Paul Volcker to Barack Obama
Former Fed Chair Paul Volcker is briefing President Obama today on how well the stimulus package is doing. I have no inside knowledge of what he's saying, but if I were Volcker (and I'm not -- he's almost two feet taller than I am), I'd say the following:
Mr. President, it's way too early to know exactly what the stimulus is doing because the money is barely out the door, but I've got to tell you I'm worried as hell. Unemployment is at 8 percent, and underemployment is over 14 percent of the workforce. The economy is shrinking much faster than it was when you put the stimulus together. It will be more than a trillion dollars short of its full capacity this year, and I have every reason to believe the same next. State governments alone are hundreds of billions in the hole, creating a huge drag. So your $787 billion over two years, only two-thirds of which is direct spending, isn't going to get us nearly far enough. I'd strongly recommend you make ready a second stimulus, about the same size, and get it enacted as soon as possible, with the proviso that it will be implemented if and when unemplyment hits 8.5 percent or underemployment reaches 15 percent.
Oh, and by the way, Mr. President. You may not want to hear this, but your Treasury Secretary is making things worse. His dithering on what to do about Wall Street, and his incapacity to speak clearly to the Street and to the public about what needs to be done, is spooking everyone. Why doesn't he just put the irrevocably insolvent banks into receivership under the FDIC, sell off their assets, protect depositors, and reimburse taxpayers with whatever remains? Let the rest of the banks fend for themselves -- working out their bad loans with their creditors. As to AIG, well, that's a complete basketcase. Put it out of its suffering. Take it over, sell its assets, protect policy holders (you'll need to create a big co-insurance plan with every other major insurer in the world), then get out.
Want a cigar?
Mr. President, it's way too early to know exactly what the stimulus is doing because the money is barely out the door, but I've got to tell you I'm worried as hell. Unemployment is at 8 percent, and underemployment is over 14 percent of the workforce. The economy is shrinking much faster than it was when you put the stimulus together. It will be more than a trillion dollars short of its full capacity this year, and I have every reason to believe the same next. State governments alone are hundreds of billions in the hole, creating a huge drag. So your $787 billion over two years, only two-thirds of which is direct spending, isn't going to get us nearly far enough. I'd strongly recommend you make ready a second stimulus, about the same size, and get it enacted as soon as possible, with the proviso that it will be implemented if and when unemplyment hits 8.5 percent or underemployment reaches 15 percent.
Oh, and by the way, Mr. President. You may not want to hear this, but your Treasury Secretary is making things worse. His dithering on what to do about Wall Street, and his incapacity to speak clearly to the Street and to the public about what needs to be done, is spooking everyone. Why doesn't he just put the irrevocably insolvent banks into receivership under the FDIC, sell off their assets, protect depositors, and reimburse taxpayers with whatever remains? Let the rest of the banks fend for themselves -- working out their bad loans with their creditors. As to AIG, well, that's a complete basketcase. Put it out of its suffering. Take it over, sell its assets, protect policy holders (you'll need to create a big co-insurance plan with every other major insurer in the world), then get out.
Want a cigar?
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Would you have also advised the President to veto the omnibus spending bill because of the earmarks? Didn't I hear you say that last night on CNBC (after first putting forth your best argument as to why Obama signed it)?
Mr. Reich, you're one of the only sane voices they allow on the air at CNBC. You shouldn't let that blowhard Kudlow push you around like that.
-- ARG
March 13, 2009 4:04 PM | Reply | Permalink
"It will be more than a trillion dollars short of its full capacity this year"
Excuse me but what is "full capacity"?
Is the economy some kind of sacred cox whose udders can objectively hold X liters of milk while the cow produces Y liters per day?
If the economy had been long overinflated by insane consumer spending (based on insane if seldom criminal borrowing), is "full capacity" insane?
March 13, 2009 6:07 PM | Reply | Permalink
"sacred cox"
No, that wasn't meant to be a joke about Cox of the SEC, except maybe as a Freudian slip...
sacred cow
March 13, 2009 6:10 PM | Reply | Permalink
Not insane, just miscalculated. Actually yes I do believe that they do measure X amount of productivity and can see that the economy has dropped. Here is my 'back to principles' take on what our Sacred Cow is:
Most people want a chance to pursue happiness, and since thats in the governments mission statement. We have an obligation to try and give them that chance (notice we only promise a chance, if your outside the bell curve- tough luck).
Our economy operates with tools and laws that we create. One could argue that the laws of economics are immutable- and certainly their are some axioms that appear to be. That is why utopia visions that ignore those rules usually fail. However most economic concepts such as 'property' are inventions of the state, that is we collectively made em up.
Now through the work of dismal scientists, such as Mr. Reich, we have figured out many tools that enable us to make those axioms work better for our general welfare. Currency is the foremost example, with the Federal Reserve as the entrusted Gate keeper.
In keeping with our mission statements we endowed the federal reserve to operate with two goals- 1 is to combat inflation (so that what we create is not destroyed-that would piss us off). 2 is full employment. And that is where the Full Capacity argument comes into play.
Now full capacity is generally defined at or around 5% unemployment. That is the magic number when inflation is thought to take effect. Many (and I would count myself in this group) argue that this is underselling our country and in fact we should consider the U-6 number as well. I know many of those people, and they have skills that can be put to use too. But that is for another day.
Now Mr. Reich references the trillion dollar number, that is just a shorthand calc based on estimate of the GDP drop. Basically counting udders. But the actual tragedy is not the $$$ amount, but the 3% under full employment.
If the one trillion was false as you note, it really wouldn't matter that much if we were still operating at full capacity. We would lose some paper wealth :( but still have jobs and be able to save and pay taxes. Our esteemed number crunchers would reestimate the GDP #s that signaled full capacity.
But we don't all have jobs so the government and the FED are failing us. This may be becuase of underlying misalignment with the basic economic axioms, but so what- we want jobs.
March 14, 2009 1:55 AM | Reply | Permalink
"If the one trillion was false as you note"
Did I??
You are saying that "full capacity" == "5% unemployment"? That's a best a slice of the pie.
I don't understand how lower unemployment necessarily (or even unnecessarily) creates problematic inflation, but maybe that's not important here.
March 15, 2009 1:44 AM | Reply | Permalink
I believe that is traditionally considered the threshold when workers wages start rising higher than productivity which is thought to signify that the economy is overheating.
With the last twenty years of technology lead productivity and wage suppression through outsourcing I don't think it has been particularly accurate.
Economics is an art, not a science. Either way the point is that ours is failing us right now.
March 15, 2009 1:58 AM | Reply | Permalink
Using a macro threshold as a micro standard is often a mistake. One can get lucky like a broken clock is right twice a day. Maybe the distinction is the difference between partial derivatives and differential trajectories...
I don't see the misapplication of an art as a failing of the art itself. For all the talk about Greenspan's admission of some marginal mistake, we should not overlook the moral aspects (immoral conduct). What Greenspan said isn't definitive, but that's not to say that I don't think he started to go bonkers circa 1996 or earlier. The question is: Why Greenspan jumped off the bridge, why did so many follow and so few criticize intellectual and moral suicide for what it is?
March 15, 2009 3:12 PM | Reply | Permalink
Confusing brain-fart typo corrected in CAPS:
WhEN Greenspan jumped off the bridge, why did so many follow and so few criticize intellectual and moral suicide for what it is?
March 15, 2009 3:13 PM | Reply | Permalink
Nobody likes Eeyore . A large part of our problem is one of culture.
For what its worth, I personally been harping on Greenspan's irresponsible actions since 1999. So has Krugman, Reich, Stiglitz, Sachs and a host of others. But a decade is a long time and you start sounding like the boy who cried wolf.
March 15, 2009 3:33 PM | Reply | Permalink
Jeffrey Sachs?
Stiglitz seems to be the closest in alignment with my only slightly informed thinking, the past 6 months. I just read Krugman's _Unraveling_ which is where I got the idea that Greenspan had a screw loose as of 1996. Evidently K's label as a liberal may have made him seem biased (tho' I don't know when he got that label) and thus more easily ignored.
March 15, 2009 5:13 PM | Reply | Permalink
You ever read Kevin Phillips?
I'm thinking you might enjoy American Theocracy.
March 15, 2009 5:25 PM | Reply | Permalink
I have placed a hold request at the county library (which has a dozen copies all of which are In Library, so it must have been quite popular some time ago but not now), thanks.
March 15, 2009 5:51 PM | Reply | Permalink
"If there is a single, if implicit, theme running through the three linked essays that form this book, it is the failure of leaders to look beyond their own and the country's immediate ambitions and desires so as to plan prudently for a darkening future. ... [long snip] What makes this book powerful in spite of the familiarity of many of its arguments is his rare gift for looking broadly and structurally at social and political change. By describing a series of major transformations, by demonstrating the relationships among them and by discussing them with passionate restraint, Phillips has created a harrowing picture of national danger that no American reader will welcome, but that none should ignore."
from a review...
March 15, 2009 6:03 PM | Reply | Permalink
Like I said, sounded like something you would enjoy
March 15, 2009 6:16 PM | Reply | Permalink
I agree with everything you said except, as a guy who quit smoking (with the help and support of TPM commenters) in recent memory -- it is absolutely wrong for Volcker to offer the president a cigar! Obama quit too, remember.
I'm kidding, of course.
Great post, as always.
And anyone who hasn't read "The Work of Nations" really should. You kind of have to replace Japan with China in your mind but it's startlingly relevant given when it was written.
March 13, 2009 7:41 PM | Reply | Permalink
Thesis: Obama listens to Geithner and backs him because he's ideologically akin to Geithner and inherently reluctant to do brutal intervention until all other options have been attempted while the economic situation worsens.
Is Volcker @ 87 the Volcker of old? Will he be blunt with a younger man he plainly likes very much?
If Volcker unloads with both barrels and is patently ignored his best course would be to resign loudly and WITH EMPHASIS. He would need to repudiate in word and deed the course followed by Colin Powell who might have wrecked the designs of the Bush lunatics had he resigned loudly and WITH EMPHASIS.
Do it, Mr. Volcker!!!
March 13, 2009 8:01 PM | Reply | Permalink
Damn you Reich, you've done it again... Great post.
March 13, 2009 10:22 PM | Reply | Permalink
This is good as far as it goes. But someone needs to also tell Obama something about the financial limits that the country is facing. I'd add this paragraph after telling him that we need another stimulus program.
"Unfortunately, there simply is no way to currently finance another large stimulus package. The deficits are already way out of hand, printing more money will destroy the dollar and undercut the entire national economy, and the other nations of the world are simply not willing to finance it. They don't want to, and even if they did they simply don't have the money. The Chinese premier all but said that openly the other day. And tax receipts this year are going to be lower than expected.
The one and only remaining way to generate additional money for the federal government to spend is to cut the military budget drastically (minimum 25%, preferably 50%). Immediately. And/or cap health care costs. Immediately. If we don't do that our economy will not come out of this for decades."
March 14, 2009 3:53 PM | Reply | Permalink