Stimulus

The Perverse Politics Surrounding Economic Policymaking

The most remarkable aspect of our current economic predicament is the politics surrounding it, which are now as dysfunctional as Bear Stearns or AIG just before they tanked in 2008.  The latest illustration is this week’s partisan take on the effectiveness of last year’s stimulus, one year after its passage.  While every cable TV loudmouth with economic opinions calls himself or herself an economist, there was never a debate among real economists over whether an $800 billion, two-year package of spending and tax cuts would help spur growth and employment.  Whether one thinks that economic relationships were better described by John Maynard Keynes and Robert Solow, or by Friedrich von Hayek and Milton Friedman, the conclusion is that it would.  And one year later, the data show that it did: Growth is back, albeit still weak; and the rapid ascent of joblessness slowed sharply, not from a spurt of new job creation but because many fewer people lost their jobs.

The short-term benefits of the stimulus have been willingly acknowledged by conservative economists from Harvard’s Martin Feldstein (Reagan’s CEA chair) to AEI’s Kevin Hassett (McCain’s economic tutor).   That makes the current carping by GOP leaders either mindlessly uninformed or willfully misleading.  

To be sure, economists have serious differences about other aspects of stimulus, principally whether their long-term costs outweigh the short-term benefits.  Ironically, here’s where a truly perverse streak in our current economic debate really kicks in.  While a neoclassical economist would expect smaller short-term benefits and larger long-term costs from stimulus than a Keynesian colleague, both would agree that the prospect that government borrowing will continue to expand after a real recovery takes hold calls for long-term deficit reduction. So, how do we explain GOP opposition to the President’s call for pay-as-you-go budget rules and a bipartisan deficit reduction commission?  In this case, the ideological blinders which dictate no tax increases even to control runaway deficits reinforce the Republican political calculus that any achievement by the President could diminish the public’s anger at incumbents.  The result is the GOP’s perverse and dysfunctional “just say no” approach to the economic debate.  

With public concerns over long-term deficits heating up – especially among the Tea Party followers currently being courted furiously by Republican leaders -- the GOP probably won’t be able to maintain its blanket opposition to any serious move to reduce those long-term deficits.  But in other areas of economic policy where the politics are less clear-cut, most notably financial reform, their across-the-board opposition will be easier to maintain.  Moreover, the economics of financial reform are also less clear-cut, producing diverse views among Democrats as well.  With most Republicans unwilling to even consider a bipartisan meeting of the minds over these reforms, the structural problems that led to the market meltdown of 2008-2009 will remain unaffected.  In the wake of a financial crisis that very nearly tipped the world into a global depression, the politics that produce this outcome are unconscionable.

The final irony may come if the GOP political strategy succeeds.  If Republicans pick up large numbers of seats in Congress come November – and they might just take over the Senate -- their enhanced numbers and especially the new members may force them to show they can produce some real progress.  And those pressures, in turn, will require compromises with the President and congressional Democrats that seem utterly out-of-reach today.

A Note on Economic Stimulus, GDP Growth, and Politics

Via Calculated Risk, here’s what Council of Economic Advisors Chair Christina Romer had to say last week in testimony before the Joint Economic Committee about how the stimulus has and will impact growth in the near term:

In a report issued on September 10, the Council of Economic Advisers (CEA) provided estimates of the impact of the ARRA on GDP and employment. ...

These estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter. This implies that much of the moderation of the decline in GDP growth in the second quarter and the anticipated rise in the third quarter is directly attributable to the ARRA.

Fiscal stimulus has its greatest impact on growth around the quarters when it is increasing most strongly. When spending and tax cuts reach their maximum and level off, the contribution to growth returns to roughly zero. This does not mean that stimulus is no longer having an effect. Rather, it means that the effect is to keep GDP above the level it would be at in the absence of stimulus, not to raise growth further. Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009. By mid-2010, fiscal stimulus will likely be contributing little to growth.

In layman’s terms, when first comes online, it adds GDP growth that wouldn’t have otherwise occurred. Then, after a time, it props the economy up at a level it wouldn’t have otherwise seen. (Romer says we’ve seen the first part, and are about to see the second part.) Here’s the thing, when the economy isn’t growing on its own but is being propped up at a higher level than it otherwise would have been due to stimulus, GDP growth will sit at basically zero. That doesn’t mean the stimulus isn’t working – the economy is producing more than it otherwise would have. 

This also means that the stimulus going offline is a “drag” - or has a negative effect - on growth as that government spending is no longer in the economy. What it doesn’t mean as that it’s making the economy worse, and it’s worth inoculating against that misunderstanding of the GDP data that will inevitably arise. Rather, it will have as measurable a positive effect on the economy in the short term and will jumpstart sustained growth (at what level is still an open question). And the investments in the elements of sustained growth – infrastructure, smart grid, energy, education, R%D, etc – will continue to pay off for many years to come.

The GOP's Early Response to Obama Has Been Catastrophic

The weekly Kos track is out, and the central dynamic of this new political year remains unchanged: Barack Obama has become a towering and popular figure, the Democratic Party retains its relatively strong position, and the already unpopular GOP had paid a heavy price for opposing the President in his efforts to lead America to recovery.  

I've been writing about how one of the central stories of the new Obama era would be how the GOP struggled with the new realities of this new political era. With the rise of Rush, the struggles of Steele, the disapointment of Jindal, the lack of any attractive savior on the horizon and the just plain irresponsibility and awfulness of their Congressional leaders in a time of national crisis the GOP truly appears to be a political party facing a long road back.  

Remember, in this Kos poll Obama is at 69, Boehner 15.  The Congressional Dems are at 45, the Congressional GOP is at 15.  There can be no other conclusion than this early engagement with the President has been catastrophic for the GOP, and that they will need to find a new way to work with the President.  

Rob Shapiro has a great new essay on the inanity of the GOP's emerging economic arguments, and I discussed all this with Norah O'Donnell on MSNBC earlier this week.

10am Update: From a new Newsweek poll getting a lot of attention this morning: 

Despite the tumbling economy, Barack Obama continues to enjoy a honeymoon with the American public in the face of the most trying crisis any newly inaugurated president has encountered since Franklin Delano Roosevelt. The GOP, meanwhile, is viewed by a majority of Americans as the party of "no," without a plan of its own to fix the economy, and even rank-and-file Republicans are concerned about the party's direction, according to the first NEWSWEEK Poll taken since Obama assumed office.

"People give Obama credit for reaching out to Republicans, but they don't see Republicans reciprocating," says pollster Larry Hugick, whose firm conducted the survey. "A surprising number said bipartisanship is more important than getting things done."

Overall, 58 percent of Americans surveyed approve of the job Obama is doing, while 26 percent disapprove and one in six (16 percent) has no opinion. Although his approval ratings are down from levels seen a few weeks ago in other polls, 72 percent of Americans still say they have a favorable opinion of Obama-a higher rating than he received in NEWSWEEK Polls during the presidential campaign last year. The president's rating in this poll is consistent with estimates provided by other national media polls in the last week.

AIG Gets More Money, Agrees to Split Up

What the global financial system is going to look like in a few months is anyone's guess.  From the FT:

AIG will on Monday announce a radical plan to break itself up after 90 years as a global insurance conglomerate by ceding control of its two largest divisions to the US government in exchange for a $30bn-plus lifeline.

The move, aimed at helping the stricken insurer absorb the blow of huge losses, is the third time in five months AIG has been bailed out by the authorities. Coming shortly after the third government rescue of Citigroup, the decision to save AIG could fuel mounting public anger.

Or as Jake wrote the other day, welcome to The Dukes of Moral Hazard. Be sure to read Joe Nocera's great piece about AIG from yesterday's NYTimes.

Is this now nationalization by another name?  

An Economic and Political Primer on the Administration's Plan for the Housing Crisis

President Barack Obama today announced a plan to cut foreclosures and reboot new mortgage financings, at least when the economy shows signs of new life. The fact of offering a plan is an advance, given that Bush and his people did nothing and proposed nothing, even as the crisis reached critical mass. As we have written here since the crisis first broke, keeping people in their homes is fundamental to solving the larger economic problem. Again, it’s the fast-rising foreclosures and mortgage delinquencies that are eroding and destroying the value of hundreds of billions of dollars in mortgage-backed securities and the credit default swaps that “back them up” (sic). And it’s the falling value of those securities and swaps, in turn, which has led to the effective bankruptcy of financial institutions that had leveraged themselves to their eyeballs to buy them or issued them and then kept them (and how dumb was that?).

While the act of proposing anything serious puts the Obama Administration ahead of its predecessor, passing such a low threshold is hardly very meaningful -- especially since the problems continue to worsen. More than nine percent of mortgages today are either in foreclosure or delinquent, two to three times the numbers from just two years earlier; and if everything continues to unravel, those numbers could double in another year. If that happens, there won’t be many large, U.S. banks left standing. Many of the homeowners now in trouble could manage, if they just could refinance at current rates. But banks quite naturally see someone in financial trouble as a poor credit risk for a new loan, which is what refinancing is. And the fall in housing prices means tens of millions of those people can’t qualify to refinance. That’s because refinancing is available today only if you owe no more than 80 percent of the original mortgage’s value. The catch for millions of families is that as the value of their home goes down, their existing mortgage (the one being refinanced) accounts for a greater percentage of the value being refinanced. In the worst cases, people just walk away from a $200,000 home with a $300,000 mortgage -- and who would refinance one of those? In millions of other, less extreme cases, the falling prices simply disqualify people for refinancing.

The Administration wants to address this precise part of the problem, by providing $75 billion in subsidies to banks to defray half of the cost of refinancing for several million homeowners at risk of losing their homes. Mortgages owned by Fannie Mae and Freddie Mac are also eligible here, and they’re the ones most likely to actually see their interest rates reset, since the government owns Fannie and Freddie and can direct them to do it. It will be harder to convince bankers already staring at enormous losses already on their books or soon to be there, especially if they’re worried that their bondholders could sue them for resetting loans. The plan also has some $100 billion for the Treasury to keep buying more of Fannie and Freddie’s failing mortgage-backed securities since, as we also have said repeatedly, until foreclosure rates return to normal, the biggest bank bailout in the world won’t prevent more banking losses.

There are more direct ways to address foreclosures. We could provide direct loans to tide over those in trouble, or Fannie and Freddie could reset the loans of everyone in trouble. The problem is that anyone advancing such a common sense approach would become a very large political target -- and not just for reflexively-critical House Republicans.

How could the president or his advisors explain to those who work hard and spend less, so they can keep their mortgage payments up to date, why they don’t qualify for a lower interest rate from the government, when their neighbor who spent more or just had harder luck does qualify? More plainly, how does the government choose who would qualify for such direct help without enraging most of those who wouldn’t? In effect, the Administration plan finesses this problem by letting banks choose, without compelling them to do so. But what if the economy continues to worsen and the plan doesn’t work, which is a very real possibility? Indeed, don’t be surprised to see the Administration revisit it six months from now with a much less “voluntary” approach.

What the Senate Bill Cut

Over at Daily Kos Meteor Blades has a list of what the Senate cut from the House bill.  

The cuts include many investments near and dear to NDN's heart, things we have fought hard for in recent months.  

As I wrote yesterday "reconciling" these two bills is not going to be easy, and will set a precedent for how the two chambers and the White House reconcile future legislation.  

Important to watch is what commitment emerges this week to keep people in their homes.  The Senate version of the bill has more money for fixing the AMT - which affects people in the upper end of the middle class - than is being floated for dealing with what may be the single most important act we can take to attack the financial crisis - stablizing the housing market.  Michael Moynihan has been making the case this week for a new USA Mortgage, a 4 percent 30 year mortgage for all Americans.   It is an idea that deserves serious consideration. 

Whatever happens this week, the leaders of our government cannot, for one moment, give the impression that the banks and those with means are getting the lion share of attention and bailout, leaving once again those struggling to get by to get what's left over.   This is the core of the politics the American people rejected last fall, and the core of the mandate the new President has been given. If President Obama is true to his arguments of this past week, and he believes the GOP has been peddling tired, failed and worn ideas, then he has an obligation not to allow too many of them in the final recovery bill and financial rescue plan that emerge this week.  Given where things seem to be heading this may be harder than the new President would have wanted.

Noon Update - Carla Marinucci of the SF Chronicle has an extensive analysis today of the moment's politics which features commentary from NDN.  It is well worth reading. 

Monday 8am Update - Paul Krugman offers a powerful critique of the Senate bill this morning, while one of its architects, Senator Specter, offers this defense.

Monday 1pm Update - Tom Edsall has a piece up on Huff Post right now which shows why the AMT "fix" is such a bad idea.   

Big Week Ahead for President Obama

There is little doubt now that the coming week will be a very important one for the nascent Obama Presidency.   On Monday he takes to the road, visiting Indiana and Florida, and speaks to the nation.  Also on Monday Treasury Secretary Tim Geithner will offer what now appears to be an outline, or sketch, of the Administration's plan to attack the financial crisis, beginning what will be a very important debate about this part of the emerging recovery plan.  Among the other things we are hoping for is a major initiative to keep people in their homes.  

Also up this week will be the attempt for the Senate and House to reconcile their different stimulus bills into one, and hit the deadline of getting the bill signed by President's day weekend.   Given news reports this morning about the late-night Senate deal, I don't know how easy this is going to be.  

One of the most interesting and important things to watch this week is how the Senate and House come together and "reconcile."   The internal dynamics of these two chambers are very different.   The bills that emerged from each chamber are different.   Will the path forward for future legislation be what we saw with the stimulus - seperate tracks for each chamber - or will the White House and Congressional leadership attempt to prenegotiate the big ones and try to reach a broad outline of a deal that can get through both chambers will little alteration?  How this stimulus bill comes together this week will be a big big test of the ability of the two chambers to reconcile their very different internal politics.

The Republicans.  We learned a lot about them these last few weeks.  Their great test will be whether they can do more than be angry that they are not in power anymore.  The signs so far are not so good. For the good of the nation we need the Republican Party to become a responsibile partner in cleaning up the incredible mess they left us all in.  I think the way The President began to remind the American people of the GOP's role in bringing about the troubles we now face was important - and may be his biggest weapon in bringing them to the table in the many legislative battles ahead (see this Washington Post news story on what could be a fatal political scandal for the new RNC Chairman, Michael Steele).  

Oh, and not to be forgotten, the President signed into law a bill this week that will bring health insurance and good medical care to millions of children who do not have it today.   It was a powerful early signal that the new government can bring people together to tackle our common challenges.  And for those of us optimistic about fixing our broken immigration system this year, that the provision to extend health insurance coverage to all legal immigrant children passed, over initial GOP opposition, is a good sign that reasonable people in both parties can come together and make progress on a broader immigration reform package this year.  

While there are pieces of the package we could do without, the emerging economic recovery plan is a very responsible and serious attempt to address the economic challenges of our time, and it contains many provisions long argued for by NDN.  President Obama and his team should be pleased with where things stand now - on their first major initiative they've shown far-sightedness, political dexterity and resolve.   But the next few days are very important, and will tell us much about our ability to meet the challenges ahead.

Sat 10pm Update - The NYTimes has a good piece running in the Sunday paper looking at the differences between the Senate and House bills.

Obama Makes His Case for a New Economic Strategy for America

In the Washington Post today President Obama makes his case:

By now, it's clear to everyone that we have inherited an economic crisis as deep and dire as any since the days of the Great Depression. Millions of jobs that Americans relied on just a year ago are gone; millions more of the nest eggs families worked so hard to build have vanished. People everywhere are worried about what tomorrow will bring.

What Americans expect from Washington is action that matches the urgency they feel in their daily lives -- action that's swift, bold and wise enough for us to climb out of this crisis.

Because each day we wait to begin the work of turning our economy around, more people lose their jobs, their savings and their homes. And if nothing is done, this recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.

That's why I feel such a sense of urgency about the recovery plan before Congress. With it, we will create or save more than 3 million jobs over the next two years, provide immediate tax relief to 95 percent of American workers, ignite spending by businesses and consumers alike, and take steps to strengthen our country for years to come.

This plan is more than a prescription for short-term spending -- it's a strategy for America's long-term growth and opportunity in areas such as renewable energy, health care and education. And it's a strategy that will be implemented with unprecedented transparency and accountability, so Americans know where their tax dollars are going and how they are being spent.

In recent days, there have been misguided criticisms of this plan that echo the failed theories that helped lead us into this crisis -- the notion that tax cuts alone will solve all our problems; that we can meet our enormous tests with half-steps and piecemeal measures; that we can ignore fundamental challenges such as energy independence and the high cost of health care and still expect our economy and our country to thrive.

I reject these theories, and so did the American people when they went to the polls in November and voted resoundingly for change. They know that we have tried it those ways for too long. And because we have, our health-care costs still rise faster than inflation. Our dependence on foreign oil still threatens our economy and our security. Our children still study in schools that put them at a disadvantage. We've seen the tragic consequences when our bridges crumble and our levees fail.

Every day, our economy gets sicker -- and the time for a remedy that puts Americans back to work, jump-starts our economy and invests in lasting growth is now.

Now is the time to protect health insurance for the more than 8 million Americans at risk of losing their coverage and to computerize the health-care records of every American within five years, saving billions of dollars and countless lives in the process.

Now is the time to save billions by making 2 million homes and 75 percent of federal buildings more energy-efficient, and to double our capacity to generate alternative sources of energy within three years.

Now is the time to give our children every advantage they need to compete by upgrading 10,000 schools with state-of-the-art classrooms, libraries and labs; by training our teachers in math and science; and by bringing the dream of a college education within reach for millions of Americans.

And now is the time to create the jobs that remake America for the 21st century by rebuilding aging roads, bridges and levees; designing a smart electrical grid; and connecting every corner of the country to the information superhighway.

These are the actions Americans expect us to take without delay. They're patient enough to know that our economic recovery will be measured in years, not months. But they have no patience for the same old partisan gridlock that stands in the way of action while our economy continues to slide.

So we have a choice to make. We can once again let Washington's bad habits stand in the way of progress. Or we can pull together and say that in America, our destiny isn't written for us but by us. We can place good ideas ahead of old ideological battles, and a sense of purpose above the same narrow partisanship. We can act boldly to turn crisis into opportunity and, together, write the next great chapter in our history and meet the test of our time.

Obama Whacks Conservative Economic Policies

In a recent post, The Utter Bankruptcy of Today's Republican Party, I argued

As I have written so many times before on this blog, the modern Republican Party ceased being a serious Party when Bush took office. Their leadership and government left America weaker today than it has been since before World War II. They failed to tackle critical challenges on their watch, and ignored warning signs of dangers to come. They have dug a very deep hole for the nation, and today they turned their backs, hard, on a popular President trying to begin cleaning up the mess they made, and do the right thing for a nation in need.

I listened to Republicans over the last couple of days, trying hard to understand the rationale for their opposition. I heard references to a CBO report that had already been proven not to exist. I heard about pork but they offered few specifics. I heard the refrain again and again that tax cuts are the best way to create jobs - an assertion that was disproven by the economic experience of the Bush era. We had historic tax cuts under Bush; job creation was anemic, and incomes for average people actually fell. The tax-cut strategy didn't work. For eight years the Bush Presidency confused cutting taxes with offering a broad economic strategy that would help prepare the nation for the great challenges of this emerging century - and we are all paying the price today. Massive structural budget deficits, ready to grow worse with the retirement of the baby boom. Aging infrastructure. Years of flat wages and declining incomes. Record home foreclosures and personal bankruptcies. 2nd tier rates of broadband penetration. Rising rates of poverty and those without health insurance. A terribly broken immigration system. A global round of economic liberalization unfinished. A badly bungled TARP. But of course one big thing did get done during this period - those massive set of tax cuts for the very wealthiest Americans.

In his CEO pay announcement today (a set of remarks that I feel somehow will be studied for a long long time) Obama took off after the failed economic theories of the age of Bush in ways we have not heard often since the election: 

Now, in the past few days I've heard criticisms of this plan that echo the very same failed theories that helped lead us into this crisis - the notion that tax cuts alone will solve all our problems; that we can ignore fundamental challenges like energy independence and the high cost of health care and still expect our economy and our country to thrive.

I reject that theory, and so did the American people when they went to the polls in November and voted resoundingly for change. So I urge members of Congress to act without delay. No plan is perfect, and we should work to make it stronger. But let's not make the perfect the enemy of the essential. Let's show people all over our country who are looking for leadership in this difficult time that we are equal to the task.

Our good President is showing that while he will work to engage and bring Repubicans on board, he will also be making every effort to defeat their anachronistic and discredited arguments that did so much harm to the nation he now leads.  And it is critical that he keep this tact up in the days ahead for to understand where we need to go we need to know where we have been.  And where we have been has been a conservative-led disaster, of awol leadership, important roads not taken, problems badly bungled.  As the right looks to reassert themselves in this debate it is critical, essential, that our President remind the country what their time in power and their vision brought.  For part of his job will  be to accomodate Republicans themselves while strenously resisting accomodation of their failed approach to governing. 

Of course pulling that off will be no easy task - but no one said this was to be an easy job.

Steele, the GOP and Confronting the Southern Strategy

Michael Steele had a lot to overcome. One of his opponents, the sitting GOP Chair from South Carolina, had just resigned from an all white country club and admitted that he became a Republican in reaction to his personal experience with desegregation. Another opponent, Chip Saltsman, sent out a wildly racist CD to RNC Members which included the now infamous Magic Negro and Star Spanglish Banner songs. Saltsman was so battered by his out-of-touch comments that he withdrew from the race before the balloting began. But Katon Dawson, the SC Chair, went all the way to the final ballot before losing to Steele.

What a stark choice this was for the Republicans: an avowed disciple of the Southern Strategy era of racial politics vs. an African-American candidate from that awfully liberal, pretty far north state of Maryland. That Steele won, defeating Saltsman and Dawson, is a hopeful sign that the GOP has begun to confront its shameful exploitation of race as a national political strategy over the past 44 years. But the road back to power for the Party Mr. Steele has chosen to lead is a hard one. As I recently wrote:

Their recent success as a national Party was built on an approach towards race that spoke to a different racial reality in America, an American one where could get away with magic negro songs, and much much worse of course. But that America - a white/black, majority/minority America - is now an historic relic, and is in the process of being replaced by an America that has 3 times as many minorities as it did just 44 years ago, and is on track to be majority minority by 2042 (for more on this historic demographic transformation see here). But for many in the GOP, including ones who might become their Chairman, they know no other politics than this Southern Strategy era politics, a politics that has been rejected once and for all by the American people of today's America.

It is important that the leaders of the GOP have begun to confront its shameful racial past. But their problem has no simple or easy fix. It will require a complete refashioning of their politics around a very different set of 21st century demographics and a much more tolerant understanding of race in America - and a complete and utter repudiation of much of their domestic agenda for the past half century. Which is major reason why I think their road back is such a long one - many of their leaders came to power by becoming expert in this kind of politics; it is the core play in their playbook; it is the foundation of their domestic agenda; and they know little else. Their old Southern Strategy dogs aren't going to learn new tricks - for the GOP they will have to slowly, over time, replace their anachronistic leaders with ones schooled in the modern governing challenges, modern media and technology and modern demography of our day. The process of watching this generational replacement take place will be one of the most interesting political stories of the next 10-20 years, and of course has become all the more necessary in the age of Obama.

Recall that one of Mr. Steele's predecessors as RNC Chairman, Senator Mel Martinez of Florida, resigned in 2007 after less than a year on the job because of the lingering intolerance of the Party of Saltsman, Tancredo, Limbaugh and Dawson. So these tensions in the GOP - and the nation - will continue to play out for some time as old attitudes and people give way to new racial attitudes and a new America.

Just yesterday, Mr. Steele showed how hard this adjustment would be for the GOP. As Huffington Post's Sam Stein reported, Steele was asked on Fox News whether the GOP's position on immigration had alienated the Latino vote for a generation. His answer? No, of course. Hispanics really agree with our position calling for continued exploitation and demonization of Hispanics, but we just didn't message it very well. Score one for the nativists.

So, all in all, Mr. Steele's election is a hopeful sign for the GOP and the nation. His Party not only chose a new path in electing him their new Chair, they rejected candidates who would have sent a very bad signal about the values of the GOP in this new age of Obama. But as we saw with the irresponsible House stimulus vote last week, old ways die hard, and the choice of Steele alone does not a new Party make.

Syndicate content