FromDC2Iowa: Economic Sorrows and Solutions

January 27, 2009, 7:45 a.m.

How Best to Stimulate an Economy
(brought to you by FromDC2Iowa.blogspot.com*)
As the American people, their elected representatives, and the mainstream media focus on the deteriorating economy and the President's "America's Recovery and Reinvestment Plan" (President-Elect Barack Obama, "American Recovery and Reinvestment," January 8, 2009, Whitehouse.gov/The Agenda/Economy/The President's American Recovery and Reinvestment Plan) most of the commentary comes in the form of numbers rather than names -- the stock markets' percentage changes, the number of bank failures, the unemployment percentages, the number of mortgage foreclosures, and the corporate earnings (or losses) reports.

[And see, "Senate Appropriations Committee Releases Highlights of American Recovery and Reinvestment Plan; Committee Announces $365 Billion Investment Package," U.S. Senate Appropriations Committee, Press Release, January 23, 2009; and "Summary: American Recovery and Reinvestment As Passed by the Full Committee," U.S. House of Representatives Committee on Appropriations, January 21, 2009. For additional related material see the House Committee on Appropriations main Web page, "News." See especially, "Economic Analysis," January 15, 2009.]

CBS tried to improve on that last Sunday night (January 25) with a segment of "60 Minutes" CBS called "A Town In Crisis" ("The town of Wilmington, Ohio has been devastated by the economic crisis and, as Scott Pelley reports, DHL, the town's largest employer, is shutting its domestic operation."). CBS urges you to Watch CBS Videos Online -- as do I. But it also enables me to embed a video of its segment here, where I also urge you to watch it.

Watch the tears, some suppressed and some flowing. Feel the despair, the pain, the sense of hopelessness among decent folks who've known no life except for going to work every day for decades, supporting their families, and dreaming of better lives for their children. See the faces. Recall those of your friends and neighbors, family members -- or yourself -- going through similar stress and confusion.

Then think about the uncaring, irresponsible bankers and corporate executives whose greed and ignorance brought on this pain; men and women who, instead of attempting to alleviate it with jobs, loans and restructured mortgages, are handing out pink slips to their loyal workers and handing out taxpayers' money, our money, as bonuses to their fellow executives and dividends to their wealthy investors, arranging for company retreats and parties, flying the world in their private jets (Citi just used our money to buy its executives a new $50 million-dollar plane), and doing million-dollar makeovers of their offices with extravagant furniture.

[E.g., Jennifer Gould Keil and Chuck Bennett, "Just Plane Despicable; 'Rescued' Citi Buying $50M Jet," New York Post, January 26, 2009 ("Beleaguered Citigroup is upgrading its mile-high club with a brand-new $50 million corporate jet -- only this time, it's the taxpayers who are getting screwed -- even though the bank's stock is as cheap as a gallon of gas and it's burning through a $45 billion taxpayer-funded rescue . . ..");

Andrew Ross Sorkin, "The Titans Take It on the Chin," New York Times, January 26, 2009 ("[That] John A. Thain, the fallen boss of Merrill Lynch, spent $1.2 million redecorating his office as Merrill hurtled toward its end seemed only to confirm people’s worst suspicions about money and the hubris it can breed. His $35,000 “commode” might strike some as a bit over the top.");

Dave Krasne, "Money for Nothing," New York Times, January 26, 2009 ("Merrill Lynch lost $27 billion last year, and yet still managed to rush through $4 billion worth of year-end bonuses in the days before it was taken over by Bank of America. . . . Merrill Lynch is not the only irresponsible institution out there. Despite a year of record losses, despite all the taxpayer money being injected into our financial institutions, bonuses for 2008 were, in some cases, down less than 50 percent from those the previous year. . . . [S]ome institutions that begged for taxpayer aid to stave off bankruptcy — simply to stay alive — made 2008 compensation packages their first order of business after receiving their bailouts. . . . [I]t’s one thing to reap great rewards when creditors are being repaid and shareholders are earning a return; it’s quite another to reward failure almost as well.");

Andrew Ross Sorkin, ed., "Cuomo Subpoenas Thain Over Merrill Bonuses," New York Times/Deal Book, January 27, 2009 ("Andrew Cuomo, New York’s attorney general, said Tuesday that he has subpoenaed John A. Thain, the former Merrill Lynch chief executive, over bonuses paid out by the firm just before it was taken over by Bank of America. . . . 'The fact that Merrill Lynch appears to have moved up the timetable to pay bonuses before its merger with Bank of America is troubling to say the least and warrants further investigation,' Mr. Cuomo said in a statement.");

Brian Knowlton, "Geithner Cracks Down on Bailout Lobbying," New York Times/The Caucus, January 27, 2009 ("The New York Times reported that some big banks receiving government bailout money were still lobbying the government — giving the appearance, at least, of using taxpayer money to lobby for more taxpayer money . . ..").]

Given these attitudes and behavior, this fraud and sense of entitlement, it would be unconscionable to simply hand over more taxpayer money to this crowd -- not just because they have now demonstrated that "they don't deserve it" (though they don't), not just because they should be punished with prison sentences rather than rewarded financially (though they should), but because we're now into a "fool me once, shame on you; fool me twice, shame on me" scenario in which it should be abundantly clear to all that this approach hasn't, and won't, work.

Does this mean that more banks will fail? Yes. Just like more auto dealerships and retail stores will fail. But any company that's "too big to fail" is simply too big. Capitalism, "the market," contemplates failure as well as success. It will take time to calculate, but require the banks to put a marketplace value on those "toxic assets." They're worth something. And at that point offer those assets -- or the entire bank itself -- for sale in the marketplace. It will fetch something. And once it's fairly valued there will be buyers, there will be investors, there will be capital, there will be loans -- and it will all have been done with market forces and without additional taxpayer dollars.

Watch this "60 Minutes" piece and then ask yourself, "Just what would be the best way to 'stimulate our economy' if one were to focus not only on the most efficient economic tools but also on the human misery of the poor rather than the worries of the wealthy?"

In an economy in which two-thirds to 70% of the fuel in our economic engine comes from consumer spending, when that engine starts sputtering might it not be a good idea to provide it more of that fuel? [See, e.g., Michael Barbaro and Louis Uchitelle, "Americans Cut Back Sharply on Spending," New York Times, January 14, 2008 ("There are mounting anecdotal signs that beginning in December [2007] Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy.")]

In 2007 the median income for men working full time was $45,000; for women it was $35,000. "Median" means that half the working men and women earned less than that; half earned more. The income of the bottom 20% of "households" (meaning the combined income from all sources for all household members aged 15 or over) was less than $19,000 -- and a half of such households had no wage earner as such at all. See, e.g., "Household Income in the United States," Wikipedia.

Thus, intuitively it would seem the best way to stimulate the economy -- humane considerations aside -- would be to put money in the hands of those most likely to spend it: those below the median among wage earners. Food Stamps and Unemployment Compensation programs come immediately to mind.

Given the economic plight of the folks featured in CBS' "A Town in Crisis" it's just highly unlikely that they would use the money to buy failing banks, pay bonuses to wealthy corporate executives, buy corporate jets, or hoard it in an effort to increase their "reserves." They'd probably spend it -- promptly, and entirely.

And it turns out this is one time when intuition is confirmed by economic analysis. Economist Mark Zandy, Senator John McCain's economic adviser, has calculated how much economic stimulus bang we get for every taxpayer buck with various programs. "New Zandi Analysis Finds Rebates More Effective As Stimulus If They Include Lower-Income Workers: Food Stamps and Unemployment Benefits Get the Highest Ratings," Center on Budget & Policy Priorities, January 22, 2008.

It turns out that food stamps are at the top of his list, providing $1.73 worth of economic activity for every dollar spent.

Next are unemployment benefits, with a $1.64 impact from every dollar we spend.

(By contrast, the tax-cutters' favorite current proposal, an acceleration in businesses' depreciation write-offs, produces only 27-cents worth of economic activity for every taxpayer dollar lost.)

Not only do food stamps and unemployment benefits return the most per taxpayer dollar, they also do it faster than any other approach.

(Temporarily funding states, enabling them to avoid deep budget cuts, produces $1.36 of activity for each federal dollar.)

Triage: First Stop the Bleeding
"Triage" is a useful concept for thinking about what we need to produce an economic recovery. ("Triage is a process of prioritizing patients based on the severity of their condition. This facilitates the ability to treat as many patients as possible when resources are insufficient for all to be treated immediately." "Triage," Wikipedia.)

Food stamps and unemployment compensation are something that is needed immediately, can be provided immediately (the programs are already in place and operating), will help the greatest number of people, and will have the greatest positive impact on the country's economy.

They need to be fully funded with whatever it takes -- and "whatever it takes" will be far less than what we've already squandered on corporate CEOs and bankers. Both food stamp and unemployment compensation programs need to be expanded in both reach and amount until they provide some assistance to everyone reasonably eligible.

With news of layoffs by the thousands coming every week, this needs to be our first priority, our primary focus, until it's running smoothly, doing what needs to be done.

[See, e.g., Catherine Rampell, "Layoffs Spread to More Sectors of the Economy," New York Times, January 26, 2009 ("Home Depot, Caterpillar, Sprint Nextel and at least eight other companies announced on Monday they would cut more than 75,000 jobs in the United States and around the world — a gloomy start to the workweek for employees anxious about holding their own as the economy sinks.")]

Second, Provide Health Care
Why should health care be second? Not because it's less important -- from either an economic or a humane perspective -- but because it will take somewhat longer to create the administrative procedure to provide. With 40 million Americans left uninsured in the best of times, laid off workers often losing what health insurance they had along with their wages, and health care costs a major factor in bankruptcies, temporary funding of health care for all -- by whatever means -- is an essential next step. This need is not met with a little extra funding for SCHIP, COBRA and Medicaid, requiring some amount of co-pay from those who can't even afford food. It must be fully funded to provide basic medical care to everyone who is unemployed or otherwise unable to pay hospital and doctor bills -- and with as little administrative paperwork for patients and doctors as possible.

Third, A Jobs Program -- for Workers Not Owners
How can I make jobs third? Isn't it better that people be paid for their work than that they get unemployment compensation for doing nothing? Absolutely; of course. Indeed, some months ago I urged the creation of a federal jobs program, in place, ready to roll out on short notice, when needed. Well, now it's needed and it's not in place. And so, like health care, that's the only reason it's third rather than first.

The reason I emphasize "workers not owners" is because a program designed to put Americans back to work needs to prioritize, needs to employ the maximum number of persons per dollar possible. And that may mean federal jobs programs that make worthwhile contributions to our infrastructure, or whatever, but would not necessarily be the projects, and jobs, that "the marketplace" would choose.

Frankly, I don't know how many jobs per dollar are created by highway projects these days. But what I guess is that a "shovel-ready" project that would have employed 200 workers with shovels in the early 1930s may very well, today, primarily enrich the owner of the construction company and employ one person who is operating an extremely large shovel and other earth moving equipment.

Fourth, Mortgage Refinancing -- For Owners, Not Bankers
Would I like to see more people able to continue living in their homes? Of course. But the details of how we do that are not easy. At least I don't have any quick solution that keeps in proper balance the remedies for those who knowingly got in over their heads, those who were taken advantage of by bankers, those who have struggled to make every mortgage payment, and those who have been profligate with other expenses. But clearly, it seems to me, no one gains -- not the home "owners," the bankers, or the real estate agents -- by throwing the occupants out on the street in a down market when a resale will result in more losses for all. Nor, as we've now seen to our multi-hundred-billion-dollar regret, can the problem be solved by giving billions to bankers who simply squirrel it away, or use it to buy other banks, enrich CEOs, and pay dividends.

Infrastructure Projects and Tax Cuts
Any project can be said to be an "economic stimulus" and that seems to be a lot of what's going into the President's, Senate's, and House's proposals: pet projects of elected officials' major campaign contributors. That looks to me more like "same old, same old" than "Change We Can Believe In."

Some of these are worthy projects. Certainly I'd prefer that Interstate Highway bridges not collapse.

But what we need now, first, is economic recovery, as quickly and wisely and efficiently as we can get it done. Diverting attention -- and more important, dollars -- from that goal to other purposes, however worthy, both takes our eye off the ball and seriously (and perhaps disasterously) weakens our ability to do the job at hand.

Tax breaks I've discussed above. They do little to produce economic recovery according to the economists. And worse, they violate the principle that "when you find yourself in a hole the first thing to do is to stop digging." It is "credit" and debt that got us into this fix. It's not clear that we can borrow our way out of a problem of excessive debt.

What this country needs right now is not more credit, more borrowing by its citizens and federal government. What it needs is more cash -- in the hands of consumers, not CEOs. Indeed, consumers are the only ones who can turn this economy around. And that's what the steps I've outlined here can do.

Finally, there are benefits and there are costs. Our public and corporate officials, and the mass media, have explained to us the benefits of massive expenditures. What they have not explained are the costs -- such as the potential of a "morning after" rampant, uncontrollable inflation, the likes of a Third World country. I'm not saying that will happen, or that it's the only possible scenario. What I do believe is that someone, sometime, somewhere needs to talk candidly about the "business plan" behind this massive spending, the "exit strategy," the projected mileposts and stages along the way -- and the serious, possible, risks we are taking.

“The cost of our debt is one of the fastest growing expenses in the federal budget. This rising debt is a hidden domestic enemy, robbing our cities and states of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on. . . . If Washington were serious about honest tax relief in this country, we'd see an effort to reduce our national debt by returning to responsible fiscal policies."

FromDC2Iowa

Tuesday, January 27, 2009

Economic Sorrows and Solutions

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