Monday Reads

Good Morning!

We’re headed towards fall and the season when everything is pumpkin-spiced. I selected some Harvest Pumpkin Ale by Blue Moon for the weekend.  I haven’t quite hit the energy level to make pumpkin bread or muffins but I’m sure it will come soon.  The a/c is beginning to stay off over night so the seasons must be changing.

I read a few things in the NYT that I thought I’d share today.  The first one is up my alley: “Don’t Tell Anyone, but the Stimulus Worked”.  Yup, Keynes is still relevant and so is the idea of using stimulus to recover from a recession.

On the most basic level, the American Recovery and Reinvestment Act is responsible for saving and creating 2.5 million jobs. The majority of economists agree that it helped the economy grow by as much as 3.8 percent, and kept the unemployment rate from reaching 12 percent.

The stimulus is the reason, in fact, that most Americans are better off than they were four years ago, when the economy was in serious danger of shutting down.

But the stimulus did far more than stimulate: it protected the most vulnerable from the recession’s heavy winds. Of the act’s $840 billion final cost, $1.5 billion went to rent subsidies and emergency housing that kept 1.2 million people under roofs. (That’s why the recession didn’t produce rampant homelessness.) It increased spending on food stamps, unemployment benefits and Medicaid, keeping at least seven million Americans from falling below the poverty line.

And as Mr. Grunwald shows, it made crucial investments in neglected economic sectors that are likely to pay off for decades. It jump-started the switch to electronic medical records, which will largely end the use of paper records by 2015. It poured more than $1 billion into comparative-effectiveness research on pharmaceuticals. It extended broadband Internet to thousands of rural communities. And it spent $90 billion on a huge variety of wind, solar and other clean energy projects that revived the industry. Republicans, of course, only want to talk about Solyndra, but most of the green investments have been quite successful, and renewable power output has doubled.

Americans don’t know most of this, and not just because Mitt Romney and his party denigrate the law as a boondoggle every five minutes. Democrats, so battered by the transformation of “stimulus” into a synonym for waste and fraud (of which there was little), have stopped using the word.

Actually, Romney appears to be a closet Keynesian.  As usual, what he says depends on who he’s saying it to.

Edward Lazear, chairman of the Council on Economic Advisers under George W. Bush, released a paper last week attempting an empirical estimate of whether current unemployment is “structural” or “cyclical” and came down firmly on the side of a cyclical explanation. Released 12 months ago, that would have read as a powerful argument for the Democratic side in an ongoing argument about stimulus. But everyone knows that stimulus is not going to happen between now and the election. Instead, it’s a sign that prominent economists in GOP circles haven’t really abandoned the New Keynesian consensus in policy circles but were only putting it in cold storage to hobble President Obama. Earlier in August, Alesina published a new paper with two coauthors arguing that deficit-reduction plans do hurt growth after all—but only when they involve tax hikes. Together, these papers lay the foundation for a 2013 agenda of big, deficit-increasing tax cuts—coincidentally enough the exact same policy that was at the heart of Reagan and Bush administration economics.

Meanwhile, accepting the GOP nomination, Romney argued that “cuts to our military will eliminate hundreds of thousands of jobs, and also put our security at risk”—a precisely Keynesian take on every Republican’s favorite form of government spending.

Romney also swore that “when nations cheat in trade, there will be unmistakable consequences.” The Republican platform more specifically argues that America should “impose countervailing duties if China fails to amend its currency policies.” That’s a policy whose previous most prominent advocate has been none other than ur-Keynesian Paul Krugman. More broadly, it’s an indication that Romney may be thinking of pursuing much-needed monetary policy stimulus and trying to frame it as a nationalistic anti-Chinese measure.

Romney’s inkled Keynesian type stimulus ideas before as mentioned in this Jonathan Chait analysis.

 But in his Halperin interview, Romney frankly admits that reducing the budget deficit in the midst of an economic crisis would be a horrible idea:

Halperin: You have a plan, as you said, over a number of years, to reduce spending dramatically. Why not in the first year, if you’re elected — why not in 2013, go all the way and propose the kind of budget with spending restraints, that you’d like to see after four years in office? Why not do it more quickly?

Romney: Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%. That is by definition throwing us into recession or depression.  So I’m not going to do that, of course.

Romney says this as if it’s completely obvious that reducing the deficit in the short term would throw the economy back into recession, even though he and his party have been arguing the opposite case with hysterical fervor. Republicans have committed themselves to Austrian economic notions and other hoary doctrines justifying the position that reducing deficits is a helpful way out of a liquidity trap.

Isn’t it weird how Democrats are now afraid to talk about the stimulus plan and how it worked, but Mitt Romney appears to offer up Keynesian solutions when he’s not out race baiting in front of some right wingers?  Does this man stay consistent on anything?

Chicago Mayor Rahm Emmanuel is going to take Chicago teachers to court to end their strike.

Chicago Mayor Rahm Emanuel has announced that he will seek a court order to end the first teachers’ strike in the city in 25 years, which escalated on Sunday when the teachers’ union decided to extend their walk-out.

The strike has cancelled classes for 350,000 kindergarten, elementary and high school students in the United States’ third-largest school district and will enter its sixth day on Monday.

It risks friction within President Barack Obama’s political coalition, where many Democrats differ over approaches to education reform, ahead of the November 6 Presidential election against Republican Mitt Romney. Emanuel is Obama’s former top White House aide.

The mayor called the strike “illegal” on Sunday and said he would go to court to seek an injunction to block it.

“I will not stand by while the children of Chicago are played as pawns in an internal dispute within a union,” Emanuel said, adding that the union walked out over issues that are not subject to a strike under Illinois state law.

 There is a lot at stake for every one in this strike.  We’ve seen a lot of crap reform happen in the educational system recently that is not in the best interest of children.  Breaking teachers unions happened in New Orleans.  The results have not been good but that has not stopped the same types of reforms from creeping around the country.  There is more here at stake than most people realize.

Under the guise of austerity measures, the burden of deficit reduction now becomes an excuse to remove public education from the discourse of freedom and social transformation. Within this regime of repressive schooling, education for the masses now consists of a “dumbing down” logic that enshrines top-down high-stakes testing, vocationalized education for the poor, schools modeled after prisons and teachers reduced to the status of mindless technicians.

The brave teachers in Chicago have had enough of this authoritarian and anti-democratic view of education. They have revolted in the name of a revolutionary ideal that inserts dignity and power back into teaching, and breathes vitality and substance back into the relationship between education and democracy. In rejecting the primacy of “the market as the sole principle of social and political organization,” they have recognized that what is at stake in the current struggle they face is “a whole generation ‘s sense of the future.”[2]

They are reclaiming the right, if not the responsibility, to assert the civic duty of public education, address the issues of race, class and agency that over-determine the relations of power that bear down on schools; and assert that the real crisis of education is about the conditions of its democratic institutions and the teachers, students and citizens who are responsible for maintaining them.

And while the strike is close to being settled, the ideals it is fighting for are far from settled. The noble ideals and project underlying this strike are primarily focused on both the purpose of schooling, and the vital nature of public education in developing the formative culture necessary to produce the ideas, values, individuals and public spheres essential for the construction of a vibrant and substantive democracy.

Okay, here’s a good one.  Shark SAVES man. Yes.  It’s for real.  This man was adrift on a boat for 5 weeks until …

Only a day after Falaile passed away a storm blew into the area and rained for several days allowing Teitoi to fill two five-gallon containers with a life-saving supply of fresh water.

“There were two choices in my mind at the time. Either someone would find me or I would follow my brother-in-law. It was out of my control.”

He continued to pray regularly and on the morning of September 11 caught sight of a fishing boat in the distance but the crew were unable to see him.
Dejected, he did what he had done most days, curling up under a small covered area in the bow to stay out of the tropical sun.

Mr Teitoi said he woke in the afternoon to the sound of scratching and looked overboard to see a six-foot shark circling the boat and bumping the hull.

When the shark had his attention it swam off.

“He was guiding me to a fishing boat. I looked up and there was the stern of a ship and I could see crew with binoculars looking at me.”

When the vessel Marshalls 203 pulled Mr Teitoi on board the first thing he asked for was a cigarette.

“They told me to wait. They took me to meet the captain, and they gave me juice and some food.”

What an amazing story!

So, what’s on your reading and blogging list today?


Thursday Reads

Good Morning!

Wall Street Royal Jamie Dimon deigned to appear before a Senate Committee yesterday, and the Senators mostly sucked up to him. I’m surprised they didn’t ask if he needed a pillow for his chair. MSNBC: Senate treats JPMorgan CEO Dimon with kid gloves

Dimon was expected to receive a frosty reception in his first congressional appearance since he announced the bank sustained a trading loss some analysts now estimate is at least $3 billion. It was a massive loss for the nation’s biggest financial institution.

Instead, Dimon, who has won praise for bringing JPMorgan (JPM) through the financial crisis relatively unscathed, was treated cordially by most of members of the Senate Banking Committee. They peppered him with questions about regulation and risky practices at the bank, but did not press him to give an update on the losses resulting from the trade. JPMorgan is expected to give an update to shareholders when it reports its second-quarter earnings July 13.

“I think it was a pretty favorable day,” David Konrad, a Keefe, Bruyette & Woods banking analyst, told CNBC. Konrad said he was surprised that the questioning of Dimon by lawmakers was so “professional.”

Excuse me, “professional” for a Senator would have been sending this man to the woodshed. NPR’s Marketplace called the treatment of Dimon “a wake for Dodd-Frank.”

Yahoo has named the winner of the “Most Tepid Endorsement of Mitt Romney” contest: it’s a bumper sticker that reads “At least he’s not a communist.”

Until recently, it appeared that no one could unseat Indiana Gov. Mitch Daniels as the champion of the tepid Romney endorsement. Since Yahoo News started conducting reader polls on the politicians who supported Mitt Romney in the least enthusiastic terms, Daniels has defeated original champ George Pataki and defended the crown against Newt Gingrich, Rick Santorum and George W. Bush. (The former president came the closest to unseating Daniels.)

We thought the book was closed on the tepid endorsement bracket until Yahoo News reporter Chris Moody spotted a bumper sticker at last weekend’s regional CPAC conference in Chicago bearing these words of praise: “At least he’s not a communist.”

You can read the other tepid endorsements at the link.

First Romney made fun of Obama for wanting to help cities and states pay for cops, teachers, and firefighters. Then he went on Fox News and said it was a “strange accusation” for anyone to say he didn’t want to hire teachers and first responders.

After an extended skewering of President Obama for a gaffe about the private sector last week, ending with the charge that it was proof the president was “out of touch” Romney was asked by Fox and Friends’ Brian Kilmeade for his response to Obama saying it was Romney who was clueless (Romney’s comment comes at about the 1:40 mark) :

[BRIAN] KILMEADE: He says that you’re out of touch. He says you want to cut firefighters and teachers, that you don’t understand what’s going on in these communities. What do you say to that, Governor?

ROMNEY: Well, that’s a very strange accusation. Of course, teachers and firemen and policemen are hired at the local level and also by states. The federal government doesn’t pay for teachers, firefighters or policemen. So, obviously that’s completely absurd.

But of course the federal government does subsidize states and they often use the money to pay for these public employees. In fact, the reason so many teachers, firefighters and cops are getting laid off now is because stimulus money has run out.

Yesterday Greg Sargent pointed out that Romney’s plan would indeed cut billions from cops, firefighters and teachers

Yesterday Mitt Romney claimed that it was “ completely absurd” of the Obama campaign to argue that he favors cutbacks in cops, firefighters and teachers. “The federal government doesn’t pay for teachers, firefighters or policemen,” Romney said, adding that they were paid by states and localities.

What’s getting lost in the back and forth here is that Romney’s actual economic plan would, in fact, cut billions of dollars in federal money that goes to cops, firefighters, and teachers — perhaps more than $10 billion a year, in fact.

This is the conclusion of the Center on Budget and Policy Priorities, which analyzed Romney’s plan through the prism of the debate over public workers at my request.

As Michael McAuliff reported yesterday, despite Romney’s claim, the federal government does give billions of dollars to states and localities through programs like Title 1, the COPS program, FEMA and others — which pay for first responders and teachers.

This is amazing. Romney finally broke down and decided to talk to a media source that isn’t Fox News! He will be on Face The Nation on Sunday morning.

A full year into his presidential campaign, presumptive Republican nominee Mitt Romney will venture out of his Fox comfort zone this Sunday to make his first appearance on a rival network’s political talk show.

Romney has been interviewed several times on ”Fox News Sunday” this campaign cycle, but has declined repeated invitations to appear on any of the other Sunday shows, occasionally drawing scorn from veteran anchors accustomed to interviewing presidential candidates.

Let’s hope Shieffer asks a few tough questions. One thing Shieffer will probably ask about is Romney’s choice of Vice President. One of the leading contenders, Marco Rubio, announced yesterday that he supports the illegal Florida voter purge.

“How can you argue against a state identifying people who are not rightfully on the voter rolls?” he said at a Bloomberg event, according to the Tampa Bay Times.

Rubio’s comments put him in line with Florida Gov. Rick Scott (R) who on Tuesday declared the debate on the merits of the purge “over,” because the probe had supposedly turned up more than 50 non-citizen voters who had cast ballots.

The Department of Justice didn’t agree. Later Tuesday, it announced it was launching a federal lawsuit against Florida over complaints that the purge was taking place within 90 days of its August 14 primary election, as well as over its alleged violation of a voting rights law meant to prevent states from suppressing voters.

That might not help Romney win over Latino voters.

John Avlon has a piece at CNN on Jeb Bush and other “moderate” Republicans who are starting to fight back against Grover Norquist:

This is what happens when politics starts looking like a cult: Jeb Bush gets attacked for being a traitor to the conservative cause.

The former Florida governor has been speaking with the freedom of someone not running for office, saying that both his father and Ronald Reagan would have had a hard time in today’s hard-right GOP and questioning the wisdom of Grover Norquist’s absolutist anti-tax pledge.

That set off a fascinating public fight between Bush and Norquist, two faces of competing factions within Republican Party. It is the latest evidence of a growing GOP backlash against the ideological straitjacket Norquist has attempted to impose on governing in the United States.

And Jeb is not alone.

As it turns out, Norquist has reason to be concerned. It’s not just Jeb Bush. A growing number of Republicans are rejecting his pledge. Oklahoma conservative Sen. Tom Coburn called the pledge’s effective veto of deficit reduction plans “ridiculous” when talking with Erin Burnett on “OutFront.”

Sen. Lindsey Graham of South Carolina on Tuesday declared his independence from the pledge, saying, “We’re so far in debt, that if you don’t give up some ideological ground, the country sinks.”

Add to those voices seven other Republican U.S. senators — from Maine’s Susan Collins to Iowa’s Chuck Grassley to Wyoming’s John Barrasso — and 11 Republican House members, ranging from centrist New Yorker Richard Hanna to tea party Floridian Allen West.

In pedophile news, Jerry Sandusky had another bad day in court yesterday with three victims testifying that he manipulated and threatened them into putting up with his sick sexual behavior.

The trio of young men who testified against Jerry Sandusky on the third day of his sexual-abuse trial couldn’t have been more different in personality and temperament. Yet each of their testimonies was sexually graphic and disturbing—and midway through the prosecution’s fast-tracked arguments, a clear pattern has emerged in their allegations.

I’m not going to quote all of the sordid details–there are too many of them anyway. You can read it all at the link. I’ll just give you one excerpt that shows what Sandusky is all about:

Then, the witness told the jury of a time he visited the Sandusky home.

“We were in the basement. We were wrestling,” he said in a monotone frequently heard from abuse victims who have had to tell their stories multiple times. “The defendant pinned me to the floor, pulled down my gym shorts, and started to perform oral sex on me.” Asked by prosecutor Joe McGettigan what his reaction was at the time, the witness said, “I freaked out.”

“Did he ever say anything to you about it?” McGettigan asked.

“He told me if I ever told anyone I’d never see my family again,” the young man replied. “Later he apologized and said he didn’t mean it, that he loved me.”

I hope Sandusky goes to prison for life, and I want to see prosecutions of his enablers at Penn State. It’s an outrage that he was allowed to go on abusing children for years after many at the school knew about his behavior.

And then there’s the Catholic Church: U.S. Catholics still suspect priests sexually abuse children: Report

The National Review Board said that, a decade after the US Conference of Catholic Bishops issued a child protection charter, there has been a “striking improvement” in the way the Church deals with the abuse of minors by clergy.

“Children are safer now because of the creation of safe environments, and action has been taken to permanently remove offenders from ministry,” said the report, released as the Conference began its annual spring meeting in Atlanta.

But it acknowledged: “Despite solid evidence (to the contrary), many of the faithful believe that sexual abuse by clergy is occurring at high levels and is still being covered up by bishops.”

Well, what did they expect? I’m certainly not surprised. In fact I’d be surprised if there aren’t still pedophile priests abusing children.

Forest boy

I’ll end with the strange story of “Forest Boy.”

Berlin police on Wednesday released photos an English-speaking teenage boy who wandered into the city nine months ago saying he had been living for the last five years in the forest with his father.
Police spokesman Thomas Neuendorf said all attempts to identify the boy since he emerged in the German capital on Sept. 5 have been unsuccessful, and they are now hoping the release of his photo may produce some leads.

“We have checked his DNA against all missing person reports, sent the data to Interpol so that they could check it internationally, but unfortunately without any success,” Neuendorf said.
The boy has told authorities his father called him “Ray” and that he was born June 20, 1994, but claims not to know his last name or where he’s from.

He said his mother, Doreen, died in a car accident when he was 12 and after that he and his father, Ryan, took to the forest. He said they wandered using maps and a compass, staying in tents or caves overnight.

He told authorities that after his father died in August, 2011, he buried him in the forest and then walked five days north before ending up in Berlin, and showed up at city hall.

As of last night, the identity of the boy was still a mystery even after release of the photos.

What’s on your reading and blogging list today?


Sign me up for the Hippie Caucus

melting magic mushrooms by spookychild

If you’re like me, you’ll get a big laugh out of Brad DeLong’s on-going tongue and cheek label of pretty much every economist as being a member of the “hippie caucus” simply for giving the MSM a lesson on economic theory.  It’s not exactly the most complex model or theory that drives the idea that you deficit spend during a tough economy to create jobs and stimulate business.  Every first year macroeconomic principles students learns that.  My guess is that most of congress and the President never got that far.

So, here’s a list of Brad’s Hippie Caucus and the statements based on simple economic theory that puts them into membership.  These are some big name economists basically saying what I’ve been saying for a few years now.  The deficit is a long term problem.  The immediate problem is business’ lack of customers.  It’s an aggregate demand thing and increased government spending is the obvious policy remedy.

The first member is Laura Tyson who I’d really like to see as Treasury Secretary or head of the CEA again.  She served under Bill Clinton.  You remember Bill Clinton?  He’s the one that had the best job creation record of any modern president.

But the overwhelming evidence suggests the opposite: when the economy has excess capacity, high unemployment and weak private demand, cuts in government spending reduce growth and eliminate jobs.

On this point, there is widespread agreement among experts. Ben Bernanke, chairman of the Federal Reserve, recently warned that sudden fiscal contraction might put the still fragile recovery at risk. The June report from the C.B.O. contains a similar warning. Even William Gross of Pimco, a vocal critic of the long-term fiscal position of the government, cautions that a move toward fiscal balance, if implemented too quickly, could “stultify economic growth.”

As Simon Johnson noted in his recent Economix post, fiscal contractions are expansionary only under special conditions. None of these apply to the United States today.

So what should policy makers do? They should pair fiscal measures aimed at job creation now with a credible plan to reduce the deficit gradually –- and pass both at once, as a package. Approving a deficit-reduction plan but deferring its starting date until the economy is near full employment will cut the odds that immediate contraction will tip the faltering economy back into recession.

Indeed, passage of such a package could bolster growth by easing investor concerns about future deficits, reducing long-term interest rates and strengthening consumer and business confidence.

The next member is Larry Summers.  You remember him, he’s the one we thought the President may have actually listened to when doing his economic policy thing?  Well, I’ve apologized for thinking Summers turned his back on his credentials and I’m having to eat my words again.

SUMMERS: I worry about a number of things with respect to growth. Most profoundly I worry about lack of demand in the United States. That means that factory capacity is unused, it means that buildings sit empty, it means that too many people are unemployed. And I look for measure that will serve to promote the level of demand in the United States. That’s why using this moment to repair our infrastructure is so important. That’s why I believe that the payroll tax cuts that put money in people’s pockets and increased employers incentives to hire are so important. And that’s why I believe that opening foreign markets and promoting U.S. exports which creates more demand is so important. And China is obviously an important part of that story.

So we already know that Paul Krugman is in the Hippie Caucus, but here’s an addition via Krugman. Traxis Partners Hedge Fund multimillionaire Barton Biggs  is saying the same thing.  Surprisingly enough, this comes from the WSJ whose editors have drunk enough Grover Norquist koolaid to be dead heads.

The U.S. and Europe are set to grow at an anemic pace for the foreseeable future unless the government can step in with an enormous fiscal stimulus, according to a veteran investor.

Speaking exclusively with The Wall Street Journal, Barton Biggs, managing partner at multibillion dollar hedge fund Traxis Partners, painted a bleak outlook for the developed world with only huge government intervention likely to improve things.

Mr. Biggs, former chief global strategist for U.S. investment banking powerhouse Morgan Stanley, demanded the U.S. government temporarily return to ideas used in the Great Depression as a way to get the country back to higher growth.

“What the U.S. really needs is a massive infrastructure program … similar to the WPA back in the 1930s,” he says.

The plan would be to employ some of the many unemployed people, jump start the economy, as well as help catch up with Asia, which is building state-of-the-art infrastructure from new mechanized port facilities to high-speed trains.

He suggested financing such building through the sale of U.S. Treasuries.

Okay, so Mark Thoma’s on the list too.  No surprise there either.  However, this comment is not on his blog Economist’s View, it’s at the FT.

I disagree with them that immediate austerity is needed. The long-term budget problem in the US is driven mainly by rising health costs, and we have many years to go before this begins to create big budget problems. Thus waiting, say, two years to begin reducing the deficit will not substantially change the probability of big problems down the road. But delaying austerity measures avoids placing a further drag on an already struggling economy, so the likely benefits are relatively large.

One of the arguments for austerity is that it would give the Federal Reserve “increased room for manoeuvre to adopt further quantitative easing if the economy weakens further”. I agree that the Fed fears being placed in the position of appearing to monetise the debt, but again I do not think immediate action is needed. A budget plan that both political parties can agree to, which is implimented only when the economy is stronger, would do a lot to give the Fed the confidence it needs to act.

Here’s a member of the Hippie Caucus from across the Pond.  That would be no other than the FT’s Martin Wolfe. He sums it up nicely by saying “enjoy the coming slump” but if you want to read the wonky way of saying it, here it is.

Few doubt there is excessive private sector debt in a number of high-income countries. But how is it to be reduced? The BIS notes four answers: repayment; default; higher real incomes; and inflation. Let us rule out the last and focus on the first. Repayment means spending less than one’s income. That is what is happening in the US private sector (see chart). Households ran a financial deficit (an excess of spending over income) of 3.5 per cent of gross domestic product in the third quarter of 2005. This had shifted to a surplus of 3.3 per cent in the first quarter of 2011. The business sector is also running a modest surplus. Since the US has a current account deficit, the rest of the world is also, by definition, spending less than its income. Who is taking the opposite side? The answer is: the government. This is what a controlled depression means: every sector, other than the government, is seeking to strengthen its balance sheet at the same time.

Another former Obama adviser that’s in the Hippie Caucus and may join my list of people that most likely quit Obama because he wasn’t listening to any economists. That would be none other than former budget director Peter Orzag. You know I thought Christie Romer was a good one and was confused when she was supporting that weak ass stimulus.  I’m now even wondering about Austin Goolsbee.

Today’s fiscal policy debate straddles two divides: one between those who support jobs and those who favor austerity, and one between those who think additional revenue is needed and those who don’t.

On the first divide, both sides are right, because the truth is that the U.S. needs both jobs and austerity — and a combination would be more powerful than either piece by itself. We face a very weak labor market now and, over the medium- and long-term, an unsustainable fiscal path. It would make sense to combine an additional round of temporary job creation measures with a substantial amount of permanent deficit reduction that would be enacted now but take effect later.

So, I’ve been blogging around here like my hair’s on fire pretty much since this financial crisis set in.  I wrote the Obama stimulus was too little and too focused on tax cuts to appease the few Republicans resident in a then overwhelmingly Democratic Congress with a president with a mandate and political capital.  I blogged that we didn’t need to extend the Bush tax cuts to millionaires and billionaires because they were the only ones that were recovering nicely. I blogged that the President should forget about health care reform and focus like a laser on the sour economic recovery. I also said that all that would do would give the Republicans more hot air come the negotiations for the debt ceiling increase. I’ve blogged repeatedly that businesses–no matter what the tax rates or the rate of interests–are not going to spend their money on capital or labor here in the US because they need customers first and foremost.  I’ve also written extensively that all this cheap Fed money at the discount window and tax breaks for industry was likely to be used in places like Asia instead of here in the U.S.  Brad DeLong has done an excellent job showing you that many, many top economists believe the same things.  So, next time any one tells you that all economists are always caught off-guard, please remember all of this.

I truly believe that Republicans are trying to tank the economy and that Barack Obama is either tacitly or complicity or ignorantly going right down the garden path with them.  Again, if you’ve got terminal cancer and need surgery to save your life do you call some one who has never gone to med school to operate on you?  If you’re wrongly accused of murder and you need some one to argue that you’re innocent, do you want some one that’s never been to law school to represent you?  Why or why do so many idiots in the press, in the congress, and in the White House think they know more about the economy and the financial markets than those of us that have spent our lives researching, studying, and doing it?

We should be rioting in the streets like the English and the Greeks.  Instead,we’re acting like sheep to the slaughter.  What our government is doing right now is actively working against the interests of its people.  There are laws in place that require it to responsibly handle the economy and create jobs.  They are doing the exact opposite of this.  We need to get mad. Voting for idiots is not working.


On the other hand … or is it Hoof?

In what is undoubtedly good news, the US Bureau of Economic Analysis (Dept. of Commerce) has announced that REAL GDP grew byantique devil tarot card approximately 3.5% in the third quarter of 2009. That is up from the second quarter growth of .7%. It appears that the economy may be rebounding from the so-called “Great Recession”. However, as with everything, the devil is in the details and the details show that this occurred because of government support. This will be good news for those folks that supported the Stimulus Plan. Details underlying the growth still show that the private sector, however, has yet to pick up slack. This means the growth has not worked its way through the economy in a way that makes it firmly sustainable. The increase in Consumer spending seem rooted firmly in the cash-for-clunkers program as well as the tax credits to first time home buyers. These programs have ended so now we have to look for sustainable consumer spending in areas not financially supported by government programs.

Policy makers will now focus on whether the recovery, supported by federal assistance to the housing and auto industries, can be sustained into 2010 and generate jobs. The record $1.4 trillion budget deficit limits President Barack Obama’s options for more aid, while Federal Reserve officials try to convince investors that the central bank will exit emergency programs in time to prevent a pickup in inflation.

“A lot of this is thanks to government support,” Kathleen Stephansen, chief economist at Aladdin Capital Holdings LLC in Stamford, Connecticut, said in an interview on Bloomberg Television. “The consumer, in fact private demand in general, is not ready yet to pick up the growth baton from the government.”

There has yet to be any signs that improvements will be permanent. The Labor Market, traditionally sticky, has yet to turn around in a fundamentally good way.

A report from the Labor Department showed 530,000 workers filed claims for jobless benefits last week, more than anticipated and signaling the job market is slow to heal even as growth picks up.

There is an extremely good piece over at Naked Capitalism that explains the situation right now called “The choice is between increasing or decreasing aggregate demand” written by Edward Harrison of Credit Writedowns.

(It’s a bit wonky so be forwarned.)

As I see it, the issue we are debating has to do with how the government responds when large debts in the private sector constrain demand for credit in the face of a severe economic shock and fall in aggregate demand. In short, if private sector debt levels are so high that a recession precipitates private sector credit revulsion, how should government respond?

pigsThis is a good question as it gets to the heart of what to do next if you’re the government and it reflects reality on the ground which are the constraints facing the economy due to continuing credit market problems. The one thing that the discussion fails to address is the fact that quantitative easing by the Fed is not feeding into the credit markets as much as it appears to be feeding a bubble on Wall Street eagerly supported by the Great Vampire Squid and other enemies spawning in the unfathomable deep. The article focuses on the paradox of thrift and the question “Do we really want the private sector to save at the moment?”

The deal is, we’ve plenty of money circulating through the financial markets at the moment because of actions by the FOMC and of course, the Treasury. The problem is where it’s going. Easy money is financing merger activities and arbitrage rather than underlying investment that promotes long run economic growth. This is the same bubble-producing activity that brings us to no good ends. We really don’t need savings as much to fund business as much as we need business to feel like it can make commitments to job-producing, goods and servicing producing capital investments funded by the financial sector that should be forced to stop its casino banking activities. If anything, we need savers to step up and buy government debt, sort’ve an any bonds today movement to stop our reliance on foreign sources and free ourselves of obligations to human rights violators like the Chinese and Saudis.

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Slowing the Downward Slide

I’d like to focus on some potential policies that could see us through this difficult economy.  It should be apparent that we’re in for a period of time where uncertainty will cause a lot of stress in the financial markets.  The uncertainty has bled into the ‘real’ economy where we’re seeing increasingly higher levels of unemployment and distress in industries outside the banking world.  If you haven’t noticed, the Fed has been actively working on this for some time.  It’s major tools indirectly impact the real economy by influencing the credit markets and the availability of loans.  It’s pretty straight forward actually, in a normal economy, low interest rates would cause banks to lend to more businesses and households and this would stimulate the economy out of a recession.  The problem right now is that losses from loans are creating such problems for bank profitability, banks are holding the money.  We have extremely low interest rates right now.  This is a situation that we saw in Japan during the 1990s.  It took a decade for the Japanese economy to snap out of it.  The Fed’s rate to banks is 1% right now.  It is cheap for them, and now many other financial institutions to borrow from the Fed.  There is still some constipation, if you will, in the banking system.  What is worse, some of the money sent to these banks that has gone to healthy banks is going into buying other banks.  None of this will help stimulate the economy.  So how do we avoid Japan’s stagnant decade?

If you know me, you know I do not favor bailing out the automobile industry.  We have a system to help corporations rearrange their obligations and make themselves more able to carry on in the future.  It is called bankruptcy.  We’ve watched the airline industry go into the bankruptcy process and come out as healthier companies.  Usually, all contracts between debtors and the companies are either renegotiated or foregiven.  The stockholders lose their stake.  The Unions will have to scale back on their contracts.  This will all happen in a very structured manner and all will have to sacrifice for the companies to survive.  I’m afraid that if we do not force them into this circumstance that we will find that we lend them money, only to have them pay creditors at the same losing level with the same bad managers.  The folks we could spend the money on would be the folks that do lose their jobs.  We can provide them with extended unemployment insurance and with job retraining.  We’ve seen the Treasury’s deal with bank result in outcomes we did not want:  no credit going to main street, bonuses and dividends still in tact, and buy-outs.  We do not need to repeat this mistake.

Do we need another stimulus package or do we need tax cuts?  If so, who should be the focus? Short term tax stimulus is probably in order.  However, if we spend all of this money, we will grow the deficit.  Growing the deficit is not a bad thing during recessions, however, we already are running a huge deficit and it’s getting bigger because of two wars and the Bush tax cuts. If we continually push 10 year bonds out to the market, there will be a point where the big money (mostly soveign wealth funds) will begin to balk.  Rates could go up which means that we could spend a huge amount of money just servicing the debt.  Any stimulus should be short-lived and should focus on the middle and working class.  Tax increases, even on the wealthy and on corporations, should be avoided for several years.  The adminstration will have to scale back on its offerings of new benefits and programs.  I don’t think we’ll see work on the health care system right now because other things will take priority.

There are two areas where new spending should be encouraged.   These are energy independence and infrastructure rebuilding.  This does not mean building new bridges to nowhere, but fixing our aging infrastructure.  This expenditures will create future economic growth and can provide jobs during the recession.  Grants to states for specific purposes can be used so that states with the biggest problems can get the highest priority.  There are challenges to this, however. The biggest problem with major programs like this is getting them to move out of congress and committees.  This can take so much time that the projects may never have an impact. Since the Democrats have strong majorities in both houses, they should be able to usher through these types of programs.  These need to be expedited.  The one big thing I worry about here is that they will not focus on what is best, but will focus on enriching groups that supported election winners. Projects providing jobs that focus on building our future potential would be a lot better use of funds than just giving folks extended unemployment benefits.   Hillary Clinton’s green jobs program and McCain’s cap and trade system to reduce green house gases are both good programs.  Jobs could include retrofitting existing houses to be more energy efficient.  The focus needs to be on the underlying capital that leads to future growth so that even if some of them are slow to develop, there will be economic development.

The focus during the rest of this year and into the next will undoubtedly be dealing with the ongoing slow-200px-whiteandkeynesdown in the economy.  We will soon see if we will get real change or just a bigger deficit with spending that accomplishes little.  I’m worried about the quality of the spending, because as I said, most of our debt is financed by the international community.  There are many other places to park their wealth.  If they pull it, U.S. citizens will not be able to come up with the difference without getting use to much higher taxes.