Uh-Oh.
As the details of Obama's stimulus plan have dribbled out, I've been getting more and more concerned, and not for the reasons that bother other progressives. I think it's not going to work. I think Obama has tried to thread the needle, crafting a plan that is sufficiently big and stimulative enough to work, but also sufficiently small and centrist enough to be passed by large Congressional majorities. Unfortunately, I am afraid that he has threaded the needle the opposite way, proposing a plan that is big enough to seem ruinously expensive to the federal balance sheet, but sufficiently small and poorly targeted enough to still fail.
Progressives should be scared. If this plan fails to work it could tip over a set of dominoes that end with the Republicans recapturing the White House in four years and putting a quick end to our new progressive era. The dominoes are: the economy continues to worsen until the 2010 elections, the voters give Republicans a majority in at least one house of Congress that year, they block Obama's agenda for the rest of his term, and coast to victory in 2012 on the back of an economy that continues to be terrible.
Paul Krugman has an excellent post that explains in clear and simple terms the math that leads to this conclusion. Everyone should read it. In it he shows how even with quite optimistic assumptions the unemployment rate would still rise to 7.3% under Obama's plan, and concludes with his fear of a scenario that he feels is more likely, in which unemployment rises to about 9% in 2010. He follows this with another post on a WSJ survey of economic forecasters whose predictions average out to a rise in unemployment to 8.4% in 2010, assuming passage of a stimulus plan. The current rate (for November 2008) is 6,7%.
These numbers, if they prove to be true, would probably be electorally lethal to the Democrats in 2010. Both Ronald Reagan and Bill Clinton went into their midterm elections with poor economies, and both suffered big losses in the House of Representatives. They both went on to victory because the economy recovered by the time they ran for re-election, but neither faced an economy caught in a liquidity trap. This trap is liable to prevent a spontaneous recovery of the kind that we all have become accustomed to, and if Obama can't get the results that everyone is used to seeing, then his election prospects are dim indeed.
So there you have it. There's an emerging economic consensus that this plan will not prevent the economy from getting a lot worse, and if that occurs then Obama is in big trouble. How did this happen?
I'm a psychologist, and I look for psychological explanations. Reports are that Obama's economic team got proposals from a wide range of economists for stimulus plans ranging from $800 billion to $1.2 trillion dollars, but are proposing something in the range of $675-$775 billion, smaller than the low end of what was proposed to them. Why? Well, the problem that I saw at the outset with Obama's team was that he appointed a group of people who are tremendously knowledgeable about the current economic crisis because they helped to create it. This gives them an ego investment in believing that their actions have not done enormous harm, and that the intellectual reasoning that they have always relied on will continue to work, even though everyone else can see that this is wrong. It is an extremely unfortunate fact of human nature that when ego needs go up against unpleasant realities, ego needs usually win. Sadly, a high I.Q. is no defense at all against this process, because a high I.Q. just gives people better tools to help them rationalize away disturbing facts.
Obama's economic team is apparently assuming that the Fed's monetary policy of low interest rates and increasing the money supply will work as it has in the past, and all we have to do is hold on until this happens, which a modest stimulus plan would allow us to do. They appear to have not processed the emotional reality presented by a liquidity trap, because that emotional reality would be terrifying to them. They are all monetarists to some degree, who believe that the Fed can always get us out of trouble if it tries hard enough. But the reality of a liquidity trap is that it is self-sustaining and the Fed is helpless, truly helpless. They don't seem to be able to accept that as possible, because it would create feelings in them of both helplessness and humiliation.
This emotional incapacity on the part of his team has, I feel, has led to a major strategic error in combining economics and politics. Obama's people were reportedly concerned about Congressional opposition from Republicans and conservative Democrats if the stimulus plan was too large, and were worried that a larger plan could not be passed. Fine. In that case, the correct strategy would be to propose a very large plan anyway, wait for the opposition, compromise on the smaller plan (meaning the current proposal) if necessary, and then be able to blame the larger plan's opponents if and when the economy still gets worse.
That would be a political winner in all scenarios. They would either pass the larger plan that is needed or be able to blame the conservative opponents if a smaller one doesn't work. Also, that would shift the debate over what is necessary in the direction of the larger numbers that are needed. With current strategy, the likelihood is that Obama will get what he wants, it won't be enough, and he'll be blamed.
The most likely course of events seems to be that a year from now the economy will still be worsening. Obama and his team need to either pass a plan now that will prevent that, or leave a political reality that will allow them to pass something additional later on if necessary. I'm extremely worried that the current economic plan and political strategy will do neither.
In 1992 Bill Clinton said, "It's the economy, stupid", meaning that a bad economy trumps everything else politically. Well, the economy is bad now, in a way that we haven't seen since the Great Depression. FDR took office in 1933, three-and-a-half years into the Depression, so no one blamed him for it. The politics for Obama will be different, because things will be getting worse on his watch. This could get really bad, both economically and then politically. As Krugman said, I hope I'm wrong.
I have yet to actually see the plan. I'm tired of Krugman's constant speculations without enough facts for his opinion to even be valid. If we take his Nobel prize away will he shut up?
How can you possibly predict a plan you've never seen before will fail? I don't think psychology is the right art to employ in this case - how about some solid fact-based economic analysis. Since the facts haven't been released yet, I don't see how that's even possible.
January 7, 2009 12:13 PM | Reply | Permalink
KGB, you really should read Krugman's posts, they are based on information that has been released, generally accepted estimates of the stimulative power of different policies, plus favorable assumptions about the plan's details. Even with these favorable assumptions, it doesn't look good. With regard to Krugman's 'constant speculations without enough facts', this is a guy who saw the present crisis coming ten years ago and wrote a book about it, before the dynamics that got us here had even begun. He saw this before the housing bubble had started, even before the legislation that deregulated financial markets had been passed. This is not the guy who needs to shut up. This is the guy who should be listened to.
January 7, 2009 1:48 PM | Reply | Permalink
I tend to agree with Krugman regarding the size of the stimulus plan being inadequate. I haven't seen how this plan is to be implemented, but if it consists largely of 'infrastructure' projects, we will be hard pressed to get these programs/projects up and running in a timely manner without incurring a lot of waste. So, perhaps the lowballing of the stimulus package may work to our favor in the short run. Thanks for posting.
January 7, 2009 12:38 PM | Reply | Permalink
Thanks for commenting, MH2O. You're right about the infrastructure piece. I think the way to go is dramatically strengthen the safety net, you get a lot of bang for the buck in terms of stimulus if you do that, just like infrastructure, but it can be implemented much more quickly.
January 7, 2009 1:51 PM | Reply | Permalink
I have to go with KGB on this one.
The difference between now and 1982 or 1994 is the Internet and the ability of Obama to position his attempts at fixing the neocon disaster each step of the way. He faces a generally receptive audience of Americans who seem to be willing to give him the benefit of the doubt on these things.
We have a short memory in most respects, so Obama simply needs to keep reminding people of what they already know - it took us thirty years to get into this mess and we won't be fixing it in three.
January 7, 2009 1:01 PM | Reply | Permalink
I definitely hope you're right, Jason, but I'm still worried. I think there are a lot of voters in this country who vote based on short-term performance, and that scares me.
January 7, 2009 1:55 PM | Reply | Permalink
I don't disagree. Up to now, Americans have been terribly short-sighted in how they vote. I am hoping we are at the beginning of a shift in that trend. If Obama can't fix that annoying trait, I doubt any modern politician can.
January 7, 2009 4:08 PM | Reply | Permalink
I noted somewhere else that a five hundred page bill or legislative directive is difficult to go through. I was in error. The legislation with add ons will be thousands of pages. As the proposal(s) reach the press, there will be squibs coming out that will not do anybody any good. There will be the 1000/500 dollar give aways like last year.
But Krugman will be one the few that I will follow diligently over the next few months. If info comes from his blogs or columns it will mean something to me.
Chin up Tom, good post, good things ahead.
January 7, 2009 1:50 PM | Reply | Permalink
Thanks, DD. I want to be optimistic, but I think our economic situation is worse than most people imagine. I know a lot of good things are coming in the couple of years, I just want them to be lasting.
January 7, 2009 1:57 PM | Reply | Permalink
I'd rather have an inadequate stimulus plan that allows a recession to continue for a year or so than an "adequate" one that puts the government further into debt and keeps the country spending more than it earns.
Recap the banks, bail out the states and localities, temporarily expand the EITC, and then go home.
January 7, 2009 2:55 PM | Reply | Permalink
Thanks for commenting, El P. I think the problem is that the economy might not recover in a year or two because of the liquidity trap. This trap occurs when people decide to hold onto more cash (be more 'liquid') because their expectations about the future have become more pessimistic. These expectations can only be changed by better economic conditions, so the trap is that the only way out is to be out already. This is why the Great Depression and Japan's recession in the 1990s lasted an entire decade. And that's why a fiscal stimulus has to be so large, in order to overpower the altered expectations of the whole population.
January 7, 2009 3:22 PM | Reply | Permalink
Tom:
Thanks for adding that, I think the liquidity trap is probably the most interesting part of depression economics from the perspective of economic theory.
As I understand it (and I'm only an armchair economist, I'm only a B.S. in the subject), the liquidity trap arises when short term interest rates go to the zero bound. No amount of additional monetary stimulus will reduce interest rates further, because in the absence of massive deflation (which would be so damaging that worrying about the liquidity trap would be silly), no one will actually pay people to borrow their money.
As a result, the monetary authority has no ability to affect consumption and investment through the interest rate mechanism, and the Keynsian response is to affect consumption and investment through direct fiscal stimulus.
There's nothing wrong with the Keynsian story (although the actual experience of the Depression was not terribly kind to it in practice). But I think that it doesn't really capture the entire situation, because it overemphasizes the interest rate mechanism, and discusses only nominal interest rates.
The Federal Reserve (to move from theory into practice) does still have tools available - and it is to some extent already using them. Fighting inflation is hard; fighting deflation is not. The FR expands its balance sheet, the money supply increases. The FR can do this as much as it wants, for as long as it wants. Creating moderate price inflation might be difficult in bad economic times, but not impossible; it's never impossible, because the Federal Reserve never runs out of dollars.
Also, price inflation creates the possibly of negative (or, in the present case, -more- negative) real interest rates, which vitiates the liquidity trap to some extent.
I guess this is a very long way of saying what Krugman said about Japan's CB in the 90's: that they could double the money supply in a day if they wanted, and their failure to even try expansionary market operations was negligent. The liquidity trap removes the effectiveness of monetary policy exercised through interest rates; it doesn't mean monetary policy is meaningless.
I think a reasonable stimulus package is a good idea, if only because the markets expect it and a return to the volatility of the fall would not be good. But the success of a recovery depends on private investment, not public investment, and the government can't buy that.
January 8, 2009 12:11 PM | Reply | Permalink
"an inadequate stimulus plan that allows the recession to go on a year or so" with stagflation or deflation, and our trade deficit + national debt will just trade out one cost, (the bailout), for another, (interest payments), and make lives more miserable for a longer period of time.
January 7, 2009 6:38 PM | Reply | Permalink
QUOTE: "an inadequate stimulus plan that allows the recession to go on a year or so" with stagflation or deflation, and our trade deficit + national debt will just trade out one cost, (the bailout), for another, (interest payments), and make lives more miserable for a longer period of time. -Miguelitoh20
This is not particularly sensical. Interest payments will increase roughly linearly with the size of the deficit, and would therefore be lower if the stimulus is more modest.
Also, as I mention in my post to Tom H., monetary policy is independent of fiscal policy. We can avoid deflation, and if stagflation occurs, we know how to deal with it.
Massive government spending, and borrowing, however, will create substantial long term problems for the country, and I think we owe our children better. I'd rather take our medicine for the ten years of debt supported "growth" than force it down the throats of future generations.
January 8, 2009 12:17 PM | Reply | Permalink
If the dollar remains strong, (no or little inflation), the dollars sent abroad in paying interest on current debt, have greater real value. Dollars paid may as you say, remain proportional to debt, but real value of those dollars increases. Inflation's the only way we've skated by with our debt, much like a homeowner who buys a house, makes payments, and as time goes by those payments are easier to make due to the inflation of the dollar. Same is true of dollars sent abroad in trade deficits, although I'll concede that they will theoretically purchase more real goods in such a scenario. Do "we know how to control deflation/stagflation" in our current circumstances? Hope so.
January 8, 2009 2:15 PM | Reply | Permalink
We should distinguish between the dollar "remaining strong" (or maintaining its value as against other world currencies), and the dollar "inflating" (or buying fewer goods and services per unit at home).
The former has no effect on how difficult the debt is to repay (well not directly - a weaker dollar would make exporting to finance deficits easier); the latter would make the debt easier to repay.
Also, on "inflation's the only way we've skated by", we have been since 1983 in a very long period of continuous low inflation. We've skated by with our debt by not allowing it to accumulate very much faster than GDP. We're now about 36% of GDP, and will be 40% before the end of 2009. Inflation may be a strategy, but if so it is one we haven't used yet.
January 8, 2009 5:02 PM | Reply | Permalink
Actually inflation has been a strategy in managing national debt since at least the 1980s. Google it.
January 8, 2009 9:26 PM | Reply | Permalink
I did, with no result.
The rate of inflation since the 1980's has been historically low; I don't understand how inflation could possibly be part of a debtor nation's "plan" in this case. If we were using inflation, we'd, you know...
Have some.
January 9, 2009 11:35 AM | Reply | Permalink
Can we please just all take a deep breath? The new president has not even been sworn in yet, and no one knows all of the details of his plan yet. For those who are hanging on to Krugman's every word, remember this - he was adamantly opposed to Obama during the primary and wrote column after column disparaging him as a candidate. IMHO, this permanently damaged the credibility of his opinions about Obama.
We are in this fix because of years of Republican rule in which the wrong choices were made about everything. The right priorities (i.e., some that will benefit regular people) can go a long way. It won't happen overnight. However, it has not been tried at all in the past 8 years and has not been tried much in the last 28 years. Give Obama a chance. He has outsmarted everyone else so far!
January 7, 2009 5:23 PM | Reply | Permalink
Thanks for commenting, FUD. That's a good point about Krugman's opposition to Obama during the primaries, I had forgotten about that. And its true, that could be skewing his opinions to some degree. I certainly agree that Obama has outsmarted everyone else so far, and as I said, I hope I'm wrong.
January 7, 2009 5:45 PM | Reply | Permalink
Or, Krugman could just be right which is far more likely than him wanting to undemrine Obama because he wasn't a kool aid drinker in the primary season.
January 7, 2009 6:15 PM | Reply | Permalink
Agree. I think Krugman's position in the primary had more to do with the differences between HRC's and BHO's economic/health positions than a personal bias against Obama.
January 7, 2009 6:32 PM | Reply | Permalink
"Progressives should be scared. "
No, Obama told the progressives that they would have to push him. Progressives should get motivated and push. Obama is known as "cautious" so it may be hard for him to be "bold", even if "bold is beautiful" is not only a handy fad phrase but maybe accurate here. I am personally sympathetic to El Presidente's remark. Which is more bold now, throwing money or wise fiscal restraint?
I think Obama is aiming for post-partisanship. That means leaving partisan stuff to Congress and proposing a possibly milquetoast package. Of course he's also not even in office yet. But I'm sympathetic to those who say his economic advisers are slanted too heavily towards the kind of thinking which created the cross which Bush is about to hand over to him.
I don't have an answer to why Obama's team is talking below the low end of the numbers now. I understand how it's often easier to come down than to fight up from too low.
January 7, 2009 5:32 PM | Reply | Permalink
Thanks for making those points, Eds. I'm having a hard time figuring out whether Obama tends to be constitutionally bold or cautious. Most people have a pronounced cognitive slant one way or the other. I just assumed he was a risk-taker because his running for President so quickly seemed extremely bold to me. Now I'm not so sure.
January 7, 2009 5:49 PM | Reply | Permalink
I think Obama's risk-taking stopped after he decided to run. He is so risk averse it isn't even funny. Just try and think of a single "risky" thing Obama has done since becoming a candidate that did not involved "standing up to" the Democratic base and showing them how conservative he can be. He's a supremely cautious, even timid political operator. He never makes a move on any contentious issue if it involves stepping out in front. That M.O. will not change. It's an integral part of his being.
January 7, 2009 6:21 PM | Reply | Permalink
I'm starting to believe that, O. After I thought more about his decision to run for President, I realized it wasn't risky for him. The worst that would have happened for him was that he wins a few primaries based on the black vote and Hillary wins the nomination. After that, if she wins the White House he's probably in the Cabinet, and if she loses then he's the heir apparent in 2012. So, I think you're right, he's a brilliant political calculator but probably pretty risk-averse.
January 7, 2009 6:31 PM | Reply | Permalink
Can't really agree with either of last two above. His cabinet picks pissed the democratic base off as did the Warren pick. For a guy not yet in office, I see Obama willing to take risks where they suit a longer term strategy or a short-term tactic.
January 7, 2009 7:58 PM | Reply | Permalink
Risk averse? The man has taken the biggest gamble in the history of American politics. One way or the other, he will permanently alter the racial dynamic in this country. He has chosen to run at a time when the risk of failure has perhaps never been greater, yet he cannot afford to fail.
January 8, 2009 1:05 AM | Reply | Permalink
Looks like you and oleeb have come around to my view already. :) I wanted to note the pun anyway, that he's probably Constitutionally cautious since The Constitution was what he taught, not what he tried to work around (think: Cheney).
Again, it's time for progressives to get off the post-election vacation and get to work supporting Obama leading progressively, however we define "bold" (and I would note that it's up in the air as to whether profligate spending is bold here, since it seems that too many economists have jumped on that bandwagon; it's now merely lemming-like mainstream in my view thus the notion that wise fiscal restraint might actually be the bold move, if there are only two moves here).
In Contraria Veritas
January 7, 2009 8:05 PM | Reply | Permalink
Obama has been the master of being somewhat more of an enigma than our usual politician. This, in fact, was the common complaint about him during the primaries and the general election.
But if you can get away with it, it's masterful because it allows you not to have to go in any one particular direction and therefore leaves you with the most options.
Obama has gotten away with it.
So far. In just a week, he will have far less wiggle room as he actually has to govern. Nonetheless, I expect him to say and indicate as little as possible to continue to give himself the most options going forward. He will do just enough communication... but no more.
As shown in the primaries, especially, he is a man who has mastered his ego (possible linked to his being half black/half white and the lifetime of training he got from those circumstances).
He would have to be a poker player to be feared: both charming and rigorously disciplined.
Ironically, Obama, who got elected as an inspired leader, is now playing the role of a master technocrat. If he can flip-flop between both of these roles in a credible fashion, he might well be one of the most effective chief executives we have seen in a century.
January 7, 2009 8:57 PM | Reply | Permalink
I'll second that last paragraph CT. He can really lay on the charm much, like FDR. I remember the fireside chats--I wasn't all that old but my folks bought a radio and wind driven battery (6 volt car) charger so they could hear him. Up to then our little Corral Creek community had to gather at a bitter republican export from Iowa's house to hear them--but gather they did. The community was mostly old hard ass ranchers. As I say I was only six or seven years old but I can still remember how mesmerized the grown ups grew when he got into it. His programs didn't start to help cow folks right away, but about 75% of those old ranchers really believed in him and they all voted for him in '36.
January 7, 2009 9:31 PM | Reply | Permalink
Fascinating, OT, thanks for adding this. FDR is just a history lesson for me, I appreciate the personal perspective.
January 8, 2009 8:09 AM | Reply | Permalink
Agreed.
January 8, 2009 9:05 AM | Reply | Permalink
Jesus, Democrats can find more stupid shit to worry about than my dear old grandmother (and she was a pro worrier, I'm here to tell you--major league, all-star and a Worry-Wart Hall of Fame inductee).
Look,, you were aware that this bill is going to have to be passed by the Congress of the United States, weren't you? And you also know that this is a must-pass, must-sign bill, right? In fact, this is the most must-passiest, must-signiest bill in at least fifty years. It has as its sole, unabashed and unashamed object, the injection of incomprehensibly large sums of borrowed money into the economy as fast as it can be shovelled into the furnace. And this bill must be written and passed by Congress. The Congress of the United States. And the most liberal United States Congress since 1980, to boot.
Whatever the most liberal U.S. Congress since 1980 does to the bill, whatever they add to it, it has to pass and has to be signed by Obama. The voters back in the district are suffering, losing their houses or generally scared shitless. Oh, and, btw, the world's most famous Nobel Prize Economist with a column and a blog at the New York Fucking Times says the danger is in going too small, that deficits will get worse later if we don't do enough deficit spending right now, so take that you deficit hawk halfwits.
So, whatever number it starts at, does anyone really think there is even a remote chance that this bill is going to hit Obama's desk in the big Oval with less than 200 billion more than he asked for tacked on to it? Yeah, right. I'll give you better odds that Angelina Jolie and Jennifer Aniston will call me up for a threesome fifteen minutes before I win the Powerball jackpot.
January 7, 2009 9:39 PM | Reply | Permalink
Is it possible that even if everything is still pretty crappy in 2010, we'll be okay, because people understand that Bush screwed up everything so badly that it would take Houdini more than 2 years to get out of this?
I can't believe that after 8 years of Bush et al, people would be ready to go back to the repubs so quickly. For my sanity's sake, I have to believe that everyone will give him more time...especially if the repubs dog him like it looks like they are going to.
January 8, 2009 12:18 AM | Reply | Permalink
History shows the mob has little patience for failure, especially in dire times.
FRD did well because (a) things were more dire (b) things did turn around and (perhaps most important) (c) there was just the beginnings of mass media and it was Roosevelt who controlled it (via the Fireside chats).
These conditions don't exist today. Obama realistically has about 6-8 months to get something real that people can see. If the Dems aren't one heckuva disciplined group, things will start working against them in 2010.
The Dems have had two consistent elections with gains in both Houses... getting a 3rd will be extraordinary indeed. This is the Dems one chance -- and they better act fast and rise to the challenge.
January 8, 2009 2:55 AM | Reply | Permalink
Stilli and CT, you've put your finger on the big political question. Who gets blamed by the voters if things stay bad for two years? Obama or Bush? I certainly hope it's Bush, but I'm far from sure about that. FDR had the advantage that the Great Depression was already at its worst when he took over, so things didn't get any worse on his watch. Unfortunately, that won't be the case with Obama. There are a lot of voters in the middle in America who don't follow things all that closely, and I'm afraid that they will just vote based on their most recent experience.
January 8, 2009 8:15 AM | Reply | Permalink
Look, if you can't get the engine working, you can't charge the batteries. And if you owe too much to afford gas, you're not going anywhere even if the engine is tuned. So what do some people do?
Declare bankruptcy and tell their creditors to bug off.
Two theories approve and disapprove of this. One says its immoral to ex-foliate one's debts. The other says it is immoral to do so unless the creditor wasn't fair in the first place. Then fair is fair. They've made more than they deserve, so off with them.
Has the creditor been fair? Has everyone been playing on a level playing field considering the US, US financial firms, the people of the US and their respective creditors?
January 8, 2009 1:30 AM | Reply | Permalink
Why does everybody forget about the 350 billion sitting around for TARP? It seems to me that any discussion of the size of the stimulus that ignores the potential impact of these funds is falling short. Bush has already established a precedence of not using the money for the stated purpose of buying toxic assets but instead capitalizing banks and bailing out AIG and Detroit.
I see two ways this can be parlayed into encouraging rapid recovery: 1 our current non-voting bank stocks could be upgraded and pressure to increase Bank lending could be exerted (pressure to refinance existing debt to lower interest rates unburdening consumers could also happen). 2 we can follow Paulson's lead and use the rest of the funds as Obama sees fit. The first option is unlikely but if times are desperate just have Rahm start making phone calls. The second options is probably more politically palatable, it would just have to be disguised appropriately. Its a lot of money and through a little bit of creativity, it could easily find its way to productive use.
If we add the 350b of TARP to the 700b or 800b they are going to get passed we are moving up from 3% of GDP to 5%. And we could be doing it through the private banks who have the relationships with small and mid-sized businesses. Most of whom - due to the diversity of their businesses would not be eligible for direct government spending on things like infrastructure.
January 8, 2009 2:58 AM | Reply | Permalink
Interesting points, Sal. But here's what I see as the problem. A liquidity trap means that people prefer to have more liquidity, which is a fancy way of saying that they want to hold on to their money. That means that people don't want to spend as much, and also that they don't want to borrow as much. So offering to lend people money loses a great deal of its effectiveness. This is why the Fed's combination of a zero interest rate and massive quantitative easing (increase of the money supply) is still not able to do the job. More TARP money is basically trying to do the same thing that the Fed is trying to do, but runs into the same obstacle: consumers still don't want to spend. When consumers don't want to spend, then employers don't hire, and investors don't invest, and the economy still shrinks. This is something that none of us in America have experienced in our adult lifetimes,, and it's what Krugman is trying to explain and alert us to.
January 8, 2009 8:25 AM | Reply | Permalink
As a long time devotee to Krugman I fully understand the issues with a liquidity trap. However, this is a complex problem and requires action on more than one front. People aren't lending for a good reason: must of our institutions and households owe more than they are worth. My points were that TARP funds can be used as Obama sees fit; and that it has already silently nationalized our banks-if needed we can use that power. (full disclosure, I was recently laid off by one of these institutions).
Somehow we have to correct the balance sheets at the same time as pumping cash into the economy.
Tax cuts will help both individuals and businesses improve their individual balance sheets (and gets a difficult campaign promise out of the way). If people use the cash to pay down some debt and they become credit worthy again-so much the better. I agree that no amount of TARP is going to by itself get people to spend, but you can use the force of TARP to get banks lending or refinancing debt to manageable interest rate levels. You could also use TARP as a new HOLC and tackle the nation's upside down mortgages. It is 350 billion dollars.
The baby boomers are staring retirement in the face and just watched their meager retirements nosedive. Savings are going to skyrocket no matter what, and they should (not just for the individuals' sake, but also for the inevitable deserting of the dollar that will someday happen)
I am a strong believer in a huge stimulus but I don't see how that by itself will solve our problems (not too mention its an insane amount of money chasing too few projects). This is why the multi-pronged attack of government action through targeted tax cuts/TARP/Huge Stimulus with the Fed printing cash (while quietly deposing of toxic assets) is potentially a better strategy.
January 8, 2009 5:02 PM | Reply | Permalink
The really bad part about this is Obama can be certain republicans will do everything imagineable to be sure he fails. I am not sure whether he appreciates this. He has yet to come to terms with the fact that republicans don't care one bit about ordinary working class citizens. Every bit of the current mess is because of republicans and Obama seems not to have gotten the memo exposing the depth of their treachery.
January 8, 2009 5:01 AM | Reply | Permalink
First things first.
Obama promised a tax cut for the middle class. The middle class voted for him. He MUST deliver.
Once he's kept that promise, he has extended the honeymoon or the grace period.
He has repeatedly referenced FDR's willingness to try - and fail - in times of extraordinary economic crisis. That's where we are. And that's what he'll do.
He will come back for more. But first, he must secure the middle class tax cut that he promised. And the Republicans dare not deny him that.
The end.
January 8, 2009 5:15 AM | Reply | Permalink
You'll notice how republicans applied different rules to Wall Street and Detroit. The full cadre of southern senators cared only that their own bread was buttered. You can expect more of the same. A focused tax cut that applies to the middle class is anathema to most republicans. It makes not a bit of difference that the Bush tax cuts went primarily to the wealthy. Republicans will be out in force opposing any tax cut the democrats may offer. Bet on it. The hypocrites and liars will be double timing it.
January 8, 2009 5:53 AM | Reply | Permalink
TPC and Homer, thanks for commenting. I agree that Obama will get his middle class tax cut, but my worry is that it won't be nearly enough to get us out of this recession. And, TPC, I do worry about Republican opposition. Not that they'll be able to defeat a stimulus bill, but their strategy will be to delay as much as possible, divert as much as possible to their own ends, and defeat as much possible of what's left as they are able. With the threat of a Senate filibuster, they could possibly weaken the bill a lot. I feel, as I think you do, TPC, that the Republican establishment mostly just serves the interests of America's economic elite, because they are part of that elite. Like economic elites throughout history, they tend to be profoundly unempathic and therefore selfish, and so you are right, we should not expect them to act in good faith.
January 8, 2009 8:35 AM | Reply | Permalink
Two points. First, no stimulus package is going to resuscitate this economy, no matter how many zeros are appended, unless it restores business and consumer confidence. That means convincing consumers that their interests are being attended to. It also means convincing the financial markets, including the foreign governments and SWFs that will ultimately be asked to finance this, that the government is serious about getting its fiscal house in order.
In the Harwood interview Obama indicated that he believes the final amount of stimulus will likely exceed what he has outlined. But he also took pains to make clear that he is keeping his eye on the deficit. It's a balancing act.
He needs the tax cut to make good on his promise to ease taxes on the middle class. He also needs it to get Republicans on board with the stimulus plan.
As a progressive I'm actually cheered by this. Obama knows he needs a big legislative majority on stimulus to have any chance of addressing the rest of his agenda, including health care and energy policy. The tanking economy gives him the chance to bring Republicans into the tent without expending a lot of political capital. He'll need every penny of that capital later on.
January 8, 2009 9:03 AM | Reply | Permalink
Hi, Tom. Wish I had time to delve into this post, but it looks like you stimulated a great conversation here! Kudos!
January 8, 2009 9:12 AM | Reply | Permalink
Tom, I think we all agree that all the tax cuts in the world won't get us out of this. There is no way that giving Joe Sixpack another $500 so he can pay his bills or buy a HDTV made in China will get the economy moving again.
One problem that worries me to death is that the train has stopped, and we've outsourced the engine to China and India.
That's why Obama's plans to build a new energy insfrastructure are so important. The key is not to stimulate spending, but to create jobs and economic growth. And infrastructure investment is probably the best arrow he has in his quiver.
January 8, 2009 9:25 AM | Reply | Permalink
Maybe the problems are so big that this economy can't be fixed by the Gov't's hand, no matter how much $$ we throw at it.
January 8, 2009 10:11 AM | Reply | Permalink
Contrast "Progressives should be scared" with "The only thing we have to fear is fear itself."
Obama will make his speech today at 11am EST. According to Josh he's going to propose a base plan and expects congress to expand it. That's a novel approach as far as I know. Contrast that with the Republicans telling us the Medicare drug plan would only cost $400 billion when they knew it would likely cost $700 to $1400 billion. I expect Barack is going to be a hell of lot of more honest about the stimulus plan and has worked with and accounted for congress's desires
to hammer out the details. That usually means lowball estimates of spending that grow if the rosiest of recovery scenarios aren't fulfilled. If he'd started with $1.3 trillion chances are congress would build into it triggers to go to $1.8 trillion. There's a whole lot else that needs to be done besides the stimulus - like healthcare reform - that also needs to be done now if we're going get the USA back on it's feet.
I haven't read Krugman's latest screeds this week but one point I'd like to make is we're not Japan. We're not dependent on predatory export industries and a low currency to keep us going. A huge chunk of the world's economy is predicated on our's being healthy. We buy a hell of lot more stuff from everybody else and Japan does it's best not to. It's in the world's best interests that we recover. Japan? There were a lot of businesses, manufacturers especially all over the world who were relieved to see them falter.
Done right the plan will mitigate the worst but let's not kid ourselves. There's no quick fix to this mess. The economy likely will still suck in 2 years no matter what Obama does. And there's a very real chance that if we spend too much we'll see a dollar collapse before we see a recovery. But buck up Tom, 1934 wasn't a wonderful year, neither was 1936, and I recall FDR and the Democratic party didn't do too badly then.
January 8, 2009 10:43 AM | Reply | Permalink
The stimulus will pass in the larger range because it appeals to established moneyed interests. Steel, asphalt, lumber, concrete... The plan subsidizes these industries on a massive scale. I am hoping for mass transit and green energy projects, along with the standard roads and bridges, but the trough must be filled with familiar slop or the legislative pigs won't eat.
January 8, 2009 10:43 AM | Reply | Permalink
Economics is not a science. The only basis for any policy is what has stuck to the wall in the past and what has not. So much wealth has been stolen by the pigs that the greatest economic genius the world has ever seen could come up with a plan to fix things.
January 8, 2009 11:04 AM | Reply | Permalink