The Speech

We don't know what Barack Obama will say to draw viewers away from the opening game of the NFL season next week, but Robert Reich has thought about it. You will find his thoughts here.

Sadly, his ideas would require that Our President grow a set of balls. I don't see much chance of that happening, of course.

Read Reich. He says it a lot better than I could.

The Problem with Keynesian Economics

The problem with Keynesian economics, sad to say, is that it's incompatible with democracy. Ordinary citizens of a democracy — or of any other political system, for that matter — always like more, and never like less. Hence, only half of the Keynesian formula ever is implemented. (Well, maybe "ever" is a slight overstatement, because Bill Clinton sort of moved in the right direction during the boom years of the nineties.)

Until very recently, Keynesianism was almost an automatic response to recession: cut taxes and increase government spending to stimulate the economy. The problems always arose during the good times — the boom times. That's when, according to Keynes, we're supposed to raise taxes and cut government spending, to keep things from overheating and build up a reserve to see us through the next recession.

Unfortunately, that second part of Keynesianism is the hard part. When incomes and profits are up, and lots of tax money is flowing into government coffers, the suck-up politicians of democratic governments say, "Hey! We've got the money! Let's make the voters happy by cutting their taxes and tossing lots of bucks around! While we're at it, we can toss even more bucks at the special interests who pay for our election!"

Everybody's doing better (except for those "fixed income" suckers and the minimum wage crowd, who can't handle the inflation), so everything goes swimmingly until the next recession. It's been going on for about eighty years now.

Note, however, that during those boom times the big benefits go to the special interests — and the most special of those interests, at least since Reagan was president, have been the very rich.

Yeah, I know — if you read this blog, it's not exactly news to you.

So now we're at a point when Keynes (like most contemporary economists) would recommend stimulus. Thanks to eighty years of getting Keynes wrong, though, our national debt is a bit on the high side. The "democratically elected" pols — Republicans, especially, but plenty of Democrats as well — are righteously demanding austerity. But why, especially when we need stimulus so badly, and interest rates are so low?

The answer, of course, goes back to those extra-special interests — the people and institutions that own that debt. They can never be losers, of course, so the rest of us have to pay.

I'm too old and lazy to start a revolution and, frankly, I wouldn't know even where to begin now that revolutions seem to start on Facebook and Twitter. I have to tell you, I'm not optimistic. Any suggestions?

Not My Fault!

Okay, at the beginning of the week I proclaimed that the market improvement we've seen recently looked like just another bubble to me — then, at the end of the week, all the indices take big hits.

Honest, though, I didn't do it. Blame somebody whose blog actually has readers. (I do this for the sake of posterity or, more to the point, so I can check on how right or wrong I've been over the years.)

Okay, again — and for the sake of "posterity" — I still think the markets are overpriced by 15 to 20 percent. When the financials finally are forced to write down their losses, I can't see how the markets won't wind up taking another big hit. If Congress and the Administration ever agree on a financial regulatory bill with some real teeth, that will impact the numbers as well. With some sensible reserve requirements, the big banks won't be able to play quite so fast nor so loose.

Continuing in my usual pessimistic vein, I'll also predict that the recent rise in GDP will fall off again — that the "recession is over" news was the product of a little stimulus package and a big statistical blip. I just hope the upcoming bad news is not sufficient to inspire voters to give the Republicans another try in 2010 — the goddamned Democrats are bad enough.

Regarding excess

To those who think the public mourning for Michael Jackson is excessive, let me say two words:

Ronald Reagan.

.....

The money from the Obama stimulus package finally is finding its way into the economy, and some economists are saying that it won't be enough. It won't, but don't hold your breath while waiting for more. It seems that a substantial majority of Democrats in the Senate actually are Republicans, while a dozen or so actually are Whigs. As for those who nominally are Republicans, well... Does anybody remember a guy named Mussolini?

I'm too lazy to look up the specific posts, but I'm sure that when the stimulus was under discussion last year I was pushing direct aid to the states. The states, remember, tend to have balanced budget provisions in their constitutions, and when a whopping economic meltdown comes along and tax revenues are way down, the states have to enact whopping budget cuts.

Those who worry that the current stimulus spending is inflationary might bear in mind that cuts in state spending significantly outweigh the increase in federal spending. The overall impact of combined government spending right now is deflationary. Lost decade, anyone?

The chance for another stimulus bill right now is nil, but just in case somebody in Washington decides to act rationally, let me reiterate: give the goddamned money to the states, to restore the jobs and programs they're cutting even as we speak. Money used to restore cuts gets into the economy a lot more efficiently than money for new spending.

"Half-assed" defined: "compromising" with assholes

So much for the definition -- on to the case in point: Obama's economic recovery plan.

Let's say you're a hospital administrator. A majority of the doctors at your hospital think patients with infections should be treated with antibiotics. A minority -- a loud minority -- believe those patients should be leached or, better yet, bled. Only in that way, they maintain, will the foul humours be released. (Note: they recommend bleeding no matter what the patient's condition, from robust health to death rattle.)

"I know," you proclaim, "let's compromise! We'll cut the dose of antibiotics in half, and we'll placate the minority with some bleeding! That way everybody will like me, and the bleeders won't shout quite so loud when they go on Fox News."

Listen, Barack, stop being such a goddamned pansy. A half dose of antibiotics (spending) and a half dose of bleeding (tax cuts) ensures that the patient dies. If you're re-elected in four years, it won't be because you knuckled under to a pack of loud-mouthed Republican troglodytes. You don't have to compromise, because if they won't go along with a real stimulus package, it simply means that they hate America. You are the goddamned popular president (albeit not yet especially popular with me), so use the goddamned popularity you worked so hard to win and get us out of this mess.

Tax cuts -- $500 for individuals and $1000 for couples -- will not stimulate anything. The money will go straight to the banks to pay down debt, which was exactly what was done with the last stimulus package. There is NO economic reason to promulgate stupid little tax cuts, except to push more public money at the very same people who created the current crisis. Did a Republican ever espouse bipartisanism? Even when goddamned Bush lost the popular vote, did it ever occur to him to compromise with Democrats?

I'm not saying helping people get out of debt is a bad idea, but a tax cut is the wrong way to do it. The average household owes over $9000 in credit card debt, with interest rates from the mid to high teens. Those who have missed a payment or two may find themselves paying interest rates in the upper twenties.

Once upon a time -- that is, before 1978 -- rates that high were illegal in every state but Delaware and Nevada. All the other states protected their residents with anti-usury laws. Then came the Marquette decision, in which the Supreme Court ruled that banks could charge borrowers in any state whatever interest was legal in the state where the bank was based.

As you might expect, banks from all over the country started relocating their corporate offices to Delaware and Nevada; then, so as not to lose their banking industries, all the other states overturned their anti-usury laws. If the new administration wants to help people get out of debt, trying to get a federal anti-usury law through Congress would be a great way to do it. At the very least, there should be a limit on interest charged by banks taking federal bailout money.

The money that Obama wants to blow in tax cuts would be much better spent in direct aid to the states. State tax revenues are crashing, and state governments are responding with budget cuts. That means job losses for workers in state and local government -- clerks, secretaries, teachers, fire fighters, librarians, social workers, trash collectors and, if things get bad enough, police. Thirty-seven states are required by their constitutions to balance their budgets, so governors will have no choice if they don't get help right away.

Yes, money for infrastructure projects is a fine thing, and should help put many of those in the construction trades back to work, but helping to support state payrolls should not be ignored -- and the twenty-two Republican governors will appreciate it every bit as much as the twenty-eight Democrats.

The right stimulus

It's time for another stimulus package, and this time, it looks like the Democrats, at least, have it right -- extended unemployment insurance, increased food stamps, and direct aid to the states. The states are in bad shape, particularly those required by their state constitutions to have balanced budgets. In New York, Governor Patterson called for $2 billion in cuts just for the current fiscal year, which ends April 1. Most of the money would come from hospital and school budgets, primarily in the form of lay-offs.

While it's true you can't solve American education's endemic problems by "throwing money" at them, budget cuts will make schools a lot worse. Cut staff and schools become genuinely intolerable. The puddle of vomit stays on the floor all day, the decibel level in the cafeteria goes into the danger zone, and the bullies rule the hallways. In overcrowded classrooms, teachers spend more time on discipline and less on instruction. In some classrooms, that means there's no instruction at all.

The only students who seem to be able to learn under these conditions are the children of recent Asian immigrants. Before you call me a racist, let me call your attention to two recent articles in the New York Times.

In the first of those articles, we learn that Asian students are the group most likely to qualify for New York City's elite high schools, "including the storied triumvirate of Stuyvesant, Bronx Science and Brooklyn Tech." At Stuyvesant, 72% of those admitted, by competitive exam, are Asian. The second article is about the efforts of Long Island's well regarded Jericho school district to get the parents of Asian students to show up at school activities. They don't join PTA and don't attend concerts (even though the orchestra is 70% Asian.) Somehow their kids keep getting into top colleges even though they don't attend college nights.

Apparently, whatever Asian parents are doing to help their kids succeed is happening at home. If we really want to improve the results we get from American schools, we may have to replace some doctors of education with anthropologists.

Some say Asian parents put excessive emphasis on test scores (and violin?), but I don't see that as the reason their children tend to be so much more successful. I think the secret is that they care about accomplishment rather than "effort" -- that their kids never hear, "Don't worry, you tried your best." They trust teachers to do their jobs, but recognize that the student, not the teacher, is responsible for learning. It follows that Asian-American students actually find it necessary to work hard to gain parental approval. How innovative!

In his most recent column, Times contributor Nicholas D. Kristof calls on Barack Obama to make sure education isn't on the "back burner," and to make improvement of urban schools a primary concern. That, he says, is the "most effective anti-poverty program." Most would agree, but the difficult question is, how do we go about it? Nothing tried so far seems to have worked especially well.

Well, here's my idea. Let's replace all the administrators, guidance counsellors, and school psychologists with Asian immigrants. They know how to apply the right stimulus -- the one that gets results.

Yikes!

As much as I hate to admit it, occasionally I'm wrong. Very occasionally, I'm extremely wrong.

As gasoline prices drop below $3 a gallon, commodity prices in general crash, and the CPI comes in unchanged, I have to consider the possibility that my fears regarding inflation (and the concomitant stagflation I've ranted about) well may be unfounded. On the other hand, all of us might be in better shape if I'd been right.

Gasoline prices fell because the price of oil is down, due, we're told, to a steep drop in demand. And how much of a drop in demand does it take to bring about a 50% drop in the price of a barrel of light, sweet crude? Since oil is valued in dollars, the calculation is easy -- 50% -- and we know it can't be just from people cutting back the mileage they put on their SUVs.

(Yes, I know -- gasoline prices have fallen by about a third, not by a half. So where has that extra money gone? Give it a little thought. It will come to you.)

Since we haven't exactly gone green in the past few weeks, demand for oil ought to be a pretty good indicator of the world's level of economic activity -- which leads one to surmise that the global economic slowdown might be a good deal worse than we've been told. Also, consider that if the CPI has dropped again the next time the figure comes out, we'll have entered the realm of deflation. Bye bye recession, hello depression.

Apparently, a new stimulus package is in the works. I sincerely hope there are no "checks in the mail" to individuals this time, given how little multiplier effect there was last time. Previously, I called for aid to the states, tied to infrastructure spending, to get the construction trades back to work. Now, I say, just give the money to the states -- no strings attached. A lot of it easily can be spent on infrastructure -- not even by creating new projects, but just by continuing existing projects. Did you ever notice how the roads always seem to get repaired in the months just before an election? Keep fixing those roads, governor! Build us some new schools, and repair some bridges! Even if all the contracts are assigned by patronage, and half the federal aid is used to pay relatively unproductive bureaucrats, people who otherwise might be unemployed will be working instead.

Of course, nobody actually has a clue what's really going on in the economy. Bernanke really seem to be playing it by ear, and Paulson changes direction as often as John McCain. Movement in the stock markets, as you've noticed, is totally erratic. Marketplace should forget about playing "We're in the Money" or "Stormy Weather" when it reports the Dow and the NASDAQ, and just play Willie Nelson's "Crazy" every time.

Way back in my youth, there was a frequently quoted fortune cookie that went something like this:

"May you live in interesting times."
-- ancient Chinese curse

Well, whatever. Life sure is interesting these days -- but I can't help but hope that out of this painful mess may arise a kinder, happier, post-capitalist world.

The next economic stimulus package

As I predicted way back on Groundhog Day, that stimulus package that was supposed to rescue us from economic stagnation turned out to have been a bust. The reason, clearly, is that it was more a product of political considerations than economic considerations. Giving away "free" money always is popular with the public, but it wasn't especially helpful.

To the extent that the cash was used to pay down consumer debt, it may have delayed some write-downs by the banks -- but given the state of American indebtedness, most of those who used their "Bush Bucks"* to pay credit card bills probably were in just as much trouble when the next month's batch of statements arrived.

It seems likely that most of the remaining rebate money was spent on gasoline. The part of the oil company profits that didn't go overseas went to the usual fat cats, and wasn't spread through the economy to any significant extent. The multiplier effect of the rebates, it follows, was insignificant.

Now Democrats are talking about another stimulus package. Mind you, just before a national election is really a very bad time to discuss an economic stimulus because there's no possibility that politics won't play a big role in what takes shape -- but there are a few level heads in the relevant Congressional Committees, so perhaps there are a few rays of hope for a genuinely helpful package this time.

The hardest part will be enacting a package without rebates. A new round of rebate checks will be no more helpful than the last round -- but the temptation to woo voters with dollars may be too strong to resist. If the presidential candidates get on the rebate bus, there's absolutely no hope of putting the money to better use.

To be worthwhile, stimulus spending must be targeted. A good start would be direct financial assistance to state and local governments. State and local governments are major employers, and many state constitutions mandate balanced budgets. When sales tax revenues fall -- and they have fallen fast because of the current recession -- government employees are laid off.

Not all aid to the states should wind up in their general funds, though. Some should be specifically targeted towards infrastructure improvements. Workers in the construction trades were particularly hard hit by the collapse of the housing market, and infrastructure projects could put many of them back to work.

Yes, politically connected contractors, as always, would get the lion's share of the contracts -- but I don't care if certain brothers-in-law profit so long as they are paying worker salaries. In my ideal world, contractors being paid with federal funds would be required to hire union workers, but that's probably way too much to hope for, even if the Democrats win big in November. There still are entirely too many "New Democrats" out there.

If there was anything good about the 2008 Farm Bill, it was the improvement in the Food Stamps program (now to be known as the Supplemental Nutrition Assistance Program for the sake of a snappy acronym), but rising food prices make even more improvement necessary. I also was pleased by the expansion of unemployment insurance benefits. Both programs pump money into the economy at the bottom, where it is certain to be spent, and have the greatest multiplier effect.

In the long run, though, no economic stimulus will be especially effective if it drives the federal government deeper into debt, further depressing the value of the dollar. To the greatest extent possible, federal stimulus spending should be paid for with cuts in other areas. I can think of two places to cut, right off the bat: oil subsidies, and agricultural subsidies. Big oil and big agribusiness have been making out like bandits (an apt comparison) while the rest of America has been suffering.

I'd also suggest changes in the Alternative Minimum Tax: index it for inflation, so that Congress need not go through it's annual ritual of raising the floor amount; and make what essentially is a flat tax progressive, so that the super- and super-duper-rich pay more than the current 28%. Of course, the AMT could be eliminated entirely if Congress had the guts to undo some Reaganomics and create a couple of higher tax brackets for both individual and corporate income taxes.

In brief, I think the people who got us into our current mess should pay to get us out of it.

*(Note: I heard the expression "Bush Bucks" from my daughter. I don't know how widespread its use might be.)