Vote blue if you care about deficits, the economy or wages

WSJ: building economic confidence one headline at a time

Economy needs a bigger stimulus

The leading economists have noted that the U.S. economic trajectory looks an awful lot like Japan in the 1990s, a time called "The Lost Decade."  Poor economic performance created a spiral of deflation and recession.  The Japanese stock index is still 67% off its 1989 high.

Nicholas Kristof notes that part of the problem is the attitude:

Japan also underscored that you can’t resolve a crisis when the public is more interested in punishing banks than rescuing them. That’s why I suggested tarring and feathering a group of prominent bankers. Populist rage then would be satisfied, and we could get on with reviving the banks.

He's kidding (I think), but he offers these thoughts:

Tom Peters, a management expert, suggests capping the pay of C.E.O.’s receiving bailouts at that of a four-star general. As for the concern that the executives would quit, who cares? Mr. Peters writes that if all the top executives of the Fortune 500 companies were exiled to Elba, “performance of their companies would not on average deteriorate.”

As Representative Barney Frank asked the bankers testifying on the Capitol Hill dunk-tank on Wednesday about their bonuses: “Why do you need to be bribed to have your interests aligned with the people who are paying your salary?”

More to the point, Kristof notes that we give away $20 billion in tax breaks to corporations, subsidizing inflated executive paychecks.  That's dumb - no wonder Americans don't care much for a bailout.

The evidence suggests that the best way to clean house is nationalize the banks.  Sound socialist?  In a good economy, a healthy bank will buy a failing one, take ownership, and clean house.  Problem is, there are no healthy banks, at least not of the size to save the four biggest U.S. banks, in need of $450 billion.

It's time for some market action, led by government.  Citizens become the shareholders, we clean house, and then sell the shares when the bank recovers (likely recovering most of the government's investment).  Why is this so bad?

This economy won't turn around fast

I already blogged about the debt trap that has captured so many Americans before and through this credit crisis, but Paul Krugman's column today highlights why the mound of debt already accumulated might make this economic downturn very, very long:

According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter...To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation. [emphasis mine]

So it's bad.  And those numbers are coming in before the crash in the Dow, and the seizing up of credit.  So when the economy is two-thirds consumer spending, can a Christmas holiday make us right?  Probably not.

American consumers have long been living beyond their means.

Here's the chart from the NY Times debt trap feature:

We've been spending more than we had for years, and now we're in a real bind.  Krugman goes into the macroeconomics, that the Fed can't even loosen up the economy because lowering interest rates can't help people who've been outspending their income for years. 

In other words, this recession's going to be here for a while.  Maybe we'll all learn a little thrift in the meantime.

Long term fiscal stimulus: a New Deal

Renewable energy and energy efficiency could be the foundation for long term economic sustainability.  And it could provide an outlet for government to provide substantial economic stimulus in the short term.

Better answers for Democrats

Why is the Democratic economic plan better than the Republican one?

Because Democrats have two fundamental beliefs: that when government acts, it should be to benefit the middle class and not the wealthy; and that when we use government to invest in the crucial functions of our economy, from health care to energy, that we have to pay for what we spend.  That's why, in a time of economic crisis, we're asking the wealthy to go back to paying taxes as they did before 2001 - since they don't need another handout - in order to sustain the middle class.

Would a Democratic President consider a judicial nominee who opposes Roe v. Wade?

A Democratic President is looking for the most qualified jurists to serve on the Supreme Court and would not use a litmus test.  That being said, the chance of their being a candidate for the Court whose judicial philosophy matches a Democratic President and yet opposes Roe v. Wade is downright infinitesimal.  You might as well talk about a Republican balancing a budget.

McCain understands the middle class

McCain - sounding a lot like Herbert Hoover

Responding to the collapse of several major investment banks this week, John McCain reassured us, "I think still -- the fundamentals of our economy are strong." That move comes from an old playbook: On Oct. 25, 1929, Herbert Hoover declared, "The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis."

McCain's fault is not just a lack of perspective on the economy, but also a willful support of deregulation that caused much of today's financial crisis.

What [McCain] doesn't talk much about is how deregulation happened. It was the 1999 Gramm-Leach-Bliley Act that repealed the 1933 Glass-Steagall Act and thus eliminated the depression-era walls between between banking, investment, and insurance that made this crisis possible. Glass-Stegall erected walls between banking, investment management, and insurance, so problems in one sector could not spill over into the others, which is precisely what is happening now. The primary author of that legislation was none other than his economic advisor, former senator Phil Gramm (who thinks the country is in a "mental recession"). McCain fully supported the bill and has a decades-long track record of opposing government regulation of the financial industry. His new-found conversion to being a fan of regulation is going to be a tough sell as Obama is already pointing out that McCain got what he wanted (deregulation) and this is the consequence.

Democrats - a party of prosperity for everyone (data)

I'm lifting this chart straight from Paul Krugman's blog. Read his caveats. And marvel at this graphic:

Chart summary: Everyone is more prosperous (in terms of average annual income growth) under Democratic presidents. The rate of growth is also more equitable than under Republicans, who heavily skew income gains to the rich.

And that's why rich folks mostly vote for Republicans.

Bush administration cut red tape, and safety lines

Many people act as thought the subprime mortgage crisis and Bear Stearns collapse were inevitable motions of the "invisible hand." But the truth is that regulators deliberately turned their backs on the problem, touting the reduction of onerous regulation.

Nice work, fellas. Some Scotch tape is in the mail for all those regs you slashed.

The current financial crisis: a crowded theater, a fire...

Paul Krugman has the most cogent and understandable assessment of the country's financial crisis on his blog. Today he upped the ante on clear explanations with this excellent metaphor about two kinds of bank runs:

In some cases, the bank run is a pure self-fulfilling prophecy: the bank is “fundamentally sound,” but a panic by depositors forces a too-hasty liquidation of its assets, and it goes bust. It’s as if someone calls “fire!” in a crowded theater, provoking a stampede that kills many people, even though there wasn’t actually a fire.

In other cases, the bank is fundamentally unsound — but the bank run magnifies its losses. It’s as if someone calls “Fire!” in a crowded theater, and there really is a fire — but the stampede kills people who would have survived an orderly evacuation.

We’re in the second case. The Fed has spent the last 7 months trying to assure people that there isn’t any fire. But there is.

Worse yet, thanks to decades of deregulation, the theater doesn’t have a sprinkler system - and the town the theater is in doesn’t have a fire department.

And if you're a Republican, we can't do anything because raising taxes to build a fire department would hurt business....

Book review: Deep Economy

I recently finished reading Deep Economy by Bill McKibben and it was an excellent book. The overall theme is that Americans have come to be obsessed with more. More economic growth, more material goods, bigger! better! McKibben begins his analysis by noting that for most Americans, wealth and material goods are not related to happiness and that we need to refocus on a "deeper" economy.

First, the main point. McKibben notes that once a country's per capita income exceeds $10,000, there is not a commensurate increase in the happiness of the population. Once basic needs of food and shelter are met, little happiness (if any) is gained from additional wealth. Economists call this the diminishing marginal utility of income (pdf).

One of the other main issues McKibben addresses is the issue of agriculture, health and the environment. Modern food systems generally involve large monocultures (a single plant covering thousands of acres), massive processing and packaging, and long-distance shipping. Thus every visit to the supermarket can offer local vegetables or exotic fruits, in any season. And it also serves up a healthy dose of pesticides, herbicides, and a massive carbon footprint.

McKibben notes that both our health (in terms of nutrition) and our land's productivity suffer. First, health suffers because when modern agriculture comes to the developing world, it tends to displace sufficiency farming. The former involves large monocropping of corns or soybeans or other commodities for export, the latter a mix of vegetables and grains to serve local nutritional needs. Modern agriculture actually reduces the self-sufficiency of the developing world and increases malnutrition.

Modern science has helped combat this with discoveries such as golden rice (infused with vitamin A) that replaces the vitamin A lost when other vegetables are not longer planted alongside rice. It's ironic, though, that it is really just a fix to another solution of modern times, the green revolution.

Even more intriguing, organic small-scale farming is actually more productive per acre and per unit of energy. That's right, you get more food for your land and inputs farming in a more traditional style, where corn can be planted in the same field as beans, instead of lined up for mechanical harvesting. And that is the tradeoff, of course. This more natural style of farming is labor-intensive and more expensive in dollars per pound of food, but more productive per acre of land.

The other big issue McKibben addresses as part of his exploration of happiness is community. Americans have a society committed to maximizing individual time: houses with more bedrooms than people, cable TV instead of movie theaters, cars instead of mass transit. The tradeoff is that people feel more alone and depressed than their parents.

McKibben suggests that community is a balancing act. Too much feels repressive, like having your parents or neighbors constantly at your door or in your space. To little leaves people vulnerable to anxiety and other products of social isolation.

Overall, I thought his book an interesting look at how to re-envision the modern economy to better respect the environment and the sense of human community. Highly recommended.

Would you envy this economy?

An article in today's New York Times suggests that the economy under President Bush would be the envy of many past presidents.

Dean Baker says, "I doubt it," defending his statement with a table of average annual GDP growth for presidential terms in the past 50 years.

Kennedy-Johnson -- 5.2%
Clinton -- 3.6%
Reagan -- 3.4%
Carter -- 3.4%
Nixon-Ford -- 2.7%
Bush II --2.6%
Bush I --1.9%

Only Bush's father would envy this economy. And because I'm a partisan, I'd like to note that 3 of the top 4 are Democratic presidential regimes. None of the bottom three are. If it's the economy, stupid, then don't vote Republican.

Flushing good money after bad

With the U.S. supposedly teetering on the edge of recession, Congress is preparing an "economic stimulus" package to [help prevent recession/slow the progress toward recession/make the recession less severe]. Unfortunately, Paul Krugman (economist) notes that most of the stimulus isn't going to those who will actually spend it. Which makes it a pretty expensive ($150 billion) "not much of a stimulus" package.

The GAO asks: are you ready for peak oil?

Robert at R-Squared Energy Blog analyzed the Government Accountability Office's new Peak Oil analysis and he has three major points:

1. Peak oil is coming soon, but it's not in the past and it's not imminent.
2. As far as energy prices go, it doesn't matter because supply isn't going to be able to get ahead of surging demand in developing countries like India and China.
3. The United States better take the GAO report seriously, because our economy is heavily dependent on oil.

Some excerpts of the report from the Energy Bulletin highlight the challenges ahead for the U.S.:

Key alternative technologies currently supply the equivalent of only about 1 percent of U.S. consumption of petroleum products, and DOE projects that even under optimistic scenarios, by 2015 these technologies could displace only the equivalent of 4 percent of projected U.S. annual consumption...

...Under these circumstances, an imminent peak and sharp decline in oil production could have severe consequences, including a worldwide recession...

...While the consequences of a peak would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be particularly vulnerable...

The GAO has the full report online and the Energy Bulletin also has a lot of great charts from the report.

The stag is back

Marketwatch is talking about stagflation - high inflation and low economic growth - due to a strong increase in "core inflation" in February. The main concern with stagflation is that inflation - typically fought with higher interest rates - is combined with slow economic growth - typically fought with lower interest rates - leaving the Federal Reserve in a bind.

As I discussed in July, the situation now isn't quite the 1970s. Inflation (2.4% annual rate) is not even half the inflation rates in the 1970s - 7% per year - nor is the current GDP growth (2.4%, adjusted for inflation) as low - 1% per year in the 1970s. However, there's an interesting piece of economic theory that suggests caution instead of optimism.

The phenomenon of stagflation is an aberration of the Phillips Curve, an economic theory that suggested that inflation and unemployment move in opposite directions. In other words, as unemployment falls, workers get higher wages which drives up inflation. In reverse, unemployment solves inflation when laid off workers bid each other's wages down.

The Economist (subscription required) notes that this theory only works when central banks - like the Federal Reserve - are in harmony with the public about inflation (e.g. that both believe that the bank will help regulate inflation instead of the public going out and demanding higher wages). If the public sees high gas prices and feels they need a bigger paycheck, then these demands will push inflation even higher. The result is that when the bank has to tighten the interest rate screws, the resulting recession will be even worse.

Conclusion? Stagflation '07 has nothing on the 1970s, but the continual pressure of high energy prices and the slowing economy doesn't bode well.

If Tax Cuts Don't Boost the Economy, What Do They Do?

The left-leaning Center on Budget and Policy Priorities has a very thorough analysis of state tax cuts during the latter half of the 1990s and the economic performance of those states since. While some of the tables and figures in the report are probably obscuring some contradictory data (note the comment about Michigan in the box on page 3), the overall analysis is startling. Tax cuts lead to slower economic growth, higher unemployment and bigger budget deficits.

A traditionally high-tax state like Minnesota should take note. A recent Minnesota Public Radio news story (I was unable to find a link) noted that Minnesota's advantage in the unemployment rate - versus the national average - is the smallest it's been in over 10 years. Is Minnesota becoming average by becoming average?

The stag rears its ugly head

So just last week I noted that comments about stagflation might be overblown, given fairly strong GDP growth and fairly low inflation (despite rising energy prices). But that argument just developed a hole the size of oil barrel prices: the latest economic report shows growth slowing to 2.5% annually in the second quarter, but inflation surging at 5.6%. It may not be time to bust out the wheelbarrows, but with wages predicted to rise less than 4% this year, we'll all be making a little less on the same dollar by Christmas.

Bulls, and Bears, and Stags - Oh My!

You don't hear much about economic downturns or inflation from the government and indeed not even much from the media. But The Austrailian doesn't shy from an assessment that the United States could be facing stagflation - a combination of a slowing economy and rising inflation that eats away the standard of living.

The Economist opined last year that while the United States was not facing the same dual punch as it did in the 1970s (with inflation above 7% and GDP growth hovering at 1%), the Federal Reserve was running too loose of a monetary policy to effectively contain inflation. This means that interest rates are still too low to act as a curb on borrowing and spending (which leads to inflation).

However, the data show that we aren't really in trouble yet. Pulling some data from the BLS, we see that US inflation (as measured by the Consumer Price Index) was up 3.3% last year and is up at a similar annual rate this year. And GDP growth was 3.5% in 2005 and 5.6% (annualized) in the first quarter of 2006. So despite a growing number of news stories about it, do we really need to worry about stagflation yet?