When Will They EVER Learn?Posted: January 29, 2009
As reported by today’s NY Times:
WASHINGTON — Without a single Republican vote, President Obama won House approval on Wednesday for an $819 billion economic recovery plan as Congressional Democrats sought to temper their own differences over the enormous package of tax cuts and spending.
There is just no end to the inability of politics to deal withan economic crisis of this proportion. Despite packing the economic stimulus program with worthless tax cuts and yet another form of rebate, the Obama administration failed to get a SINGLE republican congressman to vote for its stimulus plan. Additionally, Obamasold out poor women’s expanded access to birth control in a blink of an eye for absolutely nothing. Any one who has read any material on economic development knows that family planning plays an essential role in bringing nations and populations out of poverty and into the realm of human capital instead of human detritus. However, the principle and lesson were handily tossed and as usual, children, women and the very poor will be kept in their place so some political bipartisan marketing can rule the day. So now we have a less than adequate stimulus plan, packed with expensive little nothings that includes stuff that will NOT work and still not ONE Republican vote for the sell-out. Way to go oh He-man agent of Change and Feminist in Chief!
Meanwhile, over in Davos, the last vestiges of failed autocratic planned economies are finger pointing with NO official American presence that responds to psuedo marxist finger-wagging. Ex-President Clinton is in attendance, but the Obama administration is playing hooky. This is the lovely nugget of wisdom from China’s premier.
The Chinese premier, Wen Jiabao, left little doubt that Beijing blamed the United States for the economic breakdown. “Inappropriate macroeconomic policies,” an “unsustainable model of development characterized by prolonged low savings and high consumption,” the “blind pursuit of profit” and “the failure of financial supervision” all contributed, he said.
What he failed to mention is that unsustainable little model with prolong low savings and high consumption has contributed to the rise of the Chinese Economy and funded the machinations of fast growth as way to suppress political dissent. All of this as more Tibetans are marched off to prison in anticipation of problems surrounding the 50th anniversary the Tibet Uprising against the invasion and occupation of Tibet by the People’s Republic of China.
Least the Russians get left out of the equation, Putin was also in Davos banging a metaphorical shoe on the table. It appears there’s plenty playing the blame game, but few willing to stick their economics advisersin a room until they come out with some solutions.
If you get out of the world of idiot politicians making economic policy and into the world of economists themselves, the debate is much more healthy and focused on solving the problem, not sustaining the momentum of something that allows politicians airtime to vent their ideology. I particularly like this critique of the Obama compromise that isn’t working politically and won’t work economically. It comes from Jeffrey Sachs of FT.
The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. Neither the White House nor Congress has offered the public a scenario of how the proposed mega-deficits will affect the budget and government programmes beyond the next 12 to 24 months. Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package.
So far, we’ve had the TARP, bailouts, and rebates checks that have been rushed through Congress with little to no result. Sachs directly addresses the ineffectiveness of the TARP.
The Tarp has not revived the banks or their lending, but it has supported a massive transfer of taxpayer wealth to the management and owners of well-connected financial institutions. Some of those transfers – as in the case of Merrill Lynch using its government-financed sale to Bank of America to enable $4bn in bonuses last month – are beyond egregious. Yet the US is now inured to corruption and in such a rush that even billions of dollars of public funds shovelled into Merrill’s private pockets in broad daylight barely merited a day’s news cycle.
As usual, Brit wit rules the day withthis right on description of the latest spending barrelling through congress with more thought to the political than the practical, feasible, and end effect.
The most obvious problem with the stimulus package is that it has been turned into a fiscal piñata – with a mad scramble for candy on the floor. We seem all too eager to rectify a generation of a nation saving too little by saving even less – this time through expanding government borrowing.
He concludes with some advice:
If the present stimulus package is adopted without a medium-term plan, it will go the way of the earlier stimulus package and the Tarp, yet also put the US into a fiscal straitjacket that could paralyse public sector action in critical areas for a decade or more to come. This is especially true if we allow further tax cuts during a time of fiscal haemorrhage, or give into “bipartisan” demands to make the Bush tax cuts permanent, even for the rich, as seems increasingly likely.
There are many valuable things proposed in President Barack Obama’s spending plans – such as the sums to be spent on energy, healthcare and education – but these should be incorporated into medium-term strategies rather than a grab bag of hasty short-run spending. The tax cuts that he is likely to approve in the stimulus package, and the extension of Bush-era tax cuts if that comes to pass, could close the door to these longer-term programmes; haphazard spending on these vital programmes could do the same.
Perhaps Mr Obama should reflect on the fact that the Clinton-era boom began in 1993 with tax rises and a congressional rejection of a fiscal stimulus package.
The most wonkish debate occuring on the online economist community is between Neo Keynesians Brad Delong and Paul Krugman and the gods of Finance (oddly enough from CHICAGO) Eugene Fama and John Cochrane. Krugman’s calling it the Dark Ages of Macroeconomics. It’s posted on his blog, venture there if you want your head to spin. Since I’m a financial economist who primarily hangs out in the macroeconomics field this is like watching the superbowl for me. I’m rooting for Krugman and Delong and I’ll admit it’s partially based on having to read so much Fama and Cochrane the last four years or so that I’d like a real long vacation from what passes as theoretical finance. The RBC (Real Business Cycle) guys have jumped in know, so this is definitely moving into overtime.
But back to the idea of throwing the world’s economists in a big room until they solve THE problem …
Martin Feldstein, as conservative of an economist as there is, makes the case for fiscal stimulus here.
Now, however, increased government spending and the resulting rise in the fiscal deficit are being justified as necessary to deal withthe economic downturn – a sharp change from the reliance on monetary policy that was used to deal with previous recessions. Countercyclical fiscal policy had been largely discredited because of the delays involved in implementing fiscal changes and households’ weak response to temporary tax cuts. By contrast, the central bank could lower interest rates rapidly, which worked to raise household and business spending through a variety of channels.
Nevertheless, I support the use of fiscal stimulus in the US, because the current recession is much deeper than and different from previous downturns. Even with successful countercyclical policy, this recession is likely to last longer and be more damaging than any since the depression of the 1930’s.
Dr. Feldstein describes the problem and solution rather succinctly.
The exceptionally easy monetary policy at the start of the decade contributed to financial investors’ willingness to buy low-quality financial assets in order to get higher yield and to an explosive rise in house prices.
The rating agencies miscalculated the value of asset-backed securities.
The increase in leverage was driven in part by government policies aimed at expanding home ownership among lower-income groups that have provenunable to afford that life style. Banking supervisors did not deal with many institutions’ low levels of capital and poor asset quality. A major challenge for the future is to fix the institutional policies that led to these problems.
The new Obama administration and the Congress are still working out the structure of the fiscal stimulus for the US. Although I support the need for a large fiscal package, I disagree with many of the specific features of the plans now under consideration.
Regardless of what is done to provide a fiscal stimulus, governments around the world must act to fix dysfunctional credit markets. Otherwise, credit will not flow and growth will not resume.
If you really want to dive in to the global debate with economists from around the world, THIS is the place. They haven’t locked us up in a room, but they’ve asked every one to contribute commentary and suggestions. The Global Crisis Debate project has this description:
VoxEU.org is partnering with the UK government to collect the views of economists from around the world on what we should do to fix the global economy. The analysis and proposals that appear on Vox’s “Global Crisis Debate” page will feed directly into the UK’s preparation for the summit of world leaders in London in April. This debate will be featured on the UK government’s own web site, http://www.LondonSummit.gov.uk.
The UK is taking leadership on much of the global debate for several reasons. First, every one’s guess is they may be the next Iceland. (File that under the heading of NOT good.) Second, PM Gordon Brown is an economist. (File that under the heading of Real HOPE not just political hype.) I’m hoping that the politicians stay out of the debate, but their economics advisers jump in head first. The big question is will the ObamaTeam show up for the discussion or will they be off pacifying the Republican party with expensive presents that don’t work?
Stay tuned … I’m working on my contribution and I intend to follow the debate here.