Stimulus?

You can almost read the thought balloon: "People like money, so if I give them money they'll like me – and I'll be reelected!"  Toss in some corporate giveaways — the standard Republican solution to every problem — and you have the Administration's plan to "stimulate the economy."  Economic stimulus helps in a typical recession, but the current crisis is far from typical.  It's hard to go out and spend money when you're barricaded at home, and when the places you might spend it are closed.

Democrats, of course, have no aversion to giving away free money, but hope to put some limitation on how corporations can use essentially interest-free loans, hoping to avoid some of the abuses we saw in the 2008 economic crisis: using government funds for stock buybacks and absurd levels of executive compensation.  By the time you read this, there's likely to have been some sort of "compromise" negotiated.

The current plan to pay $1200 to 85% of the American people, and a bit less to another 5%.  The "stimulus" effect would be negligible.   To many higher earners, $1200 will be just a blip in the bank balance; and with so few places to spend it, most of the "stimulus" wouldn't make it into the broader economy until the pandemic is over.  For the unemployed, $1200 won't cover a month's rent.

Proposals coming out of the House, though, seem to recognize that what America needs now isn't stimulus, but relief — money individuals and small businesses need to survive the crisis.  Needless to say, there will be plenty of resistance to new "entitlements," but if you're going to give people money, it makes sense to give it to those who need it most.

Time to Panic?

 

Maybe.  Fresh from arresting an uncle and a cousin on charges of plotting a coup, MBS roiled oil markets by launching a price war against Russia, exacerbating instability in a world economy already teetering from the impact of COVID-19.  Investment houses think recession is likely.

The manufacturing sector already is in recession from Tr*mp's trade war, global supply chains are a mess, and a virus is not especially susceptible to economic interventions.  However much money is pumped into the economy, it doesn't do much good if people won't go out and spend it: so whatever fiscal stimulus Congress comes up with probably won't make much difference.  The Fed will cut rates again, but interest rates already are so low that a further cut can't have significant impact.  The truth is that firms already have plenty of cash-on-hand were they interested in expansion — but who's interested in expansion while there's a pandemic going on?

I suspect the coronavirus may have done some good for "Grandpa Joe" in yesterday's primary contests: weird "Uncle Bernie" seems far too angry to offer much comfort and reassurance.  If the viral threat persists, of course, "Mean Boy Donald" fares even worse.

Meanwhile, at the Fed...

It's been obvious that Our President values "loyalty" over competence, so nobody could have been especially surprised when he proposed two incompetent sycophants for seats on the Fed.  Both Cain and Moore, though,  turned out to be too horrendous even for some otherwise dependably sycophantic Republican senators.  Let us all breathe great sighs of relief.

The Fed is struggling with an unprecedented problem: ten years of economic growth with little to no inflation.  That may seem like a great thing, but that low inflation – combined with a prolonged but slow growth rate – has made it nearly impossible to push interest rates higher.  Yes, that still sounds like a good thing, but it's robbing the Fed of its most important tool for coping with an economic downturn: with interest rates so low, there's no room to meaningfully cut them when the next downturn arrives.

Assuming capitalism hasn't outgrown the business cycle, recession is inevitable — and given the length of the current expansion, it can't be too far away.  The Fed fights recession by significantly cutting interest rates; but with rates already so low, there's not enough to cut to create adequate stimulus.  It will be forced to try quantitative easing again; and economists still aren't sure how well that worked last time around.

The two empty seats on the Federal Reserve Board have to be filled by individuals who not only are expert in monetary policy, but are creative enough to come up with new strategies to prevent a downturn from spiraling into a crash.  Frankly, I'm not sure anybody can come up with the needed answers right now — but I am sure we can do better than a pair of political hacks.

My big fat Greek... bailout?

Those of us who are not Greek ought to be pretty happy today, relatively speaking. Two out of three leaders of the Greek coalition government seems to have approved the German diktat requiring concentration camp style austerity, and the Parliament will either accept it or reject it on Sunday. It could be close.

A lot of people out on the streets of Athens and other Greek cities seem to think Parliament should reject it. I'm emotionally inclined to agree with the angry mobs. Honestly, I don't know what will happen to the Greek people if there is a disorderly default, but I'm pretty sure about what will happen if they do accept Auswitch austerity.

Greece will be totally fucked for many years.

Most important, it is not Greece that will be bailed out by the current plan — the plan provides for a bailout of European banks. The IMF, ECB, and European Commission will pay into an escrow fund for the new Greek bonds, which will pay the banks first. Should there happen to be anything left after the banks are sated, that remainder goes to the Greeks.

In the meanwhile, Greece is in the fifth year of what is being called a recession but really is a depression, and that depression continues to be made worse by austerity imposed from outside. The new measures require Greece to reduce its minimum wage by 22%, and all wages are likely to fall as a result. 20% of the government jobs that have driven the Greek economy in the past will be eliminated, elevating the current 20% unemployment rate. Nobody expects a drop in the prices of things like food, fuel, and rent.

Personally, I'd be inclined to go with the drachma. Greeks who still have savings in Euros, I'm sure, will get them out of the country. Those who have Euro denominated debt can default along with their country.

Screw the banks.

Double Dip?

Bad news all around this past week — jobs, housing, the markets, what-not — but, especially, politics. The Republicans are determined to drive the US economy into a hole it can't climb out of, and the Democrats are going along for the ride.

All but a few corporately connected economists see the budget deficit as a medium- to long-term problem. Do we have to deal with it? Of course — but we don't have to balance the budget next year, the year after, or the year after that. Anyway, the best way to balance a budget is through economic growth, and austerity programs — no matter what certain ideologues have to say about it — never lead to growth.

The whole idea that businesses will fail to invest because they are afraid their taxes will go up is idiotic. Taxes can only be a percentage of profits (after the usual heavily lobbied deductions and exclusions), so if that percentage is something less than 100%, investments that increase profit margins make economic sense. If a company makes an extra billion that is taxed at 50%, that's still an extra half-a-billion.Even if it's a risky investment, if it pays off it amounts to greater profits. If it fails, it's a write-off, and the tax rate doesn't matter — it may even save the company some money on the taxation of its more profitable ventures.

I do not advocate allowing the US to default on its debt, and I think a responsible Congress would have voted to increase the debt ceiling last week with no commitments to deficit reduction. Now is not the time to play dumb political games. As a matter of fact, now is a time to stimulate job growth through greater deficit spending — enough, this time, to make a real difference.

It won't happen, of course, because too many Americans are economic illiterates, and because the Republican commitment to further enriching the rich is the foundation of the current party's existence. Only by shrinking government can further upper-income and corporate tax cuts be made possible.

I am trying to learn more about Gary Johnson, a dark horse candidate for the Republican presidential nomination. I'm starting to think that a libertarian Republican just might be a better choice for 2012 than a corporatist Democrat — and that somebody (possibly with Tea Party endorsement) has to turn the Republican Party away from its own corporatist commitments. With Johnson (or, even, Ron Paul), progressives just might get more than they will out of Obama.

Recovery?

The stock market is doing great, especially the financials. GDP was up last quarter. The recession is over — right?

Technically. Maybe.

The stock market is doing well because corporate earnings are up — but not because of increased sales, because of decreased costs. When you fire half your workers and force those who remain to work twice as hard, costs are way down, and suddenly you're profitable again. With the Fed holding interest rates at rock bottom levels (should you happen to be a large corporation and not an individual consumer), it is much cheaper to replace labor with new capital.

So far, though, all we've seen is the supply side. The demand side doesn't look nearly so rosy.

Henry Ford is remembered for his decision to pay his workers well enough so that they could afford to buy his company's cars. Somewhere along the line, that idea was forgotten. As unemployment continues to rise and wages continue to be depressed, demand for everything but luxury goods has to decline. The Wall Street execs may continue to buy their $15 million condos and $18 thousand wristwatches, but who's going to be buying the Fords?

In the meanwhile, regulatory reform looks like it's going nowhere. Flush with taxpayer subsidized profits, the banks have successfully lobbied the teeth out of proposed legislation that still might not pass. It looks pretty certain that derivatives will remain largely unregulated, and that capital requirements won't be increased enough to significantly reduce risk. Chris Dodd's plan to consolidate regulation into a single agency (that is not the Fed) is dead in the water, because no Congressional committee supervising the current assortment of agencies will be willing to give up its power. I suspect a good deal of his populist stand is an attempt to get us to kind of forget about the extra-favorable treatment he got from Countrywide Finance.

As for Obama, Emmanuel, and company — I don't think they're too anxious to give up the vast contributions coming in from those generous folks at Goldman-Sachs and the like. Don't look for leadership from the White House.

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.

The Confidence Game

Listen to enough economic news and you might be inclined to believe that the economy takes place entirely in our heads. As long as we feel good about the economy, it will be fine. It follows that the economic distress we're experiencing now is our own fault. It was brought on by a lack of faith.

If that sounds totally idiotic, that's only because it is totally idiotic. Nevertheless, the mullahs of Wall Street breathlessly await the publication of the "consumer confidence" index each month, and the Obama administration has based a good deal of recent policy on the idiotic axiom that the economy is as good as we think it is.

Well, maybe not -- or not exactly. If we believe the economy is doing better, and that our personal distress might be alleviated sometime soon, we are likely to believe that the Obama administration is doing a good job. Be confident, America! Your youngish, blackish, liberalish president is out there, taking care of you.

With that in mind, let's look at the stress test results.

The first thing that struck me was that the amount of capital we were told the top nineteen banks had to raise was roughly the same as the amount of still uncommitted TARP funds. It would be very nice if the private sector stepped up to the bat and provided that capital, but, if not, it is available in government funds without having to go back to Congress for more.

How convenient! No major bank is insolvent because the funds needed to bring it back to "health" already have been approved by Congress! Be confident, America!

Sadly, America cannot muster the patriotic spirit it needs to feel confident. It is difficult to feel confident when you think your job might disappear next week, or next month. Oh, wait! I forgot the good news -- that job losses in April were a bit less than losses in February or March.

That's not good news. It means that businesses are running out of the easy jobs to cut, and are getting into the hard ones -- that is, the people who will be harder to replace when things finally turn around and business picks up again. Under those circumstances, 539,000 is a hell of a lot of jobs. It's expensive to train a new worker to use specialized equipment or software, or to understand the specific needs of your particular customers. You hang onto those workers as long as you can, and only let them go if it's absolutely necessary.

The unemployment rate as of the end of April was 8.6%. The stress test criteria included a "worst case" unemployment rate of 10.2%. Hopefully, that's as high as unemployment will go, but it's really not the proper figure for a stress test -- it's more of a "reasonable expectation" than a "worst case."

Should my suspicions be justified, and it turns out that the stress tests were rigged to keep the big banks' additional capital requirements in line with the availability of TARP funds, more trouble is on the horizon. Unemployed workers have a distasteful propensity to default on their credit card debt. Businesses in bad enough shape to lay off workers they know they will need if they survive this recession are one step away from defaulting on their business loans.

Stress tests, my ass. Confidence? No, not much.

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.

Milton Friedman is dead...

...and it actually may be, at long last, time to bury him.

This recession will be around for a while. Badly burned by its criminally lax lending practices in recent years, the financial services industry is making credit hard to get, for both individuals and businesses. Giving investment banks access to the discount window may help a little, but the simple fact is that those who make policy for the industry have had a bad scare, and are likely to be overcautious for quite a while. Individual and institutional investors have seen their net worth nosedive, and some who might have been willing to take a few chances have their "liquid" assets tied up in auction-rate securities.

Consumer confidence has crashed, and shows no sign of picking up again. Combine that with the very high debt loads of so many families, and it becomes clear that America won't be spending itself out of recession any time soon. Small businesses that can't get the credit they need are failing, and larger businesses are cutting personnel. The picture is bleak.

I'm beginning to feel just a little bit optimistic.

Given the catastrophic consequences of the Bush binge of deregulation (and failure to exercise those regulatory powers that remain), the laissez-faire ideologues are struggling to hide the egg smeared all over their faces. Typically timid Democrats are starting to feel comfortable calling for government intervention in the economy -- an idea that would have brought waves of public mockery from all the "economic experts" just a year or two ago.

Treasury Secretary Henry Paulson has offered a plan for reforming our regulatory agencies. Needless to say, the plan of a Bush administration official and Wall Street insider wouldn't especially strengthen government's regulatory powers, but the very fact that he felt it was necessary to offer a plan is encouraging. The Paulson plan is recognition of the growing understanding that a failure to regulate was the cause of our current market failure.

Even though most Americans are economic illiterates, and have only the vaguest notion of what has gone wrong and what might be done about it, they know something is wrong. As the recession deepens, and the faces of TV commentators look more and more grim, America will become more and more receptive to populist appeals. If the Democrats have the guts to climb out from under the thumbs of their big contributors from the financial services industry (granted, a big if), they can start reconstructing the economic safeguards that were established during Roosevelt's New Deal and steadily eroded since the advent of "Reaganomics" in 1981.

It would help a lot, of course, if Clinton and Obama could start competing to see who can draw the most blood from John McCain rather than from each other. While a McCain presidency could make our economy so much worse that the eventual reaction to his neo-con policies would move America much further to the left, a genuine depression would be a heavy price to pay -- and we certainly can't afford to add any more rabid rightists to the Supreme Court.

Right now, we have the best opportunity in many years to restore the economic justice and stability we sacrificed for the sake of unrestricted economic growth. Now is the best time to begin narrowing the gap between the super-rich and the rest of us; create a climate favorable to organized labor; roll back the wave of overpriced, exploitative privatization.

Milton Friedman is dead, and now is our best chance to exorcise his ghost.

Fodder from the Fed

So according to his testimony before Congress, Ben Bernanke seems to think that inflation -- currently greater than it's been for twenty-five years -- will somehow peter out in just a little while. He didn't say how that was going to happen, of course. Will demand for oil by China and India miraculously contract so as to reduce the price of a barrel of crude? Will agribusiness stop growing corn for highly profitable subsidized ethanol, put those fields back into wheat and soybean production, and bring down the price of food? Will the dollar suddenly start getting stronger, bringing down the price of imports?

I don't think so -- but I'm not a world-class economist and Chairman of the Federal Reserve Board. On the other hand, unlike Bernanke, I don't have to worry about my words having a chilling effect on the markets or on consumer confidence. Hardly anybody reads this blog, so I'm free to say what I believe without worrying about consequences.

Bernanke strongly suggested that we can expect more cuts in interest rates. That probably will make Wall Street speculators happy for a while, but the longer-term effects of further cuts are not likely to make the rest of us too happy. Even though the Fed slashed the federal funds rate by almost a third in January, consumer interest rates haven't declined at all. Some variable rate mortgages will reset at lower rates than they might have otherwise, but the rates for new fixed rate mortgages are still drifting upwards -- for the smaller numbers of families who actually can get new mortgages. Credit card rates are just as usurious as they were before the Fed actions.

In other words, the January rate cuts have done nothing to increase consumer spending, and so have done nothing to stimulate the economy. The main effect of further rate cuts by the Fed will be to further weaken the dollar -- and, by definition, a drop in the value of your money is inflation.

Now that the rest of the country has caught up with me and started talking about stagflation, lots of people (including Bernanke) are desperately denying the possibility that it ever could rear its dreaded head again. Of course, there still are plenty of people denying that we're in a recession too, and for very similar reasons. Formally, a recession is defined as two consecutive quarters of negative growth, so we won't officially know if we're in a recession now until the figures for both this quarter and the next are in, sometime around the end of August.

Clearly, if there's no recession, there can't be stagflation -- and anyway, many of the naysayers maintain, you have to have both economic stagnation and inflation for years before you can properly use the term stagflation.

Big deal. Call it what you will, we'll still have to contend with economic contraction, higher unemployment, and inflation at the same time. The Fed isn't very good at doing that, because it can't raise interest rates to counteract inflation at the same time it cuts them to counteract recession.

Dammit, we're going to have to look to Congress again! I'll describe some of the useful things Congress won't do in a later post.

Action on the economy! (Well, sort of.)

First, the monetary policy: the overnight rate was reduced by 75 basis points in a "surprise" action by the Fed, and another half-percent cut is expected at the next regular meeting. The main impact is that Wall Street will momentarily stop screaming, "You're our bitch, Ben, and don't you forget it!"

Next comes the fiscal policy: the House and the Administration agreed to "compromise" on an "economic stimulus" bill. Certain Democratic members of the Senate will bloviate on the need for an extension of unemployment insurance before they take their seats and vote for "the best package we could get." Certain Republicans will bloviate on the intolerable expansion of the federal deficit, then vote to further expand that deficit with continued funding of the Iraq fiasco.

Neither the monetary policy nor the fiscal policy will bail our economy out of the mess its in, and the best we can hope is that they do nothing at all rather than make things worse. Let's begin by looking at monetary policy, and save the fiscal policy for another day.

Who controls the money supply?

Traditionally, a cut in the overnight rate ripples through credit markets and leads to generally lower interest rates, expanding the money supply by making it easier to borrow. Businesses and individuals use easier credit to buy more goods and services, which stimulates the economy. Sadly, these are not traditional times. Because of government's growing failure to regulate financial markets, the Federal Reserve lost control of the money supply.

The origin of the current credit crisis is not that it was too hard to get credit, but too easy. We're all familiar with the subprime mortgage fiasco -- banks extended credit to people who had no chance of making their mortgage payments once their adjustable rates reset at higher levels, then repackaged those flawed mortgages as supposedly "safe" securities which were sold to investors. The banks took their profits, the investors were left with the bad paper, and the increased demand for housing over-inflated its price -- the "housing bubble." Many who actually could afford their first mortgages borrowed against the inflated values of their homes with second mortgages and home equity lines of credit. When the bubble began to burst, and housing prices fell, some found they owed more than their homes were worth.

Less a focus of the media, but obvious to anybody who wasn't asleep, standards for other sorts of loans also declined rapidly. Our mailboxes were filled with "pre-approved" credit card applications, and auto loan offers bragged, "Bad credit? No credit? No problem!" While it's true that the 2005 change in the bankruptcy law gave the banks more protection from defaults on credit card debt, you still can't get blood from a stone. More and more families, including many who hold conventional mortgages or none at all, have debts they cannot pay.

Financial institutions like Citigroup and Merrill-Lynch have been "writing down" billions of dollars in debts they never will collect. So far, the losses come from subprime mortgages they were unable to securitize before the housing bubble burst, but we can expect even more write-downs from credit card defaults and other debts. A write-down represents a loss of liquidity. Every write-down means there is less money to lend.

Citigroup, for one, has been raising new capital by selling preferred stock to foreign investors, including sovereign wealth funds. Preferred stock is not voting stock, but it pays a guaranteed dividend. We don't know how much Citigroup will be paying for its bailout funds, but no matter how far the Fed cuts the overnight rate, interest rates at Citi will have to be high enough to cover its new expenses.

Also, no matter how far the Fed cuts rates, banks will not go back to the kinds of lending practices that caused their current problems. Quite probably they will be extremely conservative for a while, and credit will remain tight. New mortgages are being written for those with good credit, but primarily to refinance existing mortgages at lower, fixed rates -- not to buy refrigerators, second homes, and Hummers.

The recession is here, and it won't be going away very soon. Our central bank and our government, by failing to regulate the financial industry, relinquished control of the money supply to a self-serving, greed-driven corporate culture. We'll see if those elected next November have the strength of character to restore the regulation necessary to avoid this kind of market failure in the future -- no matter how much of their campaign funds came from Wall Street.

The politics of stagflation

Yesterday we heard that the Producer Price Index (PPI), which measures inflation at the wholesale level, was up 6.3% for 2007. Today, we learned that the Consumer Price Index (CPI). which measures retail prices, was up 4.1% -- the largest increase since 1990, and up quite a bit from last year's 2.5%.

Driving those increases were sharp increases in commodity prices -- crude oil, of course, but also corn, soybeans, cattle, copper, uranium, and other raw materials needed for production. The increases are demand driven. Developing countries, especially China and India, are now in the market for products previously hogged up by the United States and Western Europe. As the Chinese and Indian economies continue to grow, competition -- and prices -- can only increase.

There are those, in government and the business community, whose rose-colored glasses seem to be affixed to their heads with nails driven through their frontal lobes. A few still say we can dodge the recession that already has started; others claim that a recession in the United States will halt the growth of commodity prices.

Sorry, but it ain't gonna happen. We're in for a rough ride.

When prices are going up and incomes are going down, both consumers and businesses suffer. In last few recessions, people maintained their standards of living by using credit. This time around, though, credit is tight. Lots of people already carry more debt than they can pay back, and banks finally are raising their lending standards to where they should have been all along.

As I explained a couple of posts ago, when you have inflation and recession at the same time, it's called stagflation -- and interest rate cuts by the Fed won't solve the problem. Lower interest rates, combined with our weak dollar, will just make it harder to attract the foreign capital we'll need to get the economy going again.

So if the Fed can't save us, who can?

Oh, crap. Looks like it's gonna have to be Congress. Oh, crap, crap, crap! But what, you ask, can Congress do?

A really great start would be removing the tariff on imported ethanol, currently 54 cents a gallon. Brazilian ethanol, made from sugar cane, would be cheaper than our own, which is made primarily from corn. There would be some impact on gasoline prices, but even more impact on the price of food.

Corn used for ethanol can't be used to feed animals, so meat, egg, and dairy prices have gone up sharply. As more agricultural land is used to grow corn for ethanol, there is less available to grow wheat and other grains, pushing food prices even higher. Also, let's not forget the cost of the corn sweeteners that add empty calories to so much of what we eat.

While it's eliminating the ethanol tariff, Congress also could switch the $2.5 billion subsidy paid for production of corn-based ethanol to more cost-efficient forms of alternative energy. Once food and energy prices drop, consumers will have more money to spend in other sectors of the economy. Wouldn't that be great?

It won't happen, of course, because the agribusiness lobby is just too strong, and some of our elected representatives are just too dependent on agribusiness money. Instead, we'll get a few tax cuts and a few spending programs, all targeted at recession rather than inflation, and all more cosmetic than functional.

And we'll all just tighten our belts and try to ride it out.

What's worse than a recession?

Yes, depression is worse, but not an immediate concern. We still have plenty to worry about, though.

Back in the seventies, we ran into an economic situation that broke the rules. It was so unprecedented that economists had to make up a new name for it: stagflation. Briefly, stagflation is what you get when the economy isn't growing and unemployment is up (recession), but prices continue to rise (inflation). It's the worst of both sides of the business cycle, rolled into one.

Economists still debate the specific mechanics of what happened, but all agree that rapidly increasing fuel prices played a major role. Higher energy costs are reflected not only in the prices of gasoline and heating oil, but in the price of food and virtually every other consumer good. It takes energy to produce and transport a product, and at least part of the costs of production must be passed along to the consumer.

If income had kept pace with price increases back then, inflation would have been the only problem, but that's not what happened. Faced with increased fuel costs while trying to remain competitive, many producers responded by cutting labor costs. As workers were laid off, demand dropped, putting more pressure on business.

According to classic economic theory, when demand drops, prices should drop as well -- but thanks to unprecedented cooperation among the OPEC states, fuel prices continued to rise. Producers in the United States responded in the only way they could: they pushed up product prices while continuing to lay off workers. Demand for goods and services continued to fall, but prices kept rising. High unemployment put downward pressure on wages, decreasing demand even more. Times were hard.

What saved us was the collapse of oil prices in 1982. Our slowing economy decreased demand for oil, and the OPEC oil cartel couldn't keep its act together. Various member states began selling more than their quotas to maintain their incomes; competition returned to the oil business, and the price of crude fell to less than half of what it was at its peak. The Reagan Administration claimed credit, of course.

There are clear similarities between 1973 and 2008. Adjusted for inflation, today's oil prices are higher than they were at their peak in 1982, and the dollar is weaker than it has been at any time since the 1970s. The sub-prime mortgage crisis and the immense increase in federal borrowing to finance high-end tax cuts and the war in Iraq have sharply reduced the availability of credit. Less credit means less demand for goods and services, which leads to less demand for labor, and higher unemployment. There is no indication that oil prices will drop sharply any time soon.

Fed Chairman Ben Bernanke, under considerable pressure from Wall Street, tells us to expect further cuts in the discount rate, but the threat of stagflation puts the Fed into a double-bind -- cutting interest rates can make the coming recession less onerous, but create inflationary pressures. Cutting interest rates also will put further downward pressure on the dollar, making all imports -- including oil -- more expensive.

It's also unlikely that rate cuts will be increase demand as much as they may have done before the credit crunch. Burned in the sub-prime meltdown, financial institutions are hesitant to offer consumer credit as readily as in the past, and consumers who can qualify are beginning to pay down their debt rather than make new purchases.

In other words, cutting rates might do more harm than good -- except, of course, for hedge fund managers and other financial services executives, who earn annual bonuses based on how well the market does. Rate cuts do tend to send stock prices higher, and we can't expect the richest individuals in the country to get by on just their seven-figure salaries, can we?