Reich On Bailout: No More! Give Us Stimulus!

We Need More Stimulus, Not More Bailout

With only $110 billion remaining in the TARP bailout fund, all signs are that Tim Geithner is preparing to return to Congress seeking more bailout money. He’ll bring along the results of his bank “stress tests,” which will probably show many that big banks are still technically insolvent, along with bankruptcy scenarios for General Motors and Chrysler, and a couple of CEO scalps – he’s already got GM’s. Congress won’t be happy but in the end it will cough up another 300 to 500 billion.

Geithner believes the only way to rescue the economy is to get the big banks to lend money again. But he’s dead wrong.[emphasis mine] Most consumers cannot and do not want to borrow lots more money. They’re still carrying too much debt as it is. Even if they refinance their homes – courtesy of the Fed flooding the market with so much money mortgage rates are dropping – consumers are still not going to borrow more. And until there’s enough demand in the system, businesses aren’t going to borrow much more to invest in new plant or machinery, either.

That’s the big issue – the continued lack of enough demand in the economy. The current stimulus package is proving way too small relative to the shortfall between what consumers and businesses are buying and what the economy could produce at full capacity. (According to today's report from the Commerce Department, retail sales fell in March, as did prices paid to U.S. producers.)


Worse yet, the states are pulling in the opposite direction. States cannot run deficits, which means that as their revenues drop in this downturn they’re cutting vital services and raising taxes to the tune of $350 billion over this year and next. This fiscal drag is wiping out about half of the current federal stimulus.

If Geithner gets Congress to give him more bailout money, Congress won’t be in any mood to do what it really needs to do – which is to enlarge the stimulus package. Voters are already worried about too much government spending. At most, the administration is going to get only one more bite at the congressional apple. Make that more stimulus rather than more bailout.

Reagan Was A Socialist: Even More Socialisty Than Obama!

Be Like Reagan And Thatcher! Soak The Rich!
by hilzoy

Possibly because of my immersion in posts about going Galt, I've read altogether too many blog posts and newspaper columns about the horrid, wealth-destroying, class-warfare-waging, socialist nightmare that is Barack Obama's tax policy. So I thought it might be a good idea to get a few basic facts on the table.

Obama is not proposing to raise the personal income tax. He is proposing to allow the Bush tax cuts on families making over $250,000 a year to expire. The Republicans wrote that expiration into law to conceal to hide the costs of their tax cuts. Under the law they wrote, the top marginal tax rate will go up from 35% to 39.6% in 2011.

If a top marginal tax rate of 39.6% is socialism, then there are a lot of socialists in the world. For instance, Japan, South Korea, Australia, along with a lot of the OECD: all have rates higher than Obama is proposing. (Note: I just chose some countries at random. I'm sure I could have found more.) No wonder the world economy is in trouble! There's socialism and class warfare everywhere you look!

But it's even stranger than that. Did you know that Margaret Thatcher (pdf) declared war on the wealthy, a war so extreme it makes Obama's seem meek by comparison? The top tax rate in the UK was 60% for most of her term in office, and 40% for the last year or so. At no point was it lower than what Obama proposes -- and that's without taking into account the VAT.

Likewise, Ronald Reagan was apparently a Class Warrior: for six of the eight years during which Reagan was President, the top tax bracket was 50%. It's a wonder anyone worked at all! In Reagan's defense, though, he was just carrying on a long tradition of wealth expropriation carried out by socialists like Harry Truman, Dwight D. Eisenhower and John F. Kennedy.

All in all, it seems as though we've been suffering through an awful lot of socialism and class warfare all over the world, much of it at the hands of people conservatives claim to admire. If a top marginal rate of 39.6% is enough to make society's producers and creators go on strike, then Galt's Gulch must be getting pretty crowded.

Soak the rich, nationalize the banks, close tax loopholes, and put some greedy bastards in prison. Then all will be right with the world. Well, better anyway.

Stimulus: "Jaws" Comparison

Krugman Not Happy With Stim

I defer to Paul Krugman on matters economic. Why doesn't Obama?

The Big Dither
By PAUL KRUGMAN

Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.”

Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.

Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.

What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions. Earlier this week, Ben Bernanke, the Federal Reserve chairman, was asked about the problem of “zombies” — financial institutions that are effectively bankrupt but are being kept alive by government aid. “I don’t know of any large zombie institutions in the U.S. financial system,” he declared, and went on to specifically deny that A.I.G. — A.I.G.! — is a zombie.

This is the same A.I.G. that, unable to honor its promises to pay off other financial institutions when bonds default, has already received $150 billion in aid and just got a commitment for $30 billion more.

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.

Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.

But would it be enough to make the banking system healthy? No.

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) Realistically, it’s just not going to happen.

So why has this zombie idea — it keeps being killed, but it keeps coming back — taken such a powerful grip? The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.

But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.

Tuesday Cartoon Fun: Stimulus Edition

Sunday Cartoon Fun: Stimulus Distaste Edition

Let Them Filibuster!

Why are the Democrats so timid? They say they are compromising because they need 60 votes in the Senate (I hear it may be only 59 because of the lack of 100 "Seated" Senators) to avoid a filibuster. Let those fucking obstructionist Republicans filibuster! Let them show the world what they are made of! If they want to stand up there and claim, against the experts' opinions, that tax cuts will stimulate the economy and spending won't, let them. Then Democrats, come the next election, will have even more seats! No? Oh, and the filibuster they mount is bound to fail anyway.

Hey Republicans--Fuck You!

The Stimulus Debate: Here It Comes

From Bob Reich:

The Real Fight Starts After the Stimulus is Enacted

The real stimulus debate hasn't even started yet. Congress will pass President Obama's stimulus package in the next two weeks, more or less as he wants it. The House has already done its part, and the Senate appears likely to follow suit. But when the economy starts to turn up again, perhaps as early as next year, the president will have the real tough decisions to make. He'll have to choose which spending will continue -- or whether any of it will continue at all.

Sixteen years ago, Bill Clinton came to Washington with his own ambitious plans to reverse widening inequality, rebuild the nation's crumbling infrastructure, create an efficient and affordable health-care system and address the growing environmental crisis. But because of raging budget deficits and a towering national debt, he was unable to accomplish most of this. As his secretary of labor, I shared his frustration. Alan Greenspan, then Federal Reserve chairman, and most of Wall Street warned that the nation couldn't afford the risk of runaway inflation.

Some aspects of Obama's stimulus package look eerily familiar to me, although the price tag is far higher than Clinton ever dared imagine. Yet today, economic advisers across the political spectrum support Obama's plan. A few weeks ago, Martin Feldstein, Ronald Reagan's chief economist, told Congress that the stimulus should be $800 billion. (Although he apparently has quibbles with exactly how that sum will be spent, he's not taking issue with the total amount.)

The biggest difference between Clinton's original agenda and the public investments Obama is proposing is that Clinton came to office as the U.S. economy was emerging from a recession; Obama is facing the worst downturn since the Great Depression. Even fiscal conservatives concede that when consumers stop buying and businesses stop investing, as they are now, the government must step in as the buyer and lender of last resort.

But the moment the economy appears to be on the mend, conservatives such as Feldstein will want the government to cut spending. In their view, this is the only way to get the economy fully back on track. But others believe that it is precisely the track we were on that got us into this mess in the first place.

Those who support the stimulus as a desperate measure to arrest the downward plunge in the business cycle might be called cyclists. Others, including me, see the stimulus as the first step toward addressing deep structural flaws in the economy. We are the structuralists. These two camps are united behind the current stimulus, but may not be for long. Cyclists blame the current crisis on a speculative bubble that threw the economy's self-regulating mechanisms out of whack. They say that we can avoid future downturns if the Fed pops bubbles earlier by raising interest rates when speculation heats up.

But structuralists see it very differently. The bursting of the housing bubble caused the current crisis, but the underlying problem began much earlier -- in the late 1970s, when median U.S. incomes began to stall. Because wages got hit then by the double-whammy of global competition and new technologies, the typical American family was able to maintain its living standard only if women went into the workforce in larger numbers, and later, only if everyone worked longer hours.

When even these coping mechanisms were exhausted, families went into debt -- a strategy that was viable as long as home values continued to rise. But when the housing bubble burst, families were no longer able to easily refinance and take out home-equity loans. The result: Americans no longer have the money to keep consuming. When you consider that consumers make up 70 percent of the economy, the magnitude of the problem becomes apparent.

What happened to the money? According to researchers Thomas Piketty and Emmanuel Saez, since the late 1970s, a greater and greater share of national income has gone to people at the top of the earnings ladder. As late as 1976, the richest 1 percent of the country took home about 9 percent of the total national income. By 2006, they were pocketing more than 20 percent. But the rich don't spend as much of their income as the middle class and the poor do -- after all, being rich means that you already have most of what you need. That's why the concentration of income at the top can lead to a big shortfall in overall demand and send the economy into a tailspin. (It's not coincidental that 1928 was the last time that the top 1 percent took home more than 20 percent of the nation's income.)

Other structural problems are growing as well. One is climate change and our dependence on oil. Another is the United States' growing reliance on foreign capital, mostly from China, Japan and the Middle East. Neither is sustainable.

Meanwhile, our broken health-care system drains more of our dollars yet delivers less care. When President Clinton tried to tackle health care in 1994, it represented 14 percent of our GDP, and 38 million Americans were uninsured. Now, the nation spends 16 percent of its GDP on health, and about 44 million of us are uninsured. Most cyclists acknowledge these problems, but they tend to think of them as separate from the current crisis -- issues to be tackled after the economy has recovered, and then only to the extent that we can afford to do so.

But structuralists like myself don't believe that the economy can fully recover unless these underlying problems are addressed. Without policies that put the nation on the path to higher median incomes, higher productivity, renewable energy and a more accessible and efficient health-care system, we'll face deeper and more prolonged recessions, followed by ever more anemic upturns. Bill Clinton's inability to do enough about these problems in the 1990s, followed by George W. Bush's negligent disregard of them, allowed them to grow to the point where any major triggering event can cause a vicious downward spiral.

As early as next year, the business cycle may hit bottom and begin climbing. At that point, cyclists and structuralists will want two different things -- and which side the president chooses will be, as Will Marshall of the Progressive Policy Institute puts it, the "central drama" of the Obama administration. The president recently sought to placate the cyclists by promising to focus on controlling the future costs of Social Security and Medicare. Perhaps Obama has in mind a "grand bargain" that would allow him to continue his structural agenda after the business cycle turns upward in return for limiting spending for those two giant entitlement programs.

Let's hope he has something more in mind, something more fundamental: a debate about public investment and sustainable growth. For structuralists, the size of the federal debt itself is irrelevant. Debt has to be considered in proportion to the economy as a whole. According to government projections, the national debt will exceed half the nation's gross domestic product by the end of this year -- not including the stimulus package. That's certainly high, but not close to a record. The debt was far more than 100 percent of GDP at the end of World War II. That mammoth debt, not incidentally, put Americans back to work, financed industrial production, underwrote a new generation of science and technology and created a wave of demand for consumer goods when the war ended. In short, it got the economy on a new and faster track, thereby allowing the United States to pay down the debt and ushering the country into a new era of widely shared prosperity.

Even a high ratio of debt to GDP isn't especially worrisome if much of that debt comes from investments that put the economy on a path toward solid growth. One recent study from Columbia Teachers College, for example, shows that cutting high school dropout rates in half would generate $45 billion in new tax revenues and savings on expenses such as welfare and incarceration.

We cannot assume, however, that gains from these sorts of public investments will grow the economy enough to reduce the relative size of future debt. We must consider the tax code's structure as well. Should marginal taxes be raised on the most affluent? That could help finance what must be done to put the economy on a sustainable growth path.

But I don't think that our new president should wade into this debate right away. He has his hands full. He needs to implement the stimulus package and reverse the downturn. Bill Clinton had to choose sides almost right away -- and had little choice but to cave in to the cyclists and forfeit most of his long-term economic agenda. The severity of the current crisis gives Obama more time.

But he will need to open the larger debate sooner rather than later. This downturn is revealing the U.S. economy's underlying flaws. Once the business cycle turns up, the public and its representatives may be less inclined to tackle the things that truly drag us down. Clinton was, after all, reelected in 1996 on the wave of a cyclical upturn in the economy. But the structural problems that he failed to address -- widening inequality, sagging median incomes, a broken health-care system, crumbling infrastructure and global warming -- are that much larger now, making the current crisis all the worse.