October 7, 2010
The End of the Tunnel By PAUL KRUGMAN
The Erie Canal. Hoover Dam. The Interstate Highway System. Visionary public projects are part of the American tradition, and have been a major driver of our economic development.
And right now, by any rational calculation, would be an especially good time to improve the nation’s infrastructure. We have the need: our roads, our rail lines, our water and sewer systems are antiquated and increasingly inadequate. We have the resources: a million-and-a-half construction workers are sitting idle, and putting them to work would help the economy as a whole recover from its slump. And the price is right: with interest rates on federal debt at near-record lows, there has never been a better time to borrow for long-term investment.
But American politics these days is anything but rational. Republicans bitterly opposed even the modest infrastructure spending contained in the Obama stimulus plan. And, on Thursday, Chris Christie, the governor of New Jersey, canceled America’s most important current public works project, the long-planned and much-needed second rail tunnel under the Hudson River.
It was a destructive and incredibly foolish decision on multiple levels. But it shouldn’t have been all that surprising. We are no longer the nation that used to amaze the world with its visionary projects. We have become, instead, a nation whose politicians seem to compete over who can show the least vision, the least concern about the future and the greatest willingness to pander to short-term, narrow-minded selfishness.
So, about that tunnel: with almost 1,200 people per square mile, New Jersey is the most densely populated state in America, more densely populated than any major European nation. Add in the fact that many residents work in New York, and you have a state that can’t function without adequate public transportation. There just isn’t enough space for everyone to drive to work.
But right now there’s just one century-old rail tunnel linking New Jersey and New York — and it’s running close to capacity. The need for another tunnel couldn’t be more obvious.
So last year the project began. Of the $8.7 billion in planned funding, less than a third was to come from the State of New Jersey; the rest would come, in roughly equal amounts, from the independent Port Authority of New York and New Jersey and from the federal government. Even if costs were to rise substantially, as they often do on big projects, it was a very good deal for the state.
But Mr. Christie killed it anyway.
News reports suggest that his immediate goal was to shift funds to local road projects and existing rail repairs. There were, however, much better ways to raise those funds, such as an increase in the state’s relatively low gasoline taxes — and bear in mind that whatever motorists gain from low gas taxes will be at least partly undone by pain from the canceled project in the form of growing congestion and traffic delays. But, no, in modern America, no tax increase can ever be justified, for any reason.
So this was a terrible, shortsighted move from New Jersey’s point of view. But that’s not the whole cost. Canceling the tunnel was also a blow to national hopes of recovery, part of a pattern of penny-pinching that has played a large role in our continuing economic stagnation.
When people ask why the Obama stimulus didn’t accomplish more, one good response is to ask, what stimulus? Leaving aside the cost of financial rescues and safety-net programs like unemployment insurance, federal spending has risen only modestly — and this rise has been largely offset by cutbacks at the state and local level. Many of these cuts were forced by Congress, which has refused to approve adequate aid to the states. But as Mr. Christie is demonstrating, local politicians are also doing their part.
And the ideology that has led Mr. Christie to undermine his state’s future is, of course, the same ideology that has led almost all Republicans and some Democrats to stand in the way of any meaningful action to revive the nation’s economy. Worse yet, next month’s election seems likely to reward Republicans for their obstructionism.
So here’s how you should think about the decision to kill the tunnel: It’s a terrible thing in itself, but, beyond that, it’s a perfect symbol of how America has lost its way. By refusing to pay for essential investment, politicians are both perpetuating unemployment and sacrificing long-run growth. And why not? After all, this seems to be a winning electoral strategy. All vision of a better future seems to have been lost, replaced with a refusal to look beyond the narrowest, most shortsighted notion of self-interest.
I wish I could say something optimistic at this point. But at least for now, I don’t see any light at the end of this tunnel.
Showing posts with label Stimulus. Show all posts
Showing posts with label Stimulus. Show all posts
Thursday, October 07, 2010
Tuesday, June 08, 2010
A Few Steps Short on Jobs By DAVID LEONHARDT
June 8, 2010
A Few Steps Short on Jobs By DAVID LEONHARDT
Washington
One of the political mysteries of the last year is why the White House and Congress have not been even more aggressive about trying to put people back to work.
It is true that President Obama and Democratic leaders in Congress favor more stimulus and have been stymied by Republicans and, more recently, conservative Blue Dog Democrats worried about the deficit. But it’s also true that Mr. Obama, Nancy Pelosi and Harry Reid have done less than they could have.
The president has not wrapped his arms around teachers, firefighters and other government workers facing layoffs and dared Republicans to oppose him, much as he did with financial reregulation. He has not pushed for a big new round of tax cuts, which could also put Republicans in a bind. And the White House has been slow to fill vacancies at the Federal Reserve that could go to officials who favor the Fed’s doing more to lift economic growth.
None of these steps would have cured the job market on their own. The aftermath of the financial crisis was always going to be long and harsh. Still, the Democrats find themselves in the position of heading into a midterm election campaign with the unemployment rate near 10 percent, knowing that they have not done everything in their power to bring it down.
Publicly, Mr. Obama’s advisers reject this description. “Job creation and economic recovery were and remain President Obama’s top priority,” Lawrence Summers said recently. Mr. Obama is now lobbying the Senate to pass a larger jobs bill than the House passed two weeks ago and pushing for an energy bill that could also create jobs.
But when they are not speaking for quotation, some White House and Congressional officials acknowledge that they could have done more to stimulate the economy, and sooner. In part, they have been busy with other things: legislation on health care, finance and education that could shape the economy for decades to come. The bigger reason, though, is politics.
In the face of near-united Republican opposition, top Democrats have decided that the political costs of aggressively pushing for more stimulus are too high. Any new bill will help only on the margins, and it will give Republicans another chance to blame Mr. Obama for the deficit, even though the current deficit is more of their own party’s making. The Democrats may be right, too. We will never know, because we will never be able to re-run the 2010 election under a different set of circumstances.
Yet the current circumstances bring their own political risks and their own economic costs, especially for anybody who is out of work or soon may be.
•
If there was any doubt that the government could put people to work, at least temporarily, last year’s $787 billion stimulus program should have removed it.
The bill passed in February 2009, when the economy was shedding more than 700,000 jobs a month, and it was greeted with considerable skepticism. Some economists went so far as to suggest it would hurt the economy. Michael Boskin, a Stanford professor and former aide to the first President Bush, wrote an opinion article in The Wall Street Journal on March 6, 2009, blaming Mr. Obama and his policies for the stock market’s drop in previous weeks.
Soon, though, job losses began shrinking. The details — a rebound in state spending, an increase in corporate investment and a spurt in home sales helped by tax credits — suggested that the stimulus bill was a major cause. The Congressional Budget Office and private research firms estimate that the bill has added on the order of 2.5 million jobs. Since Mr. Boskin’s op-ed article appeared, stocks are up 56 percent.
But the stimulus has been less popular than effective, polls show. People see that the economy remains in bad shape, and they have a hard time getting excited by the notion that it could be worse.
These lukewarm views have then been aggravated by the country’s very real deficit problem. The federal government has promised to pay out vastly more in Medicare, Medicaid and Social Security over coming decades than it will collect in taxes. Any additional stimulus would only increase the deficit.
Of course, it would have a much smaller impact on the deficit than the 2001 and 2003 tax cuts, the bipartisan Medicare prescription drug program or the wars in Iraq and Afghanistan did. The bond market, for its part, remains utterly calm about the near-term deficit, based on the government’s extremely low borrowing costs.
But the political dynamic is set. Voters are wary of stimulus and worried about the deficit. Almost nobody in Congress is agitating for the ideal economic solution: a combination of short-term stimulus with longer-term spending cuts and tax increases. It’s easier just to express somber concern about both the deficit and jobs.
Against this backdrop, Mr. Obama and his aides decided not to go all out for more stimulus.
The one part of their strategy that seems almost impossible to defend is their approach to the Fed. By law, the Fed’s mission is to maintain low inflation and maximum employment. Over the last three months, inflation has been zero. Over the last two years, it has risen at the slowest pace in more than 50 years. Meanwhile, 15 million people remain unemployed.
Yet the Fed has taken no recent action to spur the economy — like buying bonds to reduce long-term borrowing costs for households and businesses, as Joseph Gagnon, a former Fed economist, has urged. And the White House and Treasury Department have allowed two of the seven Fed governor spots to sit empty since Mr. Obama took office. He finally announced nominees on April 29, and they await Senate confirmation.
Despite all this, there is reason to think that more stimulus may finally be on the way. Last Friday’s jobs report showed little private-sector job growth in May, which was a good reminder that recoveries from financial crises are usually rocky. The report has the potential to persuade Congress to expand the jobs bill passed by the House, which is now before the Senate.
As is, the House bill would cut taxes for businesses and temporarily extend jobless benefits, among other things. By the end of the year, it would add about 170,000 jobs, Moody’s Economy.com estimates. Expanding the bill to include extra Medicaid funds for states — which seems politically conceivable — could add 100,000 more jobs. Expanding it to keep teachers employed — which is unlikely — could add 200,000 or so.
Will another half-million jobs make the economy feel strong again? No. Will the next round of stimulus be more popular than the last one? Probably not.
Is it nonetheless the right thing to do? That’s another question entirely.
A Few Steps Short on Jobs By DAVID LEONHARDT
Washington
One of the political mysteries of the last year is why the White House and Congress have not been even more aggressive about trying to put people back to work.
It is true that President Obama and Democratic leaders in Congress favor more stimulus and have been stymied by Republicans and, more recently, conservative Blue Dog Democrats worried about the deficit. But it’s also true that Mr. Obama, Nancy Pelosi and Harry Reid have done less than they could have.
The president has not wrapped his arms around teachers, firefighters and other government workers facing layoffs and dared Republicans to oppose him, much as he did with financial reregulation. He has not pushed for a big new round of tax cuts, which could also put Republicans in a bind. And the White House has been slow to fill vacancies at the Federal Reserve that could go to officials who favor the Fed’s doing more to lift economic growth.
None of these steps would have cured the job market on their own. The aftermath of the financial crisis was always going to be long and harsh. Still, the Democrats find themselves in the position of heading into a midterm election campaign with the unemployment rate near 10 percent, knowing that they have not done everything in their power to bring it down.
Publicly, Mr. Obama’s advisers reject this description. “Job creation and economic recovery were and remain President Obama’s top priority,” Lawrence Summers said recently. Mr. Obama is now lobbying the Senate to pass a larger jobs bill than the House passed two weeks ago and pushing for an energy bill that could also create jobs.
But when they are not speaking for quotation, some White House and Congressional officials acknowledge that they could have done more to stimulate the economy, and sooner. In part, they have been busy with other things: legislation on health care, finance and education that could shape the economy for decades to come. The bigger reason, though, is politics.
In the face of near-united Republican opposition, top Democrats have decided that the political costs of aggressively pushing for more stimulus are too high. Any new bill will help only on the margins, and it will give Republicans another chance to blame Mr. Obama for the deficit, even though the current deficit is more of their own party’s making. The Democrats may be right, too. We will never know, because we will never be able to re-run the 2010 election under a different set of circumstances.
Yet the current circumstances bring their own political risks and their own economic costs, especially for anybody who is out of work or soon may be.
•
If there was any doubt that the government could put people to work, at least temporarily, last year’s $787 billion stimulus program should have removed it.
The bill passed in February 2009, when the economy was shedding more than 700,000 jobs a month, and it was greeted with considerable skepticism. Some economists went so far as to suggest it would hurt the economy. Michael Boskin, a Stanford professor and former aide to the first President Bush, wrote an opinion article in The Wall Street Journal on March 6, 2009, blaming Mr. Obama and his policies for the stock market’s drop in previous weeks.
Soon, though, job losses began shrinking. The details — a rebound in state spending, an increase in corporate investment and a spurt in home sales helped by tax credits — suggested that the stimulus bill was a major cause. The Congressional Budget Office and private research firms estimate that the bill has added on the order of 2.5 million jobs. Since Mr. Boskin’s op-ed article appeared, stocks are up 56 percent.
But the stimulus has been less popular than effective, polls show. People see that the economy remains in bad shape, and they have a hard time getting excited by the notion that it could be worse.
These lukewarm views have then been aggravated by the country’s very real deficit problem. The federal government has promised to pay out vastly more in Medicare, Medicaid and Social Security over coming decades than it will collect in taxes. Any additional stimulus would only increase the deficit.
Of course, it would have a much smaller impact on the deficit than the 2001 and 2003 tax cuts, the bipartisan Medicare prescription drug program or the wars in Iraq and Afghanistan did. The bond market, for its part, remains utterly calm about the near-term deficit, based on the government’s extremely low borrowing costs.
But the political dynamic is set. Voters are wary of stimulus and worried about the deficit. Almost nobody in Congress is agitating for the ideal economic solution: a combination of short-term stimulus with longer-term spending cuts and tax increases. It’s easier just to express somber concern about both the deficit and jobs.
Against this backdrop, Mr. Obama and his aides decided not to go all out for more stimulus.
The one part of their strategy that seems almost impossible to defend is their approach to the Fed. By law, the Fed’s mission is to maintain low inflation and maximum employment. Over the last three months, inflation has been zero. Over the last two years, it has risen at the slowest pace in more than 50 years. Meanwhile, 15 million people remain unemployed.
Yet the Fed has taken no recent action to spur the economy — like buying bonds to reduce long-term borrowing costs for households and businesses, as Joseph Gagnon, a former Fed economist, has urged. And the White House and Treasury Department have allowed two of the seven Fed governor spots to sit empty since Mr. Obama took office. He finally announced nominees on April 29, and they await Senate confirmation.
Despite all this, there is reason to think that more stimulus may finally be on the way. Last Friday’s jobs report showed little private-sector job growth in May, which was a good reminder that recoveries from financial crises are usually rocky. The report has the potential to persuade Congress to expand the jobs bill passed by the House, which is now before the Senate.
As is, the House bill would cut taxes for businesses and temporarily extend jobless benefits, among other things. By the end of the year, it would add about 170,000 jobs, Moody’s Economy.com estimates. Expanding the bill to include extra Medicaid funds for states — which seems politically conceivable — could add 100,000 more jobs. Expanding it to keep teachers employed — which is unlikely — could add 200,000 or so.
Will another half-million jobs make the economy feel strong again? No. Will the next round of stimulus be more popular than the last one? Probably not.
Is it nonetheless the right thing to do? That’s another question entirely.
Tuesday, June 01, 2010
Jobs Bill vs. Deficit, a Showdown in the Senate by DAVID LEONHARDT
June 1, 2010
Jobs Bill vs. Deficit, a Showdown in the Senate by DAVID LEONHARDT
WASHINGTON
You are a member of the Senate, and you’re starting to get spooked by the deficit. Polls show that voters are worried about it. Economists are, too. Something needs to change.
But you’re tired of politicians who pound the table about the issue without actually naming programs they would cut or taxes they would increase. You know that reducing the deficit is like losing weight: it’s as straightforward as it is difficult. “We have to stop spending money we don’t have,” as Jim Cooper, a House member from Tennessee, said the other day.
When Congressional leaders announced plans for a new $200 billion jobs bill recently, Mr. Cooper and other centrist House Democrats saw a chance to do something tangible. Only about a third of the bill’s cost would have been paid, by closing tax loopholes for investment managers and overseas businesses. The remaining $134 billion would have been added to the deficit. In response, the centrists said no and forced the leaders to cut the bill’s spending nearly in half.
Now the slimmed-down bill is coming to the Senate, and you need to decide what to do.
It would still add about $54 billion to the deficit over the next decade. On the other hand, it could also do some good. Among other things, it would cut taxes for businesses, expand summer jobs programs and temporarily extend jobless benefits for some of today’s 15 million unemployed workers.
“Oh, Master, make me chaste and celibate — but not yet,” Saint Augustine famously said.
What you want to know is when, at long last, will it be yet?
The case against the jobs bill starts with the idea that the economy is recovering. Since the recession’s nadir, in January 2009, the job market has improved at the most rapid pace since 1983. On Friday, forecasters expect the Labor Department to report that job growth continued to accelerate in May.
There is always the chance that the economy could slip back again. But the case for optimism seems stronger. Corporate executives are becoming more upbeat, surveys show. Business travel has picked up. Silicon Valley firms are doing more deals. Nissan broke ground last week on a car battery plant in Tennessee, and Chrysler is adding 1,100 jobs at a Jeep plant in Michigan.
No one doubts that Washington will eventually have to switch from Keynesian pump-priming to fiscal discipline. If the economy has turned a corner, you wonder if maybe that moment has arrived. You know it certainly can’t be too far off.
Including the jobs bill, the deficit is projected to grow to about $1.3 trillion next year (and that’s assuming the White House can persuade Congress to make some proposed spending cuts and repeal the Bush tax cuts for the affluent). To be at a level that economists consider sustainable, the deficit needs to be closer to $400 billion. Only then would normal economic growth be able to pay it off.
So Congress would need to find almost $900 billion in savings. By voting down the jobs bill, it would save more than $50 billion by 2015 and get 7 percent of the way to the goal. That’s not nothing. In a nutshell, it’s the case against the bill.
Unfortunately, you also know that the deficit over the next several years isn’t the main problem. Medicare is. It and, to a lesser extent, Social Security and Medicaid are on pace to spend far more money than taxpayers will pay into the system.
That means the deficit will continue to grow in the years ahead. To get it under control, Congress doesn’t just need to find savings for 2011. It needs to do that and then find more cuts for 2012, yet more for 2013 and vastly more for the decades that follow.
In this context, the jobs bill looks a lot smaller. Its cost is equal to only about 2 percent of the total cuts needed to get the deficit to an acceptable level over the next decade. Beyond the next decade, the bill could actually save money, because its spending is temporary — mostly by 2012 — while its closing of tax loopholes is permanent.
Of course, even if the bill is not very expensive, it is worth passing only if it will make a difference. And economists say it will.
Last year’s big stimulus program certainly did. The Congressional Budget Office estimates that 1.4 million to 3.4 million people now working would be unemployed were it not for the stimulus. Private economists have made similar estimates.
There are two arguments for more stimulus today. The first is that, however hopeful the economic signs, the risk of a double-dip recession remains. Financial crises often bring bumpy recoveries. The recent troubles in Europe surely won’t help.
The second argument is that the economy has a terribly long way to go before it can be considered healthy. Here is a sobering way to think about the situation: If the next four years were to bring job growth as fast as the job growth during the best four years of the 1990s boom — which isn’t likely — the unemployment rate would still be higher in 2014 than when the recession began in late 2007.
Voters may not like deficits, but they really do not like unemployment.
Looking at the problem this way makes the jobs bill seem like less of a tough call. Luckily, the country’s two big economic problems — the budget deficit and the job market — are not on the same timeline. The unemployment rate is near a 27-year high right now. Deficit reduction can wait a bit, given that lenders continue to show confidence in Washington’s ability to repay the debt.
As a result, Congress does not have to choose between the problems. It can pass the jobs bill, putting people back to work, and even pass a separate bill to help struggling states. History has shown that state aid, which prevents layoffs of teachers, emergency medical technicians and other workers, is the single most effective form of stimulus.
But this new spending needs to be accompanied by something more credible than Augustine-like vows of future parsimony. It should be paired with substantive cuts to continuing policies, like subsidies for oil companies and agribusinesses, outdated weapons systems, NASA’s moon program and at least some Bush tax cuts, among many other things.
That is the right economic strategy. It’s probably the right political one, too. It shows serious concern about both jobs and the deficit.
So what do you say, Senator?
E-mail: leonhardt@nytimes.com
An earlier version of this column incorrectly described the year in which a jobs bill before the Senate would add about $50 billion to the deficit and the percentage of the savings needed to reduce next year's deficit to a level economists consider sustainable.
This article has been revised to reflect the following correction:
Correction: June 5, 2010
The Economic Scene column on Wednesday about the effect a federal jobs bill would have on the federal deficit misstated the year in which a jobs bill before the Senate would add about $50 billion to the deficit and the percent of the deficit it represents. The bill would affect the deficit next year, not 2015. If the jobs bill is not passed, the $50 billion would represent 7 percent of the savings needed to reduce next year’s deficit to a level economists consider sustainable, not one-fourth of the savings.
Jobs Bill vs. Deficit, a Showdown in the Senate by DAVID LEONHARDT
WASHINGTON
You are a member of the Senate, and you’re starting to get spooked by the deficit. Polls show that voters are worried about it. Economists are, too. Something needs to change.
But you’re tired of politicians who pound the table about the issue without actually naming programs they would cut or taxes they would increase. You know that reducing the deficit is like losing weight: it’s as straightforward as it is difficult. “We have to stop spending money we don’t have,” as Jim Cooper, a House member from Tennessee, said the other day.
When Congressional leaders announced plans for a new $200 billion jobs bill recently, Mr. Cooper and other centrist House Democrats saw a chance to do something tangible. Only about a third of the bill’s cost would have been paid, by closing tax loopholes for investment managers and overseas businesses. The remaining $134 billion would have been added to the deficit. In response, the centrists said no and forced the leaders to cut the bill’s spending nearly in half.
Now the slimmed-down bill is coming to the Senate, and you need to decide what to do.
It would still add about $54 billion to the deficit over the next decade. On the other hand, it could also do some good. Among other things, it would cut taxes for businesses, expand summer jobs programs and temporarily extend jobless benefits for some of today’s 15 million unemployed workers.
“Oh, Master, make me chaste and celibate — but not yet,” Saint Augustine famously said.
What you want to know is when, at long last, will it be yet?
The case against the jobs bill starts with the idea that the economy is recovering. Since the recession’s nadir, in January 2009, the job market has improved at the most rapid pace since 1983. On Friday, forecasters expect the Labor Department to report that job growth continued to accelerate in May.
There is always the chance that the economy could slip back again. But the case for optimism seems stronger. Corporate executives are becoming more upbeat, surveys show. Business travel has picked up. Silicon Valley firms are doing more deals. Nissan broke ground last week on a car battery plant in Tennessee, and Chrysler is adding 1,100 jobs at a Jeep plant in Michigan.
No one doubts that Washington will eventually have to switch from Keynesian pump-priming to fiscal discipline. If the economy has turned a corner, you wonder if maybe that moment has arrived. You know it certainly can’t be too far off.
Including the jobs bill, the deficit is projected to grow to about $1.3 trillion next year (and that’s assuming the White House can persuade Congress to make some proposed spending cuts and repeal the Bush tax cuts for the affluent). To be at a level that economists consider sustainable, the deficit needs to be closer to $400 billion. Only then would normal economic growth be able to pay it off.
So Congress would need to find almost $900 billion in savings. By voting down the jobs bill, it would save more than $50 billion by 2015 and get 7 percent of the way to the goal. That’s not nothing. In a nutshell, it’s the case against the bill.
Unfortunately, you also know that the deficit over the next several years isn’t the main problem. Medicare is. It and, to a lesser extent, Social Security and Medicaid are on pace to spend far more money than taxpayers will pay into the system.
That means the deficit will continue to grow in the years ahead. To get it under control, Congress doesn’t just need to find savings for 2011. It needs to do that and then find more cuts for 2012, yet more for 2013 and vastly more for the decades that follow.
In this context, the jobs bill looks a lot smaller. Its cost is equal to only about 2 percent of the total cuts needed to get the deficit to an acceptable level over the next decade. Beyond the next decade, the bill could actually save money, because its spending is temporary — mostly by 2012 — while its closing of tax loopholes is permanent.
Of course, even if the bill is not very expensive, it is worth passing only if it will make a difference. And economists say it will.
Last year’s big stimulus program certainly did. The Congressional Budget Office estimates that 1.4 million to 3.4 million people now working would be unemployed were it not for the stimulus. Private economists have made similar estimates.
There are two arguments for more stimulus today. The first is that, however hopeful the economic signs, the risk of a double-dip recession remains. Financial crises often bring bumpy recoveries. The recent troubles in Europe surely won’t help.
The second argument is that the economy has a terribly long way to go before it can be considered healthy. Here is a sobering way to think about the situation: If the next four years were to bring job growth as fast as the job growth during the best four years of the 1990s boom — which isn’t likely — the unemployment rate would still be higher in 2014 than when the recession began in late 2007.
Voters may not like deficits, but they really do not like unemployment.
Looking at the problem this way makes the jobs bill seem like less of a tough call. Luckily, the country’s two big economic problems — the budget deficit and the job market — are not on the same timeline. The unemployment rate is near a 27-year high right now. Deficit reduction can wait a bit, given that lenders continue to show confidence in Washington’s ability to repay the debt.
As a result, Congress does not have to choose between the problems. It can pass the jobs bill, putting people back to work, and even pass a separate bill to help struggling states. History has shown that state aid, which prevents layoffs of teachers, emergency medical technicians and other workers, is the single most effective form of stimulus.
But this new spending needs to be accompanied by something more credible than Augustine-like vows of future parsimony. It should be paired with substantive cuts to continuing policies, like subsidies for oil companies and agribusinesses, outdated weapons systems, NASA’s moon program and at least some Bush tax cuts, among many other things.
That is the right economic strategy. It’s probably the right political one, too. It shows serious concern about both jobs and the deficit.
So what do you say, Senator?
E-mail: leonhardt@nytimes.com
An earlier version of this column incorrectly described the year in which a jobs bill before the Senate would add about $50 billion to the deficit and the percentage of the savings needed to reduce next year's deficit to a level economists consider sustainable.
This article has been revised to reflect the following correction:
Correction: June 5, 2010
The Economic Scene column on Wednesday about the effect a federal jobs bill would have on the federal deficit misstated the year in which a jobs bill before the Senate would add about $50 billion to the deficit and the percent of the deficit it represents. The bill would affect the deficit next year, not 2015. If the jobs bill is not passed, the $50 billion would represent 7 percent of the savings needed to reduce next year’s deficit to a level economists consider sustainable, not one-fourth of the savings.
Friday, February 13, 2009
What’s in the Bill for You By RON LIEBER
February 13, 2009
Your Money
What’s in the Bill for You By RON LIEBER
All the talk the last couple of days about the stimulus bill was about compromise and slimming down. What is left, though, is a huge spending bill, with well over $100 billion in tax breaks and handouts for individuals.
And most of us will be able to use at least one of them, though it will be difficult to get much money immediately, unlike the stimulus checks that went out last year.
What follows is a list of some of the biggest provisions in the bill that will hit you directly in the wallet. Keep in mind that the language in the measure isn’t quite final and the Senate and House still have to vote to approve it.
INCOME TAX In 2009 and 2010, there is a tax credit of up to $400 for individuals and $800 for married couples filing their taxes jointly. You calculate your credit, subtracted from other federal taxes you owe, by taking 6.2 percent of your earned income.
Your eligibility for this credit begins to phase out if you’re an individual with an adjusted gross income over $75,000 or a couple with income higher than $150,000.
Employers may end up adjusting tax withholdings on paychecks so that this credit trickles into your bank account over the course of the year. People who are self-employed can adjust their quarterly tax filings to account for the credit.
This credit is refundable, according to a summary of the stimulus bill that the Senate Finance and House Ways and Means committees released Thursday. That means that even if you have no federal income tax liability, you will still get the money.
UNEMPLOYMENT Normally, you pay federal income taxes on federal unemployment benefits. In 2009, however, you won’t have to pay taxes on the first $2,400 in benefits you receive.
HEALTH INSURANCE If you get fired, your company is required, thanks to a law known as Cobra, to allow you to pay to keep your health insurance, generally for up to 18 months.
The problem is, it can cost you $1,000 a month or more to keep the coverage.
Now, the federal government will subsidize 65 percent of the premium for up to nine months. To be eligible, you need to have been forced out of your job between Sept. 1, 2008, and Dec. 31, 2009. Also, your income in the year you receive the subsidy cannot be more than $125,000 for individuals or $250,000 for married couples filing their taxes jointly.
If you lost your job after Sept. 1, 2008, and declined Cobra coverage, you’ll now get another chance. Call your former company in the next two months to find out how this will work.
You need not keep an eye on the mail for a subsidy check from the government, according Kathryn Bakich, senior vice president in Washington of the Segal Company, a benefits consulting firm. Instead, your former employer will collect the money from the government.
SOCIAL SECURITY In 2009 a number of retirees and disabled people, including Social Security recipients, will receive a $250 refundable tax credit. The money would arrive within 120 days of the bill’s signing.
CAR BUYER TAX DEDUCTION For the rest of 2009, you’ll be able to deduct the state and local sales and excise taxes you pay on the purchase of a new (not used) car, light truck, recreational vehicle or motorcycle.
This will be an “above-the-line deduction,” according to Clint Stretch, the managing principal of tax policy at Deloitte L.L.C. in Washington. That means that you can take it regardless of whether you itemize other deductions on your tax return.
Mark Luscombe, principal tax analyst for CCH, a tax information service, notes that state sales taxes alone can run 6 to 7 percent, before any county or local tax kicks in. That said, if you trade in a vehicle, your taxable purchase price may be lower.
Eligibility for this tax break begins to phase out for single people with adjusted gross income over $125,000 or $250,000 for married couples filing jointly. And the deduction does not apply on spending above $49,500.
PELL GRANT According to a summary from the office of House Speaker Nancy Pelosi, the maximum Pell Grant will increase by $500, to $5,350 in 2009 and $5,550 in 2010. The grants are generally for low-income students.
HIGHER EDUCATION TAX CREDIT This credit covers up to $2,500 of the cost of college tuition and other related expenses in 2009 and 2010. You’ll need to spend at least $4,000 in a single year to get the full credit. The credit begins to phase out for individual taxpayers with adjusted gross incomes over $80,000 or $160,000 for married couples filing jointly.
Forty percent of the credit is refundable, which benefits low-income students paying their way through school (who may owe no federal income taxes).
529 PLAN EXPANSION When you withdraw money from a 529 college savings plan, you can use it for tuition, room, board, books and other college expenses. In 2009 and 2010, families can also use the money for computers and computer technology, which could include educational software and Internet service for students living at home.
FIRST-TIME HOME BUYER CREDIT First-time home buyers are eligible for a refundable tax credit equal to 10 percent of the purchase price of their home, up to $8,000, if they made the purchase after Jan. 1, 2009, but before Dec. 1, 2009.
Unlike a similar credit that Congress provided last year, you don’t have to pay this one back over 15 years. The new credit, however, does phase out for individuals with incomes over $75,000 or married couples with incomes over $150,000 who file their taxes jointly. Also, you forfeit the credit if you sell the house within three years.
TRANSIT ACCOUNTS If you commute to work via public transportation, your employer may allow you to set aside pretax money from your paycheck to pay for the bus, train or parking. Currently, you can put aside only $120 a month for mass transit while those who drive and park can save $230. This year and next, those who take mass transit will also be able to put aside $230 each month.
A.M.T. PATCH Each year, Congress creates a temporary fix to keep millions of people from paying the alternative minimum tax. This year, the patch is part of the stimulus bill. “If you didn’t pay the A.M.T. last year, you probably won’t this year,” said Mr. Stretch of Deloitte. “For most people, this is a nonevent. They didn’t even realize they were in danger of being shot in the head by the A.M.T.”
Your Money
What’s in the Bill for You By RON LIEBER
All the talk the last couple of days about the stimulus bill was about compromise and slimming down. What is left, though, is a huge spending bill, with well over $100 billion in tax breaks and handouts for individuals.
And most of us will be able to use at least one of them, though it will be difficult to get much money immediately, unlike the stimulus checks that went out last year.
What follows is a list of some of the biggest provisions in the bill that will hit you directly in the wallet. Keep in mind that the language in the measure isn’t quite final and the Senate and House still have to vote to approve it.
INCOME TAX In 2009 and 2010, there is a tax credit of up to $400 for individuals and $800 for married couples filing their taxes jointly. You calculate your credit, subtracted from other federal taxes you owe, by taking 6.2 percent of your earned income.
Your eligibility for this credit begins to phase out if you’re an individual with an adjusted gross income over $75,000 or a couple with income higher than $150,000.
Employers may end up adjusting tax withholdings on paychecks so that this credit trickles into your bank account over the course of the year. People who are self-employed can adjust their quarterly tax filings to account for the credit.
This credit is refundable, according to a summary of the stimulus bill that the Senate Finance and House Ways and Means committees released Thursday. That means that even if you have no federal income tax liability, you will still get the money.
UNEMPLOYMENT Normally, you pay federal income taxes on federal unemployment benefits. In 2009, however, you won’t have to pay taxes on the first $2,400 in benefits you receive.
HEALTH INSURANCE If you get fired, your company is required, thanks to a law known as Cobra, to allow you to pay to keep your health insurance, generally for up to 18 months.
The problem is, it can cost you $1,000 a month or more to keep the coverage.
Now, the federal government will subsidize 65 percent of the premium for up to nine months. To be eligible, you need to have been forced out of your job between Sept. 1, 2008, and Dec. 31, 2009. Also, your income in the year you receive the subsidy cannot be more than $125,000 for individuals or $250,000 for married couples filing their taxes jointly.
If you lost your job after Sept. 1, 2008, and declined Cobra coverage, you’ll now get another chance. Call your former company in the next two months to find out how this will work.
You need not keep an eye on the mail for a subsidy check from the government, according Kathryn Bakich, senior vice president in Washington of the Segal Company, a benefits consulting firm. Instead, your former employer will collect the money from the government.
SOCIAL SECURITY In 2009 a number of retirees and disabled people, including Social Security recipients, will receive a $250 refundable tax credit. The money would arrive within 120 days of the bill’s signing.
CAR BUYER TAX DEDUCTION For the rest of 2009, you’ll be able to deduct the state and local sales and excise taxes you pay on the purchase of a new (not used) car, light truck, recreational vehicle or motorcycle.
This will be an “above-the-line deduction,” according to Clint Stretch, the managing principal of tax policy at Deloitte L.L.C. in Washington. That means that you can take it regardless of whether you itemize other deductions on your tax return.
Mark Luscombe, principal tax analyst for CCH, a tax information service, notes that state sales taxes alone can run 6 to 7 percent, before any county or local tax kicks in. That said, if you trade in a vehicle, your taxable purchase price may be lower.
Eligibility for this tax break begins to phase out for single people with adjusted gross income over $125,000 or $250,000 for married couples filing jointly. And the deduction does not apply on spending above $49,500.
PELL GRANT According to a summary from the office of House Speaker Nancy Pelosi, the maximum Pell Grant will increase by $500, to $5,350 in 2009 and $5,550 in 2010. The grants are generally for low-income students.
HIGHER EDUCATION TAX CREDIT This credit covers up to $2,500 of the cost of college tuition and other related expenses in 2009 and 2010. You’ll need to spend at least $4,000 in a single year to get the full credit. The credit begins to phase out for individual taxpayers with adjusted gross incomes over $80,000 or $160,000 for married couples filing jointly.
Forty percent of the credit is refundable, which benefits low-income students paying their way through school (who may owe no federal income taxes).
529 PLAN EXPANSION When you withdraw money from a 529 college savings plan, you can use it for tuition, room, board, books and other college expenses. In 2009 and 2010, families can also use the money for computers and computer technology, which could include educational software and Internet service for students living at home.
FIRST-TIME HOME BUYER CREDIT First-time home buyers are eligible for a refundable tax credit equal to 10 percent of the purchase price of their home, up to $8,000, if they made the purchase after Jan. 1, 2009, but before Dec. 1, 2009.
Unlike a similar credit that Congress provided last year, you don’t have to pay this one back over 15 years. The new credit, however, does phase out for individuals with incomes over $75,000 or married couples with incomes over $150,000 who file their taxes jointly. Also, you forfeit the credit if you sell the house within three years.
TRANSIT ACCOUNTS If you commute to work via public transportation, your employer may allow you to set aside pretax money from your paycheck to pay for the bus, train or parking. Currently, you can put aside only $120 a month for mass transit while those who drive and park can save $230. This year and next, those who take mass transit will also be able to put aside $230 each month.
A.M.T. PATCH Each year, Congress creates a temporary fix to keep millions of people from paying the alternative minimum tax. This year, the patch is part of the stimulus bill. “If you didn’t pay the A.M.T. last year, you probably won’t this year,” said Mr. Stretch of Deloitte. “For most people, this is a nonevent. They didn’t even realize they were in danger of being shot in the head by the A.M.T.”
In Japan's Stagnant Decade, Cautionary Tales for America By HIROKO TABUCHI
February 13, 2009
In Japan's Stagnant Decade, Cautionary Tales for America By HIROKO TABUCHI
TOKYO — The Obama administration is committing huge sums of money to rescuing banks, but the veterans of Japan's banking crisis have three words for the Americans: more money, faster.
The Japanese have been here before. They endured a "lost decade" of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures.
Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.
By then, Tokyo's main Nikkei stock index had lost almost three-quarters of its value. The country's public debt had grown to exceed its gross domestic product, and deflation stalked the land. In the end, real estate prices fell for 15 consecutive years.
More alarming? Some students of the Japanese debacle say they see a similar train wreck heading for the United States.
"I thought America had studied Japan's failures," said Hirofumi Gomi, a top official at Japan's Financial Services Agency during the crisis. "Why is it making the same mistakes?"
Many American critics of the plan unveiled Tuesday by Treasury Secretary Timothy F. Geithner said the plan lacked details. Experts on Japan found it timid — especially given the size of the banking crisis the administration faces.
"I think they know how big it is, but they don't want to say how big it is. It's so big they can't acknowledge it," said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. "The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks."
Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.
One reason Japan's leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.
A further lesson from Japan is that the bank rescue will determine the fate of the wider economy. While President Obama has prioritized his stimulus plan, no stimulus is likely to succeed unless the banking sector is repaired.
The Japanese crisis of the 1990s and early 2000s had roots similar to the American crisis: a real estate bubble that collapsed, leaving banks holding trillions of yen in loans that were virtually worthless.
Initially, Japan's leaders underestimated how badly the real estate collapse would hurt the country's banks. As in the United States, a policy of easy money had fueled both stock and real estate speculation, as well as reckless lending by banks.
Many in Japan thought that low interest rates and economic stimulus measures would help banks recover on their own. In late 1997, however, a string of bank failures set off a crippling credit crisis.
Prodded into action, the government injected 1.8 trillion yen into Japan's main banks. But the injections — too small, poorly planned and based on little understanding of the extent of the banking sector's woes — failed to stem the growing crisis.
Fearing more bad news if banks were forced to disclose their real losses, Japan's leaders allowed banks to keep loans to "zombie" companies on their balance sheets.
Japan, instead, experimented with a series of funds, in part privately financed, to relieve banks of their bad assets.
The funds brought limited results at best, says Takeo Hoshi, economics professor at the University of California, San Diego. For one thing, the funds were too small to make an impact. The depository for bad loans had no orderly way to sell them off. And the purchases that did take place failed to recapitalize banks because the bad assets were priced so low.
So far, the Obama administration's plan avoids the hardest decisions, like nationalizing banks, wiping out shareholders or allowing banks to collapse under the weight of their own bad debts. In the end, Japan had to do all those things.
Economists say these blunders meant Japan's financial system did not start to recover until late 2002, six years after the crisis broke. That year, the government of the reformist leader Junichiro Koizumi ordered a tough audit of the country's top banks.
Called the Takenaka Plan after Heizo Takenaka, who headed the government's financial reform efforts, the move finally brought the full extent of bad loans to light. Initially, banks lashed out at Mr. Takenaka. "The government can't order bank management to do this and that," Yoshifumi Nishikawa, president of the Sumitomo Mitsui Financial Group, complained to the press in October 2002. "It's absolutely absurd."
But Mr. Takenaka stood firm. His rallying cry, he said in an interview on Wednesday, was, "Don't cover up. Don't distort principles. Follow the rules."
"I told the banks clearly, 'I am in a position to supervise you,' " Mr. Takenaka said. "I told them I am not open to negotiation."
It took three more years to finally get the majority of bad loans off the banks' books. Resona Bank, which was found to have insufficient capital, was effectively nationalized.
From 1992 to 2005, Japanese banks wrote off about 96 trillion yen, or about 19 percent of the country's annual G.D.P. But Mr. Takenaka's toughness restored faith in the banks.
"That was a turning point in the banking crisis," said Mr. Gomi of the Financial Services Agency, who worked with Mr. Takenaka on the audits.
By then, other factors had fallen into place that aided economic recovery, including a boom in exports to the United States and China.
(Those very share holdings would come back to haunt banks, as the recent market sell-off batters their balance sheets. And as the economy worsens, bad loans are again on the rise, the Financial Services Agency said Tuesday.)
The United States will probably not be able to count on growing demand for its products, since the global economy is worsening.
"The way things are going right now," said Mr. Hoshi, "the U.S. taxpayers' burden will keep going up and up."
http://www.nytimes.com/2009/02/13/business/economy/13yen.html?sq=Tabuchi%20Hiroko&st=cse&scp=1&pagewanted=print
http://snipurl.com/by272
In Japan's Stagnant Decade, Cautionary Tales for America By HIROKO TABUCHI
TOKYO — The Obama administration is committing huge sums of money to rescuing banks, but the veterans of Japan's banking crisis have three words for the Americans: more money, faster.
The Japanese have been here before. They endured a "lost decade" of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures.
Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.
By then, Tokyo's main Nikkei stock index had lost almost three-quarters of its value. The country's public debt had grown to exceed its gross domestic product, and deflation stalked the land. In the end, real estate prices fell for 15 consecutive years.
More alarming? Some students of the Japanese debacle say they see a similar train wreck heading for the United States.
"I thought America had studied Japan's failures," said Hirofumi Gomi, a top official at Japan's Financial Services Agency during the crisis. "Why is it making the same mistakes?"
Many American critics of the plan unveiled Tuesday by Treasury Secretary Timothy F. Geithner said the plan lacked details. Experts on Japan found it timid — especially given the size of the banking crisis the administration faces.
"I think they know how big it is, but they don't want to say how big it is. It's so big they can't acknowledge it," said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. "The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks."
Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.
One reason Japan's leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.
A further lesson from Japan is that the bank rescue will determine the fate of the wider economy. While President Obama has prioritized his stimulus plan, no stimulus is likely to succeed unless the banking sector is repaired.
The Japanese crisis of the 1990s and early 2000s had roots similar to the American crisis: a real estate bubble that collapsed, leaving banks holding trillions of yen in loans that were virtually worthless.
Initially, Japan's leaders underestimated how badly the real estate collapse would hurt the country's banks. As in the United States, a policy of easy money had fueled both stock and real estate speculation, as well as reckless lending by banks.
Many in Japan thought that low interest rates and economic stimulus measures would help banks recover on their own. In late 1997, however, a string of bank failures set off a crippling credit crisis.
Prodded into action, the government injected 1.8 trillion yen into Japan's main banks. But the injections — too small, poorly planned and based on little understanding of the extent of the banking sector's woes — failed to stem the growing crisis.
Fearing more bad news if banks were forced to disclose their real losses, Japan's leaders allowed banks to keep loans to "zombie" companies on their balance sheets.
Japan, instead, experimented with a series of funds, in part privately financed, to relieve banks of their bad assets.
The funds brought limited results at best, says Takeo Hoshi, economics professor at the University of California, San Diego. For one thing, the funds were too small to make an impact. The depository for bad loans had no orderly way to sell them off. And the purchases that did take place failed to recapitalize banks because the bad assets were priced so low.
So far, the Obama administration's plan avoids the hardest decisions, like nationalizing banks, wiping out shareholders or allowing banks to collapse under the weight of their own bad debts. In the end, Japan had to do all those things.
Economists say these blunders meant Japan's financial system did not start to recover until late 2002, six years after the crisis broke. That year, the government of the reformist leader Junichiro Koizumi ordered a tough audit of the country's top banks.
Called the Takenaka Plan after Heizo Takenaka, who headed the government's financial reform efforts, the move finally brought the full extent of bad loans to light. Initially, banks lashed out at Mr. Takenaka. "The government can't order bank management to do this and that," Yoshifumi Nishikawa, president of the Sumitomo Mitsui Financial Group, complained to the press in October 2002. "It's absolutely absurd."
But Mr. Takenaka stood firm. His rallying cry, he said in an interview on Wednesday, was, "Don't cover up. Don't distort principles. Follow the rules."
"I told the banks clearly, 'I am in a position to supervise you,' " Mr. Takenaka said. "I told them I am not open to negotiation."
It took three more years to finally get the majority of bad loans off the banks' books. Resona Bank, which was found to have insufficient capital, was effectively nationalized.
From 1992 to 2005, Japanese banks wrote off about 96 trillion yen, or about 19 percent of the country's annual G.D.P. But Mr. Takenaka's toughness restored faith in the banks.
"That was a turning point in the banking crisis," said Mr. Gomi of the Financial Services Agency, who worked with Mr. Takenaka on the audits.
By then, other factors had fallen into place that aided economic recovery, including a boom in exports to the United States and China.
(Those very share holdings would come back to haunt banks, as the recent market sell-off batters their balance sheets. And as the economy worsens, bad loans are again on the rise, the Financial Services Agency said Tuesday.)
The United States will probably not be able to count on growing demand for its products, since the global economy is worsening.
"The way things are going right now," said Mr. Hoshi, "the U.S. taxpayers' burden will keep going up and up."
http://www.nytimes.com/2009/02/13/business/economy/13yen.html?sq=Tabuchi%20Hiroko&st=cse&scp=1&pagewanted=print
http://snipurl.com/by272
Failure to Rise By PAUL KRUGMAN
February 13, 2009
Op-Ed Columnist
Failure to Rise By PAUL KRUGMAN
By any normal political standards, this week's Congressional agreement on an economic stimulus package was a great victory for President Obama. He got more or less what he asked for: almost $800 billion to rescue the economy, with most of the money allocated to spending rather than tax cuts. Break out the Champagne!
Or maybe not. These aren't normal times, so normal political standards don't apply: Mr. Obama's victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks. And the politics of the stimulus fight have made nonsense of Mr. Obama's postpartisan dreams.
Let's start with the politics.
One might have expected Republicans to act at least slightly chastened in these early days of the Obama administration, given both their drubbing in the last two elections and the economic debacle of the past eight years.
But it's now clear that the party's commitment to deep voodoo — enforced, in part, by pressure groups that stand ready to run primary challengers against heretics — is as strong as ever. In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration's tax cuts is more Bush-style tax cuts.
And the rhetorical response of conservatives to the stimulus plan — which will, it's worth bearing in mind, cost substantially less than either the Bush administration's $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq — has bordered on the deranged.
It's "generational theft," said Senator John McCain, just a few days after voting for tax cuts that would, over the next decade, have cost about four times as much.
It's "destroying my daughters' future. It is like sitting there watching my house ransacked by a gang of thugs," said Arnold Kling of the Cato Institute.
And the ugliness of the political debate matters because it raises doubts about the Obama administration's ability to come back for more if, as seems likely, the stimulus bill proves inadequate.
For while Mr. Obama got more or less what he asked for, he almost certainly didn't ask for enough. We're probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn't nearly enough to bridge that chasm.
Officially, the administration insists that the plan is adequate to the economy's need. But few economists agree. And it's widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have — that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support. We've just seen how well that worked.
Now, the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue, one that would unfreeze the credit markets and get money moving again. But the long-awaited announcement of the Obama administration's plans on that front, which also came this week, landed with a dull thud.
The plan sketched out by Tim Geithner, the Treasury secretary, wasn't bad, exactly. What it was, instead, was vague. It left everyone trying to figure out where the administration was really going. Will those public-private partnerships end up being a covert way to bail out bankers at taxpayers' expense? Or will the required "stress test" act as a back-door route to temporary bank nationalization (the solution favored by a growing number of economists, myself included)? Nobody knows.
Over all, the effect was to kick the can down the road. And that's not good enough. So far the Obama administration's response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses. It's early days yet, but we're falling behind the curve.
And I don't know about you, but I've got a sick feeling in the pit of my stomach — a feeling that America just isn't rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.
There's still time to turn this around. But Mr. Obama has to be stronger looking forward. Otherwise, the verdict on this crisis might be that no, we can't.
http://www.nytimes.com/2009/02/13/opinion/13krugman.html?sq=&st=cse&%2334;Failure%20to%20Rise=&scp=1&%2334;%20Krugman=&pagewanted=print
http://snipurl.com/by22r
Op-Ed Columnist
Failure to Rise By PAUL KRUGMAN
By any normal political standards, this week's Congressional agreement on an economic stimulus package was a great victory for President Obama. He got more or less what he asked for: almost $800 billion to rescue the economy, with most of the money allocated to spending rather than tax cuts. Break out the Champagne!
Or maybe not. These aren't normal times, so normal political standards don't apply: Mr. Obama's victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks. And the politics of the stimulus fight have made nonsense of Mr. Obama's postpartisan dreams.
Let's start with the politics.
One might have expected Republicans to act at least slightly chastened in these early days of the Obama administration, given both their drubbing in the last two elections and the economic debacle of the past eight years.
But it's now clear that the party's commitment to deep voodoo — enforced, in part, by pressure groups that stand ready to run primary challengers against heretics — is as strong as ever. In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration's tax cuts is more Bush-style tax cuts.
And the rhetorical response of conservatives to the stimulus plan — which will, it's worth bearing in mind, cost substantially less than either the Bush administration's $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq — has bordered on the deranged.
It's "generational theft," said Senator John McCain, just a few days after voting for tax cuts that would, over the next decade, have cost about four times as much.
It's "destroying my daughters' future. It is like sitting there watching my house ransacked by a gang of thugs," said Arnold Kling of the Cato Institute.
And the ugliness of the political debate matters because it raises doubts about the Obama administration's ability to come back for more if, as seems likely, the stimulus bill proves inadequate.
For while Mr. Obama got more or less what he asked for, he almost certainly didn't ask for enough. We're probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn't nearly enough to bridge that chasm.
Officially, the administration insists that the plan is adequate to the economy's need. But few economists agree. And it's widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have — that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support. We've just seen how well that worked.
Now, the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue, one that would unfreeze the credit markets and get money moving again. But the long-awaited announcement of the Obama administration's plans on that front, which also came this week, landed with a dull thud.
The plan sketched out by Tim Geithner, the Treasury secretary, wasn't bad, exactly. What it was, instead, was vague. It left everyone trying to figure out where the administration was really going. Will those public-private partnerships end up being a covert way to bail out bankers at taxpayers' expense? Or will the required "stress test" act as a back-door route to temporary bank nationalization (the solution favored by a growing number of economists, myself included)? Nobody knows.
Over all, the effect was to kick the can down the road. And that's not good enough. So far the Obama administration's response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses. It's early days yet, but we're falling behind the curve.
And I don't know about you, but I've got a sick feeling in the pit of my stomach — a feeling that America just isn't rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.
There's still time to turn this around. But Mr. Obama has to be stronger looking forward. Otherwise, the verdict on this crisis might be that no, we can't.
http://www.nytimes.com/2009/02/13/opinion/13krugman.html?sq=&st=cse&%2334;Failure%20to%20Rise=&scp=1&%2334;%20Krugman=&pagewanted=print
http://snipurl.com/by22r
The Worst-Case Scenario By DAVID BROOKS
February 13, 2009
Op-Ed Columnist
The Worst-Case Scenario By DAVID BROOKS
Between 1990 and 2007, the total mortgage debt held by Americans rose from $2.5 trillion to $10.5 trillion. This rise was part of a societal credit bubble that burst in 2008. To cushion the pain of that collapse, federal authorities decided to replace private debt with public debt.
In 2008, the Bush administration increased spending by about $1.7 trillion, and guaranteed loans, investments and deposits worth about $8 trillion. In 2009, the Obama administration spent $800 billion on a stimulus package, $1 trillion on a second round of bank bailouts and committed another trillion on health care reform and other bailout plans.
Americans generally welcomed the burst of public activism. In “Democracy in America,” Alexis de Tocqueville wrote about what happens to a people beset by anxiety: “The taste for public tranquility then becomes a blind passion, and the citizens are liable to conceive a most inordinate devotion to order.”
In normal times, Americans would have been skeptical of proposals to double or triple the size of federal programs, but amid the economic fear, that skepticism fell away. Wall Street traders hungered for a huge federal bailout replete with strings. Economists produced models that assumed that government could efficiently spend huge amounts of money, and these models were accepted.
The Obama administration was staffed with moderates who found that there was no reward for moderation. Liberals attacked them for being tepid. Republicans attacked them because it was enjoyable to see Democrats attacked. Over time, the administration drifted left and created what you might call Split Level Technocratic Liberalism.
President Obama defended spending initiatives in broad terms. He had enormous faith in the power of highly trained experts and based his arguments on models and projections. The actual legislation was cobbled together by Democratic committee chairmen, often acting beyond the administration’s control.
During 2010, the economic decline abated, but the recovery did not arrive. There were a few false dawns, and stagnation. The problem was this: The policy makers knew how to pull economic levers, but they did not know how to use those levers to affect social psychology.
The crisis was labeled an economic crisis, but it was really a psychological crisis. It was caused by a mood of fear and uncertainty, which led consumers to not spend, bankers to not lend and entrepreneurs to not risk. No amount of federal spending could change this psychology because uncertainty about the future remained acute.
Essentially, Americans had migrated from one society to another — from a society of high trust to a society of low trust, from a society of optimism to a society of foreboding, from a society in which certain financial habits applied to a society in which they did not. In the new world, investors had no basis from which to calculate risk. Families slowly deleveraged. Bankers had no way to measure the future value of assets.
Cognitive scientists distinguish between normal risk-assessment decisions, which activate the reward-prediction regions of the brain, and decisions made amid extreme uncertainty, which generate activity in the amygdala. These are different mental processes using different strategies and producing different results. Americans were suddenly forced to cope with this second category, extreme uncertainty.
Economists and policy makers had no way to peer into this darkness. Their methods were largely based on the assumption that people are rational, predictable and pretty much the same. Their models work best in times of equilibrium. But in this moment of disequilibrium, behavior was nonlinear, unpredictable, emergent and stubbornly resistant to Keynesian rationalism.
The failure to generate a recovery led to a collapse of public confidence. President Obama’s promises of 3.5 million jobs now seemed a sham and his former certainty a delusion. The political climate grew more polarized. That meant it was impossible to tackle entitlement debt. That and the economic climate meant it was impossible to raise taxes or cut spending or do anything to reduce the yawning deficits. Federal deficits were 15 percent of G.D.P. and growing.
Far from easing uncertainty, the exploding deficits led to more fear. The U.S. could not afford to respond to new emergencies, like hurricanes or foreign crises. Other nations sensed American overextension. Foreign debt-holders grew nervous. Interest rates rose. Congress indulged its worst instincts, erecting trade barriers, propping up doomed companies. Scholars began to talk about the American Disease, akin to the British Disease of the 1970s.
The nation had essentially bet its future on economic models with primitive views of human behavior. The government had tried to change social psychology using the equivalent of leeches and bleeding. Rather than blame themselves, Americans directed their anger toward policy makers and experts who based estimates of human psychology on mathematical equations.
Op-Ed Columnist
The Worst-Case Scenario By DAVID BROOKS
Between 1990 and 2007, the total mortgage debt held by Americans rose from $2.5 trillion to $10.5 trillion. This rise was part of a societal credit bubble that burst in 2008. To cushion the pain of that collapse, federal authorities decided to replace private debt with public debt.
In 2008, the Bush administration increased spending by about $1.7 trillion, and guaranteed loans, investments and deposits worth about $8 trillion. In 2009, the Obama administration spent $800 billion on a stimulus package, $1 trillion on a second round of bank bailouts and committed another trillion on health care reform and other bailout plans.
Americans generally welcomed the burst of public activism. In “Democracy in America,” Alexis de Tocqueville wrote about what happens to a people beset by anxiety: “The taste for public tranquility then becomes a blind passion, and the citizens are liable to conceive a most inordinate devotion to order.”
In normal times, Americans would have been skeptical of proposals to double or triple the size of federal programs, but amid the economic fear, that skepticism fell away. Wall Street traders hungered for a huge federal bailout replete with strings. Economists produced models that assumed that government could efficiently spend huge amounts of money, and these models were accepted.
The Obama administration was staffed with moderates who found that there was no reward for moderation. Liberals attacked them for being tepid. Republicans attacked them because it was enjoyable to see Democrats attacked. Over time, the administration drifted left and created what you might call Split Level Technocratic Liberalism.
President Obama defended spending initiatives in broad terms. He had enormous faith in the power of highly trained experts and based his arguments on models and projections. The actual legislation was cobbled together by Democratic committee chairmen, often acting beyond the administration’s control.
During 2010, the economic decline abated, but the recovery did not arrive. There were a few false dawns, and stagnation. The problem was this: The policy makers knew how to pull economic levers, but they did not know how to use those levers to affect social psychology.
The crisis was labeled an economic crisis, but it was really a psychological crisis. It was caused by a mood of fear and uncertainty, which led consumers to not spend, bankers to not lend and entrepreneurs to not risk. No amount of federal spending could change this psychology because uncertainty about the future remained acute.
Essentially, Americans had migrated from one society to another — from a society of high trust to a society of low trust, from a society of optimism to a society of foreboding, from a society in which certain financial habits applied to a society in which they did not. In the new world, investors had no basis from which to calculate risk. Families slowly deleveraged. Bankers had no way to measure the future value of assets.
Cognitive scientists distinguish between normal risk-assessment decisions, which activate the reward-prediction regions of the brain, and decisions made amid extreme uncertainty, which generate activity in the amygdala. These are different mental processes using different strategies and producing different results. Americans were suddenly forced to cope with this second category, extreme uncertainty.
Economists and policy makers had no way to peer into this darkness. Their methods were largely based on the assumption that people are rational, predictable and pretty much the same. Their models work best in times of equilibrium. But in this moment of disequilibrium, behavior was nonlinear, unpredictable, emergent and stubbornly resistant to Keynesian rationalism.
The failure to generate a recovery led to a collapse of public confidence. President Obama’s promises of 3.5 million jobs now seemed a sham and his former certainty a delusion. The political climate grew more polarized. That meant it was impossible to tackle entitlement debt. That and the economic climate meant it was impossible to raise taxes or cut spending or do anything to reduce the yawning deficits. Federal deficits were 15 percent of G.D.P. and growing.
Far from easing uncertainty, the exploding deficits led to more fear. The U.S. could not afford to respond to new emergencies, like hurricanes or foreign crises. Other nations sensed American overextension. Foreign debt-holders grew nervous. Interest rates rose. Congress indulged its worst instincts, erecting trade barriers, propping up doomed companies. Scholars began to talk about the American Disease, akin to the British Disease of the 1970s.
The nation had essentially bet its future on economic models with primitive views of human behavior. The government had tried to change social psychology using the equivalent of leeches and bleeding. Rather than blame themselves, Americans directed their anger toward policy makers and experts who based estimates of human psychology on mathematical equations.
Wednesday, February 04, 2009
Time to Steer 'Forceful Course' for Stimulus By DAVID LEONHARDT
Economic Scene
Time to Steer 'Forceful Course' for Stimulus By DAVID LEONHARDT
The most serious charge against the stimulus package is that it does not pack enough punch. Two different camps have been making this argument over the last few weeks. Publicly, the Obama administration hasn't really answered either one.
The first camp says that the stimulus is simply too small. The recession is likely to idle almost $2 trillion of resources — buildings, equipment and people — this year and next, yet the current stimulus will fill only $700 billion of the hole. Several liberal economists, the forecasters at Goldman Sachs and Mark Zandi (an economist whose forecasts the administration has used) all argue for a bill of at least $1 trillion.
The second camp says that, dollar for dollar, the current package is not as effective as it should be. The public face of this group is Martin Feldstein, a longtime adviser to Republicans. Rather than across-the-board tax cuts, he is calling for targeted tax cuts that people will receive only by spending money, on a new house or other items.
The administration has responded to its critics mostly by repeating its original arguments that the economy desperately needs help — which is true, but doesn't address the criticisms. So I spent much of the last few days asking Team Obama to be more specific.
Why isn't it pushing for a bigger package? Didn't Timothy Geithner, the Treasury secretary, recently say, "In a crisis of this magnitude, the most prudent course is the most forceful course." What about targeted incentives to get people to go shopping? Or why not devote more of the stimulus to the military — another idea of Mr. Feldstein's — and other programs that spend money more quickly than, say, railroad construction?
The answers, I think, allow for some clearer judgments about the bill. Remember, the deadline set by President Obama is still nine days away. He and Congress have time to improve the package.
•
One administration official began his explanation for why the package wasn't bigger by quoting a line from a Gates Foundation executive: Giving money away is not as easy as it may seem.
Shortly after the election, even advocates of an aggressive stimulus plan were calling for one that would cost only $600 billion. But the economy has continued to deteriorate. So the number has kept rising. The bill passed by the House last week cost about $800 billion. The price tag of the version being debated by the Senate is closer to $900 billion (about $700 billion of which would be spent this year or next year).
Either one would be the largest stimulus in history, as Lawrence Summers, Mr. Obama's top economic adviser, says. At these sizes, finding ways to spend the money can actually become a problem.
High-speed rail cannot be built quickly. States and cities can build only so many highways. As for the military, administration officials say they asked the Pentagon for a list of temporary projects that could begin soon. But the $10 billion of spending in the current bill covers them. Military barracks can be built quickly. Fighter jets cannot, especially when defense contractors are already operating at nearly full capacity, says Gordon Adams, a national security expert who was part of Mr. Obama's transition team.
Agencies rarely say no to more permanent financing, of course, but that's not what the White House is offering. It is looking for programs that can get off the ground quickly and that, for the sake of the budget deficit, won't be politically difficult to end once the economy starts growing again. That point is especially important, administration officials say, for winning the support of moderate Democrats and Republicans.
Even some of the administration's critics buy these arguments. "It's very difficult to spend the money quickly," Mr. Zandi says. "There are diminishing returns." That's why Mr. Zandi and Mr. Feldstein are emphasizing tax cuts.
And Obama aides say they are open to adding some tax cuts that specifically encourage spending. They looked into the possibility of sending debit cards to all 150 million American households, but decided it was not yet logistically feasible. Instead, the final package may include some smaller programs, like a home-buying subsidy the Senate began discussing on Tuesday.
But targeted tax cuts — in effect, a bribe for households to spend more money — bring their own problems, officials say. One of the economy's big weak spots right now is consumer indebtedness. Additional spending will help the economy this year, but it could also lead to more credit card and mortgage defaults — which would undermine the Treasury Department's efforts to revive the financial system.
The core of the administration's case comes down to four points. First, some of its critics' suggestions don't stand up to scrutiny. Second, the bill is, once again, getting larger and will make a major difference. "The goal was three million jobs," Rahm Emanuel, the chief of staff, told me, referring to Mr. Obama's promise that the stimulus would save or create three million jobs. "It achieves that goal."
Third, as Mr. Summers said, "Fiscal measures are only one prong — one component — of our overall approach." The response also "includes financial rescue, support for housing and global economic cooperation," he said.
Fourth, aides say this bill is not their only bite at the apple. Mr. Obama is willing to do more in the future. Congress, facing midterm elections, may also want to pass another small stimulus package next year.
•
What are we to make of these arguments?
It is certainly true that a much larger stimulus package would create problems of its own. It's also true, as administration officials acknowledge, that nobody can know for sure what the right size is.
Already, if you include the additional spending that will result from the jobs that the stimulus bill creates — the so-called multiplier effect — the Senate version of the bill might close about half of the $2 trillion output gap. The yet-to-be-announced programs to get credit flowing and reduce foreclosures will shrink the gap further. So if the current bill is the wrong size, it is probably not off by much.
Yet I keep coming back to Mr. Geithner's point about force and prudence. Credit crises are terrifically nasty beasts. They have a habit of making economists look foolishly optimistic.
The odds that, a year from now, Mr. Obama and Congress will regret not having been more aggressive seem bigger than the odds that they'll think they overdid it. Why not redouble efforts to find a few other ways to spend money quickly? More than 50 mass transit agencies across the country are cutting services or raising fares, and the stimulus bill does nothing for them.
Today, the Obama administration can still blame the Bush administration for the economy's condition. Next year, fairly or not, that won't be so easy.
E-mail: Leonhardt@nytimes.com
http://www.nytimes.com/2009/02/04/business/04leonhardt.html?sq=&st=cse&%2334;%20Leonhardt=&scp=1&%2334;Time%20to%20Steer=&pagewanted=print
http://snipurl.com/by2iq
Time to Steer 'Forceful Course' for Stimulus By DAVID LEONHARDT
The most serious charge against the stimulus package is that it does not pack enough punch. Two different camps have been making this argument over the last few weeks. Publicly, the Obama administration hasn't really answered either one.
The first camp says that the stimulus is simply too small. The recession is likely to idle almost $2 trillion of resources — buildings, equipment and people — this year and next, yet the current stimulus will fill only $700 billion of the hole. Several liberal economists, the forecasters at Goldman Sachs and Mark Zandi (an economist whose forecasts the administration has used) all argue for a bill of at least $1 trillion.
The second camp says that, dollar for dollar, the current package is not as effective as it should be. The public face of this group is Martin Feldstein, a longtime adviser to Republicans. Rather than across-the-board tax cuts, he is calling for targeted tax cuts that people will receive only by spending money, on a new house or other items.
The administration has responded to its critics mostly by repeating its original arguments that the economy desperately needs help — which is true, but doesn't address the criticisms. So I spent much of the last few days asking Team Obama to be more specific.
Why isn't it pushing for a bigger package? Didn't Timothy Geithner, the Treasury secretary, recently say, "In a crisis of this magnitude, the most prudent course is the most forceful course." What about targeted incentives to get people to go shopping? Or why not devote more of the stimulus to the military — another idea of Mr. Feldstein's — and other programs that spend money more quickly than, say, railroad construction?
The answers, I think, allow for some clearer judgments about the bill. Remember, the deadline set by President Obama is still nine days away. He and Congress have time to improve the package.
•
One administration official began his explanation for why the package wasn't bigger by quoting a line from a Gates Foundation executive: Giving money away is not as easy as it may seem.
Shortly after the election, even advocates of an aggressive stimulus plan were calling for one that would cost only $600 billion. But the economy has continued to deteriorate. So the number has kept rising. The bill passed by the House last week cost about $800 billion. The price tag of the version being debated by the Senate is closer to $900 billion (about $700 billion of which would be spent this year or next year).
Either one would be the largest stimulus in history, as Lawrence Summers, Mr. Obama's top economic adviser, says. At these sizes, finding ways to spend the money can actually become a problem.
High-speed rail cannot be built quickly. States and cities can build only so many highways. As for the military, administration officials say they asked the Pentagon for a list of temporary projects that could begin soon. But the $10 billion of spending in the current bill covers them. Military barracks can be built quickly. Fighter jets cannot, especially when defense contractors are already operating at nearly full capacity, says Gordon Adams, a national security expert who was part of Mr. Obama's transition team.
Agencies rarely say no to more permanent financing, of course, but that's not what the White House is offering. It is looking for programs that can get off the ground quickly and that, for the sake of the budget deficit, won't be politically difficult to end once the economy starts growing again. That point is especially important, administration officials say, for winning the support of moderate Democrats and Republicans.
Even some of the administration's critics buy these arguments. "It's very difficult to spend the money quickly," Mr. Zandi says. "There are diminishing returns." That's why Mr. Zandi and Mr. Feldstein are emphasizing tax cuts.
And Obama aides say they are open to adding some tax cuts that specifically encourage spending. They looked into the possibility of sending debit cards to all 150 million American households, but decided it was not yet logistically feasible. Instead, the final package may include some smaller programs, like a home-buying subsidy the Senate began discussing on Tuesday.
But targeted tax cuts — in effect, a bribe for households to spend more money — bring their own problems, officials say. One of the economy's big weak spots right now is consumer indebtedness. Additional spending will help the economy this year, but it could also lead to more credit card and mortgage defaults — which would undermine the Treasury Department's efforts to revive the financial system.
The core of the administration's case comes down to four points. First, some of its critics' suggestions don't stand up to scrutiny. Second, the bill is, once again, getting larger and will make a major difference. "The goal was three million jobs," Rahm Emanuel, the chief of staff, told me, referring to Mr. Obama's promise that the stimulus would save or create three million jobs. "It achieves that goal."
Third, as Mr. Summers said, "Fiscal measures are only one prong — one component — of our overall approach." The response also "includes financial rescue, support for housing and global economic cooperation," he said.
Fourth, aides say this bill is not their only bite at the apple. Mr. Obama is willing to do more in the future. Congress, facing midterm elections, may also want to pass another small stimulus package next year.
•
What are we to make of these arguments?
It is certainly true that a much larger stimulus package would create problems of its own. It's also true, as administration officials acknowledge, that nobody can know for sure what the right size is.
Already, if you include the additional spending that will result from the jobs that the stimulus bill creates — the so-called multiplier effect — the Senate version of the bill might close about half of the $2 trillion output gap. The yet-to-be-announced programs to get credit flowing and reduce foreclosures will shrink the gap further. So if the current bill is the wrong size, it is probably not off by much.
Yet I keep coming back to Mr. Geithner's point about force and prudence. Credit crises are terrifically nasty beasts. They have a habit of making economists look foolishly optimistic.
The odds that, a year from now, Mr. Obama and Congress will regret not having been more aggressive seem bigger than the odds that they'll think they overdid it. Why not redouble efforts to find a few other ways to spend money quickly? More than 50 mass transit agencies across the country are cutting services or raising fares, and the stimulus bill does nothing for them.
Today, the Obama administration can still blame the Bush administration for the economy's condition. Next year, fairly or not, that won't be so easy.
E-mail: Leonhardt@nytimes.com
http://www.nytimes.com/2009/02/04/business/04leonhardt.html?sq=&st=cse&%2334;%20Leonhardt=&scp=1&%2334;Time%20to%20Steer=&pagewanted=print
http://snipurl.com/by2iq
Friday, January 30, 2009
A Global Credit Squeeze Is Felt Unevenly By FLOYD NORRIS
January 30, 2009
High & Low Finance
A Global Credit Squeeze Is Felt Unevenly By FLOYD NORRIS
DAVOS, Switzerland
Decoupling is last year's discredited theory.
It may also be tomorrow's reality. The world's efforts at economic recovery could well turn into a case of every country for itself. Call it "capital protectionism."
A year ago at the World Economic Forum, many chief executives and government officials hoped that an American recession, if one came, would be mild and would not spread overseas. The strength of world economic growth would enable Europe and Asia to "decouple" from the American economy.
What happened instead was the downside of globalization. Readily available and cheap capital played a crucial role in lifting growth around the world, and its absence for all but the safest borrowers is causing pain everywhere.
But what is not the same everywhere is the ability of governments to stimulate the economy. While the United States debates the details of how to spend a trillion dollars or more to bail out banks and stimulate the economy, the governments of some other countries find themselves caught in the credit squeeze.
In Latvia, the government got a bailout from the International Monetary Fund by agreeing to draconian measures that include wage cuts, spending reductions and tax increases. There were riots.
The president of Latvia, Valdis Zalters, was diplomatic when I asked him Thursday if he thought it was unfair that the United States could easily borrow when his country could not. "It's the way it is," he said. "The U.S. has a AAA rating. We had no choice."
The best positioned are those countries that have huge foreign currency reserves — think China — or printing presses for the international reserve currency — think the United States.
"The money is flowing out of all markets," said Ferit F. Sahenk, the chairman of Dogus Group, a Turkish conglomerate. This, he said, raised the risk of inadequate capital "not only for the banks but for private sector debtors as well."
That risk is only increased by what Steven Roach, the Morgan Stanley economist, called "the rising tide of economic nationalism." In both Europe and the United States there is pressure on bailed-out banks to increase lending — but not to just any borrowers.
"Some countries are encouraging their banks to invest mostly in domestic assets," Mr. Sahenk complained. "This is a new form of protectionism."
That worry is widespread. "Large economies are accessing international capital markets for themselves," said Trevor Manuel, the finance minister of South Africa.
He wants the big countries to share the borrowed wealth, but fears they will not.
Lord Adair Turner, the chairman of Britain's Financial Services Authority, voiced the same concern, calling it "the risk of a new mercantilism," centered on credit availability rather than trade. "It is not easy to avoid this," he added. "It could get out of hand."
The onset of credit protectionism, if it comes, will be the result of a drastic shift in the financial system. Private allocation of credit played a major role in the extraordinary world growth of the last quarter-century, but that system blew up when financial innovation led to a huge overextension of credit to borrowers with dubious ability to repay, whether they were subprime mortgage borrowers or highly leveraged companies.
With the banks crippled and shown to have taken what now look like foolish risks, it has fallen to governments to allocate credit, either indirectly by deciding which banks to bail out and on what terms, or even directly if, as some expect, many banks are eventually nationalized.
The pressures for nationalization come in part from worries that bank balance sheets are bottomless pits of toxic assets, and concern that it is unfair to taxpayers to let the benefits flow to the shareholders who stood by as the banks took too many risks.
Alan S. Blinder, a former vice chairman of the Federal Reserve and now an economics professor at Princeton, said he did not think nationalization would be the first or second choice of American policy makers, but that it could be the third or fourth.
And he added that the risk of credit protectionism would rise if the banks were nationalized.
It is hard to imagine that governments will do a particularly good job of allocating capital to its most productive uses, given the political pressures they will face. But there is no agreement on how to get the private banking system operating in an adequate fashion.
Pumping capital into the banks has not yet worked, even if it has stirred public outrage over high pay and perks for the bankers who got us into this mess. There is renewed interest in some kind of "bad bank" approach that would separate the toxic assets from the good ones, leaving the government with the bad stuff. But figuring out what to pay — assuming the banks have not been nationalized — is likely to be contentious.
At the same time, there is much talk about how to reform the regulatory systems around the world, and how to standardize regulation to avoid the "regulatory arbitrage" of seeking out jurisdictions with the least stringent rules.
"We allowed a series of near banks and shadow banks to grow without being regulated," said Lord Turner. In a new regime, he added, one rule must be, "If it looks like a bank and quacks like a bank, we have to regulate it like a bank." To do that, he would give regulators wide discretion to get information on how hedge funds and other institutions are operating, with the ability to impose regulation if they start to act too much like a bank.
Some economists fear that would stifle financial creativity, and even some who think far more regulation is needed question whether regulators can amass the expertise to make needed decisions promptly and wisely.
Mr. Roach predicts that this will be the first year since the Great Depression that the gross domestic product of the entire world declines. Fiscal stimulus plans may help to ease the pain, but it is hard to see how the world's economies can resume decent growth until the private financial system is operating much better than it is now.
"We've all been building this big, integrated financial system," said James Rosenfield, a co-founder of Cambridge Energy Research Associates. "We didn't consider what would happen when it disintegrated."
http://www.nytimes.com/2009/01/30/business/30norris.html?sq=Floyd%20Norris%20January%2030,%202009&st=cse&scp=1&pagewanted=print
http://snipurl.com/by50m
High & Low Finance
A Global Credit Squeeze Is Felt Unevenly By FLOYD NORRIS
DAVOS, Switzerland
Decoupling is last year's discredited theory.
It may also be tomorrow's reality. The world's efforts at economic recovery could well turn into a case of every country for itself. Call it "capital protectionism."
A year ago at the World Economic Forum, many chief executives and government officials hoped that an American recession, if one came, would be mild and would not spread overseas. The strength of world economic growth would enable Europe and Asia to "decouple" from the American economy.
What happened instead was the downside of globalization. Readily available and cheap capital played a crucial role in lifting growth around the world, and its absence for all but the safest borrowers is causing pain everywhere.
But what is not the same everywhere is the ability of governments to stimulate the economy. While the United States debates the details of how to spend a trillion dollars or more to bail out banks and stimulate the economy, the governments of some other countries find themselves caught in the credit squeeze.
In Latvia, the government got a bailout from the International Monetary Fund by agreeing to draconian measures that include wage cuts, spending reductions and tax increases. There were riots.
The president of Latvia, Valdis Zalters, was diplomatic when I asked him Thursday if he thought it was unfair that the United States could easily borrow when his country could not. "It's the way it is," he said. "The U.S. has a AAA rating. We had no choice."
The best positioned are those countries that have huge foreign currency reserves — think China — or printing presses for the international reserve currency — think the United States.
"The money is flowing out of all markets," said Ferit F. Sahenk, the chairman of Dogus Group, a Turkish conglomerate. This, he said, raised the risk of inadequate capital "not only for the banks but for private sector debtors as well."
That risk is only increased by what Steven Roach, the Morgan Stanley economist, called "the rising tide of economic nationalism." In both Europe and the United States there is pressure on bailed-out banks to increase lending — but not to just any borrowers.
"Some countries are encouraging their banks to invest mostly in domestic assets," Mr. Sahenk complained. "This is a new form of protectionism."
That worry is widespread. "Large economies are accessing international capital markets for themselves," said Trevor Manuel, the finance minister of South Africa.
He wants the big countries to share the borrowed wealth, but fears they will not.
Lord Adair Turner, the chairman of Britain's Financial Services Authority, voiced the same concern, calling it "the risk of a new mercantilism," centered on credit availability rather than trade. "It is not easy to avoid this," he added. "It could get out of hand."
The onset of credit protectionism, if it comes, will be the result of a drastic shift in the financial system. Private allocation of credit played a major role in the extraordinary world growth of the last quarter-century, but that system blew up when financial innovation led to a huge overextension of credit to borrowers with dubious ability to repay, whether they were subprime mortgage borrowers or highly leveraged companies.
With the banks crippled and shown to have taken what now look like foolish risks, it has fallen to governments to allocate credit, either indirectly by deciding which banks to bail out and on what terms, or even directly if, as some expect, many banks are eventually nationalized.
The pressures for nationalization come in part from worries that bank balance sheets are bottomless pits of toxic assets, and concern that it is unfair to taxpayers to let the benefits flow to the shareholders who stood by as the banks took too many risks.
Alan S. Blinder, a former vice chairman of the Federal Reserve and now an economics professor at Princeton, said he did not think nationalization would be the first or second choice of American policy makers, but that it could be the third or fourth.
And he added that the risk of credit protectionism would rise if the banks were nationalized.
It is hard to imagine that governments will do a particularly good job of allocating capital to its most productive uses, given the political pressures they will face. But there is no agreement on how to get the private banking system operating in an adequate fashion.
Pumping capital into the banks has not yet worked, even if it has stirred public outrage over high pay and perks for the bankers who got us into this mess. There is renewed interest in some kind of "bad bank" approach that would separate the toxic assets from the good ones, leaving the government with the bad stuff. But figuring out what to pay — assuming the banks have not been nationalized — is likely to be contentious.
At the same time, there is much talk about how to reform the regulatory systems around the world, and how to standardize regulation to avoid the "regulatory arbitrage" of seeking out jurisdictions with the least stringent rules.
"We allowed a series of near banks and shadow banks to grow without being regulated," said Lord Turner. In a new regime, he added, one rule must be, "If it looks like a bank and quacks like a bank, we have to regulate it like a bank." To do that, he would give regulators wide discretion to get information on how hedge funds and other institutions are operating, with the ability to impose regulation if they start to act too much like a bank.
Some economists fear that would stifle financial creativity, and even some who think far more regulation is needed question whether regulators can amass the expertise to make needed decisions promptly and wisely.
Mr. Roach predicts that this will be the first year since the Great Depression that the gross domestic product of the entire world declines. Fiscal stimulus plans may help to ease the pain, but it is hard to see how the world's economies can resume decent growth until the private financial system is operating much better than it is now.
"We've all been building this big, integrated financial system," said James Rosenfield, a co-founder of Cambridge Energy Research Associates. "We didn't consider what would happen when it disintegrated."
http://www.nytimes.com/2009/01/30/business/30norris.html?sq=Floyd%20Norris%20January%2030,%202009&st=cse&scp=1&pagewanted=print
http://snipurl.com/by50m
Cleaner and Faster By DAVID BROOKS
January 30, 2009
Op-Ed Columnist
Cleaner and Faster By DAVID BROOKS
Throughout 2008, Larry Summers, the Harvard economist, built the case for a big but surgical stimulus package. Summers warned that a "poorly provided fiscal stimulus can have worse side effects than the disease that is to be cured." So his proposal had three clear guidelines.
First, the stimulus should be timely. The money should go out "almost immediately." Second, it should be targeted. It should help low- and middle-income people. Third, it should be temporary. Stimulus measures should not raise the deficits "beyond a short horizon of a year or at most two."
Summers was proposing bold action, but his concept came with safeguards: focus on the task at hand, prevent the usual Washington splurge and limit long-term fiscal damage.
Now Barack Obama is president, and Summers has become a top economic adviser. Yet the stimulus approach that has emerged on Capitol Hill abandoned the Summers parameters.
In a fateful decision, Democratic leaders merged the temporary stimulus measure with their permanent domestic agenda — including big increases for Pell Grants, alternative energy subsidies and health and entitlement spending. The resulting package is part temporary and part permanent, part timely and part untimely, part targeted and part untargeted.
It's easy to see why Democrats decided to do this. They could rush through permanent policies they believe in. Plus, they could pay for them with borrowed money. By putting a little of everything in the stimulus package, they avoid the pay-as-you-go rules that might otherwise apply to recurring costs.
But they've created a sprawling, undisciplined smorgasbord, which has spun off a series of unintended consequences. First, by trying to do everything all it once, the bill does nothing well. The money spent on long-term domestic programs means there may not be enough to jolt the economy now (about $290 billion in spending is pushed off into 2011 and later). The money spent on stimulus, meanwhile, means there's not enough to truly reform domestic programs like health technology, schools and infrastructure. The measure mostly pumps more money into old arrangements.
Second, by pumping so much money through government programs, the bill unleashes a tidal wave on state governments. A governor with a few-hundred-million-dollar shortfall will suddenly have to administer an additional $4 billion or $5 billion. That money will be corrosive both when washing in, and when it disappears in a few years time.
Third, the muddle assures ideological confrontation. A stimulus package was always going to be controversial, because economists differ widely about whether or how a stimulus can work. But this bill also permanently alters the role of the federal government, thus guaranteeing a polarizing brawl at the very start of the Obama presidency.
Fourth, Summers's warnings about deficits have been put aside. There is no fiscal exit strategy. Instead, permanent spending commitments are entailed with no permanent funding stream to pay for them.
Fifth, new government expenditures on complex matters are being designed on a hasty, reckless timetable. As readers may know, the policy I am most passionate about is pre-K education. Yet I fervently hope that the Head Start expansion is dropped from this bill. A slapdash and shambolic expansion could discredit the whole idea.
Wise heads are now trying to restore structure and safeguards to the enterprise. In testimony this week, Alice Rivlin, Bill Clinton's former budget director, raised the possibility of separating the temporary from the permanent measures and focusing independently on each. "A long-term investment program should not be put together hastily and lumped in with the anti-recession package," Rivlin testified. "The elements of the investment program must be carefully planned and will not create many jobs right away."
The best course is to return to the original Summers parameters — temporary, targeted and timely — thus making the stimulus cleaner and faster.
Strip out the permanent government programs. Many of them are worthy, but we can have that debate another day. Make the short-term stimulus bigger. Many liberal economists have been complaining it is too small, so replace the permanent programs with something like a big payroll tax cut, which would help the working class.
Add in a fiscal exit strategy so the whole thing is budget neutral over the medium term. Finally, coordinate the stimulus package with plans to shore up the housing and financial markets. Until those come to life, no amount of stimulus will do any good.
This recession is scary and complicated. It's insane to try to tackle it and dozens of other complicated problems, all in one piece of legislation. Leadership involves prioritizing. Those who try to do everything at once will end up with a sprawling, lobbyist-driven mess that does nothing well.
http://www.nytimes.com/2009/01/30/opinion/30brooks.html?sq=Cleaner%20and%20Faster%20Brooks&st=cse&scp=1&pagewanted=print
http://snipurl.com/by45r
Op-Ed Columnist
Cleaner and Faster By DAVID BROOKS
Throughout 2008, Larry Summers, the Harvard economist, built the case for a big but surgical stimulus package. Summers warned that a "poorly provided fiscal stimulus can have worse side effects than the disease that is to be cured." So his proposal had three clear guidelines.
First, the stimulus should be timely. The money should go out "almost immediately." Second, it should be targeted. It should help low- and middle-income people. Third, it should be temporary. Stimulus measures should not raise the deficits "beyond a short horizon of a year or at most two."
Summers was proposing bold action, but his concept came with safeguards: focus on the task at hand, prevent the usual Washington splurge and limit long-term fiscal damage.
Now Barack Obama is president, and Summers has become a top economic adviser. Yet the stimulus approach that has emerged on Capitol Hill abandoned the Summers parameters.
In a fateful decision, Democratic leaders merged the temporary stimulus measure with their permanent domestic agenda — including big increases for Pell Grants, alternative energy subsidies and health and entitlement spending. The resulting package is part temporary and part permanent, part timely and part untimely, part targeted and part untargeted.
It's easy to see why Democrats decided to do this. They could rush through permanent policies they believe in. Plus, they could pay for them with borrowed money. By putting a little of everything in the stimulus package, they avoid the pay-as-you-go rules that might otherwise apply to recurring costs.
But they've created a sprawling, undisciplined smorgasbord, which has spun off a series of unintended consequences. First, by trying to do everything all it once, the bill does nothing well. The money spent on long-term domestic programs means there may not be enough to jolt the economy now (about $290 billion in spending is pushed off into 2011 and later). The money spent on stimulus, meanwhile, means there's not enough to truly reform domestic programs like health technology, schools and infrastructure. The measure mostly pumps more money into old arrangements.
Second, by pumping so much money through government programs, the bill unleashes a tidal wave on state governments. A governor with a few-hundred-million-dollar shortfall will suddenly have to administer an additional $4 billion or $5 billion. That money will be corrosive both when washing in, and when it disappears in a few years time.
Third, the muddle assures ideological confrontation. A stimulus package was always going to be controversial, because economists differ widely about whether or how a stimulus can work. But this bill also permanently alters the role of the federal government, thus guaranteeing a polarizing brawl at the very start of the Obama presidency.
Fourth, Summers's warnings about deficits have been put aside. There is no fiscal exit strategy. Instead, permanent spending commitments are entailed with no permanent funding stream to pay for them.
Fifth, new government expenditures on complex matters are being designed on a hasty, reckless timetable. As readers may know, the policy I am most passionate about is pre-K education. Yet I fervently hope that the Head Start expansion is dropped from this bill. A slapdash and shambolic expansion could discredit the whole idea.
Wise heads are now trying to restore structure and safeguards to the enterprise. In testimony this week, Alice Rivlin, Bill Clinton's former budget director, raised the possibility of separating the temporary from the permanent measures and focusing independently on each. "A long-term investment program should not be put together hastily and lumped in with the anti-recession package," Rivlin testified. "The elements of the investment program must be carefully planned and will not create many jobs right away."
The best course is to return to the original Summers parameters — temporary, targeted and timely — thus making the stimulus cleaner and faster.
Strip out the permanent government programs. Many of them are worthy, but we can have that debate another day. Make the short-term stimulus bigger. Many liberal economists have been complaining it is too small, so replace the permanent programs with something like a big payroll tax cut, which would help the working class.
Add in a fiscal exit strategy so the whole thing is budget neutral over the medium term. Finally, coordinate the stimulus package with plans to shore up the housing and financial markets. Until those come to life, no amount of stimulus will do any good.
This recession is scary and complicated. It's insane to try to tackle it and dozens of other complicated problems, all in one piece of legislation. Leadership involves prioritizing. Those who try to do everything at once will end up with a sprawling, lobbyist-driven mess that does nothing well.
http://www.nytimes.com/2009/01/30/opinion/30brooks.html?sq=Cleaner%20and%20Faster%20Brooks&st=cse&scp=1&pagewanted=print
http://snipurl.com/by45r
Thursday, January 29, 2009
Components of Stimulus Vary in Speed and Efficiency By DAVID M. HERSZENHORN
January 29, 2009
News Analysis
Components of Stimulus Vary in Speed and Efficiency By DAVID M. HERSZENHORN
WASHINGTON — At first, it will trickle into paychecks in small, barely perceptible amounts: perhaps $12 or $13 a week for many American workers, in the form of lower tax withholding.
For the growing ranks of the unemployed, it will be more noticeable: benefit checks due to stop will keep coming, along with an extra $25 a week.
At the grocery store, a family of four on food stamps could find up to $79 more a month on their government-issued debit card.
And far bigger sums will appear, courtesy of Washington, on budget ledgers in state capitals nationwide: billions of dollars for health care, schools and public works.
There is no doubt that the impact of the $819 billion economic stimulus package advanced by President Obama and approved by the House on Wednesday will start to be felt within weeks once the final version becomes law.
But estimating how effective the huge program of tax cuts and spending will be in getting America's economic engines humming again is a far more complex calculation requiring almost line-by-line scrutiny of the 647-page bill, lawmakers, economists and policy analysts say.
While it may be difficult to predict how well the overall plan will work, it is easier to draw conclusions about its individual components, gauging them against the basic goal of any stimulus: to promote economic activity and create jobs as quickly and efficiently as possible.
Devising any economic stimulus plan is tricky: initiatives that can be carried out relatively fast, like tax cuts, tend to provide less bang for the buck in terms of generating jobs and economic growth, while initiatives likely to spur more robust activity, like public works projects, can take so long to get under way that they arrive too late.
Tax Cuts
The provisions intended to have the swiftest impact are the tax cuts, totaling $275 billion, roughly a third of the package.
Republicans say the cuts are too small, some Democrats say they were ill designed in a vain effort to appease House Republicans, and some economists say both sides are right: that the plan should include more effective tax cuts and more of them, and also address specific problems like the weak housing market.
Mr. Obama's signature tax cut would provide a credit of up to $500 for individuals and $1,000 for couples. It won praise in an analysis by the Tax Policy Center, a nonpartisan research group, because it could be carried out quickly, by reducing the amount of money withheld from paychecks.
But the same group also criticized it because it would help families earning as much as $150,000 a year, who are more likely to save than spend. (Saving, or paying off debt, might make sense for individual households, but what the economy needs most is for people to spend money, helping stores to sell more, factories to produce more and employers to avoid cutting additional jobs.)
Some experts say adjusting withholding rates could prove complicated, delaying the money. But the White House says the plan would work even better than a lump-sum rebate; some research suggests that rebate checks are more likely to be saved than tax reductions spread out over a length of time.
Even some economists who generally support the stimulus think that the main tax proposal would provide limited economic lift.
"People are going to spend 30, 40 cents on the dollar, so the multiplier is going to be low," said Adam S. Posen, deputy director of the Peterson Institute of International Economics.
Aid to States
One area where analysts say the bill would be relatively effective is in providing assistance to states, many of which, to comply with balanced-budget requirements, are facing the prospect of steep cuts in jobs and services. Aid to states does not expand economic activity, but it helps prevent cuts that would make the downturn even worse.
An $87 billion provision increasing the federal contribution for Medicaid costs is expected to go a long way to help states close their budget gaps.
But there has been little discussion so far on a proposal by the Senate Republican leader, Mitch McConnell of Kentucky, that aid to states be provided in the form of loans, encouraging them to spend the money wisely and, once the economy rebounds, obligating them to help reduce the national debt.
The bill would also create a $79 billion state fiscal stabilization fund, disbursing half the money in late 2009 and half in late 2010. The Congressional Budget Office has estimated that little of that money would be spent this year.
Infrastructure
The greatest prospect of delay in spending is on infrastructure. The bill provides $30 billion for highway construction and tens of billions more for other transportation projects, water projects, park renovation, military construction; local housing projects and more.
A Congressional Budget Office analysis found that only 64 percent of the bill's spending would be completed within 19 months, and spending on construction projects was among the slowest.
If the economic recovery is slow, that timing could work out perfectly, giving the economy a jolt just when faster-acting components are wearing off. But if there is a quicker-than-expected rebound, many of those projects could start just in time to compete with renewed private spending.
Then there is the risk that the projects themselves have little or no long-term economic value and simply drive up the budget deficit. Democrats bowed to Republican pressure on Tuesday and stripped from the bill a $200 million provision for National Mall restorations.
Education, Health Care
And Alternative Energy
A look at more than $140 billion in the bill's spending on education finds some that can move quickly — for instance, $13 billion each over two years for Title I schools, which serve impoverished students, and for special education under the Individuals With Disabilities Education Act.
But also included are programs that even under the most optimistic timetable will take longer to complete, like $20 billion for school renovations. These would provide little near-term help for the economy.
Similar scrutiny could be trained on health care and especially on alternative energy programs. Like some of the education spending, a large chunk of health care spending would not start until 2012 or later, when, most experts think, the recession will be over.
Automatic Stabilizers
Unemployment benefits and food stamps are such useful stimulus tools that budget analysts refer to them as "automatic stabilizers."
They are built into the system, allowing money to flow quickly to people who need it and likely to spend it.
The House bill would spend $20 billion over five years on added food stamps. If the recovery legislation is adopted by mid-February, officials say, the first added food stamps will be delivered in April and nearly all of that aid used that month.
The legislation would also devote roughly $43 billion over two years to extend and increase unemployment benefits. The provision would add as much as 33 weeks of benefits, for states with the highest unemployment rates.
http://www.nytimes.com/2009/01/29/us/politics/29assess.html?%2334;Following%20the%20Money=&sq=Herszenhorn%20&st=cse&%2334;=&scp=1&pagewanted=print
http://snipurl.com/by41r
News Analysis
Components of Stimulus Vary in Speed and Efficiency By DAVID M. HERSZENHORN
WASHINGTON — At first, it will trickle into paychecks in small, barely perceptible amounts: perhaps $12 or $13 a week for many American workers, in the form of lower tax withholding.
For the growing ranks of the unemployed, it will be more noticeable: benefit checks due to stop will keep coming, along with an extra $25 a week.
At the grocery store, a family of four on food stamps could find up to $79 more a month on their government-issued debit card.
And far bigger sums will appear, courtesy of Washington, on budget ledgers in state capitals nationwide: billions of dollars for health care, schools and public works.
There is no doubt that the impact of the $819 billion economic stimulus package advanced by President Obama and approved by the House on Wednesday will start to be felt within weeks once the final version becomes law.
But estimating how effective the huge program of tax cuts and spending will be in getting America's economic engines humming again is a far more complex calculation requiring almost line-by-line scrutiny of the 647-page bill, lawmakers, economists and policy analysts say.
While it may be difficult to predict how well the overall plan will work, it is easier to draw conclusions about its individual components, gauging them against the basic goal of any stimulus: to promote economic activity and create jobs as quickly and efficiently as possible.
Devising any economic stimulus plan is tricky: initiatives that can be carried out relatively fast, like tax cuts, tend to provide less bang for the buck in terms of generating jobs and economic growth, while initiatives likely to spur more robust activity, like public works projects, can take so long to get under way that they arrive too late.
Tax Cuts
The provisions intended to have the swiftest impact are the tax cuts, totaling $275 billion, roughly a third of the package.
Republicans say the cuts are too small, some Democrats say they were ill designed in a vain effort to appease House Republicans, and some economists say both sides are right: that the plan should include more effective tax cuts and more of them, and also address specific problems like the weak housing market.
Mr. Obama's signature tax cut would provide a credit of up to $500 for individuals and $1,000 for couples. It won praise in an analysis by the Tax Policy Center, a nonpartisan research group, because it could be carried out quickly, by reducing the amount of money withheld from paychecks.
But the same group also criticized it because it would help families earning as much as $150,000 a year, who are more likely to save than spend. (Saving, or paying off debt, might make sense for individual households, but what the economy needs most is for people to spend money, helping stores to sell more, factories to produce more and employers to avoid cutting additional jobs.)
Some experts say adjusting withholding rates could prove complicated, delaying the money. But the White House says the plan would work even better than a lump-sum rebate; some research suggests that rebate checks are more likely to be saved than tax reductions spread out over a length of time.
Even some economists who generally support the stimulus think that the main tax proposal would provide limited economic lift.
"People are going to spend 30, 40 cents on the dollar, so the multiplier is going to be low," said Adam S. Posen, deputy director of the Peterson Institute of International Economics.
Aid to States
One area where analysts say the bill would be relatively effective is in providing assistance to states, many of which, to comply with balanced-budget requirements, are facing the prospect of steep cuts in jobs and services. Aid to states does not expand economic activity, but it helps prevent cuts that would make the downturn even worse.
An $87 billion provision increasing the federal contribution for Medicaid costs is expected to go a long way to help states close their budget gaps.
But there has been little discussion so far on a proposal by the Senate Republican leader, Mitch McConnell of Kentucky, that aid to states be provided in the form of loans, encouraging them to spend the money wisely and, once the economy rebounds, obligating them to help reduce the national debt.
The bill would also create a $79 billion state fiscal stabilization fund, disbursing half the money in late 2009 and half in late 2010. The Congressional Budget Office has estimated that little of that money would be spent this year.
Infrastructure
The greatest prospect of delay in spending is on infrastructure. The bill provides $30 billion for highway construction and tens of billions more for other transportation projects, water projects, park renovation, military construction; local housing projects and more.
A Congressional Budget Office analysis found that only 64 percent of the bill's spending would be completed within 19 months, and spending on construction projects was among the slowest.
If the economic recovery is slow, that timing could work out perfectly, giving the economy a jolt just when faster-acting components are wearing off. But if there is a quicker-than-expected rebound, many of those projects could start just in time to compete with renewed private spending.
Then there is the risk that the projects themselves have little or no long-term economic value and simply drive up the budget deficit. Democrats bowed to Republican pressure on Tuesday and stripped from the bill a $200 million provision for National Mall restorations.
Education, Health Care
And Alternative Energy
A look at more than $140 billion in the bill's spending on education finds some that can move quickly — for instance, $13 billion each over two years for Title I schools, which serve impoverished students, and for special education under the Individuals With Disabilities Education Act.
But also included are programs that even under the most optimistic timetable will take longer to complete, like $20 billion for school renovations. These would provide little near-term help for the economy.
Similar scrutiny could be trained on health care and especially on alternative energy programs. Like some of the education spending, a large chunk of health care spending would not start until 2012 or later, when, most experts think, the recession will be over.
Automatic Stabilizers
Unemployment benefits and food stamps are such useful stimulus tools that budget analysts refer to them as "automatic stabilizers."
They are built into the system, allowing money to flow quickly to people who need it and likely to spend it.
The House bill would spend $20 billion over five years on added food stamps. If the recovery legislation is adopted by mid-February, officials say, the first added food stamps will be delivered in April and nearly all of that aid used that month.
The legislation would also devote roughly $43 billion over two years to extend and increase unemployment benefits. The provision would add as much as 33 weeks of benefits, for states with the highest unemployment rates.
http://www.nytimes.com/2009/01/29/us/politics/29assess.html?%2334;Following%20the%20Money=&sq=Herszenhorn%20&st=cse&%2334;=&scp=1&pagewanted=print
http://snipurl.com/by41r
Wednesday, January 28, 2009
A Stimulus With Merit, and Misses Too By DAVID LEONHARDT
January 28, 2009
Economic Scene
A Stimulus With Merit, and Misses Too By DAVID LEONHARDT
WASHINGTON
How much of a difference will the stimulus make?
Two weeks ago, a Congressional committee posted a table of numbers on its Web site that gave an early answer. The numbers came from the Congressional Budget Office and seemed to show that only 38 percent of the money in the bill would be spent by September 2010. That didn't sound very stimulating, and the numbers soon caused a minor media sensation.
But anyone who looked closely would have seen something strange about the table. It suggested that the bill would cost only $355 billion in all, rather than its actual cost of about $800 billion.
Why? It turns out that the table was analyzing only certain parts of the bill, like new spending on highways, education and energy. It ignored the tax cuts, jobless benefits and Medicaid payments — the very money that will be spent the fastest.
On Monday evening, the Congressional Budget Office put out its analysis of the full bill, and it gave a very different picture. It estimated that about 64 percent of the money, or $526 billion, would be spent by next September.
That timetable may still be slower than ideal, and short of the 75 percent benchmark President Obama has promised, but it isn't terrible. Spending hundreds of billions of dollars takes time. In fact, for all the criticism the stimulus package has been getting, it does pretty well by several important yardsticks.
First of all, the package really is stimulus. It will quickly give money to the people who have been hardest hit by the recession and who, not coincidentally, will be most likely to spend that money soon. The spending also has a chance to do some long-term good, by paying for the computerization of medical records, the weatherization of homes and other such investments.
By my count, the current package has just one major flaw. It could do a lot more to change how the government spends its money. It doesn't have nearly the amount of the fresh, reformist thinking as Mr. Obama's campaign speeches and proposals did. Instead, the bill is mostly a stew of spending on existing programs, whatever their warts may be.
I understand that this approach reflects the realities of political negotiations. It even has some economic merits: it may help speed the flow of money out the door. But it still is a missed opportunity in a few instances.
The biggest is infrastructure. Transportation experts had hoped the package would be the start of not only more spending on infrastructure but also smarter spending on highways, mass transit, sewer systems and other public works. So far, the experts are disappointed.
In the current system, the federal government sends money to states without any real effort to evaluate whether it will pay for worthy projects. States rarely do serious analyses of their own. They build new roads before fixing old ones. They don't consider whether those new roads will lead to faster traffic or simply more traffic. They spend millions of dollars on legislators' pet projects and hulking new sports stadiums. In the world of infrastructure, cost-benefit analysis is still a science of the future.
A couple of weeks ago, Ed Rendell, the Democratic governor of Pennsylvania, came to Washington to talk up infrastructure. He is a member of a tripartisan threesome — along with Michael Bloomberg, New York's independent mayor, and Arnold Schwarzenegger, California's Republican governor — trying to persuade the country to get serious about infrastructure.
In his talk, Mr. Rendell said he understood that the stimulus bill couldn't come close to solving all these problems. But it could make some progress, and Mr. Obama's sky-high approval ratings gave him a wonderful chance to do so. "This is the time to put down some markers — this is the time," Mr. Rendell said.
And the bill does include a couple of markers. It will list on the Web the projects that the federal government is financing — an idea that, amazingly enough, is considered radical — and will require that mayors and governors sign off on projects. That will make it harder for them to lobby for projects now and criticize those same projects later, as Gov. Sarah Palin did with the Bridge to Nowhere. At least one version of the bill also sets aside $5.5 billion to be awarded by the transportation secretary, supposedly on the merits of a project.
But it's not clear how that will work, and there is so much more that could be done. The bill could create a small-scale version of an "infrastructure bank," a free-standing entity that could make more merit-based decisions than Congress does (an idea that Mr. Obama supports). The bill could also finance the creation of new state offices to conduct cost-benefit analyses. It could also help cover the budget shortfalls of public transit systems, instead of simply allocating another $30 billion for the construction of new highways.
Fifty-one transit systems have recently proposed service cuts or fare increases, including those in Atlanta, Denver, New York, Phoenix, St. Louis, San Diego and Washington. If these cuts go through, they will make it harder for people to get to work (or look for work), and they will undermine one of the long-term goals of the stimulus package: laying the groundwork for a greener economy.
It's not just infrastructure, either. The bill includes big, admirable increases in college financial aid — but appears likely to do little to use those increases to improve higher education. The package will also sprinkle millions of dollars on some debatable projects, like the renovation of the National Mall.
The standard that I'm setting here may seem a bit high. Even with its current flaws, the bill has much to recommend it. It will indeed try to encourage significant changes in health care and K-12 education, for example.
The bill is certainly superior to a huge package of tax cuts, which might be politically popular but end up in people's bank accounts rather than stimulating the economy. By now, we should know that tax cuts are not a cure-all. The cuts of 2001 and 2003 couldn't keep the recent expansion from being one of the weakest on record or the current recession from being so deep.
This bill should help the economy in both the near term and the long term. But the government doesn't go out and spend about $800 billion every day. The details matter.
Email: leonhardt@nytimes.com
http://www.nytimes.com/2009/01/28/business/economy/28leonhardt.html?sq=Leonhardt%20&st=cse&%2334;A%20Stimulus%20With%20Merit=&%2334;=&scp=1&pagewanted=print
http://snipurl.com/by2nn
http://www.nytimes.com/interactive/2009/01/26/business/economy/20090126-recessions-graphic.html
Economic Scene
A Stimulus With Merit, and Misses Too By DAVID LEONHARDT
WASHINGTON
How much of a difference will the stimulus make?
Two weeks ago, a Congressional committee posted a table of numbers on its Web site that gave an early answer. The numbers came from the Congressional Budget Office and seemed to show that only 38 percent of the money in the bill would be spent by September 2010. That didn't sound very stimulating, and the numbers soon caused a minor media sensation.
But anyone who looked closely would have seen something strange about the table. It suggested that the bill would cost only $355 billion in all, rather than its actual cost of about $800 billion.
Why? It turns out that the table was analyzing only certain parts of the bill, like new spending on highways, education and energy. It ignored the tax cuts, jobless benefits and Medicaid payments — the very money that will be spent the fastest.
On Monday evening, the Congressional Budget Office put out its analysis of the full bill, and it gave a very different picture. It estimated that about 64 percent of the money, or $526 billion, would be spent by next September.
That timetable may still be slower than ideal, and short of the 75 percent benchmark President Obama has promised, but it isn't terrible. Spending hundreds of billions of dollars takes time. In fact, for all the criticism the stimulus package has been getting, it does pretty well by several important yardsticks.
First of all, the package really is stimulus. It will quickly give money to the people who have been hardest hit by the recession and who, not coincidentally, will be most likely to spend that money soon. The spending also has a chance to do some long-term good, by paying for the computerization of medical records, the weatherization of homes and other such investments.
By my count, the current package has just one major flaw. It could do a lot more to change how the government spends its money. It doesn't have nearly the amount of the fresh, reformist thinking as Mr. Obama's campaign speeches and proposals did. Instead, the bill is mostly a stew of spending on existing programs, whatever their warts may be.
I understand that this approach reflects the realities of political negotiations. It even has some economic merits: it may help speed the flow of money out the door. But it still is a missed opportunity in a few instances.
The biggest is infrastructure. Transportation experts had hoped the package would be the start of not only more spending on infrastructure but also smarter spending on highways, mass transit, sewer systems and other public works. So far, the experts are disappointed.
In the current system, the federal government sends money to states without any real effort to evaluate whether it will pay for worthy projects. States rarely do serious analyses of their own. They build new roads before fixing old ones. They don't consider whether those new roads will lead to faster traffic or simply more traffic. They spend millions of dollars on legislators' pet projects and hulking new sports stadiums. In the world of infrastructure, cost-benefit analysis is still a science of the future.
A couple of weeks ago, Ed Rendell, the Democratic governor of Pennsylvania, came to Washington to talk up infrastructure. He is a member of a tripartisan threesome — along with Michael Bloomberg, New York's independent mayor, and Arnold Schwarzenegger, California's Republican governor — trying to persuade the country to get serious about infrastructure.
In his talk, Mr. Rendell said he understood that the stimulus bill couldn't come close to solving all these problems. But it could make some progress, and Mr. Obama's sky-high approval ratings gave him a wonderful chance to do so. "This is the time to put down some markers — this is the time," Mr. Rendell said.
And the bill does include a couple of markers. It will list on the Web the projects that the federal government is financing — an idea that, amazingly enough, is considered radical — and will require that mayors and governors sign off on projects. That will make it harder for them to lobby for projects now and criticize those same projects later, as Gov. Sarah Palin did with the Bridge to Nowhere. At least one version of the bill also sets aside $5.5 billion to be awarded by the transportation secretary, supposedly on the merits of a project.
But it's not clear how that will work, and there is so much more that could be done. The bill could create a small-scale version of an "infrastructure bank," a free-standing entity that could make more merit-based decisions than Congress does (an idea that Mr. Obama supports). The bill could also finance the creation of new state offices to conduct cost-benefit analyses. It could also help cover the budget shortfalls of public transit systems, instead of simply allocating another $30 billion for the construction of new highways.
Fifty-one transit systems have recently proposed service cuts or fare increases, including those in Atlanta, Denver, New York, Phoenix, St. Louis, San Diego and Washington. If these cuts go through, they will make it harder for people to get to work (or look for work), and they will undermine one of the long-term goals of the stimulus package: laying the groundwork for a greener economy.
It's not just infrastructure, either. The bill includes big, admirable increases in college financial aid — but appears likely to do little to use those increases to improve higher education. The package will also sprinkle millions of dollars on some debatable projects, like the renovation of the National Mall.
The standard that I'm setting here may seem a bit high. Even with its current flaws, the bill has much to recommend it. It will indeed try to encourage significant changes in health care and K-12 education, for example.
The bill is certainly superior to a huge package of tax cuts, which might be politically popular but end up in people's bank accounts rather than stimulating the economy. By now, we should know that tax cuts are not a cure-all. The cuts of 2001 and 2003 couldn't keep the recent expansion from being one of the weakest on record or the current recession from being so deep.
This bill should help the economy in both the near term and the long term. But the government doesn't go out and spend about $800 billion every day. The details matter.
Email: leonhardt@nytimes.com
http://www.nytimes.com/2009/01/28/business/economy/28leonhardt.html?sq=Leonhardt%20&st=cse&%2334;A%20Stimulus%20With%20Merit=&%2334;=&scp=1&pagewanted=print
http://snipurl.com/by2nn
http://www.nytimes.com/interactive/2009/01/26/business/economy/20090126-recessions-graphic.html
Monday, January 26, 2009
Bad Faith Economics By PAUL KRUGMAN
January 26, 2009
Op-Ed Columnist
Bad Faith Economics By PAUL KRUGMAN
As the debate over President Obama's economic stimulus plan gets under way, one thing is certain: many of the plan's opponents aren't arguing in good faith. Conservatives really, really don't want to see a second New Deal, and they certainly don't want to see government activism vindicated. So they are reaching for any stick they can find with which to beat proposals for increased government spending.
Some of these arguments are obvious cheap shots. John Boehner, the House minority leader, has already made headlines with one such shot: looking at an $825 billion plan to rebuild infrastructure, sustain essential services and more, he derided a minor provision that would expand Medicaid family-planning services — and called it a plan to "spend hundreds of millions of dollars on contraceptives."
But the obvious cheap shots don't pose as much danger to the Obama administration's efforts to get a plan through as arguments and assertions that are equally fraudulent but can seem superficially plausible to those who don't know their way around economic concepts and numbers. So as a public service, let me try to debunk some of the major antistimulus arguments that have already surfaced. Any time you hear someone reciting one of these arguments, write him or her off as a dishonest flack.
First, there's the bogus talking point that the Obama plan will cost $275,000 per job created. Why is it bogus? Because it involves taking the cost of a plan that will extend over several years, creating millions of jobs each year, and dividing it by the jobs created in just one of those years.
It's as if an opponent of the school lunch program were to take an estimate of the cost of that program over the next five years, then divide it by the number of lunches provided in just one of those years, and assert that the program was hugely wasteful, because it cost $13 per lunch. (The actual cost of a free school lunch, by the way, is $2.57.)
The true cost per job of the Obama plan will probably be closer to $100,000 than $275,000 — and the net cost will be as little as $60,000 once you take into account the fact that a stronger economy means higher tax receipts.
Next, write off anyone who asserts that it's always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.
Here's how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.
The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, it's clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created (see the previous fraudulent argument) — because a large fraction of any tax cut will simply be saved.
This suggests that public spending rather than tax cuts should be the core of any stimulus plan. But rather than accept that implication, conservatives take refuge in a nonsensical argument against public spending in general.
Finally, ignore anyone who tries to make something of the fact that the new administration's chief economic adviser has in the past favored monetary policy over fiscal policy as a response to recessions.
It's true that the normal response to recessions is interest-rate cuts from the Fed, not government spending. And that might be the best option right now, if it were available. But it isn't, because we're in a situation not seen since the 1930s: the interest rates the Fed controls are already effectively at zero.
That's why we're talking about large-scale fiscal stimulus: it's what's left in the policy arsenal now that the Fed has shot its bolt. Anyone who cites old arguments against fiscal stimulus without mentioning that either doesn't know much about the subject — and therefore has no business weighing in on the debate — or is being deliberately obtuse.
These are only some of the fundamentally fraudulent antistimulus arguments out there. Basically, conservatives are throwing any objection they can think of against the Obama plan, hoping that something will stick.
But here's the thing: Most Americans aren't listening. The most encouraging thing I've heard lately is Mr. Obama's reported response to Republican objections to a spending-oriented economic plan: "I won." Indeed he did — and he should disregard the huffing and puffing of those who lost.
http://www.nytimes.com/2009/01/26/opinion/26krugman.html?sq=Krugman%20Bad%20Faith%20economics&st=cse&scp=1&pagewanted=print
http://snipurl.com/by32g
Op-Ed Columnist
Bad Faith Economics By PAUL KRUGMAN
As the debate over President Obama's economic stimulus plan gets under way, one thing is certain: many of the plan's opponents aren't arguing in good faith. Conservatives really, really don't want to see a second New Deal, and they certainly don't want to see government activism vindicated. So they are reaching for any stick they can find with which to beat proposals for increased government spending.
Some of these arguments are obvious cheap shots. John Boehner, the House minority leader, has already made headlines with one such shot: looking at an $825 billion plan to rebuild infrastructure, sustain essential services and more, he derided a minor provision that would expand Medicaid family-planning services — and called it a plan to "spend hundreds of millions of dollars on contraceptives."
But the obvious cheap shots don't pose as much danger to the Obama administration's efforts to get a plan through as arguments and assertions that are equally fraudulent but can seem superficially plausible to those who don't know their way around economic concepts and numbers. So as a public service, let me try to debunk some of the major antistimulus arguments that have already surfaced. Any time you hear someone reciting one of these arguments, write him or her off as a dishonest flack.
First, there's the bogus talking point that the Obama plan will cost $275,000 per job created. Why is it bogus? Because it involves taking the cost of a plan that will extend over several years, creating millions of jobs each year, and dividing it by the jobs created in just one of those years.
It's as if an opponent of the school lunch program were to take an estimate of the cost of that program over the next five years, then divide it by the number of lunches provided in just one of those years, and assert that the program was hugely wasteful, because it cost $13 per lunch. (The actual cost of a free school lunch, by the way, is $2.57.)
The true cost per job of the Obama plan will probably be closer to $100,000 than $275,000 — and the net cost will be as little as $60,000 once you take into account the fact that a stronger economy means higher tax receipts.
Next, write off anyone who asserts that it's always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.
Here's how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.
The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, it's clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created (see the previous fraudulent argument) — because a large fraction of any tax cut will simply be saved.
This suggests that public spending rather than tax cuts should be the core of any stimulus plan. But rather than accept that implication, conservatives take refuge in a nonsensical argument against public spending in general.
Finally, ignore anyone who tries to make something of the fact that the new administration's chief economic adviser has in the past favored monetary policy over fiscal policy as a response to recessions.
It's true that the normal response to recessions is interest-rate cuts from the Fed, not government spending. And that might be the best option right now, if it were available. But it isn't, because we're in a situation not seen since the 1930s: the interest rates the Fed controls are already effectively at zero.
That's why we're talking about large-scale fiscal stimulus: it's what's left in the policy arsenal now that the Fed has shot its bolt. Anyone who cites old arguments against fiscal stimulus without mentioning that either doesn't know much about the subject — and therefore has no business weighing in on the debate — or is being deliberately obtuse.
These are only some of the fundamentally fraudulent antistimulus arguments out there. Basically, conservatives are throwing any objection they can think of against the Obama plan, hoping that something will stick.
But here's the thing: Most Americans aren't listening. The most encouraging thing I've heard lately is Mr. Obama's reported response to Republican objections to a spending-oriented economic plan: "I won." Indeed he did — and he should disregard the huffing and puffing of those who lost.
http://www.nytimes.com/2009/01/26/opinion/26krugman.html?sq=Krugman%20Bad%20Faith%20economics&st=cse&scp=1&pagewanted=print
http://snipurl.com/by32g
Friday, January 16, 2009
An Economy of Faith and Trust By DAVID BROOKS
January 16, 2009
Op-Ed Columnist
An Economy of Faith and Trust By DAVID BROOKS
Once there was just Newtonian physics and the world seemed neat and mechanical. Then quantum physics came along and revealed that deep down things are much weirder than they seem. Something similar is now happening with public policy.
Once, classical economics dominated policy thinking. The classical models presumed a certain sort of orderly human makeup. Inside each person, reason rides the passions the way a rider sits atop a horse. Sometimes people do stupid things, but generally the rider makes deliberative decisions, and the market rewards rational behavior.
Markets tend toward efficiency. People respond in pretty straightforward ways to incentives. The invisible hand forms a spontaneous, dynamic order. Economic behavior can be accurately predicted through elegant models.
This view explains a lot, but not the current financial crisis — how so many people could be so stupid, incompetent and self-destructive all at once. The crisis has delivered a blow to classical economics and taken a body of psychological work that was at the edge of public policy thought and brought it front and center.
In this new body of thought, you get a very different picture of human nature. Reason is not like a rider atop a horse. Instead, each person's mind contains a panoply of instincts, strategies, intuitions, emotions, memories and habits, which vie for supremacy. An irregular, idiosyncratic and largely unconscious process determines which of these internal players gets to control behavior at any instant. Context — which stimulus triggers which response — matters a lot.
This mental chaos explains how people can respond so quickly and intuitively to so many different circumstances. But it also entails a decision-making process that is more complicated and messy than previously thought.
For example, we don't perceive circumstances objectively. We pick out those bits of data that make us feel good because they confirm our prejudices. As Andrew Lo of M.I.T. has demonstrated, if stock traders make a series of apparently good picks, the dopamine released into their brains creates a stupor that causes them to underperceive danger ahead.
Biases abound. People who've been told to think of a high number will subsequently bid much more for an item than people who've been told to think of a low number. As Jonah Lehrer writes in his forthcoming book, "How We Decide," there are certain circumstances (often when there are many options) in which gut instincts lead to the best decisions, while there are other circumstances (sometimes when there are a few options) when calm deliberation is best.
Most important, people seek relationships more than money. If behaving a certain way helps a stock trader or a regulator fit in with his crowd, he's likely to keep doing it without too much rigorous self-examination.
A thousand mental shortcomings contributed to the financial meltdown. Republicans have tried to explain it by pointing to irresponsible policies at Fannie Mae. But that only explains a piece of what's happening.
This crisis represents a flaw in the classical economic model and its belief in efficient markets. Republicans haven't begun to grapple with the consequences.
For years, Republicans have been trying to create a large investor class with policies like private Social Security accounts, medical savings accounts and education vouchers. These policies were based on the belief that investors are careful, rational actors who make optimal decisions. There was little allowance made for the frailty of the decision-making process, let alone the mass delusions that led to the current crack-up.
Democrats also have an unfaced crisis. Democratic discussions of the stimulus package also rest on a mechanical, dehumanized view of the economy. You pump in a certain amount of money and "the economy" spits out a certain number of jobs. Democratic economists issue highly specific accounts of multiplier effects — whether a dollar of spending creates $1.20 or $1.40 of economic activity.
But an economy is a society of trust and faith. A recession is a mental event, and every recession has its own unique spirit. This recession was caused by deep imbalances and is propelled by a cascade of fundamental insecurities. You can pump hundreds of billions into the banks, but insecure bankers still won't lend. You can run up gigantic deficits, hire road builders and reduce the unemployment rate from 8 percent to 7 percent, but insecure people will still not spend and invest.
The economic spirit of a people cannot be manipulated in as simple-minded a fashion as the Keynesian mechanists imagine. Right now political and economic confidence levels are running in opposite directions. Politically, we're in a season of optimism, but despite a trillion spent and a trillion more about to be, the economic spirit cowers.
Mechanistic thinkers on the right and left pose as rigorous empiricists. But empiricism built on an inaccurate view of human nature is just a prison.
http://www.nytimes.com/2009/01/16/opinion/16brooks.html?sq=Brooks%20An%20Economy%20of%20Faith&st=cse&scp=1&pagewanted=print
http://snipurl.com/by4nm
Op-Ed Columnist
An Economy of Faith and Trust By DAVID BROOKS
Once there was just Newtonian physics and the world seemed neat and mechanical. Then quantum physics came along and revealed that deep down things are much weirder than they seem. Something similar is now happening with public policy.
Once, classical economics dominated policy thinking. The classical models presumed a certain sort of orderly human makeup. Inside each person, reason rides the passions the way a rider sits atop a horse. Sometimes people do stupid things, but generally the rider makes deliberative decisions, and the market rewards rational behavior.
Markets tend toward efficiency. People respond in pretty straightforward ways to incentives. The invisible hand forms a spontaneous, dynamic order. Economic behavior can be accurately predicted through elegant models.
This view explains a lot, but not the current financial crisis — how so many people could be so stupid, incompetent and self-destructive all at once. The crisis has delivered a blow to classical economics and taken a body of psychological work that was at the edge of public policy thought and brought it front and center.
In this new body of thought, you get a very different picture of human nature. Reason is not like a rider atop a horse. Instead, each person's mind contains a panoply of instincts, strategies, intuitions, emotions, memories and habits, which vie for supremacy. An irregular, idiosyncratic and largely unconscious process determines which of these internal players gets to control behavior at any instant. Context — which stimulus triggers which response — matters a lot.
This mental chaos explains how people can respond so quickly and intuitively to so many different circumstances. But it also entails a decision-making process that is more complicated and messy than previously thought.
For example, we don't perceive circumstances objectively. We pick out those bits of data that make us feel good because they confirm our prejudices. As Andrew Lo of M.I.T. has demonstrated, if stock traders make a series of apparently good picks, the dopamine released into their brains creates a stupor that causes them to underperceive danger ahead.
Biases abound. People who've been told to think of a high number will subsequently bid much more for an item than people who've been told to think of a low number. As Jonah Lehrer writes in his forthcoming book, "How We Decide," there are certain circumstances (often when there are many options) in which gut instincts lead to the best decisions, while there are other circumstances (sometimes when there are a few options) when calm deliberation is best.
Most important, people seek relationships more than money. If behaving a certain way helps a stock trader or a regulator fit in with his crowd, he's likely to keep doing it without too much rigorous self-examination.
A thousand mental shortcomings contributed to the financial meltdown. Republicans have tried to explain it by pointing to irresponsible policies at Fannie Mae. But that only explains a piece of what's happening.
This crisis represents a flaw in the classical economic model and its belief in efficient markets. Republicans haven't begun to grapple with the consequences.
For years, Republicans have been trying to create a large investor class with policies like private Social Security accounts, medical savings accounts and education vouchers. These policies were based on the belief that investors are careful, rational actors who make optimal decisions. There was little allowance made for the frailty of the decision-making process, let alone the mass delusions that led to the current crack-up.
Democrats also have an unfaced crisis. Democratic discussions of the stimulus package also rest on a mechanical, dehumanized view of the economy. You pump in a certain amount of money and "the economy" spits out a certain number of jobs. Democratic economists issue highly specific accounts of multiplier effects — whether a dollar of spending creates $1.20 or $1.40 of economic activity.
But an economy is a society of trust and faith. A recession is a mental event, and every recession has its own unique spirit. This recession was caused by deep imbalances and is propelled by a cascade of fundamental insecurities. You can pump hundreds of billions into the banks, but insecure bankers still won't lend. You can run up gigantic deficits, hire road builders and reduce the unemployment rate from 8 percent to 7 percent, but insecure people will still not spend and invest.
The economic spirit of a people cannot be manipulated in as simple-minded a fashion as the Keynesian mechanists imagine. Right now political and economic confidence levels are running in opposite directions. Politically, we're in a season of optimism, but despite a trillion spent and a trillion more about to be, the economic spirit cowers.
Mechanistic thinkers on the right and left pose as rigorous empiricists. But empiricism built on an inaccurate view of human nature is just a prison.
http://www.nytimes.com/2009/01/16/opinion/16brooks.html?sq=Brooks%20An%20Economy%20of%20Faith&st=cse&scp=1&pagewanted=print
http://snipurl.com/by4nm
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