Stimulus

The Utter Bankruptcy of Today's Republican Party

No Republican votes tonight.  None.  

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.  

For the last four years, Rob Shapiro and I have talking about the inability of the political class to come to terms with was happening to the American middle class.  For those with means, the Bush era - up until the last year - was a boom time.  Taxes were cut, assets appreciated. But for far too many Americans the economic crisis we talk about today began long before the financial crisis hit in 2007 and 2008 - and this crisis was the increasing struggle of every day people, the decline of median income even during a robust period of economic growth.  This lack of a proper response to this crisis is what drove the Republicans from power more than anything else in 2006, and it was Barack's finding of his voice on the struggle of every day people in the summer and fall of 2008 that was so critical to his pulling away from McCain.  The American people have come to feel that the modern GOP really didn't understand or have a plan to deal with their very real economic crisis.  They are right of course, and this more than any other issue is what has driven the GOP from power and given the Democrats their huge majorities today. 

But clearly the Republicans in charge of the House don't understand all this.  Their party only swung into action when the economic crisis began to affect the monied class.  Their actions were predictably inept, secretive, and misguided.  $500 billion of stimulus and TARP money was spent in 2008 and the crisis worsened.  They even blocked meaningful action on keeping people in their homes - key to solving the financial portion of this crisis - with predictable and cynical cries of "moral hazard" when two companies alone - AIG and Citigroup - received commitments from their Treasury Department of close to $500 billion.  More money, of course, than the one year cost of the stimulus plan passed tonight by the House.  That's right. Citigroup and AIG have commitments for more money from our government than all of the 2009 portion of the stimulus plan that has been derided by the GOP as an outrageous use of the people's money.  

The GOP will have two more chances on this stimulus to behave in much more constructive ways, with upcoming votes in the Senate and again when the bills are brought together and voted on again in each chamber.   I don't know what is going to happen, or how this will play across the nation over the next few days.  I wrote recently that the road back for the GOP, this party of "magic negros," would be a long one.  But if the Republicans continue to act in ways so clearly designed to serve the interests of the few over the interests of the many at a time of such great national challenge then their road back may be even longer than I could have imagined.

Taking A Closer Look at FDR's Legacy

Steve Lohr has a very worthwhile story in the NYTimes today taking a hard look at the true economic legacy of FDR.  Titled "F.D.R's Example Offers Obama Cautionary Lessons, " it begins:

In 1933, as today, a new president stepped into the White House,
vowing change and decisive action at a time when a banking crisis posed
a grave threat to the nation’s economy.

The economic morass that confronted Franklin D. Roosevelt 76 years ago was undeniably deeper and more ominous than the trouble President Obama
is facing. Yet, according to economists and historians, there are also
some telling similarities and cautionary lessons to be drawn from the
experience of the Roosevelt years in the 1930s.

Roosevelt had his triumphs. He stemmed panic and stabilized the
banking system with a combination of deposit insurance, government
investment in banks, restrictions on banking practices and his
“fireside chat” radio addresses, which repeatedly steadied the national
mood and bought Roosevelt time to make changes.

Still, even after the government assistance, the surviving banks
were shaken and lending remained anemic — much as the nation’s banks
today are reluctant to make loans again, despite receiving more than
$300 billion of taxpayers’ money in Round 1 of the federal banking
bailout.

So, throughout the 1930s, economic recovery remained frustratingly
elusive and arrived only with the buildup for World War II in the 1940s.

The shorthand verdict on Roosevelt, economists and historians say,
is that he was an eloquent and skillful politician, and an innovator in
jobs programs like the Civilian Conservation Corps and in regulatory
steps like the creation of the Securities and Exchange Commission to
police Wall Street. But Roosevelt, they say, while brilliant in many
ways, did not have a sure grasp of how to guide the economy as a whole.

“Roosevelt had some successes, but we hope that Obama is going to do
better,” said Kenneth S. Rogoff, a professor of economics at Harvard. “Otherwise, we’re in trouble.” 

I've been a little suprised that so much of the discussion in recent months on FDR's legacy has focused on his first 100 days, or some of the jobs programs which had marginal impact on the economy at the time.  A truer read of his legacy would show that America remained in an economic slow down until we went to war; that perhaps his most lasting legacy was not domestic but international, in defeating fascism and in fashioning a new liberal international order that has kept the world peaceful and prosperous for 60 years; and that of all of this was done over time, a long time - the FDR-Truman Administrations were in power for 20 years. 

As I wrote in a recent essay, Progress Not Motion, those in power now have to start coming to terms with the most challenging part of the FDR legacy - the unpleasant reality that solving the great challenges in front of us will certainly take more than the 2 years before the next election and the 4 years before the President's reelection.   There is a very real chance that the economy will still be in recession in 2010, and even 2012.  To me what this means is that our leaders need to stop raising expectations that things will get better quickly; to stop suggesting that there is no time to waste; to resist short term fixes that will not hasten the transition of America into the new economy of the 21st century.   As our new President said in his Inaugural speech last week this is a time for us to act responsibly, which means many things but certainly it means that we cannot confuse motion and progress in these vital days ahead.  It is more important at this critical time for our leaders to be right than fast - and to make it clear to the American people that the messes left behind by our recent era of terrible leadership will take many years, a lot of money, a great deal of effort and a lot of patience to fix. 

Politics and the Economic Crisis

Barack Obama's historic election as a new, national agent of change will face a daunting test as the economic crisis continues to accelerate, and the political pressures arising from what must now be called “The Great Recession” begin to reshape the response.

The latest evidence is today’s unemployment data: one million jobs lost in two months; the sharpest eight-month rise in the jobless rate since 1945, when tens of millions of soldiers and sailors were demobilized; and losses across every sector and every region. Jobs are in freefall along with the markets, investment, consumer spending and household wealth. And economists are now genuinely frightened by the course the Great Recession is taking, because there’s been nothing like it in anyone’s experience.

That’s why long-time advocates of fiscal probity now call for stimulus topping $1 trillion, and why every spending and tax idea floating around Congress for the last decade is back on the table again. The political pressures and real concerns are so overwhelming that there’s talk of large tax cuts, despite the consensus among economists that when people and businesses are as economically downcast as they are today, tax relief has little stimulus power. That’s not only politics at work; it also reflects a sense of grave foreboding among many of those same economists.

We do need unprecedented stimulus – but all of the stimulus in the world won’t change the course of this crisis until we also address its underlying forces. The wealth of American households and the portfolios of American financial institutions will continue to tank until the housing market stabilizes -- or at least until foreclosure rates return to normal. And the most aggressive, easy policy in our history won’t be enough, and financial institutions won’t begin normal lending again, until they’re more confident that the hundreds of billions of dollars in mortgage-backed securities and other derivatives they still own aren’t headed for the drain as well.

The new Administration can take on these challenges directly, as candidate Obama pledged to do with extraordinary foresight. For example, we can impose a 90-day moratorium on foreclosures and use the time to renegotiate the terms of tens of thousands of distressed mortgages held by Fannie Mae and Freddie Mac. One idea promoted by many economists is to convert those mortgages to 30-year fixed at 5.25 percent, which happens to be long-term mean rate for Fannie and Freddie mortgages. It won’t stop foreclosures, but it should bring down foreclosure rates to near-normal levels, which would do more to stabilize the financial system than the bailouts in the Bush Administration’s own Wall Street version of tsunami stimulus. And some tough love from the new Treasury Secretary could help restart the lending process: having done what we can to stabilize the value of their portfolios, we should consider requiring institutions receiving federal aid to use a real share of that assistance to restart their lending.

We need large-scale stimulus, but it will only work if we first address the underlying problems. Otherwise, 18 months from now, we could be $1 trillion poorer and have little to show for it.

Obama's Weekly Focuses on the Economy, Stimulus

The text: 

As the holiday season comes to end, we are thankful for family and
friends and all the blessings that make life worth living. But as we
mark the beginning of a new year, we also know that America faces great
and growing challenges—challenges that threaten our nation’s economy
and our dreams for the future.  Nearly two million Americans have lost
their jobs this past year—and millions more are working harder in jobs
that pay less and come with fewer benefits.  For too many families,
this new year brings new unease and uncertainty as bills pile up, debts
continue to mount and parents worry that their children won’t have the
same opportunities they had.

However we got here, the problems we face today are not Democratic
problems or Republican problems. The dreams of putting a child through
college, or staying in your home, or retiring with dignity and security
know no boundaries of party or ideology.

These are America’s problems, and we must come together as Americans
to meet them with the urgency this moment demands.  Economists from
across the political spectrum agree that if we don’t act swiftly and
boldly, we could see a much deeper economic downturn that could lead to
double digit unemployment and the American Dream slipping further and
further out of reach.

That’s why we need an American Recovery and Reinvestment Plan that
not only creates jobs in the short-term but spurs economic growth and
competitiveness in the long-term.  And this plan must be designed in a
new way—we can’t just fall into the old Washington habit of throwing
money at the problem.  We must make strategic investments that will
serve as a down payment on our long-term economic future. We must
demand vigorous oversight and strict accountability for achieving
results. And we must restore fiscal responsibility and make the tough
choices so that as the economy recovers, the deficit starts to come
down. That is how we will achieve the number one goal of my plan—which
is to create three million new jobs, more than eighty percent of them
in the private sector.

To put people back to work today and reduce our dependence on
foreign oil tomorrow, we will double renewable energy production and
renovate public buildings to make them more energy efficient.  To build
a 21st century economy, we must engage contractors across the nation to
create jobs rebuilding our crumbling roads, bridges, and schools.  To
save not only jobs, but money and lives, we will update and computerize
our health care system to cut red tape, prevent medical mistakes, and
help reduce health care costs by billions of dollars each year. To make
America, and our children, a success in this new global economy, we
will build 21st century classrooms, labs, and libraries. And to put
more money into the pockets of hardworking families, we will provide
direct tax relief to 95 percent of American workers.

I look forward to meeting next week in Washington with leaders from
both parties to discuss this plan.  I am optimistic that if we come
together to seek solutions that advance not the interests of any party,
or the agenda of any one group, but the aspirations of all Americans,
then we will meet the challenges of our time just as previous
generations have met the challenges of theirs.

There is no reason we can’t do this.  We are a people of boundless
industry and ingenuity.  We are innovators and entrepreneurs and have
the most dedicated and productive workers in the world.  And we have
always triumphed in moments of trial by drawing on that great American
spirit—that perseverance, determination and unyielding commitment to
opportunity on which our nation was founded.  And in this new year, let
us resolve to do so once again. Thank you.

See the video here.

For more on NDN's recent work on the economy and stimulus click here, and for our recommendation on including a national effort to give all American workers computer training visit here.

Krugman on Backstopping the States

For months President-Elect Obama has been arguing for including aid to the states in the next stimulus.  Paul Krugman does an excellent job today explaining why it is so important to do so.

The Politics of Trading Recession for Inflation

On virtually everything economic, the Bush Administration and much of Congress have become the gang that can't shoot straight -- and their stray bullets could take down a good piece of the nation's economic prospects. They have directed hundreds of billions of taxpayer dollars to financial institutions (and soon, auto companies), and they're getting ready to direct several hundred billion more at the overall economy. In all of these instances, a political drive to display the will and capacity for large actions has overwhelmed deliberate thinking about the specific consequences of those actions. The Obama presidency and the country may pay a big price for this scattershot approach.

The latest example of this dangerous development is the ever-expanding size of the long-awaited next stimulus. We're in a deep and serious recession and a major stimulus was certainly needed -- mainly six months ago, when the Bush Administration and Congress provided tax rebates which were largely saved and had little stimulative effect. Now we know how bad the downturn is turning out to be, and Congress and the Administration-in-waiting is preparing another stimulus of a size commensurate with what's already unfolding, once again, as if this were six or eight months ago. A stimulus providing another $200 billion to $300 billion in new federal spending makes sense, mainly as insurance for another shock to the economy. But a $500 billion to $750 billion package like the one now under discussion will miss its target by many months and mainly indicates that the new rule is that anything goes when you win and damn the consequences.

Congress seems intent on responding to this recession as if everything known about how the business cycle works can be ignored, and the consequences could be serious. The Obama team is focused on long-term investments in 21st century energy and transportation infrastructure, modernizing health care records, expanding training and education, and extending broadband and IT access for poor children. That's all good news for the long-term health of the economy and for the incomes of many households.  The catch is, long-term investments entail not a one-time boost in spending, but continued funding. So when we raise the ante on those investments from $100 billion or so to $300 billion, $400 billion or $500 billion, we're implicitly choosing either to foreswear any other commitments, such as health care, or to embrace another round of dangerously large, structural deficits.

Since the new politics seems to involve never saying no, the likely result of the current course, on top of the extraordinary infusions of credit by the Federal Reserve, is serious inflation once the downturn begins to resolve itself. This pattern is disturbingly similar to the short-sighted and cavalier approach to long-term risks that got the nation into this mess. And it continues to develop alongside the Treasury and Congress' continuing inability to address the rising foreclosures still driving the financial crisis and the credit freeze accelerating the downturn. Yet real responses are within reach: place a moratorium on foreclosures while Fannie Mae and Freddie Mac renegotiate the terms of millions of troubled mortgages and link financial bailout funds to a commitment to use them to extend credit to businesses. If we do that, the economy won't need so much fiscal or monetary stimulus. 

The current approach presents other serious risks. This pattern of fast-rising spending, on top of the bailouts already done and those to come, as well as more tax cuts, could push the U.S. deficit to levels that even the United States will have trouble financing. The Asian and Middle Eastern governments that provide much of our public financing could stop -- either because they'll see inflation coming, too, or because the global downturn and falling oil prices sharply reduce their savings and thus, their ability to lend them to us. The U.S. Treasury will always find the funds it needs, but it may have to pay a lot more to borrow them, which means higher interest rates. So the current approach risks an interest rate spike on top of everything else, which at best would lead to a substandard recovery. With all of its talent and broad public support, the Obama presidency should be able to do a lot better than that.

Emergency Stimulus Requires an Emergency Board

New York City - Clean infrastructure stimulus is coming and it is coming fast, perhaps as soon as January 20th, given the new accelerated timetable of President Elect Obama and the Congressional leadership.  For us at NDN, this is an exciting moment, as we have been advocating on behalf of a large green stimulus package that works for the long term as well as the short term for quite some time.

Clean infrastructure stimulus has the ability not only to create jobs in the near term -- particularly in sectors and regions hard hit by the now official recession, the manufacturing belt and the construction industry -- but also to create the clean, modernized physical plant and infrastructure that America needs to ensure our future prosperity.

However, how the stimulus is structured and carried out is as critical as the dollar amount.  On Tuesday, the nation's governors presented President Elect Obama with a list of $176 billion in infrastructure projects ready to go.  However, to get the money out onto the street quickly, moving it through the usual government channels won't work.  Rather, we need to create a new process and structure to get the money out quickly and efficiently.

Dick Ravitch, the former New York City MTA Chairman and head of New York Governor Paterson's new infrastructure commission, knows more about how federal funds flow to the states under ordinary circumstances than most.  Funds normally move slowly.  He argues this is no time for business as usual and his recommendation, an emergency infrastructure board, well supervised, with proper auditing controls and carefully monitored by Congress, is critical to getting funds flowing and jobs starting quickly. 

Rather than allocate money to agencies, Congress should authorize a board to fund valid projects.  Infrastructure projects that get funded should be ones teed up and ready to go with all their zoning and permitting in place so that the only thing missing is funding.  This is a far better way to move the funds out quickly than the usual funding channels that generally go through the Department of Transportation.  At the same time, money should be allocated according to sound, consistent principles to ensure orderly dispensation of funds.  The interests of the people can be adequately addressed by states identifying those that are high priority.

Projects with a green advantage such as public transportation projects, projects that employ green building, water projects and others that move us toward a low carbon economy should go to the head of the line.

As excited as we at NDN are about the speed with which green stimulus is now moving forward, moving money out quickly but also responsibly is vital to making this historic stimulus work.  If the money is spent wastefully, or perceived as being spent wastefully according to political expediency, it will not only be a tragic missed opportunity but also reduce its impact and undermine market confidence. 

Indeed, just yesterday, China's sovereign wealth fund announced it would no longer invest in American banks because of the erratic changes in US policy.  I wrote recently about the problem with the Treasury managing the bailout fund like a hedge fund.  What we need is structure and consistency but a streamlined process to move money out onto the street where it is needed quickly and effectively.

At the same time, we cannot let red tape or ordinary bureaucratic lethargy slow funding when a key purpose of stimulus is to get the money out quickly to create jobs and get the economy moving again.

We don't have that much time to get this right, but we do have a great deal of will as we face up to the severe economic challenges facing the country. An emergency board with emergency powers but also the proper rules in force to guarantee the judicious but expeditious spending of the tax payer's money is a good idea that the incoming Administration and Congress should embrace.

Following are links to some of NDN's work on a clean infrastructure stimulus:

A Vision for a Modernized Electric Grid: Clean Infrastructure for a 21st Century Economy

Understanding the Cleantech Investment Opportunity

A Stimulus for the Long Run

Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure

Solar Energy: The Case for Action

Investing in Our Common Future: U.S. Infrastructure

As the Economy Screams

This morning I had the opportunity of attending the "As the Economy Screams" discussion hosted by the New America Foundation. Focusing on the current problems of the United States economy, the senior economic advisors for presidential candidates Barack Obama, John Edwards, Hillary Clinton, and John McCain explained their candidate's economic agenda in a few short minutes and fielded questions from the crowd and press. I've bulletpointed some of the remarks made by the advisors below.

Austan Goolsbee
Senior Economic Advisor, Barack Obama for President

- In order to maintain the status of richest and most productive nation in the world, it is essential to focus on long-term investments in the areas of education, energy, and technology.
- Many of the economic fears that we are now facing are a result of a troubled healthcare system, college becoming less affordable, and a distribution of income that cannot promote a healthy economy. As a result, savings are falling and consumer debt is rising.
-In the short run, it is essential to have tax relief for the middle class and invest in the long term issues enumerated above in order to provide a light at the end of the tunnel for many struggling American workers today. In increasing savings by setting up an automatic enrollment program, and not just tax cuts alone, workers can immediately begin to save for their future.
- "ipod" style of government, where everything works easily, smoothly, and responds fast to problems can bring our country to new heights

Leo Hindery
Senior Economic Advisor, John Edwards for President

- "John Edwards feels like Paul Revere in search for a horse."
- The United States economy is falling and the only ones not feeling it are those sitting on the top.
- First off, it is unfair to label the sub-prime crisis as a misfortune brought about in America by the poor failing to live up to their responsibilities. The credit crisis in general was brought about not only by people struggling to make their payments, but also by irresponsible lenders, so this problem ranges widely across the economic spectrum.
- There are about 90% of Americans living in stagnant growth and this period of time has the most unequal economy since 1928.
- When it comes to the effects of globalization, America needs to look at trade as a fairness issue, similar to many environmental practices. Overall, the economy severely needs quick action and cutting Americans small checks that won't arrive until June will not benefit anyone.

Gary Gensler
Senior Advisor, Hillary Clinton for President

- There is currently a huge disconnect between the debates in Washington and the people of the United States. Many Americans are living a single pink slip away from foreclosure and have virtually no savings to assist them.
- If America can have long-term optimism for universal health care, addressing the needs to get students from kindergarten through college, and creating a savings program, short-term drops will be eliminated.
- The American people need to find a plan to be dependant on our own resources because it will help the economy and reduce serious national security threats.

Kevin Hasset
Senior Advisor, John McCain for President

- If you add up all the promises that the United States makes versus the revenue that the country has coming in, we are about 50-60 trillion dollars short.
- Foreign countries continue to buy up American securities, but if the American government cannot address the long-term problems facing the country, the foreign investors that the United States relies upon will begin to question their investments.
- There are many opportunities to fix stimulus problems, but the United States can't and shouldn't continue to "borrow money from the Chinese to drop from helicopters" in order to provide short-term relief for workers across the country.
- Restoring the competitiveness of US corporations by giving companies more room to function will help businesses create a more competitive edge in the future. In short, helping firms will help the people.

Some interesting Q & A

Question: If in office starting Janurary 20th, what specific aspect of a stimulus package would immediately be put forward first?

Hindery (Edwards): There needs to be a reformation of the current health care system and implement ideas from the "green economy" that is constantly in the news. Take resources at the disposal of the federal government and put them into domestic needs like heating costs. It is important to realize that putting cash in hands of the consumers will only pay off their amounting bills, not encourage them to go out and spend more.

Goolsbee (Obama): The biggest criticism of fiscal stimulus is that the government can't get money into the hands of the people in time. If you apply an optimistic view, looking at America's history, recessions typically last for about eleven months before turning around. If the first checks can't get in the hands of the consumers until June and additional checks might be needed, there is possibility of the market correcting itself, and then the influx of $150 billion or more, then actually leading to further inflation. The only solution to this problem is immediate cash in hand to the people who are in most dire need.

Gensler (Clinton): Stimulus package announced last week is the United States' best option with $40 billion dollars given in immediate tax rebates in addition to money to help people facing foreclosure. Then a large portion of the package will be given to the states so that each state can analyze and implement a plan that works best in their specific citizens.

Hasset (McCain): Stimulus packages will most likely not work unless it is associated with permanent tax cuts to dispel the fears of the American people of further recession and give them the opportunity to spend more money. In addition, by lessening restrictions on corporations, they can adapt to the economy and respond today, not in June when checks might be written. By allowing companies to act more freely, everyone will benefit from their productivity and gains.

Question: How should the government deal with growing debt?

Goolsbee (Obama): Openness and transparency is a problem. America needs to regain a trust in credit rating agencies and all other forms of government. Establishing a more critical review process for agencies is not anti-business or anti-market. Furthermore, Americans need to realize that losses from the mortgage crisis are large, but not huge when compared to the economy as a whole. By starting with correcting the problems with homeowners and lenders on a micro level, losses then further up the chain to large corporations can be minimized or avoided.

Hindery (Edwards): As seen in this mornings increase, European and Asian markets are better at recognizing the long-term effects of the United States economy on the world. The United States problems arise from 25 years of trade, state, consumer, and corporate fluctuations and often-regulatory responses have been neglectful. If we can reform these systems, the chances of this kind of economic downturn can be side stepped in the future.

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