tora Bora moment”, President Obama decided to rely on the advice of the very people who helped cause the financial crisis, by doing more for the zombie banks of Wall Street and less for Main Street – by sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.  In April of 2009, Obama chose to parrot the discredited “money multiplier” myth, fed to him by Larry Summers and “Turbo” Tim Geithner, in order to justify continuous corporate welfare for the megabanks.  If Obama had followed the right course, by pushing a stronger, more infrastructure-based stimulus program through the Democrat-controlled Senate and House, we would be enjoying a more healthy economy right now.  A significant number of the nearly fifteen million people currently unemployed could have found jobs from which they would now be paying income taxes, which reduce the deficit.  But that didn’t happen.  President Obama has no one else to blame for that error.  His opponents are now attempting to “snowball” that mistake into a disaster that could make him a one-term President.

Former Labor Secretary Robert Reich saw this coming back in March:

House Majority Leader Eric Cantor recently stated the Republican view succinctly:  “Less government spending equals more private sector jobs.”

In the past I’ve often wondered whether they’re knaves or fools.  Now I’m sure.  Republicans wouldn’t mind a double-dip recession between now and Election Day 2012.

They figure it’s the one sure way to unseat Obama.  They know that when the economy is heading downward, voters always fire the boss.  Call them knaves.

What about the Democrats?  Most know how fragile the economy is but they’re afraid to say it because the White House wants to paint a more positive picture.

And most of them are afraid of calling for what must be done because it runs so counter to the dominant deficit-cutting theme in our nation’s capital that they fear being marginalized.  So they’re reduced to mumbling “don’t cut so much.”  Call them fools.

Professor Simon Johnson, former Chief Economist of the International Monetary Fund, recently brought the focus of the current economic debate back to where it belongs:

In the nation’s latest fiscal mood swing, the mainstream consensus has swung from “we must extend the Bush tax cuts” (in December 2010) towards “we must immediately cut the budget deficit.”  The prevailing assumption, increasingly heard from both left and right, is that we already have far too much government debt – and any further significant increase will likely ruin us all.

This way of framing the debate is misleading – and very much at odds with US fiscal history.  It masks the deeper and important issues here, which are much more about distribution, in particular how much are relatively wealthy Americans willing to transfer to relatively poor Americans?

*   *   *

The real budget debate is not about a few billion here or there – for example in the context of when the government’s “debt ceiling” will be raised.  And it is not particularly about the last decade’s jump in government debt level – although this has grabbed the headlines, this is something that we can grow out of (unless the political elite decides to keep cutting taxes).

The real issue is how much relatively rich people are willing to pay and on what basis in the form of transfers to relatively poor people – and how rising healthcare costs should affect those transfers.

As the Tea Partiers flock to movie theaters to watch Atlas Shrugged, perhaps it’s time for a porno send-up, based on a steamy encounter between Ayn Rand and Gordon Gekko called, Greed Feels Good.


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Double Bubble

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I’m sure there has been a huge number of search engine queries during the past few days, from people who are trying to find out what is meant by the term: “quantitative easing”.  My cynical, home-made definition of the term goes like this:

Quantitative easing involves the Federal Reserve’s purchase of Treasury securities as well as mortgage-backed securities from those privileged, too-big-to-fail banks.

The curiosity about quantitative easing has increased as a result of the release of the notes from the most recent meeting of the Federal Open Market Committee (FOMC) which boosted expectations that there will be another round of quantitative easing (often referred to as QE II).  On October 15, Federal Reserve chairman Ben Bernanke delivered a speech at the Federal Reserve Bank of Boston.  After discussing how weak the economic recovery has been (as demonstrated by lackluster consumer spending and the miserable unemployment crisis) Bernanke pointed out that the Fed’s current predicament results from the fact that it has already lowered short-term, nominal interest rates to near-zero.  He then noted that the federal funds rate will be kept low “for longer than the markets expect”.  Bernanke finally got to the point that people wanted to hear him discuss:  whether there will be another round of quantitative easing.  Here is what he said:

In particular, the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate.  Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies, and, as always, the Committee’s actions are contingent on incoming information about the economic outlook and financial conditions.

In other words:  They’re still thinking about it.  Meanwhile, former Secretary of  Labor, Robert Reich, wrote a great essay telling us that the Fed will go ahead with more quantitative easing.  After defining the term, Professor Reich added this important tidbit:

Problem is, it won’t work.  Businesses won’t expand capacity and jobs because there aren’t enough consumers to buy additional goods and services.

I’m sure that was a helluva lot more common sense than many people were expecting from a professor at Berkeley.  Beyond that, Professor Reich gave us the rest of the bad news:

So where will the easy money go?  Into another stock-market bubble.

It’s already started.  Stocks are up even though the rest of the economy is still down because money is already so cheap. Bondholders (who can’t get much of any return from their loans) are shifting their portfolios into stocks.  Companies are buying back more shares of their own stock.  And Wall Street is making more bets in the stock market with money it can borrow at almost zero percent interest.

When our elected representatives can’t and won’t come up with a real jobs program, the Fed feels pressed to come up with a fake one that blows another financial bubble.  And we know what happens when financial bubbles get too big.

Another bubble currently under expansion is the “junk bond” bubble.  Sy Harding wrote an important article for Forbes entitled, “Fed Still Blowing Bubbles?“.  Here is some of what he said:

The economy’s problems at this point don’t seem to be the level of interest rates, but the lack of jobs, dismal consumer confidence, and the unwillingness of banks to make loans.

However, just the anticipation of additional quantitative easing and still lower long-term interest rates has already potentially begun to pump up the next bubbles, as investors have moved out the risk curve in an effort to find higher rates of return. Money has been flowing at a dramatic pace into high-yield junk bonds, commodities, and gold.  And the stock market has surged up 12% just since its August low when talk of another round of quantitative easing began.  Meanwhile, the U.S. dollar has been trashed further on expectations that the Fed will be ‘printing’ more dollars to finance another round of quantitative easing.

Nevertheless, Sy Harding isn’t so sure that QE II is a “done deal”.  After making his own cost-benefit analysis, Mr. Harding reached this conclusion:

It’s a no-brainer.  Blow another bubble and worry about the consequences down the road.

Yet in his speech Friday morning Fed Chairman Bernanke did not go all in on quantitative easing, stopping short of announcing a new policy, saying only that the Fed contemplates doing more, but “will take into account the potential costs and risks.”

So uncertainty remains for a market that has probably already factored in a substantial new round of stimulus.

This raises an important question:  How will the markets react if the consensual assumption that there will be a QE II turns out to be wrong?

Bond guru, Mohamed El-Erian of PIMCO,  recently wrote a piece for the Financial Times, in which he asserted his conclusion that judging from the FOMC minutes, “it is virtually a foregone conclusion” that the Fed will proceed with QE II.  El-Erian described this anticipated action by the Fed as an effort to “push” investors “to move out on the risk spectrum and buy corporate bonds and stocks”.

Getting back to my earlier question:  If the Fed decides not to proceed with QE II, will the bubbles that have been inflated up to that point make such a large pop as to drive the economy toward that dreaded second dip into recession?  On the other hand, if the Fed does proceed to implement QE II:  What will be the ultimate cost to taxpayers for something Robert Reich describes as a “fake” jobs program “that blows another financial bubble” and accomplishes nothing else?

As Professor Reich has pointed out, the Fed itself is the one being “pushed” to take action here because “our elected representatives can’t and won’t come up with a real jobs program”.  Unfortunately, any “jobs program” initiated by the government has become a “third rail” issue with mid-term elections looming.   As I stated previously, if the economic crisis had been properly addressed two years ago, when the political will for an effective solution still existed, the Fed would not be faced with the current dilemma.  But here we are   .  .  .   just blowing more bubbles.


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Demolition Derby

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June 24, 2010

They’re at the starting line, getting ready to trash the economy and turn our “great recession” into a full-on Great Depression II (to steal an expression from Paul Farrell).  Barry Ritholtz calls them the “deficit chicken hawks”.  The Reformed Broker recently wrote a clever piece which incorporated a moniker coined by Mark Thoma, the “Austerians”,  in reference to that same (deficit chicken hawk) group.   The Reformed Broker described them this way:

.  .  .  this gang has found a sudden (upcoming election-related) pang of concern over deficits and our ability to finance them.  Critics say the Austerians’ premature tightness will send the economy off a cliff, a la the 1930’s.

Count me among those who believe that the Austerians are about to send the economy off a cliff – or as I see it:  into a Demolition Derby.  The first smash-up in this derby was to sabotage any potential recovery in the job market.  Economist Scott Brown made this observation at the Seeking Alpha website:

One issue in deficit spending is deciding how much is enough to carry us through.  Removing fiscal stimulus too soon risks derailing the recovery.  Anti-deficit sentiment has already hampered a push for further stimulus to support job growth.  Across the Atlantic, austerity moves threaten to dampen European economic growth in 2011.  Long term, deficit reduction is important, but short term, it’s just foolish.

The second event in the Demolition Derby is to deny the extension of unemployment benefits.  Because the unemployed don’t have any money to bribe legislators, they make a great target.  David Herszenhorn of The New York Times discussed the despair expressed by Senator Patty Murray of Washington after the Senate’s failure to pass legislation extending unemployment compensation:

“This is a critical piece of legislation for thousands of families in our country, who want to know whether their United States Senate and Congress is on their side or is going to turn their back on them, right at a critical time when our economy is just starting to get around the corner,” Mrs. Murray said.

The deficit chicken hawk group isn’t just from the Republican side of the aisle.  You can count Democrat Ben Nelson of Nebraska and Joe “The Tool” Lieberman among their ranks.

David Leonhardt of The New York Times lamented Fed chairman Ben Bernanke’s preference for maintaining “the markets’ confidence in Washington” at the expense of the unemployed:

Look around at the American economy today.  Unemployment is 9.7 percent.  Inflation in recent months has been zero.  States are cutting their budgets.  Congress is balking at spending the money to prevent state layoffs.  The Fed is standing pat, too.  Bond investors, fickle as they may be, show no signs of panicking.

Which seems to be the greater risk:  too much action or too little?

The Demolition Derby is not limited to exacerbating the unemployment crisis.  It involves sabotaging the economic recovery as well.  In my last posting, I discussed a recent report by Comstock Partners, highlighting ten reasons why the so-called economic rebound from the financial crisis has been quite weak.  The report’s conclusion emphasized the necessity of additional fiscal stimulus:

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed.  And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy.  In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable.

In a recent essay, John Mauldin provided a detailed explanation of how premature deficit reduction efforts  can impair economic recovery:

In the US, we must start to get our fiscal house in order.  But if we cut the deficit by 2% of GDP a year, that is going to be a drag on growth in what I think is going to be a slow growth environment to begin with.  If you raise taxes by 1% combined with 1% cuts (of GDP) that will have a minimum effect of reducing GDP by around 2% initially.  And when you combine those cuts at the national level with tax increases and spending cuts of more than 1% of GDP at state and local levels you have even further drags on growth.

Those who accept Robert Prechter’s Elliott Wave Theory for analyzing stock market charts to make predictions of long-term financial trends, already see it coming:  a cataclysmic crash.   As Peter Brimelow recently discussed at MarketWatch, Prechter expects to see the Dow Jones Industrial Average to drop below 1,000:

The clearest statement comes from the Elliott Wave Theorist, discussing a numerological technical theory with which it supplements the Wave Theory’s complex patterns:  “The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years and bottom in 2016.”

*   *   *

There will be a short-term rally at some point, thinks Prechter, but it will be a trap:  “The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope.  Then the final years of decline will usher in capitulation and finally despair.”

So it is written.  The Demolition Derby shall end in disaster.





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