Jon Stewart hosted John Yoo on "The Daily Show" this week, and essentially gave the guy a free pass.

As Deputy Assistant Attorney General in 2003, John Yoo was the author of the infamous "torture memo" which argued that torture was allowable if the physical pain was anything less than "death, organ failure, or the permanent impairment of a significant bodily function." This memo, signed by Yoo, is available at the website of the ACLU at this link. In a debate in 2006 with Notre Dame professor Doug Cassell, Yoo apparently justified even the torture of children, in this exchange:

Cassel: If the President deems that he's got to torture somebody, including by crushing the testicles of the person's child, there is no law that can stop him?
Yoo: No treaty.
Cassel: Also no law by Congress. That is what you wrote in the August 2002 memo.
Yoo: I think it depends on why the President thinks he needs to do that.

Torture is explicitly prohibited by the Geneva Conventions; the 1984 Convention Against Torture; the 1948 Universal Declaration of Human Rights; the International Covenant on Civil and Human Rights; and the American Convention on Human Rights. Most scholars also believe torture violates the U.S. Constitution's prohibition on "cruel and unusual punishment."

Jon didn't raise any of these issues with Yoo.

Last spring week, a Spanish court opened a criminal investigation against Bush administration officials, including John Yoo, for violating international law in providing the legal framework for the U.S. government's use of torture. (See my previous post on this). 

By almost any measure, the decisions of Yoo and his superiors were legally incompetent. At the very least, their recommendations, and the decisions taken by President Bush, were violations of international law. They come close to crimes against humanity. They should be brought to account in this country, under American law. But Yoo, far from facing indictments in the U.S. continues to teach at one of the most prestigious law schools in the U.S., and continues to find a hearing for his views in the pages of the New York Times and the Wall Street Journal. 

Shameful. 

And we expect more from Jon Stewart!

Cross-Posted from The End of the American Century
Indiana, like most states, is facing a budget crisis, and Governor Mitch Daniels (President Bush's former Budget Director) recently proposed cutting $300 million from K-12 education budgets--3.5% of the total. This came on the heels of some searing stories in the Indianapolis Star about the dismal state of public schools in the city.

The Governor argued that he "had no choice." But I am always wary when someone makes that assertion. We always have choices. The issue is priorities, not a lack of choice. Indiana had no difficulty, for example, raising $720 million to build a new professional football stadium.

Money alone will not solve the problems of public education in Indiana, or in the U.S. But inadequate funding is one of the problems, and budget cuts will simply exacerbate those problems. One reason that the U.S. is falling behind globally in education, and why Indiana is lagging nationally, is because of low levels of funding for education. According to U.N. figures, the U.S. ranks 45th among the countries of the world in public spending on education, as a proportion of the economy. Among the 50 states Indiana ranks #33 in per capita expenses for K-12 education (U.S. Census Bureau data).

It should be no wonder, then, that our schools perform so poorly compared to others, both globally and nationally. The high school graduation rate in Indiana is 73%, placing us in the bottom half of the 50 states. Even worse, Indianapolis ranks dead last among the nation's 50 largest cities in high school graduation rates

Our spending on education is low, in large part because our state revenues are low. While there has been a big hullabaloo about property taxes in the state, they are overall low compared to other states. As a proportion of household income, they rank 34th among the 50 states. Indiana's income tax rate is also low, especially given the "flat" rate of 3.4%. Most states have "bracketed" tax rates (as for federal income taxes), which require wealthy people to pay a higher rate than poor people. Almost all such states have top brackets above 5% of income. 

So we are getting what we pay for. We have low taxes, low funding for public education, and poor schools. One choice--a necessary one in my view--is to raise taxes, especially on those who can most afford it, and begin providing funding that the schools deserve. We have choices.

I was absolutely stunned to read this quotation from Dick Armey, the former House Republican leader, in a speech he gave recently in North Carolina: 

"Nearly every important office in Washington, D.C., today is occupied by someone with an aggressive dislike for our heritage, our freedom, our history and our Constitution."

It is inconceivable that Armey, who worked so long in Washington, actually believes this. Could he actually come up with some names of people that fit in that category? Probably not. So one can only conclude that Armey deliberately lied when he said this to a crowd of supporters in Hickory, N.C. 

Since retiring from the House in 2003 has worked as a lobbyist for a big law firm, while also serving as chairman of a conservative nonprofit called FreedomWorks, which is opposed to "big government." A story on him, and how he "has taken his politics and ideas to the right-wing protest movement," appeared in the November 8 issue of the New York Times Magazine.

Later, in discussing the health care reform with a reporter, he admitted that he did not believe some of the extreme charges--for example, about "death panels"--but said that "if people want to believe that, it's O.K. with me."

This is demagoguery, fear- and hate-mongering that has no place in the U.S. political arena, though it is increasingly dominating and poisoning the political process, and American democracy. Armey should be ashamed of himself; instead, he seems to revel in the way his provocative lies stirs up the political pot.

President Obama called attention to this phenomenon in his Afghanistan speech on Wednesday night, where he called for a return to the spirit and values that unite us as Americans:

"we, as a country, cannot sustain our leadership, nor navigate the momentous challenges of our time, if we allow ourselves to be split asunder by the same rancor and cynicism and partisanship that has in recent times poisoned our national discourse."

"I refuse to accept," the President continued, "the notion that we cannot summon that unity again. I believe with every fiber of my being that we -- as Americans -- can still come together behind a common purpose. For our values are not simply words written into parchment -- they are a creed that calls us together, and that has carried us through the darkest of storms as one nation, as one people."

We can disagree about policies, and the role of government, and the rights of the individual vs. the needs of the community. That is all part of the political process. But we need to speak out against, and call to account, people like Dick Armey and Glenn Beck who deliberately lie and deliberately foster hate and division.

Cross-Posted from The End of the American Century

It is not just the American economy that is bankrupt, but the profession of economics as well. It is partly the interaction of these two that has led to the collapse of the American economy and the huge economic hole we find ourselves in.

Paul Krugman provides a devastating critique of his own profession in the Sept. 6 New York Times Magazine , in an essay entitled "How Did Economists Get it So Wrong?" Krugman, a Princeton economist, New York Times columnist and Nobel prize winner, believes that

American economics, as a field "got in trouble because economists were seduced by the vision of a perfect, frictionless market system."

The profession was blind to the possibility of catastrophic failures in a market economy, he asserts.

In a June lecture at the London School of Economics, Krugman argued that most

macroeconomics of the past 30 years was "spectacularly useless at best, and positively harmful at worst."

Others besides Krugman are dissecting the economics field, and finding serious problems with it. Britain's influential Economist magazine had a cover story (7/18) on "Modern Economic Theory: Where it Went wrong--and how the crisis is changing it." They quote the LSE's Willem Buiter saying that a training in modern macroeconomics was "a severe handicap" at the onset of the financial crisis. The main problem was that in many macroeconomic models, insolvencies simply cannot occur.
So much for those models.

The problem of economics is even worse, I think, because the discipline has been so intolerant of dissenting views. Modern economic theory is as much an ideology as anything else, with a faith in the market that ignores both reality and those who challenge the dominant paradigm. As the New York Times put it in a story last March:

"For years, economists who have challenged free market theory have been the Rodney Dangerfields of the profession. Often ignored or belittled because they questioned the orthodoxy, they say, they have been shut out of many economics departments and the most prestigious economics journals. They got no respect."

I saw this firsthand at my university a decade ago, when we were attempting to create a department of economics within the college of liberal arts and sciences. I was on the search committee to hire an economics professor to begin building that program. But it soon became clear that there was a basic inconsistency between the goals of the liberal arts curriculum--free inquiry, critical thinking, competing ideas--and that of the economics profession. The candidates we considered most interesting , with provocative ideas and wide-ranging interests, were largely outcasts in their own discipline, which favored narrow specialties, and strict adherence to the free market ideology. "They got no respect" from the economics discipline, so didn't have the necessary credentials, and couldn't be hired. Eventually, the university gave up on trying to create an economics department in the liberal arts college.

Not only is the narrow ideology of modern American economics inconsistent with the traditions of critical thinking, it has proved totally incompetent at predicting the crisis, or figuring out how to get out of it. There are a few exceptions, like Paul Krugman, Yale's Robert Schiller, and Columbia's Joseph Stiglitz--all Nobel laureates--and some economics writers like the New York Times'  David Leonhardt. But until now, most of them have been voices in the wilderness, trying unsuccessfully to point out the problems of mounting debt, growing inequality, and neglect of economic and social infrastructure.

President Obama , I believe, recognizes the problems and is trying to remedy them, but he is caught in a vise between huge accumulated needs of the U.S.--for example in health care and education--and the unprecedented level of government and consumer debt.

From an outsider's perspective--that of a non-economist--it seems to me that the problem is pretty obvious and simple, and the solution is equally obvious and simple, but horribly painful. The problem is that for a generation, American government and citizens have both been living well beyond their means, borrowing to pay for the plethora of consumer goods most of us enjoy. But in the meantime, we have neglected the poor, the schools, the health care system, infrastructure, the environment, and most of the rest of the world. We have lots of goodies, but the society is ailing, and we have passed the buck to the next generation.

The painful solution is that Americans will have to spend and consume less, pay more in taxes, and be prepared for a long-term contraction in the economy. There is evidence of this already, with people finally beginning to save, and to practice "consumer thrift." But more saving and less spending simply contributes to a contraction of the economy. Banks, retailers, the service and entertainment industry have all depended on people borrowing to spend. As this changes, all these industries will decline, and the economy will decline.

Most American economists, including those with the President, are predicting an imminent end to the recession, and a relatively quick economic recovery. So far, virtually all such predictions have proved overly optimistic and wrong. I think those predictions are based on flawed economic models, and do not account for the depths of the hole we have dug ourselves into. We are in for a very long slog.

While I agree with President Obama and Professor Krugman on most things, I disagree with them that the solution is more spending, by government and consumers, to prime the economy. What we need now is belt-tightening, and a return to a more modest standard of living--perhaps comparable to what we had in the 1970s. This will entail a continuing and severe contraction of the U.S. economy, to return to equilibrium. In the long run, though, it will be best for both the U.S. and the rest of the world.

But you won't hear this from many economists

Cross Posted From The End of the American Century

 

China now has the three largest banks in the world, measured by market capitalization. This is a stunning change, and yet another indicator of China's rapid emergence as a global economic power. According to a New York Times article, three years ago, China did not have a single bank among the world's top 20. Now it has the top three and four of the top ten.

The United States, due in part to the banking and financial crisis, has dropped considerably in global banking. In 2006, the U.S. had 7 of the top 20 banks, including the top 2. Now it has just 3 of the top 20 and the largest, Morgan Stanley, is rated fifth.

If banking is so crucial to market economies--as Americans are constantly being reminded that it is--then the decline of US banks, in combination with the rise of Chinese ones, provides another example of the relative decline of the United States.

Furthermore, it seems that the Chinese economy, and its banking system, is in position to weather the storm of the global financial and economic meltdown. Most of the big banks in the West lost 20% or more of market value in the first two months of 2009. In China, the top two banks lost only 3% and 8% in value, respectively and the third largest, the Bank of China, actually increased by 5%.

As the New York Times notes, while most of the world is in financial collapse, "China's economy has suddenly become too big--and too healthy, expected to grow by at least 6.3 percent this year--for the rest of the world to ignore."

Kenneth Lieberthal, a Brookings Institution scholar who oversaw White House Asia policy from 1998 to 2000, sees China as one of the first countries to emerge from the current crisis and one of the very few countries that will emerge from it "without having high levels of government debt."

Cross-posted from The End of the American Century

Last week, a Spanish court took the first steps in opening a criminal investigation against Bush administration officials for violating international law in providing the legal framework for the U.S. government's use of torture. Among those the court is expected to indict are former Attorney General Alberto Gonzales and former Justice Department lawyer John Yoo, who is now a professor at the University of California at Berkeley.

John Yoo was the author of the so-called "torture memos" which justified the use of torture and argued that the U.S. should ignore the Geneva Conventions, which explicitly prohibit torture. 

The United States is a party to the Geneva Conventions, and also to the 1984 Convention Against Torture, which is binding on 145 countries, including the U.S. Torture is explicitly prohibited in numerous other international treaties, including the 1948 Universal Declaration of Human Rights; the International Covenant on Civil and Human Rights; and the American Convention on Human Rights. Most scholars also believe torture violates the U.S. Constitution's prohibition on "cruel and unusual punishment."

So there is plenty of legal precedent to assert that Gonzales, Yoo and other Bush administration officials--probably even the president himself-- were in violation of international law.

The Spanish initiative comes on the heels of two damaging new reports on the Bush administration's use of torture. The Justice Department's Office of Professional Responsibility is investigating whether the legal advice of Yoo and others "was consistent with the professional standards that apply to Department of Justice attorneys," according to Newsweek. If Attorney General Holder accepts the report, it could be forwarded to state bar associations for possible disciplinary action.

An even more damning report by the International Red Cross on the treatment of prisoners at Guantanamo has been brought to light by Mark Danner, in a short article in the New York Times and a longer one in The New York Review of Books. The Red Cross reports--basically verbatim accounts of interviews with Guantanamo prisoners--makes absolutely clear, according to Danner, "that the United States tortured prisoners and that the Bush administration, including the president himself, explicitly and aggressively denied that fact."

Danner concludes, as I have done in The End of the American Century, that the U.S. use of torture not only eroded our own values, but further poisoned the global reputation of the U.S. and stimulated the recruitment of terrorists around the globe. The decision to torture, writes Danner,

"harmed American interests by destroying the democratic and Constitutional reputation of the United States, undermining its liberal sympathizers in the Muslim world, and helping materially in the recruitment of young Muslims to the extremist cause. By deciding to torture, we freely chose to embrace the caricature they had made of us."

Of course it was not just at Abu Ghraib and Guantanamo that prisoners were tortured. Jane Mayer, author of The Dark Side: The Inside Story of How the War on Terror Turned Into a War on American Ideals, convincingly shows that the use of torture was a central tool in the battle against terrorism. Even though President Bush denounced the use of torture, the tactics he denounced were exactly the same as those he had authorized and encouraged in the extensive worldwide network of secret prisons set up to hold and interrogate suspected terrorists. As the distinguished historian Alan Brinkley wrote in a review of The Dark Side:

"it would be difficult to find any precedent in American history for the scale, brutality and illegality of the torture and degradation inflicted on detainees over the last six years; and it would be even harder to image a set of policies more likely to increase the dangers facing the United States and the world."

By almost any measure, the decisions of Yoo and Gonzales were legally incompetent, morally repugnant, and ethically questionable.  At the very least, their recommendations, and the decisions taken by President Bush, were violations of international law. They come close to crimes against humanity. They should be brought to account in this country, under American law. But Yoo, far from facing indictments in the U.S., continues to teach at one of the most prestigious law schools in the U.S., and continues to find a hearing for his views in the pages of the New York Times and the Wall Street Journal. 

Perhaps it will take a European court, in the end, to have him, and other Bush officials, account for their decisions. For a Spanish court to indict them will be largely symbolic, of course, since the U.S. is unlikely to extradite them to Spain. But symbols are important. And one of the most important symbols of all was President Obama's categorical assertion, in the first weeks of his presidency, that

"under my administration, the U.S. does not torture."

China has also suffered from America's economic meltdown, but the country's leaders continue to assert themselves on the global stage, both economically and politically. Some Chinese even see the problems in the U.S. as an opportunity for China to fill the void being left by the U.S.

The latest example of China's new confidence is a remarkable story buried on page A5 of this Tuesday's New York Times--"China Urges New Reserve to Replace the Dollar."

"In another indication that China is growing increasingly concerned about holding huge dollar reserves, the head of its central bank has called for the eventual creation of a new international currency reserve to replace the dollar."

The official argued that a new currency reserve system controlled by the International Monetary Fund would be "more stable and economically viable."

As the Times observes, "the proposal suggests that China is preparing to assume a more influential role in the world."

This is a theme I develop in The End of the American Century, where I describe China's opposition to "hegemonic" and "unipolar" power politics--code words for U.S. domination--and the country's growing efforts to promote its "soft power" influence in Asia, Africa, and elsewhere. The "peaceful rise" of China is supported by the population as well: in a 2003 poll in the country, 40 percent picked China as "the most prominent country in the world."

As London's Economist observes in its cover story on How China Sees the World "there is a sense in Beijing that the reassertion of the Middle Kingdom's global ascendancy is at hand." Prime Minister Wen "no longer sticks to the script that china is a humble player in world affairs" and now talks of China as "a great power."

The main reason for the proposal for a new international currency is China's growing concern about the safety and stability of its own vast holdings of the U.S. currency. China holds an estimated $1 trillion in U.S. government debt, the world's largest holdings. Earlier this month, the Chinese prime minister, Wen Jiabao, publicly expressed concern about the "safety" of these investments and asked the Obama administration for assurances that these securities would maintain their value.(See the New York Times story "China's Premier Seeks Guarantee from U.S. on Debt"). Last January, Mr. Wen criticized the "unsustainable model of development characterized by prolonged low savings and high consumption." There was no question about which country he was referring to.

When Premier Wen hosted Secretary of State Hillary Clinton in Beijing in February, it was clear that this was a meeting of equal, sovereign states. Next month, at the meeting of the "G20" economic powers in London, the most important business will be that between the "G2" Presidents Barack Obama and Hu Jintao. The Middle Kingdom is back.

Cross-Posted From The End of the American Century

Washington is finally catching on to why people are so upset with these million dollar bonuses for executives who drove their companies into the ground and swindled American taxpayers. But Wall Street apparently still doesn't quite understand the fuss, and the folks there continue to make the argument that these bonuses are necessary to "attract and retain talent." This "talent" are the greedy, immoral,short-sighted scoundrels who bankrupt their own companies, stole the retirement funds of million of Americans and drove the global economy to the brink of depression. Some talent.

The most stupefying assertion of this ridiculous argument about talent comes in the form of a New York Times column by Andrew Ross Sorkin, entitled "The Case for Bonuses at A.I.G."

Sorkin writes that "as unpalatable as it seems, taxpayers need to keep some of these braniacs in their seats" so they can help fix the mess they made and "to prevent them from turning against the company."

Braniacs at A.I.G.??? These "braniacs" are colossal blunderers and incompetents, just like most of the CEOs at the other companies that went bankrupt based on hugely risky and irresponsibly stupid investment decisions.  And if they "turn against" the taxpayer-funded company that they work(ed) for, then they should be arrested for conspiracy and fraud.

Edward M. Liddy, the new (supposedly improved) CEO of A.I.G., perpetuates this shibboleth:

 "We cannot attract and retain the best and brightest talent to lead and staff" the company "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."

This argument about attracting and retaining talent has two major problems. First, it is clear by now that such a strategy did not work. Big money didn't attract talent, but greed. And selfish greed doesn't benefit much of anybody except those few who practice it.

Second, if multimillion dollar payouts are necessary to attract "talent," then how do you explain the influx of very talented, dedicated, public-spirited people into the federal government, especially with the new Obama administration? Washington is inundated by people, young and not-so-young, wanting to hitch their stars to a noble vision and public service. How many of them are being offered million dollar salaries? None.

So let THEM take over administration of these discredited and disgraced financial institutions.

Cross-Posted from The End of the American Century

The U.S. economic stimulus plan passed by Congress aims to regenerate economic growth, spending and consumption. But it is almost certainly bound to fail, and not for the reasons given by partisans on both sides of the Congressional aisle. In spite of the stimulus, the economy will continue to contract. This is inevitable; it is necessary; and it is even desirable. The main task of the government should be protecting those who are displaced and impoverished during this contraction and retrenchment.

The U.S. economy must contract because it is way too large, in numerous respects. It is too large given the U.S. levels of production and exports. It is built largely on consumption and debt, not output. And it is too large for the rest of the world, even given the size and wealth of the country.

The U.S. economy is big--about 28% of global GDP. But the U.S. accounts for only about 8% of global exports; 16% of manufacturing value-added output, and 5% of the world's population.

The main contributor to the outsized US GDP is consumption, where the U.S. is indeed the world's leader. Consumption accounts for about 72% of US GDP, which is a record for any large economy in modern history. As we are now learning, this consumption has been built on a mountain of consumer and household debt, which now totals some $13 trillion--approximately the size of the entire U.S. economy. This is unsustainable.

Furthermore, much of U.S. debt is owed to other countries. About half of the federal debt and a quarter of corporate bond debt is held by foreigners. As former Senator Hillary Clinton pointed out in 2007, "16% of our entire economy is being loaned to us by the Central Banks of other nations."

These huge levels of consumption are a drain on the planet, its resources and its people. The U.S. has only 1 in 20 of the globe's people, but we consume a quarter of the world's fossil fuels; 29% of "materials" (including minerals, metals and synthetics); 19% of forestry products; and 14% of its water. The U.S. is also the world's biggest contributor to environmental pollution, greenhouse gas emissions (a quarter of the world's total) and global warming. At 5% of the globe, we leave a huge carbon footprint.

In the 1970s Yale historian Paul Kennedy, writing in The Rise and Fall of the Great Powers, suggested that eventually the U.S. would have to decline to its "natural" share of the world's wealth and power, which he estimated should be in the 16-18% range, rather than the 30-40% held by the U.S. at that time. This would indicate a cutting of the U.S. economy by half.. But so would many of the economic indicators I mention above. Consumption, debt, and borrowing all need to be reduced by about that amount, as should petroleum and energy use.

Given the hugely bloated size of the U.S. economy, and of U.S. consumption, and of consumer and government debt, it is hard to see how the economic stimulus package will make much of a dent in things. The economy is bound to decline, and needs to.

This contraction has already begun. The country's GDP shrunk last quarter at an annualized rate of 3.8 %. If this continues, it will be the largest yearly decline in the US economy since 1946. But a much larger decline will be necessary to bring the economy back to a more natural, balanced and sustainable level. The contraction of GDP is likely to continue for several years, at the very least. This would be unprecedented for the postwar period, when only once (1974-75) did the economy contract two years in a row.

Such a decline could be on a scale of that of the 1930s. The main problem then, as now, will be the reduction in employment, and the consequent growth in poverty. It is hopeless throwing good money after bad in an effort to revive growth, consumption and debt. Instead, the federal and state governments should focus on alleviating the suffering that this contraction will entail, by increasing funds for unemployment compensation, Medicaid, welfare, job retraining and education.

Many people will suffer in this transition, and they should be helped. For most people, though, this economic retrenchment will simply mean belt-tightening. Our standard of living will decline, in ways most of us have not experienced before. But we are still a highly developed wealthy country, and will remain so. Once the U.S. economy has stabilized at a more natural size, it will grow again. And this time, it can happen in a way that is not so destructive of the planet, other peoples, and our souls.

Cross-posted from The End of the American Century

David Leonhardt, the prescient and hard-headed New York Times economics columnist, states flatly that "your taxes are going up" in his column of Feb. 25. Leonhardt's data and arguments reinforce those I have made in The End of the American Century and in my Op-Ed for the Christian Science Monitor ("This is not the time to cut taxes").

Leonhardt argues that if we want the government services that we have come to expect and rely on (like national security, infrastructure, Medicare, education), we need more federal revenues, because at the moment "we are not paying nearly enough taxes to maintain those programs." He sees taxes going up soon, "and the increase will be permanent."



On the upside, Leonhardt argues, there is room for such an increase, and it will probably not hurt economic growth. As he points out, for a half century federal taxes have remained fairly constant relative to the size of the economy--at about 18% of GDP. "But the 18 percent era has to end soon."

In The End of the American Century, I show that US tax rates are low in global comparisons.

"Compared to other wealthy countries, the United States has among the lowest rates of both individual and corporate income taxes, and total tax revenues in the U.S. (as a percentage of GDP) are lower than those in most of the affluent democracies that are members of the OECD [see OECD data here]. Thus, not only is the U.S. spending and consuming more than most countries, but it is not paying for the relatively few benefits that the government provides. This is the crux of the problem of the deficit and the debt."

Leonhardt argues that "despite all the scary stories you've heard, the evidence that higher taxes necessarily cripple an economy is somewhere between thin and nonexistent." He points out that the fastest postwar economic growth occurred in the 1950s and 1960s, "when the top marginal tax rate was a now-unthinkable 90 percent."

He also points out that it will not be sufficient to simply raise taxes on the very wealthy, as President Obama has proposed. The incomes and wealth of that group have soared in the last decade, as their federal tax rates have declined. So their higher tax rates should be restored.

But, as Leonhardt says, "the problem can't be solved just by taxing the rich." That top 1% pays only about one quarter of federal taxes. So the tax increases will have to spread more widely.

This will be a very difficult task politically. No politician wants to raise taxes. But not to do so will simply pass the problem onto our children, and burden them with an even bigger mountain of debt. We need to start paying for what we get. And especially now, as we launch huge new spending programs for health care, education, infrastructure and banks, we need to shell out for what we are getting.

Cross Posted from The End of the American Century

 

Indiana's Governor Mitch Daniels, using a $1000 per hour state aircraft for a trip to Washington, appeared clueless when a reporter asked him if it might be cheaper to fly commercial and stay an extra night in DC.

Last weekend, Daniels was flying to Washington for the annual meeting of the National Governors Association when the plane developed a crack in one of the windows, forcing it to land in Columbus. He flew on from there on a commercial flight.

The state-owned plane, a King Air prop, costs $791 per hour for fuel plus $184 in maintenance costs for each hour of flying. The flight from Indianapolis to Washington takes about two hours.

According to the Indianapolis Star, when he was asked why he didn't fly commercial in the first place, Daniels said there was no commercial flight that would have gotten him to Washington on time. "I would've had to come the night before and buy a hotel room and I don't know what else." When asked whether it still wouldn't have been cheaper to fly commercial, even if it meant another night in a hotel, Daniels said "I have no idea."

This seems a peculiar response from the former director of the national budget, and a man who President Bush referred to as "The Blade" for his acumen at budget cutting. But even then, Daniels was not so good at keeping spending under control. During his tenure as director of the Office of Management and Budget from 2001 to 2003, the federal budget flipped from a $236 billion surplus to a $400 billion deficit.

So I took the liberty of checking up on prices for the gov. The Governors Association was meeting at the J.W. Marriott hotel in DC. A king size bed on a weekend night costs about $200--though almost certainly the governors attending the conference received a reduced convention rate. A commercial roundtrip flight from Indy to DC--non-stop and at least as fast as flying a smaller turboprop--also runs about $200.

So to fly commercial and stay an extra night would have been roughly $400. To fly the 9-seat King Air, without having to "buy a hotel room and I don't know what else" costs about 2k each way, for a total of $4000. Ten times as much, Mr. Governor.

Maybe this is trivial, but Daniels' cavalier dismissal of the question on costs betrays an arrogance and profligacy that is unbecoming of a public servant. Some of our Congressional representatives have grilled the bailout CEOs about their use of corporate jets. Surely our elected representatives should be held to at least the same standards, particularly in this time of deficits, belt-tightening, and sacrifice.

The Social Science Research Council and Columbia University Press have published a remarkable and eye-opening book, called The Measure of America: American Human Development Report 2008-2009.

 

The book is modeled on the annual Human Development Report published since 1990 by the United Nations Development Programme.  That series attempted to get away from the raw economic indicator of Gross Domestic Product, and to determine the level of human development in each country.  The "human development index" used by UNDP, an alternative to GDP,  was "a composite index measuring average achievement in the three basic dimensions of human development--a long and healthy life, knowledge, and a decent standard of living."  (From the Human Development Report 2006).

The Nobel Prize winning economist Amartya Sen was instrumental in developing the Human Development Report, and wrote the Foreword to The Measure of America.  There, he writes that "we have to judge the success of a society, including its economy, not just in terms of national wealth or the ubiquitous GNP, but in terms of the freedoms and capabilities that people enjoy to live as they would value living."  Sen observes that this approach has been "remarkably neglected in the United States in particular" and notes in this country "a major discrepancy between opulence and achievement."  The U.S. may be on some measures the world's wealthiest nation, but "its accomplishments in longevity, secure health, fine education and other such basic features of good living are considerably below those of many other--often much poorer--countries."  He also notes that the position of the U.S. relative to other countries has been "steadily falling" over the years.

 

The book itself assembles data in clearly presented tables on the three main "building blocks" of the human development index:  a long and healthy life; access to knowledge; and a decent standard of living.  In all three areas, the U.S. fares poorly in comparison to other countries.  Compared to other wealthy countries, for example, the U.S. ranks #24 in life expectancy;  #18 in high school graduation rates; and #2 in poverty rates (you don't want to rank high on that one!).

 

The data shows the downward trend for the U.S. over time in most of these measures as well.  And for the overall index, the U.S. world rank dropped from #2 in 1980 (behind only Switzerland) to #12 in 2005.  Countries ahead of us include much of western Europe, Canada, Australia and Japan.

 

These are all trends and themes presented in The End of the American Century, where I employ  many of the same measures used in The Measure of America.  They point out how far the U.S. has fallen, and how much work we have to do.  The problems of the U.S., both economic and social, predate the disastrous Bush presidency, which simply exacerbated them all.  It took more than eight years to dig us into this hole, and will take at least that long to recover.  But we have to recognize these problems and understand them before we can begin to solve them.

(For the full version of this post, see The End of the American Century

Cross-Posted FromThe End of the American Century

President Obama called Wall Street bankers "shameful" after reports that they had given themselves some $20 billion in bonuses this year, just as the economy was deteriorating and the government spending billions to bail them out.

Here's a modest proposal: for companies receiving federal bailouts, let's limit the pay of those CEOs to what the President of the United States earns--$400,000.

Once those bailout companies have repaid our tax-paid bailout money, they can return to paying themselves tens of millions of dollars yearly, as they do now.

To give you some context, here are the top ten recipients of federal bailout money under the TARP (Troubled Asset Relief Program).


1. Bank of America, $45 billion
2. Citigroup, $45 billion
3. AIG, $40 billion
4. JPMorgan Chase, $25 billion
5. Wells Fargo, $25 billion
6. General Motors, $10.2 billion
7. Goldman Sachs, $10 billion
8. Morgan Stanley, $10 billion
9. PNC Financial, $7.6 billion
10. U.S. Bankcorp, $6.6 billion

And here are the 2007 total compensations for the CEOs of those same firms:

1. Kenneth Lewis, $20.4 million
2. Vikram Pandit, $3.2 million
3. Martin Sullivan, $13.9 million
4. James Dimon, $28.9 million
5. John Stumpf, $11.4 million
6. G. R. Wagoner, $15.7 million
7. Lloyd Blankfein, $54 million
8. John Mack, $41.4 million
9. James Rohr, $14.5 million
10. Richard Davis, $5.9 million

These men are all multimillionaires, even if you only count their take from last year. They can afford to slum it for a while on the salary of the President of the United States. And if these CEOs are genuinely committed to help their companies, and the United States, recover, then they should be willing to forego a little extravagance for a few years. If they are unwilling to do so, then the federal government should appoint a caretaker CEO until the bailouts have been repaid.

The rules of the game have changed. These companies and their CEOs have brought this country to the brink of economic disaster. The government has stepped in to save these companies, as a means of rescuing the economy. There can no longer be any argument that multimillion dollar compensation packages are necessary to attract "talent." It was not true in the past (when CEO salaries were far lower); it is not true in other countries (where CEO salaries are a small fraction of American ones--see chart below); and it is not true now--when this "talent" drove their companies, and the economy, into the ground.

Congress has talked about limiting the pay of bailout CEOs, but they have done nothing about it. It is time. And this idea--of limiting these CEO salaries to the level of the highest paid government executive--was even profferred by Republican John McCain during the campaign:

"no C.E.O. of any corporation or business that is bailed out by us, that is rescued by American tax dollars, should receive any more than the highest paid person in the federal government."

CEO Pay as a Multiple of Average Worker Pay, in US and Other Countries
(From The End of the American Century, p. 40)

Cross Posted From The End of the American Century   

Economists and politicians are debating whether we are in a recession or a depression, and how many months or years it will take to recover from the downturn. But what is now happening to the economy is not typical or normal. I would call it a "retrenchment" rather than a recession. In that sense, it is a permanent correction, and will result in a substantial and long-term contraction of GDP, the standard of living and the stock market. It will take many years to return to where we were. The problem is that the U.S. government and consumer have both been living on borrowed money for a generation, so that most of the gains of that period are illusory. We were never really that wealthy, and now we have to start paying for that extravagance.

A similar argument is made in an interesting article entitled "Will There Be A Recovery?" by Paul Craig Roberts, a former Assistant Secretary of the Treasury in the Reagan administration. He also sees the current situation as different from past recessions. Recovery in the past could be stimulated by cuts in interest rates, allowing consumers to spend more against rising real wages. This would lead the economy to rebound.

Now it is different though. For one thing, for most workers, real wages have remained stagnant for almost twenty years. Consumers have maxed out their credit and can no longer borrow so freely. And interest rates are already at rock bottom levels.

"And there's another problem," says Roberts. "Much of what American consumers purchase today is made offshore. Stimulating consumer demand in America puts factories back to work, but those factories are located elsewhere in the world." The U.S. consumed more than it produced, by borrowing from abroad. But this source of funds is also drying up now.

These are all themes that I raised in The End of the American Century. While I do not totally agree with all of Roberts' arguments, his overall point is right on target.  There will not be a recovery like ones of the past. The task for the U.S., and the Obama administration, is to figure out how to navigate this difficult transition, and to convince U.S. citizens that we can live a good life without all the excesses of the past.

Take a look at Roberts' essay, and offer your thoughts.

Last week, John Thain, the former CEO of Merrill Lynch was sacked by the CEO of Bank of America, which recently absorbed the bankrupt brokerage firm. Thain is a prime example of the mind-boggling greed, incompetence and cluelessness of the captains of the U.S. financial services sector. (See also Zachary Roth's TPM blog on "John Thain's Top Ten Greatest Moments")  I called attention to Thain in my September blog on CEO pay, where I noted that Thain was the highest paid CEO in 2007, with compensation exceeding $83 million. This was a year in which Merrill Lynch lost $7.8 billion, mind you. Granted, Thain didn't take over Merrill until November of 2007. But 2008 was even worse. Merrill's losses of $27 billion last year was what led to its absorption by Bank of America.

But Thain's greed and arrogance gets even worse. He apparently demanded a bonus of $30-40 million for 2008, the year he presided over the company's bankruptcy and collapse. This was after Merrill had already received some $10 billion from U.S. taxpayers as part of the federal government's financial bailout. Furthermore, according to a story in the Financial Times, Merrill granted some $4 billion in bonuses to other executives in the company, just before the Bank of America takeover was finalized. As the Financial Times observers, "this was money that appeared to come directly from US government funds."

A New York Times story says that Thain spent $1.2 million to redecorate his Merrill Lynch office last year, including an $87,000 rug and a $68,000 credenza.

John Thain stands out as the worst abuser of corporate and government funds. But the problem is much wider than John Thain or Merrill Lynch, and extends across the entire corporate landscape. These huge CEO compensations in the U.S. are horribly inflated, both by historical standards and in comparison to other capitalist countries. In the 1980s, average CEO pay in the U.S. was about 50 times that of average worker pay. In Germany, Canada, and Japan, the ratio is less than 25 to 1. In the United States in recent years, on the other hand, that ratio has approached 500 to 1.

Thain is out, thank goodness. New York Attorney General Andrew Cuomo is investigating the bonus payments in Merrill Lynch. There is some accountability there, at least. U.S. representatives and taxpayers should make sure, though, that U.S. citizens do not subsidize the lavish lifestyles and obscene salaries of executives in companies that are receiving taxpayer money. Most of them are multimillionaires already. If they truly want to help the economy and the country (as most of them say they do), let them live on an average worker's salary for a few years.