. . . because much of the content relates both to Washington, D.C., and "outside the beltway" -- the heartland, specifically Iowa -- and because after going from Iowa to Washington via Texas and California I subsequently returned, From DC 2 Iowa.
"Jobs" Focus is Misleading Economics and Politics (bought to you by FromDC2Iowa.blogspot.com*)
Iowa's two candidates for Governor -- a former governor vs. the incumbent -- are engaged in a food fight over "jobs": their own, and those of the thousands of unemployed Iowans.
The economic analysis and rhetoric of both of them is misleading at best. As politics, it has been self-defeating for Governor Chet Culver, and has led to a despicable TV commercial from former Governor Terry Branstad.
Infrastructure
Human societies have come a long way since the day we came down out of the trees and started chasing, and later growing, our food.
Today we live above a veritable house of cards. Each of those cards is a part of our "infrastructure."
They include roads and bridges, oil and natural gas pipelines, railroads and airports, municipal water and sewerage treatment plants, dams and locks, telephone and Internet networks, and the power grid -- among other things. Some are built and operated by governments, some by public utilities, and some by traditional profit-maximizing corporations.
We don't think much about the air we breath until we can't see through it, our eyes water, we start coughing, or we learn it is contributing to our parents' cancer and our children's asthma.
Similarly, it is seldom that the mass media, elected officials (or you and I) spend much time thinking, talking or writing about our nation's infrastructure until one of those cards collapses.
By now, everyone knows about the damage done to the Gulf of Mexico by BP's oil spill. What we may be less aware of are our dependence upon, and the risks associated with, the underground network of natural gas and oil pipelines that criss-cross our nation and are subject to leaks and explosions.
Pipelines, like bridges, need to be regularly inspected, repaired and replaced. They too corrode, weaken, and leak. Like BP, Enbridge Energy Partners, the owner and operator of the pipeline, had been warned of the risk of oil leakage. The investigation isn't yet concluded, but it now looks like those warnings -- like those given BP -- were ignored.
And let's not so quickly forget the 90-year-old Lake Delhi dam that finally gave way last week -- and the others that may soon follow. As the Register later editorialized, "Thirty-one Iowa dams have structural problems or other deficiencies. Nearly all are earthen structures that support small lakes or ponds and, if improvements aren't made, these dams could fail, too, according to state records. The Iowa Department of Natural Resources has classified six of them as 'high hazard,' which means failure may result in loss of life." Editorial, "Public Dollars If There is a Public Benefit,"Des Moines Register, August 9, 2010.
There is virtually no end of examples of the infrastructure that is so central to our day-to-day lives, but can cause so much disaster when it goes terribly, terribly wrong. It's the infrastructure that most politicians and corporate CEOs don't want to even think about, let alone build, repair and replace.
What Governor Culver set out to do last year with his horribly misnamed endeavor was to focus attention on Iowa's share of our nation's infrastructure needs, identify the most critical (62% of which are flood-recovery-and-prevention-related), borrow about $857 million (to be paid back with state revenues from the gambling industry), match it with federal and private sources of some $610 million, and start with the shovel-ready projects -- now scheduled for all, and underway in most, of Iowa's 99 counties.
From almost any conceivable vantage point, this was an effort (approved by the Iowa legislature) deserving of statewide applause and commendation.
What Branstad needs to answer is, "What would you do with those fire stations, water treatment plants, libraries, bridges and flood-protection projects that Culver has funded?"
What are the options? You continue to let them rot -- like the bridge in Minneapolis, or the oil pipeline in Michigan -- or you build new and fix what's there. To pay for the projects you either raise taxes or you borrow the money. Given that Iowa is well up in the top 10 states for high credit ratings, and low obligations-per-citizen, borrowing made sense.
Would Branstad ignore all the needs, or just some? If the latter, which projects would he not fund? Would he have preferred to raise taxes rather than issue bonds? Or if he would find the money by cutting public services even further than they've already been cut, what programs would he eliminate and how much would that generate?
What Culver has done is responsible governing; something we should all be thankful for in this age of two dysfunctional major political parties. It may not be as politically appealing as talk about same-sex marriage, abortion, immigration, taxes, and guns, but it's one hell of a lot more important to the present and future of Iowa than any of those evening news sound bites and commercials.
Jobs
Rather than public projects, we're more used to taxpayers' money being funneled to for-profit corporations in the form of tax breaks, subsidies, bailouts, government contracts, and other nefarious schemes -- all too often in exchange for campaign contributions. It's called "socialism for the rich, and free private enterprise for the poor," or "my profits are mine, my losses are the taxpayers.'" (My reaction: If no one else is willing to put sufficient money into a new project -- not the entrepreneur, his or her family and friends, venture capitalists, banks, pension funds and insurance companies -- it doesn't look to me like a very good investment for the public's money either. What's wrong with "the marketplace" working its will?)
In order to sell such giveaways of public money to the wealthy, they are usually described as "jobs programs."
(As I have often written here, you can't jump-start an economy, 80% driven by consumer spending, by giving money to CEOs. No business person in their right mind is going to hire more employees, to manufacture more products, when they can't sell the inventory they already have to unemployed former consumers. If you really want to pull out of recession you do what FDR did (during his first month in office): You make the government the employer of last resort and put all the unemployed on the federal payroll. They spend their paychecks, demand for consumer goods increases, the private sector starts hiring to make more of those goods, the federal payroll declines, and the recession is over. We are paying an enormous price as a nation for letting our ideological purity regarding "socialism" and thinking that "government is the problem" stand in the way of such an obvious path to prosperity for all.)
Thus, it is understandable why Culver, out of political habit, would call his infrastructure proposal "I-Jobs" -- a jobs program (although even he might have thought to exercise restraint with regard to his early boast that it would create 30,000 jobs).
So now he's in a food fight with Branstad over the numbers -- which range, in various estimates, from 4,000 to his original 30,000. This is a fight Culver cannot possibly win, and which he could have, and should have, avoided.
Here's Branstad's latest commercial.
Forget about the precise numbers. To suggest that you can spend $875 million of public money, plus $600 million in the matching funds it makes possible, on projects in 99 Iowa counties, without creating jobs, in addition to being a dishonorable political assertion is economic lunacy. Of course it has created jobs!
In a nationwide -- indeed a global -- economic recession there will be unemployment. It is, for the most part, unemployment no governor can do anything about. This time around, even the federal government (refusing to create a real federal jobs program) has been unable to do much about it.
To put precise numbers on how many jobs I-Jobs created is mostly smoke and mirrors. You can't get accurate data, and even if you could it's not clear what should be included.
Do you just count the guy running the heavy equipment on the highway construction project? Or do you include the folks manufacturing, transporting, stocking, and selling retail the work clothes he or she buys, or those who work in the supermarket and cafes where the workers get food?
Culver would have been better off never to have even mentioned jobs -- except perhaps as a closing almost after thought: "Oh, yes, and we hope this will all provide a few jobs for those who might otherwise be unemployed."
Editorial, "Value of I-JOBS is flood repair,"Quad-City Times, July 31, 2010 ("Follow the money and Gov. Chet Culver’s touted I-JOBS program clearly should be called I-Flood. The top five counties benefiting from I-JOBS are those hit hardest by the 2008 flooding that, frankly, made even our 1993 record-setter look like a big drip. Those five counties won 62 percent of the $705.3 million allocated and borrowed for immediate infrastructure repair and better flood plain management.");
Rob Daniel, "Officials: I-JOBS program has created jobs,"Iowa City Press-Citizen, August 3, 2010 ("According to the latest program report, the program has translated into more than $154 million in funding in Johnson County, including $5.76 million to Iowa City to build a new fire station and wastewater treatment plant and $27.1 million to Coralville for flood control along First Avenue.").
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
As if we don't already have enough evidence of what's wrong with masquerading corporate subsidies and bailouts as "jobs programs," see Nicholas Johnson, "Unemployment Answer is Jobs Not Bailouts," February 6, 2010, it now turns out that the "green" stimulus money for the jobs Obama promised American workers went to GE instead, and such wind power turbine manufacturing jobs as were created are located in China and other countries, not the U.S.
"Obama has consistently made the creation of green jobs a priority for his administration. At a gathering of the AFL-CIO on Sept. 15 [2009], he pledged to create a 'clean energy economy that will free America from the grip of foreign oil and create millions of new green jobs that can't be outsourced.' The president pledged to make ‘made in America’ not just a slogan but 'a reality.'” Russ Choma, "Overseas firms collecting most green energy money," American University Investigative Reporting Workshop, October 29, 2009.
It now turns out that, "[U]nless American manufacturers can quickly scale up production lines to build the equipment, parts, and systems to meet the heightened demand the United States will cede to overseas competitors a once-in-a generation opportunity to create millions of new jobs. The U.S. currently imports more than 70 percent of the component parts for these systems. If the international market in clean energy were a pizza, we would be left with the crust. About half of the installed wind energy capacity in the U.S. is imported . . .." Seph Petta, "Lessons From Europe on Clean Energy Manufacturing Policy That Works," Apollo News Service, May 19, 2009.
The American University report, linked above, indicates that 88% of the stimulus money going to wind companies is going to foreign firms, citing the Department of Energy.
The Capitol Steps have put our imminent demise to music in "Buy, Buy American Pie":
Obama has consistently made the creation of green jobs a priority for his administration.
At a gathering of the AFL-CIO on Sept. 15, he pledged to create a “clean energy economy that will free America from the grip of foreign oil and create millions of new green jobs that can't be outsourced.” The president pledged to make ‘made in America’ not just a slogan but “a reality.” (Transcript.)
Obama is well aware of America’s role as an energy innovator slipping while foreign competitors have taken the lead. At a campaign event in Portsmouth, N.H. in October 2007, the president noted that technologies invented in America – like wind turbines, solar panels, and compact fluorescent bulbs – are being developed overseas and sold back to American consumers.
“This will change when I am president,” he said. . . .
The most important figure, however, may be the number of turbines that were installed by these four companies. According to Iberdrola Renewables, the company only employs 800 people in all of their U.S. operations. It’s the production of turbines that matters most economically. In fact, as much as 70 percent of the economic activity generated by investing in wind comes from the manufacture of the modern, highly sophisticated turbines – but this is where foreign companies actually have their strongest grip on the market.
In the case of these 11 wind farms, according to data provided by the companies themselves in regulatory filings and collected by the American Wind Energy Association, 982 turbines were installed – 695 of them were manufactured by a foreign company.
A study by the Renewable Energy Policy Project , a think-tank that advocates renewable energy technology research, estimates that for every 1,000 megawatts of wind energy that is developed, 4,300 jobs are created: 600 for operation and maintenance of the wind farms; 700 for the installation of new turbines; and 3,000 for manufacturing.
The cash grants were given for the installation of 1,763 megawatts of capacity – 1,566 installed by foreign companies. Using the Renewable Energy Policy Project’s own numbers, as many as 4,500 manufacturing jobs may have been created overseas. . . .
The manufacturing market is thoroughly dominated by foreign companies . . . more recently Asian manufacturers . . .. The U.S. market for wind turbines and components is growing rapidly, but the import/export numbers offer a grim picture of who is winning the battle.
According to U.S. Customs data for 2008 and the U.S. Trade Commission, the U.S. imported $2.5 billion worth of wind turbines last year -– up from $365 million in 2003. . . .
But the American market is narrow – GE Energy accounted for 42.7 percent alone . . .."
. . .
The cash grants that were handed out in September theoretically will trickle down to American workers when the market demands locally built turbines -– but that’s not guaranteed to happen.
“There is a larger concern that turbines might be coming from China,” said Xizhou Zhou, an analyst at IHS CERA, a global energy advisory firm, pointing to other industries where cheaper costs have allowed Chinese manufactured goods to replace American-made products.
Although Vestas Americas said it plans to establish an American supply chain, other manufacturers, even American-owned ones, have begun building supply chains in countries with cheaper labor costs to provide the thousands of parts that may finally be assembled in the United States. Zhou cited three facilities GE owns in China to produce turbine components, . . .
February 12 addition: "No matter what Congress does to lower the cost of labor, employers won’t hire unless they believe demand will be sufficient to sell whatever the business produces." Editorial, "How Not to Write a Jobs Bill,"New York Times, February 12, 2010, p. A30. The New York Times got that much right. Only by putting money in the pockets of workers -- not their potential employers -- can "demand" be created in that 70% of our economy that is driven by consumers. Unfortunately, the editorial does not take the next logical step and propose a federal jobs program. _______________
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
"It's the Unemployment, Stupid! (brought to you by FromDC2Iowa.blogspot.com*)
Washington's corruption of our economic recovery efforts is painful, embarrassing and so obviously benefiting the rich while ignoring the poor and middle class that it's coming to be as depressing emotionally as it is economically.
Yesterday Tom Ashbrook's "On Point" program from WBUR offered one more example in, "The Housing Wild Card," October 20, 2009. Guests included Diana Olick, real estate correspondent for CNBC; Karl Case, Wellesley College professor of economics and co-author of the Case-Shiller Home Price Index; Thomas Lawler, housing economist and founder, Lawler Economic & Housing Consulting; and Mark Zandi, chief economist and co-founder of Moody’s Economy.com.
The show provided just one more example of corporate greed and a Congress favoring America's wealthiest -- and most generous campaign contributors.
Housing is where a lot of our current economics problems began. Remember?
It's like the story of the doctor who asks, "Have you ever had this before?" The patient nods, and the doctor provides the diagnosis: "Well, you've got it again."
We're about to get it again.
(1) While we took our eyes off of the Federal Reserve last March they went and put another $1.25 trillion into the housing market. ("To provide greater support to mortgage lending and housing markets, the [Federal Open Market] Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year . . ..") Press Release, Federal Reserve, March 18, 2009.
(2) Add to this the mortgage interest deduction that constitutes a $69 billion subsidy to help boost home sales -- a subsidy enjoyed by only 23% of taxpayers, and a disproportionate share of which goes to the wealthiest 1%, given that it applies to homes worth as much as $1 million.
Note that this means that Congress is willing to spend twice as much subsidizing housing for the wealthy as it's willing to spend on low income housing for the poor -- a program it says "we can't afford." Danilo Pelletiere, "Mortgage Interest Deduction," National Low Income Housing Coalition, May 6, 2009. ("In FY08, the Joint Committee on Taxation calculated the cost of the [MID] subsidy to be $67 billion. Though developments in housing markets may put downward pressure on the trend, the cost of the MID is expected to increase to as much as $112 billion by 2012.").
(3) Not satisfied with that largess, the housing profiteers got Congress to give them enough taxpayers' money to provide an $8000 cash subsidy to potential "first time buyers" -- some 355,000 individuals as it turned out who are sufficiently well-off to even contemplate buying a home at a time like this. It can fairly be assumed many of them would have bought homes without this additional $3 billion designed to further help the housing industry. Now the program is about to expire, so they're back with their hands out demanding it be extended, increased to a $15,000 subsidy per buyer, and opened to all (not just first-time) home buyers. And while most economists oppose the plan as folly at best and wasteful corruption at worst, the housing industry may well get its wish.
But where are all these houses coming from? Why, foreclosures, of course. So more of the unemployed, those facing bankruptcy because they've lost their health insurance, or those otherwise too financially strapped to pay their mortgages, will be out on the streets.
And how is this "housing program" going to help our recovery when 70% of the economy is driven by consumer spending? It won't, of course. But we will have wealthier real estate brokers and mortgage lenders, just as we have wealthier Wall Street bankers enjoying million-dollar bonuses as a result of our generosity.
The Wall Street Journal quotes Thomas Lawler's analysis as to why this level of subsidization is folly: "Of course, in the current environment home prices have . . . in most areas of the country, finally adjusted back down to more 'normal' levels . . .; the government is providing massive resources to ensure that mortgage rates remain low; and the biggest obstacle to a rebound . . . is the job outlook. The housing tax credit is an enormously inefficient use of government resources, and it does not really focus on what the economy needs: more job creation, and a return to “normal” growth of households." Nick Timiraos, "Weigh In: Should Congress Extend the First-Time Buyer Tax Credit?,"Wall Street Journal, October 1, 2009.
New York Times columnist Bob Herbert agrees about the need for jobs:
[I]ncreasingly important is the idea of direct government job creation. The recession has absolutely crushed employment opportunities for unskilled, undereducated young people — not just in big cities and rural areas, but in suburban communities as well. Without direct government intervention, the recession is never going to end for them.
During the first half of this year in Illinois, to take one wretched example, just one in four black men in the age group of 20 through 24 had a job.
Nationally during that period, according to the Center for Labor Market Studies at Northeastern University in Boston, “the employment rate of males 16-19, 20-24, and 25-29 were at their lowest values over the past 61 years for which national employment data are available.” That’s for men of all ethnic groups.
“The past,” as William Faulkner told us, “is not dead. It’s not even past.” The lessons of the Works Progress Administration and the Civilian Conservation Corps of the 1930s are right in front of us, ready to be studied, analyzed, updated and applied to the present-day needs of the country.
My own view -- buttressed by [reports regarding] (1) the automobile industry (especially General Motors), (2) retail sales, and (3) unemployment -- is that the best interests of the business community, as well as the American people, will be served by providing public jobs programs, and economic support to the unemployed, rather than continuing to pour billions of dollars into failed and failing businesses. . . .
[A] major part of GM's problem is that laid-off GM workers, and the 10 million other unemployed Americans, don't have the money to buy anybody's cars right now . . ..
Enabling auto executives to have tens of billions of additional dollars to spend at their discretion in postponing bankruptcy doesn't strike me as a solution to anything . . ..
Another problem with Washington's willy-nilly giveaways, aside from the fact that they are unfair, don't work and will ultimately bankrupt our nation, is that they are irrational. . . .
[I]f Obama is looking for economic sectors to which to transfer taxpayers' money, wouldn't the one that represents "two-thirds of the nation's economic activity" make more sense in a recession/depression than bailing out the one that makes $30,000 new vehicles? . . .
Why We Need a Jobs Program
Look at the numbers. There are now over 10 million unemployed. Unemployment stands at 6.5 percent, and is projected to go to 8 percent next year -- 22 percent of whom have been out of work for more than six months, something we haven't seen for a quarter-century. The rates are increasing. Of the 1.2 million jobs lost this year 284,000 were in September and 240,000 in October. [These are, of course, the numbers from a year ago, when this blog entry was written.]
In the 1950s over 50 percent of the unemployed received benefits; today, because of various restrictions, only 32 percent qualify -- more unemployment, more holes in the safety net. . . .
[T]he answers seem, to me, rather obvious.
You can't improve business (profits, returns to shareholders, executive compensation) without improving retail sales; you can't improve retail sales without putting money in the hands, and confidence in the heads, of potential consumers; and unemployed consumers don't have money unless they are provided either unemployment compensation or wages from a public sector job (in an economy with a shrinking private sector). . . .
[E]ither makes more sense than trying to turn an economy around with "trickle down" -- whether tax cuts for the rich, or bailouts for the rich.
[If he was still in the wall poster business,] James Carville, the political consultant who once famously tried to keep presidential candidate Bill Clinton "on message" with the wall sign, "It's the economy, stupid!" . . . , I suspect his wall sign for President Obama might well be, "It's the unemployment, stupid!"
We did this in the 1930s and called it the "Works Progress Administration" and "Civilian Conservation Corps" -- the creations of which we are still enjoying to this day (for example, in our state parks).
Why are we not doing it today? Your guess is as good as mine. But my suspicion is that it has more to do with the big money corruption of our political system than with some new, Nobel-prize-winning insight into the mysteries of economic theory.
We may be Number 37 in the world in health care, but by golly we're Number 1 in greed and economic stupidity. ____________
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson
Our unemployment numbers continue to climb to roughly 10%, with some pockets more than double that, and most economists projecting at least a year before meaningful improvement, noting that the jobs picture is the last to improve when coming out of a recession.
Despite these realities, the response of Congress and the White House has been bailouts for the corporate CEOs credited with the largest campaign contributions rather than America's working men and women.
Excerpts from my earlier recommendations, and the Times' report on the Perry County, Tennessee, project, follow.
My own view -- buttressed by [reports regarding] (1) the automobile industry (especially General Motors), (2) retail sales, and (3) unemployment -- is that the best interests of the business community, as well as the American people, will be served by providing public jobs programs, and economic support to the unemployed, rather than continuing to pour billions of dollars into failed and failing businesses. . . .
[A] major part of GM's problem is that laid-off GM workers, and the 10 million other unemployed Americans, don't have the money to buy anybody's cars right now . . ..
[T]here's little likelihood much of the billions given to GM (whether "loans" unlikely to be repaid, "bailouts," or money said to be for "re-tooling" or research on more energy efficient vehicles) is going to find its way to UAW workers, suppliers and dealers -- unless GM would be stupid enough to increase its production, and inventories, of cars that neither its dealers nor its customers can afford. . . .
If the automobile industry is the lynch pin to economic recovery the new president thinks it is, the solution is to get more money into the hands of consumers -- especially the unemployed (and soon to be unemployed). Enabling auto executives to have tens of billions of additional dollars to spend at their discretion in postponing bankruptcy doesn't strike me as a solution to anything . . ..
Another problem with Washington's willy-nilly giveaways, aside from the fact that they are unfair, don't work and will ultimately bankrupt our nation, is that they are irrational. . . .
I have no more enthusiasm for bailing out, or subsidizing, the retail sector than I have for the automobile sector. If Target's sales are down (as they are), I'm not confident that giving its executives billions of dollars will increase its "discretionary spending" sales to customers who barely have money for food.
But if Obama is looking for economic sectors to which to transfer taxpayers' money, wouldn't the one that represents "two-thirds of the nation's economic activity" make more sense in a recession/depression than bailing out the one that makes $30,000 new vehicles? . . .
Why We Need a Jobs Program
Look at the numbers. There are now over 10 million unemployed. Unemployment stands at 6.5 percent, and is projected to go to 8 percent next year -- 22 percent of whom have been out of work for more than six months, something we haven't seen for a quarter-century. The rates are increasing. Of the 1.2 million jobs lost this year 284,000 were in September and 240,000 in October.
In the 1950s over 50 percent of the unemployed received benefits; today, because of various restrictions, only 32 percent qualify -- more unemployment, more holes in the safety net. . . .
[T]he answers seem, to me, rather obvious.
You can't improve business (profits, returns to shareholders, executive compensation) without improving retail sales; you can't improve retail sales without putting money in the hands, and confidence in the heads, of potential consumers; and unemployed consumers don't have money unless they are provided either unemployment compensation or wages from a public sector job (in an economy with a shrinking private sector).
Given our rotting, unattended, infrastructure (roads, bridges, pipelines, schools) resulting from the last 30 years of "tax cuts" it seems to me, given the same amount of money, that using it to create "jobs" makes more sense than providing it for "unemployment compensation."
But either makes more sense than trying to turn an economy around with "trickle down" -- whether tax cuts for the rich, or bailouts for the rich.
[* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson]
Now read what's happening in Tennessee:
Critics elsewhere may be questioning how many jobs the stimulus program has created, but here in central Tennessee, hundreds of workers are again drawing paychecks after many months out of work, thanks to a novel use of federal stimulus money by state officials.
Here in one of Tennessee’s hardest-hit areas, some workers were cutting down pine trees with chainsaws and clearing undergrowth on a recent morning, just past the auto parts factory that laid them off last year when it moved to Mexico. Others were taking applications for unemployment benefits at the very center where they themselves had applied not long ago. A few were making turnovers at the Armstrong Pie Company (“The South’s Finest Since 1946”).
The state decided to spend some of its money to try to reduce unemployment by up to 40 percent here in Perry County, a rural county of 7,600 people, 90 miles southwest of Nashville where the unemployment rate had risen to above 25 percent after its biggest plant, the auto parts factory, closed.
Rather than waiting for big projects to be planned and awarded to construction companies, or for tax cuts to trickle through the economy, state officials hit upon a New Deal model of trying to put people directly to work as quickly as possible.
They are using welfare money from the stimulus package to subsidize 300 new jobs across Perry County, with employers ranging from the state Transportation Department to the milkshake place near the high school.
As a result, the June unemployment rate, which does not yet include all the new jobs, dropped to 22.1 percent.
“If I could have done a W.P.A. out there, I would have done a W.P.A. out there,” said Gov. Phil Bredesen of Tennessee, a Democrat, referring to the Works Progress Administration, which employed millions during the Great Depression. . . .
The impact has been enormous, all across the county. Even the look of the place is changing, following the old W.P.A. model. In addition to the jobs for adults, there are 150 summer jobs for young people, some of whom have been working with resident artists to paint murals depicting local history on the buildings along Main Street in Linden, the county seat.
Over all, two-thirds of the new jobs are in private sector businesses, which are reimbursed by the state for the salaries of eligible stimulus workers. Some, in retail, might be hard to sustain when the stimulus money runs out in September 2010. Other businesses say the free labor will help them expand, hopefully enough to keep a bigger work force.
The Commodore Hotel Linden, a newly restored 1939 hotel that has brought new life to downtown, has seen an increase in its bookings since it has expanded its staff thanks to the stimulus. And the Armstrong Pie Company expects to be able to keep on the new bakery assistants and drivers it hired with stimulus money, saying the new workers have helped the company triple its pie production and expand its reach through central Tennessee. . . .
My only disagreement with the Times' story is its characterization of the Perry County approach as "novel." As it alludes later in the piece, we did this in the 1930s and called it the "Works Progress Administration" and "Civilian Conservation Corps" -- the creations of which we are still enjoying to this day (in, for example, our state parks).
Why are we not doing it today -- outside of Perry County? Your guess is as good as mine. But my suspicion is that it has more to do with the big money corruption of our political system than with some new, Nobel-prize-winning insight into the mysteries of economic theory. ____________
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson
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.
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.
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."
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson
November 14, 2008, 10:45 a.m., 3:20 p.m.; November 15, 2008, 10:20 a.m. (video of Peter Schiff's prescient predictions during last couple of years); November 16, 2008, 11:00 a.m. (Sunday Register's consistent editorial; bottom of blog entry)
"Workers of the World Unite You Have Nothing You Need Use But Your Brains"
Forgive the distant play on "workers of the world unite, you have nothing to lose but your chains;" the point is that the observations of workers and all the rest of us are worth something when evaluating the judgments of the "experts."
On balance, I'm a proponent of a meritocracy, expertise, graduate and post-graduate education, and looking to scientists and experts rather than ideologues for solutions to public policy challenges.
But it's also reassuring when ordinary folks like myself, relying on instincts, intuition and such limited information and understanding as we possess, can come to the same conclusions ultimately adopted by the experts.
(And I won't even note the instances when the "experts" prove to be not all that expert -- except to provide you the following video look-back on how Fox's "experts" trashed the prescient predictions of Peter Schiff.)
That amateur's instincts can often prove right is fortunate for a blogger like myself, since I enjoy expressing opinions on dozens of public policy topics for which I have neither formal educational training nor the expertise of "experience."
But there may be a lesson here for the experts as well. In a variation on "when the people will lead their leaders will follow," when the public says "the emperor has no clothes" it might well behoove the experts to at least take a second look at their naked proposals.
So it is with the coming global economic collapse.
Please note that my point is precisely the opposite of "we're smarter than the experts." My point is that even though many of us are not smarter than the experts, even though we don't have the educational credentials or experience that they do, doesn't mean that we aren't capable -- drawing on what we do have -- of coming up with positions and understandings that ultimately prove to be correct.
When I wrote the op ed column, "Ten Questions for Bush Before War" in February of 2003 (along with many similar analyses at that time), I wasn't the only "non-expert" who was able to predict, pretty much step-by-step, the disasters for America that would result from our invasion and occupation of Iraq.
When Secretary Paulson announced his three-page $700 billion bank bailout plan many noted that if we were going to go down that road we should at least give the taxpayers some equity in return for being bilked, rather than just buy up the banks' securitized worthless mortgages. I was among them: Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan; Senate Bill: Wrong Plan, Favoring Wrong People, at the Wrong Time," October 2, 2008. Now even Paulson has reversed course and acknowledged we were right.
Today's issue involves the automobile industry bailout being pushed by the Democratic Party leadership -- President-elect Obama, Speaker Pelosi, and Senate Majority Leader Reid. Indeed, apparently Obama made this among his top priorities during the limited time he had with President Bush (who has opposed the idea) during their visit. Declan McCullagh, "Big Three Bailout? Not So Fast," CBSNews.com, November 12, 2008 ("The labor movement spent, according to Financial Week, a whopping $385 million to elect Obama and other Democrats last week. Nobody writes such large checks without expecting something: now it's payback time.").
GM's problems are fundamental and have been for decades.
Management has been unimaginative, resistant to change, and bureaucratized beyond belief. It has opposed progress of all kinds: seat belts, air bags, and bumpers that might withstand a crash at more than two miles per hour; small cars when customers wanted them and foreign car manufacturers were gaining an increasing share of our domestic market by providing them; efforts to reduce greenhouse gases and climate change; their lobbying for tariff protections rather than confronting competition in an open marketplace; dragging their feet on hybrids and alternative fuel vehicles or even improving the gas mileage of conventional vehicles; continuing to manufacture trucks and SUVs in the face of rising gas prices. See, Declan McCullagh, "Big Three Bailout? Not So Fast," CBSNews.com, November 12, 2008 ("Detroit's problems aren't caused by a one-time slump. They can't be fixed by another infusion of cash. One cause is that union labor and legacy costs are too high and make the so-called Big Three companies uncompetitive. Another is that their profitability is tied to large, heavy trucks and SUVs that Americans no longer want to buy, at least in such large numbers. That's just common sense.").
The company has permitted itself to assume liabilities (for employees' health care and pension plans among other things) far beyond its ability to pay. And now it's burning through cash at a rate that will bring it to bankruptcy by early next year. Sales of internal combustion vehicles are down dramatically around the world -- but far more so for GM than for those made at American plants by American workers by Toyota, Honda, BMW, and Kia. "Sales of cars and auto parts plunged 23.4 percent from last year, . . . and 31.9 percent in October . . . the lowest recorded in 25 years and analysts predict the market will remain weak into 2009." Jack Healy, "A Record Decline in October’s Retail Sales,"New York Times, November 14, 2008; Declan McCullagh, "Big Three Bailout? Not So Fast," CBSNews.com, November 12, 2008 ("Honda kept its focus on smaller cars such as the Civic and Accord, and saw its sales continue to increase this summer while GM, Ford, and Chrysler have slid.").
And today we learn European insurers are now refusing to provide insurance to suppliers of the Big Three.
There would seem to be little justification for a bailout -- nor does there seem to be a realistic business plan in place regarding what the money will be used for, what it will accomplish (especially in this economy), where it will get us and when and why.
To the extent the earlier, special $25 billion taxpayer gift is to be used for re-tooling and design of new, more "green" vehicles, (a) is that a business the taxpayers really want to get in? (b) isn't the market (e.g., Toyota) responding to that desire? (c) if not, is there a point to doing it if customers won't buy the cars (e.g., how many Volts will sell at $40,000 a copy?) (d) if we want any private institution to undertake such research, why on earth would we pick GM -- whose executives have had decades to provide this response and have fought doing so? (e) even if some GM employees had the ability to pull this off, what is the likelihood the company will be able to do in the next few months what it has been unwilling to do for years? and (f) if it takes three years to bring a car from design to showroom, how is that going to save a company that is less than six months from bankruptcy?
So what, exactly, is going to be done with the near-$100 billion the Democrats want to give the (formerly) "Big Three" besides continuing excessive executive compensation and payments to shareholders? Workers are going to continue to be laid off -- which won't make it any easier for them to buy cars (a principle that Henry Ford understood in setting his workers' wages in the early 20th Century). There's little point in the few who will be retained making cars for dealers who are closing their showrooms and don't want the inventory, or potential customers who have lost their jobs and can't pay their mortgages.
And this morning one of my favorite conservatives (because he's smart, rational, and rarely ideological or mean spirited), David Brooks, sums up the situation as well as anyone. David Brooks, "Bailout to Nowhere,"New York Times, November 14, 2008. Here are some excerpts:
Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.
But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. . . .
It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. . . .
It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state. . . .
G.M. and Chrysler . . . are not innocent victims of this crisis. To read the expert literature on these companies is to read a long litany of miscalculation. . . .
There seems to be no one who believes the companies are viable without radical change. A federal cash infusion will not infuse wisdom into management. It will not reduce labor costs. It will not attract talented new employees. . . .
In short, a bailout will . . . just postpone things. . . .
[T]he most persuasive experts argue that bankruptcy is the least horrible option. Airline, steel and retail companies have gone through bankruptcy proceedings and adjusted. It would be a less politically tainted process. Government could use that $50 billion — and more — to help the workers who are going to be displaced no matter what. . . .
Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.
There you have it.
We have a mechanism in place to deal with the auto industry's problem: Chapter 11 bankruptcy reorganization. It's clearly a preferable "least-worst solution" to bailouts. Some corporate executives will be out of work, but they deserve to be -- indeed must be if the companies' prospects are to improve. Shareholders will suffer a loss -- but their stock has already declined some 90% in value, so it's not like Chapter 11 is their biggest problem. "Shares in American automakers, the Ford Motor Company and General Motors, have fallen to multi-decade lows as the companies reported billions in losses." Jack Healy, "A Record Decline in October’s Retail Sales,"New York Times, November 14, 2008.
Economic support should go to workers, not named, pre-existing corporations. (That means jobs programs, unemployment compensation, food stamps, healthcare and retraining programs.) The corporations' physical assets aren't going anywhere. As Brooks points out, they can (and will) continue to be operated either in Chapter 11, or by whatever other companies may acquire them at market value. (As a sidenote, our largest local mall, Coral Ridge, will probably be in Chapter 11 by early 2009; the theater, big box stores, restaurants and skating rink will continue to operate -- or, if not, they will be reacting to their own economic conditions, not those of the mall owner.)
See, Amitai Etzioni, "Bail Out the Workers, Not the Plants," The Huffington Post, November 11, 2008; Declan McCullagh, "Big Three Bailout? Not So Fast," CBSNews.com, November 12, 2008 ("The better solution is a simple one: Allow automakers to declare bankruptcy. Contrary to popular belief, that will not mean the end of a company such as GM, which has indicated it may run out of cash by the end of this year. Under Chapter 11, a bankruptcy judge will weigh the different interests of GM's creditors, labor unions, shareholders, and so on, and the resulting company will emerge leaner and stronger. Many current customers of United Airlines, Texaco, Global Crossing, and Pacific Gas and Electric probably don't even know that those companies once filed for Chapter 11."). Micheline Maynard, "G.M.’s Troubles Stir Question of Bankruptcy vs. a Bailout,"New York Times, November 12, 2008 ("But not everyone agrees that a Chapter 11 filing by G.M. would be the disaster that many fear. Some experts note that while bankruptcy would be painful, it may be preferable to a government bailout that may only delay, at considerable cost, the wrenching but necessary steps G.M. needs to take to become a stronger, leaner company.").
"Under it [Chapter 11], creditors took some losses, shareholders even bigger ones, some managers' heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn't pay a penny.
So why, exactly, is the Treasury substituting government bailouts for chapter 11? . . . Wall Street's major banks and insurance giant AIG . . . [don't] have to be bailed out. They could be reorganized under bankruptcy protection. . . .
And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs -- including jobs rebuilding the nation's crumbling infrastructure and finding alternative sources of energy.
It's not the big guys who need rescuing. It's the small. Right now, the government has its priorities upside down.
As a final, not insignificant comment note that this ill-considered, seeming capitulation to the auto industry and UAW is not an example of "reaching across the aisle" to serve the interests of Obama's oft-heralded "United States of America" (as distinguished from our "Red States" and "Blue States"). Whatever the red state Republicans' motives may be, they are opposed to this idea. (Not incidentally, they give many of the same reasons for their opposition as the rest of us.) Coupled with Obama's earlier support for the original $700 billion bailout, and his prior vote supporting immunity for the telephone companies that spied on us in violation of law, it does not bode well for the new Administration's ability to offer "change" (beyond freeing up stem cell research) to a "broken" Washington, subservient to corporate power.
The U.S. unemployment rate hit a 14-year high of 6.5 percent last week. The fear of losing a job is compounded by the difficulty in finding another if you're laid off. . . .
Iowa State University economist and professor emeritus [Neil Harl] said it's not out of the realm of possibility that the United States could see unemployment rates [of] some 25 percent . . . and "there's nothing to indicate [employment rates] are going to improve." . . .
What has been tried so far hasn't worked so well.
Tax cuts pushed by the Bush administration didn't trickle down to create sustained job growth. Rebate checks didn't sufficiently stimulate the economy. Recent investment-bank bailouts haven't done enough to boost lending.
It's time for a better, bolder strategy. President-elect Barack Obama should make job creation his No. 1 priority. . . . Spending dollars to create jobs benefits workers directly and boosts the overall economy. . . .
The federal government could quickly infuse money into states to fund projects that are already planned -- including roads, bridges, sewers, parks and trails. That would create jobs for unemployed Americans, [send] money rippling through the economy [and] this country would get more of its infrastructure updated [strengthening] the economy against global competition for years to come. . . .
In the summer of 1932, Franklin D. Roosevelt . . . began putting the country to work through the Works Progress Administration.
Within a few years, millions of Americans were working to build infrastructure -- improvements that are still around today. . . .
Create jobs. Boost consumer confidence. Put the country on track for a brighter economic future.
It makes more sense than pouring more billions into bailouts.
Because When Your Automobile (Industry) is in the River It Makes More Sense to Go For the Shore Than to Continue Bailing it Out
Executive Summary: This morning's (and probably this weekend's) blog entry is stimulated by President-Elect Obama's comments yesterday (November 7) regarding the need for taxpayers to transfer billions of dollars of their own money to the automobile industry.
My own view -- buttressed by the New York Times' reports yesterday and today, below, regarding (1) the automobile industry (especially General Motors), (2) retail sales, and (3) unemployment -- is that the best interests of the business community, as well as the American people, will be served by providing public jobs programs, and economic support to the unemployed, rather than continuing to pour billions of dollars into failed and failing businesses.
Discussion.
The Automobile Industry.
Yesterday Obama said, "I have made it a high priority for my transition team to work on . . . policy options to help the auto industry."
If you haven't yet learned the vocabulary, "policy options" is Obama-speak for transfers of, ballpark, $50-100 billion of additional taxpayers money to GM and Ford.
It seems to me when the ship is going down the better part of wisdom is to put the passengers on the lifeboats rather than continue bailing.
GM went through nearly $7 billion in cash in the course of losing over $4 billion during the last three months! Pouring more billions of taxpayers' money into this bottomless pit can do little more than postpone the agony for three or four more months.
GM's problem is that customers don't want to buy its cars. In part that's because for decades GM has been making cars customers didn't want to buy -- while Toyota, manufacturing cars in the U.S., providing jobs for American workers, has been capturing ever-larger shares of the market. Indeed, if the taxpayers are going to be forced into the automobile business wouldn't they get more bang for their billions of bucks by giving them to Toyota, a company that makes cars they do want to buy? Wouldn't that provide more jobs, and get more dollars flowing through the economy? As long as we're going socialist, doesn't it make more sense to reward business success than failure?
But another major part of GM's problem is that laid-off GM workers, and the 10 million other unemployed Americans, don't have the money to buy anybody's cars right now (or see higher priorities for the limited funds they do have).
I'm fully aware of the jobs involved in GM's dealerships and suppliers. But there's little likelihood much of the billions given to GM (whether "loans" unlikely to be repaid, "bailouts," or money said to be for "re-tooling" or research on more energy efficient vehicles) is going to find its way to UAW workers, suppliers and dealers -- unless GM would be stupid enough to increase its production, and inventories, of cars that neither its dealers nor its customers can afford. (And UAW members pension funds are guaranteed by the taxpayers anyway.)
If the automobile industry is the lynch pin to economic recovery the new president thinks it is, the solution is to get more money into the hands of consumers -- especially the unemployed (and soon to be unemployed). Enabling auto executives to have tens of billions of additional dollars to spend at their discretion in postponing bankruptcy doesn't strike me as a solution to anything except perhaps helping to hold Michigan's electoral votes for the Democrats in 2012.
Other industry sectors -- especially retail.
Another problem with Washington's willy-nilly giveaways, aside from the fact that they are unfair, don't work and will ultimately bankrupt our nation, is that they are irrational.
As the New York Times reports, below, "Consumer spending represents two-thirds of the nation’s economic activity, and analysts said the striking sales declines at retailers almost certainly portended an extended, severe recession. . . . Sales at the nation’s largest retailers fell off a cliff in October, casting fresh doubt on the survival of some chains . . .." ("Neiman Marcus . . . dropped nearly 28 percent in October . . ..")
Now I have no more enthusiasm for bailing out, or subsidizing, the retail sector than I have for the automobile sector. If Target's sales are down (as they are), I'm not confident that giving its executives billions of dollars will increase its "discretionary spending" sales to customers who barely have money for food.
But if Obama is looking for economic sectors to which to transfer taxpayers' money, wouldn't the one that represents "two-thirds of the nation's economic activity" make more sense in a recession/depression than bailing out the one that makes $30,000 new vehicles?
And surely there are other sectors of the economy that would like to nominate themselves.
Why We Need a Jobs Program
Look at the numbers. There are now over 10 million unemployed. Unemployment stands at 6.5 percent, and is projected to go to 8 percent next year -- 22 percent of whom have been out of work for more than six months, something we haven't seen for a quarter-century. The rates are increasing. Of the 1.2 million jobs lost this year 284,000 were in September and 240,000 in October.
In the 1950s over 50 percent of the unemployed received benefits; today, because of various restrictions, only 32 percent qualify -- more unemployment, more holes in the safety net.
The Times reports, "'The economy is slipping deeper into a recessionary sinkhole that is getting broader,' said Stuart G. Hoffman, chief economist at PNC Financial Services Group in Pittsburgh."
Put it all together and the answers seem, to me, rather obvious.
You can't improve business (profits, returns to shareholders, executive compensation) without improving retail sales; you can't improve retail sales without putting money in the hands, and confidence in the heads, of potential consumers; and unemployed consumers don't have money unless they are provided either unemployment compensation or wages from a public sector job (in an economy with a shrinking private sector).
Given our rotting, unattended, infrastructure (roads, bridges, pipelines, schools) resulting from the last 30 years of "tax cuts" it seems to me, given the same amount of money, that using it to create "jobs" makes more sense than providing it for "unemployment compensation."
But either makes more sense than trying to turn an economy around with "trickle down" -- whether tax cuts for the rich, or bailouts for the rich.
Referenced Times articles below:
President-Elect Obama's News Conference
Here is an excerpt from a transcript of President-Elect Obama's news conference of November 7, 2008, regarding automobile industry bailouts:
The news coming out of the auto industry this week reminds us of the hardship it faces, hardship that goes far beyond individual auto companies to the countless suppliers, small businesses and communities throughout our nation who depend on a vibrant American auto industry.
The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil.
I would like to see the administration do everything it can to accelerate the retooling assistance that Congress has already enacted. In addition, I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States of America.
And I was glad to be joined today by Governor Jennifer Granholm, who obviously has great knowledge and great interest on this issue.
I've asked my team to explore what we can do under current law and whether additional legislation will be needed for this purpose.
General Motors is edging closer to running out of money, as slumping sales and deteriorating economic conditions drove the automaker to a larger-than-expected loss of $4.2 billion in the third quarter . . ..
The carmaker’s results came on the heels of similar dismal quarterly earnings from the Ford Motor Company . . ..
G.M. said its revenue in the third quarter declined 13 percent . . . on weak demand in its core North American and European markets. . . .
The company also reported that it burned through $6.9 billion in cash during the quarter, and it ended the period with just $16.2 billion. The rapid depletion of its cash puts G.M. perilously close to dropping below the level needed to finance its operations. . . .
G.M. said that it “will fall significantly short” of the cash needed to run its business in the first half of 2009 unless economic conditions improve and the company gets access to financial aid from the federal government. . . .
The rating agency Standard & Poor’s cut G.M.’s debt by one grade to CCC+ on Friday, citing concerns about its cash supply. . . .
Earlier, the Ford Motor Company said that it burned through $7.7 billion in cash in the third quarter . . ..
Ford’s automotive business lost $2.9 billion in the quarter, and the company announced more cuts to conserve cash . . ..
Over all, Ford said . . . Excluding . . . one-time items, the company lost $2.7 billion. . . .
The company will eliminate as many as 2,200 salaried jobs by January . . ..
Underscoring the dire circumstances, the chief executives of G.M., Ford and Chrysler met with Nancy Pelosi, the House speaker, and Harry Reid, the Senate majority leader, on Thursday about an emergency loan package. The meeting focused on a request by automakers for up to $25 billion in loans to help the companies get through the worst vehicle market in 15 years and avoid bankruptcy protection. . . .
The loan request is in addition to $25 billion in low-interest loans administered by the Energy Department to assist automakers in developing more fuel-efficient vehicles.
In his news conference Friday afternoon in Chicago, President-elect Barack Obama urged the current administration to do everything possible to accelerate disbursement of $25 billion for the vehicles. . . .
Ford is also using up cash at a surprising rate — $7.7 billion in the third quarter. . . .
The automaker is moving to increase its cash by as much as $17 billion by cutting more jobs . . ..
Sales at the nation’s largest retailers fell off a cliff in October, casting fresh doubt on the survival of some chains and signaling that this will probably be the weakest Christmas shopping season in decades.
The remarkable slowdown hit luxury chains that sell $5,000 designer dresses as badly as stores that offer $18 packs of underwear, suggesting that consumers at all income levels are snapping their wallets shut.
Sales at Neiman Marcus, the luxury department store, dropped nearly 28 percent in October compared with the same month last year. . . .
Of the more than two dozen major retailers that reported on Thursday, most had sales declines at stores open at least a year, the majority of the decreases in double digits. . . .
Consumer spending represents two-thirds of the nation’s economic activity, and analysts said the striking sales declines at retailers almost certainly portended an extended, severe recession. The reports highlighted once again the depth of the economic problems confronting President-elect Barack Obama.
Consumers are cutting their spending for many reasons, but high on the list is the weakening employment picture. . . .
“October was every bit as bad we feared,” said John D. Morris, a retailing analyst with Wachovia. “Maybe worse. October’s numbers were so disappointing, particularly in the final week, which had to leave retailers in a state of high anxiety going into the holiday season.” . . .
A few retailers have strong balance sheets, but many do not, and with credit hard to find they can ill afford a disastrous Christmas season. Analysts said they expected a new wave of bankruptcies after the first of the year.
The American economy lost another 240,000 jobs in October, the government reported Friday, as cash-strapped consumers pulled back and businesses hunkered down, intensifying the distress gripping much of the country.
The unemployment rate spiked to 6.5 percent from 6.1 percent, the highest level since 1994. Many analysts now expect unemployment will reach 8 percent by the middle of next year.
Coupled with revisions to September’s data — which now show a loss of 284,000 jobs . . . — the economy has shed 1.2 million jobs since the beginning of the year. . . .
“The economy is slipping deeper into a recessionary sinkhole that is getting broader,” said Stuart G. Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. “The layoffs are getting larger, and coming faster. We’re likely to see at least another six months of more jobs reports like this.” . . .
Democratic leaders in the House said this week that they would seek swift passage of $60 billion to $100 billion worth of measures that would extend unemployment benefits and food stamps, while aiding states whose tax revenues have plummeted. They would then pursue a broader package of measures that could reach $200 billion after Mr. Obama takes office in January.
The Bush administration has criticized Democratic proposals for immediate aid, raising the specter of a veto. . . .
The number of unemployed Americans increased by 603,000 in October to 10.1 million — the largest number since 1983. More than 22 percent of all unemployed people have been out of work for six months or longer — another level not reached in a quarter-century.
Only 32 percent of all unemployed people were drawing state benefit checks in October because of restrictions on eligibility for part-time workers and those who were not in their jobs long enough to qualify. More than half of all unemployed people drew benefits in the 1950s, and about 45 percent received state checks during the last recession in 2001.
“It’s a national shame, the state of our safety net,” said Andrew Stettner, deputy director of the National Employment Law Project in New York. “We need to be helping these families avert financial disaster, and help make up for the loss of consumer demand, and the best way we can do that is to get people unemployment checks.” . . .
The latest monthly snapshot of the jobs market reinforced how the economy remains gripped by a potent combination of troubles — plunging housing prices, tight credit and shrinking paychecks — with all three in a downward spiral.
Companies have been hiring tepidly and laying off workers throughout the year, as business has slowed, while cutting working hours for those on the payroll. That trend continued in October: The so-called underemployment rate — which includes people working part-time for lack of full-time positions and those who have given up looking for work — rose to 11.8 percent, up from 8.4 percent a year earlier.
“What you see now is this cascading of unemployment moving from hours cut to hiring freezes to layoffs,” said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. “At this point, we have a very toxic combination of all of the above. There’s almost no economic activity out there that’s going to generate jobs right now. This is the front edge of the deeper trough of the recession. It’s going to get worse before it gets better.”
Wages have effectively shrunk for most workers, as rising costs for food and fuel have more than absorbed meager increases in pay. . . .
All of this came on the heels of the revised September data showing that 284,000 jobs were lost that month — the worst toll since November 2001, in the aftermath of the terrorist attacks in New York and Washington.
Fewer people working translates into less spending power: Consumer spending dropped between July and September — the first quarterly decline in 17 years — further eroding the motivation for businesses to hire.
Recent days have offered fresh indications of trouble. On Thursday, major retailers reported a sharp pullback in sales in October, presaging what is likely to be the weakest holiday spending in many years.
The annual pace of auto sales fell off in October, down 15 percent compared to September, according to analysis from Goldman Sachs.
The widely watched Institute for Supply Management survey fell in October to depths last seen 26 years ago, reflecting shrinking industrial activity and suggesting weakening demand for goods as the economy slows. . . .
Many economists expect this picture to worsen. Though a $700 billion taxpayer-financed bailout has staved off fears of an imminent collapse and restored some order to the financial system, it has not persuaded banks to lend freely. Credit remains tight for businesses and homeowners. . . .
Meanwhile, here's the list of persons on President-Elect Obama's economics team. By going to the New York Times site for this list, linked below, you can find out more about each one from links provided by the Times. Their bios are not my focus this morning, so I haven't done that -- with the result that what I'm about to say may be off the mark.
But it looks to me that, in terms of "economic expertise," nine of the 17 are primarily business persons (which is not to say they don't have some very practical understanding of "economics;" Buffett, Campos, Daley, Donaldson, Ferguson, Mulcahy, Parsons, Pritzker, Schmidt), three are primarily politicians (Bonior, Grandholm, Villaraigosa), and five combine an academic background and experience focusing on national economic policy (Reich, Rubin, Summers, Tyson, Volker).
Bringing these folks together for part of a day, and having them on display at the President-Elect's first news conference, primarily serves a public relations show and political purpose: it reassures the business community that it needn't panic from its fear there really will be "change," that Obama is getting his advice from folks who are familiar and "solid," no radical economic innovators there. There's a substantive benefit from such a calming move as well, when at least some of what's going on in an economic meltdown is mental.
There's also a substantive benefit from including business representatives, goodness knows.
And of course I have no reason to believe there is anyone in the group who is not selfless, intelligent, knowledgeable, ethical, and offering what he or she truly believes is in the nation's best interest when offering advice to the President-Elect.
But I would feel a little more confident of the group's advice if it included a little heavier weighting from those of the nation's academic and other economists with expertise in public finance -- along with at least one or two of those with less conventional thinking.
Here's the list:
DAVID E. BONIOR Academic; former Democratic Congressman from Michigan; John Edwards’s campaign manager.
WARREN E. BUFFETT Billionaire investor and chairman of Berkshire Hathaway; expected to take part by telephone.
ROEL C. CAMPOS Washington lawyer; former member of the Securities and Exchange Commission; former broadcasting executive.
WILLIAM M. DALEY Senior executive at JP Morgan Chase; former Commerce Secretary; chairman of Al Gore’s presidential campaign.
WILLIAM H. DONALDSON Former chairman of the S.E.C.; long career in investment banking, higher education and government.
ROGER W. FERGUSON Jr. Chief executive of TIAA-CREF, the private financial services company; former vice chairman of the Federal Reserve.
JENNIFER M. GRANHOLM Governor of Michigan.
ANNE M. MULCAHY Chairwoman and chief executive of Xerox.
RICHARD D. PARSONS Chairman of Time Warner; former banker.
PENNY S. PRITZKER Senior executive, Hyatt; national finance chairwoman for the Obama campaign.
ROBERT B. REICH Author, academic, former Labor Secretary.
ROBERT E. RUBIN Chairman of Citigroup; former Treasury Secretary.
ERIC E. SCHMIDT Chairman and chief executive, Google.
LAWRENCE H. SUMMERS Economist, academic; former Treasury Secretary.
LAURA D’ANDREA TYSON Academic; former chairwoman of the President’s Council of Economic Advisors and the National Economic Council.
ANTONIO R. VILLARAIGOSA Mayor of Los Angeles.
PAUL A. VOLCKER Former chairman of the Federal Reserve.
Remember when the I-35W bridge over the Mississippi River in Minneapolis collapsed? That was one of those cards. It got our attention -- briefly. [Photo credit: Minnesota Department of Transportation]
Only last week this happened near Battle Creek, Michigan. Eric D. Lawrence and Brent Snavely, "Fumes from oil leak creep over Battle Creek," Detroit Free Press, July 27, 2010 ("An estimated 840,000 gallons of oil leaked into a creek Monday that feeds into the [Kalamazoo] river").
