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9/4/09: THE ECONOMY IS STILL FALLING (if slower) AND IT NEEDS ANOTHER BOOST On August 21, Federal Reserve Chairman Ben Bernancke spoke to the world's Central Bankers at their annual get-together to take stock of the world economy. He spoke of last Fall's great financial crisis that had, in his words, plunged the world into a deep recession. He then noted at the end of his speech, that the world seems to be emerging from that recession. The New York Times headlined that aspect of his speech stating that the world's Central Bankers were optimistic that the recession was ending. [See New York Times, Aug 22, 2009. For Bernancke's speech see http://www.federalreserve.gov/newsevents/speech/bernanke20090821a.htm] What is remarkable about Bernancke's speech is that though he acknowledged that unemployment was likely to decline slowly, he failed to mention that in the US we are still losing jobs and failed to say anything about how to get job creation going again. [Job losses were 225,000 for the month of August.] Another interesting omission from Bernancke's speech is that although he mentioned the fall in housing prices and construction activity and the decline in confidence in fancy mortgage backed securities on the part of investors, he didn't once concede that there had been a gigantic housing bubble and that it had caused the current crisis. He also failed to see any connection between rising inequality and the recession. In fact, from his speech, you would think that the crisis were some "bolt from the blue" an "act of God" that "no one" could have anticipated. Of course this is errant nonsense. I was talking about the housing bubble in the year 2006 and Dean Baker, the man who first "called" the housing bubble did so in 2002. [See http://www.cepr.net/index.php/publications/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble/] But let's not belabor the past. What about the future? The world's Central Bankers seem to believe that averting a total financial meltdown and "fixing" the financial system, will cause the rest of the economy (the stuff that matters to us like jobs and incomes) to somehow take care of itself. This is also nonsense. Even after the 1930s New Deal fixed the financial system the real economy did not recover until World War II - six years after those financial reforms. The question before us as citizens who hope to influence our policy-makers is - what is the government going to do to put people back to work? Though the Central Bankers see signs that the recession is ending --- businesses are going to be profitable soon, the stock market is rising, bankers are getting bonuses again --- ordinary folks are still losing jobs. The "good news" is that the rate of job loss seems to be slowing. But we need job creation not just slower job loss. That's why there has to be another federal stimulus. Disposable personal income (what we ultimately can cash from our paychecks) fell from the middle of 2008 till the end of March of this year and then rose due to a combination of tax cuts and increased government transfer payments. [See http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=58&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2007&LastYear=2009&3Place=N&Update=Update&JavaBox=no#Mid Diposable personal income rose $137 billion between the first and second quarters of 2009. Personal tax collections fell $100 billion and transfer payments rose $48 billion - almost a perfect offset.] However, personal consumption expenditures, the spending that drives the economy, didn't rise at all. All of the increase in personal income went into personal savings. [Actually personal consumption expenditures rose approximately .01% -- that's one - one-hundreth of a percent --- $1 billion out of close to $10 trillion. Personal savings rose $142 billion.] That may help the economy in the future but right now, the only way to put people back to work is for some one or some entity to spend money on goods and services. [National savings if translated into investment increases economic growth. National savings that is not spent borrowed and invested by someone else is a drag on the economy. In economics this is known as the paradox of thrift. Right now, the key to economic recovery is a rise in consumer spending.] Don't look to private investors --- they are still cutting back and they have a deep hole to climb out of. [See http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&Freq=Qtr&FirstYear=2007&LastYear=2009 Gross Private Domestic Investment fell from approximately $2.3 trillion in the third quarter of 2007 to approximately $1.5 trillion in the second quarter of 2009.] State and local governments also have to cut spending because revenues are down and unlike the federal government they cannot borrow at will. So there you have it. The only way to stop job loss and begin the process of job creation is for the federal government to spend more money to fill the gaps left by declines in private investment and state and local government expenditures and the failure of consumption growth to match the recent rises in disposable personal income. It's as simple at that. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 7/6/09: The Public Has to Stand Up and Be Counted in Favor of True Health Care Reform We are witnessing a great debate on Capitol Hill as the Obama Administration attempts to deliver on the campaign promise to "fix" our health care system. The insurance companies, for-profit hospitals, and pharmaceutical companies who benefit handsomely from our current system are gearing up to destroy a "public option" alternative to private insurance. That alternative is essential for cost controls. I urge everyone to participate to the fullest extent possible in this great national debate so that, for once, the fear-mongering about "socialized medicine" and "rationed care" will be defeated by reasoned argument and an angry public. The nefarious role of those who profit from our current healthcare system is described in an article in the July 2 issue of the New York Review of Books. The author, Arnold Relman, argues that one of the major causes of the high cost of US medical care is the fact that [quote] "more than in any other advanced country, large parts of the system are owned by investors. … [T]he entire system behaves like a profit-driven industry." He continues: "No other health care system is as focused on generating income as ours, and in no other country is medical care marketed and advertised so aggressively, ... This increases health costs, while hospitals concentrate on the delivery of profitable, rather than effective, services. It also favors those who can pay over those who need medical care but can't afford it." [See Arnold Relman, "The Health Reform we Need and Are Not Getting" New York Review of Books, July 2, 2009. http://www.nybooks.com/articles/22798.] Health profiteers like the current system - why wouldn't they? It makes them multi-millionaires. They never fail to tell us that we have the best health care in the world - and that's true for those who can afford it or whose insurance covers it. We also have relatively poor health outcomes and we spend a higher percentage of our GDP on health care than any other industrialized country. Now I know that many believe that a profit-driven industry will be efficient and deliver high quality at the lowest possible cost because of competition. But medical care isn't a product like a car, clothing, or a meal in a restaurant. Consumers of those products can judge their degree of satisfaction by USING the product. But patients are not like that. They must rely on doctors to tell them what they need. This point was made back in the 1960s by Nobel prize-winning economist Kenneth Arrow who concluded that competition among doctors would be unlikely to moderate cost increases. [See Kenneth J. Arrow, "Uncertainty and the Welfare Economics of Medical Care," The American Economic Review, Vol. 53, No. 5 (December 1963).] Our profit-driven medical establishment produces great inequalities in the delivery of health care as well as increasing cost --- and they are willing to spend lots of money to make sure that Congress does not stop the gravy train. That is where we citizens come in. We have to see through the attempted demonization of "government controlled" health care so that if a serious and effective "public option" comes before Congress we can insist that they make sure it can effectively compete with for-profit insurance companies. [I might add parenthetically that it is a crying shame that the most efficient, universal system, that controls costs by getting rid of the for-profit insurance industry while maintaining independent doctors and hospitals - the single-payer option represented by HR 676 - is considered a "non-starter" in the current political climate. It is important to note that the strong public option is just a poor "second best" which will not control costs anywhere near as well as would a single-payer system.] Private colleges and universities compete with public institutions of higher education. Imagine what their tuition would be if there were no state colleges and universities. The postal service competes with FedEx and UPS. Has the private sector been harmed by competing with these government entities? A true public option run like traditional medicare would be a valuable competitive tool to keep private insurance costs in line. It amazes me that those who tout the virtues of the free enterprise system want to shield private insurance companies from real competition. Please don't let them get away with this --- stand up, shout and be heard. Health care reform is necessary - let's not lose this opportunity. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 6/12/09: THE DEFICIT HAWKS ARE AT IT AGAIN --- DON'T LISTEN TO THEM! On Wednesday, June 3, Fed Chairman Bernanke testified before Congress. While acknowledging that the federal government had a responsibility to combat the current recession with deficit spending, he also stated that the government needed to be thinking about cutting back on deficit spending in the future. "Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," he said. He added "Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," The NY Times reporter stated that "…financial markets have started to quaver on worries about the government's spending plans and how they are piling more obligations onto the country's $11 trillion national debt." The evidence for this conclusion is that fact that "…yields on Treasury notes have risen to their highest points in five months as investors who once thronged to the safety of government debt begin to invest elsewhere." [See New York Times, June 4, 2009] To paraphrase former President Ronald Reagan - "There they go again!" The deficit hawks are at it again - and they are just a wrong now as they've ever been. In the Guardian Unlimited on May 27, Mark Weisbrot, co-director of the Center for Economic Policy Research write an OP ED in which he argued that what the US needs is more fiscal stimulus not an effort to reign in the deficit. Weisbrot notes that the Congressional Budget Office predicts that recent decisions will increase the federal debt held by the public from 40.8 percent of GDP in 2008 to 71.4 percent in 2013. This may seem like a large increase but after WW II, the US had a public debt of 109 percent of GDP in 1946. Despite the fears in the NY Times article, the rise in the U.S. budget deficit from 3.2 percent of GDP in 2008 to 13.1 percent for 2009, has occurred while interest payments on the debt have actually fallen, from 1.8 to 1.2 percent of GDP. Despite the rise in interest rates recently, the CBO does not project the burden of interest payments (which is interest as a percentage of GDP) to rise until 2013. Weisbrot (and I agree with him) argues against the view from the NY Times that increases in the debt as a percentage of GDP will harm long run growth. On the contrary, he claims that the debt we accumulate during this recession is not relevant to the standard of living of future generations. [Weisbrot's OP ED can be found at http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/sp-misses-the-boat:-uk-and-us-need-more-stimulus,-not-deficit-reduction/ ] There are two elements to the future prosperity of the US. First, the growth in productivity and skills embedded in the economy as well as the accumulation of new capital equipment, software and structures represent what we think of as the supply side of the growth process. However, before those increases can actually raise the standard of living, there must be sufficient demand to call forth that investment and employment. If the government cuts its spending or raises taxes in a foolish pursuit of fiscal discipline, there will be less employment and investment in the near future and thus slower growth in the long run. If that happens, then the debt in the future will actually end up being higher as a percentage of GDP because GDP will not have grown rapidly. On the other hand if there is growth in the GDP because employment was high, then the future debt will end up being a lower percentage of GDP. Thus, it is essential we not cut spending or raise taxes before a sustained recovery is entrenched. That may be two years from now. Thus we had better ignore the ridiculous warnings of the deficit hawks. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 4/19/09: IS US CAPITALISM LOSING ITS LUSTRE? A recent Rasmussen poll (April 2009) found that only 53% of Americans believe that capitalism is superior to socialism. About 20 percent support socialism and the rest are undecided. Those polled were not given definitions for capitalism and socialism. A number of right-wing commentators have seized on this result and blamed President Barack Obama for selling a socialist agenda. I propose an alternative explanation. The attacks on President Obama's programs as "socialistic" may have made a significant percentage of those polled more positively inclined towards socialism - whatever they think it might be - because they support his policies. I think that since this poll has gotten a significant amount of publicity, it would be worthwhile to attempt to get some clarity about what capitalism and socialism actually are. Capitalism is easy to define. It is the economic system we see all around us. There are private businesses --- individually owned, or in partnership or in the form of corporations. They get income by selling goods and/or services in markets and can do with that income what they wish. Government is responsible for, among other things, protecting the rights of individual property owners (for example, by enforcing laws against stealing) and enforcing contracts. One characteristic of the specific version of capitalism that exists in the United States is the increasing importance of giant businesses - as demonstrated by the emergence of entities that are too big for the government to allow them to fail. I talked about this in my last commentary. Defining socialism is more complicated. My dictionary says socialism refers to "any of various theories or … movements advocating or aiming at collective or governmental ownership and administration of the means of production and control of the distribution of goods." [Webster's Third New International Unabridged Dictionary]. Note the importance of government ownership. Making rules that constrain what private businesses do is not sufficient to turn an economy into a socialist one. The words "means of production" refer to machinery and buildings -- the physical capital of businesses. The centrally planned societies of the former Soviet Union and Maoist China definitely fit that definition and thus many people associate socialism with the totalitarianism of those societies. However, we should note that there is nothing in the definition of socialism that involves totalitarian rule. Unaware of the true definition, many people believe socialism involves any economic activity engaged in by government. Thus, according to this view, the postal service, public libraries, public universities and Amtrak are examples of socialism. So are Medicare and Social Security. Yet even in Europe where governments play much more extensive roles in the economy than in the US (most have government provided health care, for example), the system is still capitalism. There are plenty of private companies who own most of the productive capital. What exists in the United States and in Western Europe are various versions of "mixed capitalism," which means simply that the economy is run on a private enterprise model but that the government plays a significant role in regulating the behavior of enterprises and individuals, in purchasing things like military equipment and in redistributing income as in the Social Security system. These actions influence the course of the economy but do not control it. Perhaps the surprising small margin of the population that unequivocably supports capitalism over socialism is because many people are disgusted with the excesses of giant businesses who have come to dominate our American version of capitalism. While right wingers rail against the idea that President Obama's policies will make the US more like Europe, it is possible that the European model of social democracy - not full blown socialism with total government control but with much more government involvement than here in the US - is actually becoming more attractive to ordinary Americans sick to death of inequality, insecurity and cronyism between the super-rich and political leaders. [On this, see Jacob Hacker The Great Risk Shift.] I think the results of the Rasmussen poll indicate a healthy skepticism about our economy and how it functions. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 4/3/09: Have you ever heard of Peter Schiff? He has been hailed as someone who "called" the recession two years ago. I happened to see him on TV recently. They showed clips from 2006 of him debating individuals who were asserting that the economy was in great shape. He was arguing that the housing market a bubble and its inevitable collapse was going to have a negative impact on the entire economy. In 2006 I along with a few economists like my friend Dean Baker was also talking about how the housing market was a dangerous bubble ready to burst. However, where Baker and I disagree with Schiff is in his explanation of WHY the economy got into the fix it's in and what we should do about it. On TV, Schiff made the absurd (but on its face plausible) argument that WE (I'll get back to this word in a minute) caused this problem by borrowing and spending beyond our means and therefore WE cannot solve this problem by more borrowing and more spending. It does sound plausible -- right? Too much borrowing and spending is the problem so the solution cannot possibly be more of the same. By the way, Schiff also said that WE (that word again) have to take our medicine in the recession. Deflation and business failures are needed to clear away all the bad choices made during the artificial bubble boom of the previous eight years. Trying to stop the recession will only make things worse. Here's what's wrong with Schiff's diagnosis. Debt can be used to very positive ends by individuals, businesses and governments. You can borrow to purchase a college education which will pay off in a career and higher income than you would have had if you had not gone to college. A business can borrow to purchase new machinery which will lead to higher income over the life of the machine. Governments can borrow to finance basic scientific research and development (think of the internet) which pays off in faster economic growth in the future and increased tax revenue. On the other hand, debt can be used to expand financial businesses which make profits by speculating rather than producing goods and services for consumers. Debt can be used by individuals to take lavish vacations. Governments can go into debt by cutting taxes on high income individuals who will in turn take those tax cuts and invest in businesses heavily involved in financial speculation. My point is that the problem of debt-fueled expansion over the past eight years was WHAT THE DEBT WAS USED FOR, not the number of dollars borrowed. A striking fact is that the percentage of US debt contracted by households (you and me on mortgages and credit cards mostly) stayed roughly the same between 1975 and 2005 while the percentage of debt contracted by financial businesses went from 10% of all debt to 30% of all debt. (On this issue, see the recent book, The Great Financial Crisis by John Bellamy Foster and Fred Magdoff. [NY: Monthly Review Press, 2009]) Meanwhile, non-financial businesses - producers of cars, food, musical instruments, etc. - saw their share of US debt shrink from 33% to 20%. In other words, it was in the speculative, non-goods producing financial sector that much of the recent debt explosion occurred. It wasn't an all-encompassing "we" as Schiff was arguing. (Meanwhile, the "we" who have to suffer through the recession does not, so far, appear to include the Wall Street high rollers who caused the mess!) If the Obama Administration succeeds in getting Congress to pass his budget -- a big if, given the efforts of lobbyists for insurance companies and dirty energy companies to derail his health care and energy reforms - the large short term increase in government borrowing will be spent on long term investments such as a universal system of health care that will, in the long run, bring costs down but just as importantly will increase the health of our citizens. Similarly, investments leading to changing how we generate and consume energy will increase government borrowing in the short run but in the long run will lead to lower costs and, more importantly, an environment less likely to accelerate global warming. And of course both of these actions will also put people back to work. Mr. Schiff sounds right but because he fails to distinguish borrowing for productive investments from wasteful borrowing he is in fact dead wrong. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 3/22/09: In the early 1990s, my daughter worked as a Legislative Aide for a Congressman. They were discussing a bill that would have eased restrictions on bank mergers. My daughter asked: "Aren't small banks better than big banks!" She was told (in a friendly way) to stick to her own areas and "stay out of banking…" - an admonition that suggested there was nothing wrong with big banks. It turns out that the thought behind her lay-person's question --- that smaller sized business institutions are to be preferred to the giants that grew so large over the 20th century - was correct. We have learned the painful lesson that allowing institutions to grow until they are - TOO BIG TO FAIL - is a recipe for disaster. The lay person prefers small to large for the same reason economists prefer competition to monopoly. Competition rewards firms that satisfy their customers with profits and punishes those firms that do not with failure. Knowing that their business might fail leads decision-makers to carefully manage the risks they take. However, when a business gets very big, failure becomes a danger not just to shareholders and creditors but to many other indirectly connected individuals and institutions. Thus, the government stands ready to step in and prevent that failure. A version of this approach actually worked dramatically to stem the tide of bank failures in the 1930s - it was the institution of deposit insurance. Once it was in place, the danger of runs on banks receded because depositors knew that their deposits were safe. In other words, the government didn't have to bail out the banks directly. It merely prevented "runs" due to a loss of confidence by insuring depositors. Unfortunately, that's not enough today. Deposit insurance only which kicks in AFTER banks fail. But decision-makers in large financial institutions know their organizations are "too big to fail." This creates an incentive to take big risks because the potential punishment of failure does not exist. Nobel Prize winning economist George Akerlof co-authored a paper with Paul Romer that pinpointed this problem and introduced a new one. They investigated four instances where investors knew they were driving businesses into bankruptcy. Why did they do it: "Investors acted as if future losses were somebody else's problem … They were right." The paper was entitled "looting." - as in looting from one's own business. Legislation to stop businesses from becoming too big to fail has a long history in the US. In 1890, Congress passed the Sherman Anti-Trust Act. The goal of this law - and many subsequent laws - was to use the government to force industries to maintain a competitive structure - to not permit a few giants to emerge from the pack of small and medium-sized competitors. Needless to say, those laws failed to stop the emergence of giants. Many theorists believed it was unnecessary to even try. Thus, by the late 20th century, anti-trust laws seemed quaint and old fashioned. Some economists (sometimes acting as hired guns for businesses) tried to convince the public that no matter how gigantic a business became (think General Motors, Citicorp, Bank of America, Microsoft) as long as it wasn't a government protected monopoly like a public utility, it was COMPETITIVE ENOUGH. Even if it were one of only two or three businesses selling similar products (think Coke and Pepsi, Exxon-Mobil and Shell), they would still feel the threat of POTENTIAL competition in making their decisions. In other words, giant businesses posed no threat. This of course was what was behind the jocular admonition to my daughter to "stay out of banking" when she wondered if smaller banks weren't preferable to larger ones. Unfortunately, we now see the real threat in letting businesses get very large. Once they become too big to fail, we give the decision-makers in those businesses terrible incentives - the incentives to take crazy risks, knowing that they will get to keep the rewards for the period of time they make profits (or engage in successful looting), and be able to slough the losses off onto us taxpayers. Some people are suggesting we go back to my daughter's approach - break up giant firms before they get too big to fail. Fed Chairman Ben Bernanke suggested, alternatively, that we create a super-regulatory body to control the behavior of giant firms. You all know my proposal from two weeks ago - take them over and run them for our benefit. (For a really good journalistic treatment of the rise and fall of AIG and the regulatory changes that made it possible as well as a serious critique of the Paulson-Geithner program to shovel money into these giant firms to keep them from failing, see Matt Taibbi "The Big Takeover" Rolling Stone April 2, 2009 available on line at http://www.rollingstone.com/politics/story/26793903/the_big_takeover/1.) Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 3/6/09: In last Sunday's New York Times, [March 1] Tyler Cowen from George Mason University weighed in with reasons why banks should not be nationalized. Meanwhile, on the other end of the spectrum, Fred Moseley from Mount Holyoke College wrote an article for the journal Dollars and Sense which urged nationalization of all banks that are currently insolvent. I want to focus today's commentary on the apparently "way out" idea that permanent nationalization of all insolvent banks is the appropriate way to go. This is not the temporary "receivership" option some have mentioned, and I understand this approach will initially be dismissed as politically impossible and economically impracticable. What follows is a brief dialog I have put together between Cowen and Moseley - I am quoting from Cowen's piece in the NY Times and from Moseley's point by point rebuttal which he sent me. COWEN: the government doesn't have the expertise to run large bank holding companies. There is the danger that caretaker managers, with bureaucratic incentives, will never return the banks to profitability. And restrictions on executive pay already enacted into law, will make it hard to hire the necessary talent. MOSLEY: There are lots of unemployed bankers out there with lots of expertise. I imagine that most of them would be eager to work for the government banks, even if the salary is lower. Plus, surely government-run banks can't be worse than what we have now! We then get to the heart of the debate: Cowen: there would be increasing pressure to politicize lending decisions - for instance, by requiring loans to the ailing automobile industry. Moseley: Not a problem for me! I think lending decisions should be "politicized", i.e. the general priorities and objectives decided democratically. Let's think about that issue for a minute. The private sector decision-makers decided to create the fancy instruments that they then fraudulently marketed to other institutions while the regulators looked the other way --- and professor Cowen is worried about future politicized lending decisions? (I know there's an argument that government regulations forced banks to make subprime loans and that is what got us into this mess. This assertion is totally false. The private sector responded to the bubble by utilizing these fancy instruments that had been around since the 1970s. Government regulations failed to stop it but did not cause it.) What could have been more politicized that the willful ignoring of the growing housing bubble between 2003 and 2006? If a knock down open-ended political debate in the press, in Congress, and in our various civic organizations had occurred beginning in 2003 about the looming dangers of the housing bubble we would not be in the current economic predicament. Instead, a handful of experts and MAESTROS (like Alan Greenspan), enabled by the media, drowned out the sane voices of people like Robert Shiller, Dean Baker and others. If every insolvent bank were nationalized and the decision-making turned over to public servants beholden to the elected representatives of the people, then lending decisions could be made based on the political desires of the people. If we want to create an auto industry that produces electric cars and does a tremendous amount of research on the hydrogen fuel cell, then we can order our nationalized banks to lend to that industry. The same approach can be used to get capital to green technology start-ups. By the way, I do not expect all banks to have to be nationalized. There are plenty of successful (admittedly smaller) banks all over the country who have behaved responsibly and are not insolvent. I just think what Cowen called the "shovel method" of attempting to deal with the current banking crisis - that is shoveling money into them in hopes they'll recover - is a prescription for disaster. Let's nationalize the dead banks and put them out of their misery - and at the same time, we can use these newly nationalized banks to get credit flowing again. Because that's the main role of the financial system anyway. (Creating credit in the banking system is a means to an end. Unfortunately, in this bubble-dominated world, it has been treated as an end in itself.) Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 2/22/09: THE STIMULUS IS JUST A FIRST STEP - MUCH MORE NEEDS TO BE DONE A year ago, my February commentary focused on the stimulus package of 2008. What a difference a year makes. The total of that stimulus was $146 billion. By contrast, the recently passed stimulus package represents a close to $800. However, despite the assertions by some politicians and pundits decrying the debt burden this stimulus is allegedly bequeathing to future generations, most economists believe the package is not large enough to do the job. The reason is because all other categories of aggregate spending are heading in the wrong direction. Anyone who has ever had a Principles of Economics course has been taught that total spending in the economy can be divided between spending that come from households buying current consumption items, businesses buying capital goods (investment spending), governments hiring workers and purchasing supplies from businesses, and the difference between how much foreigners buy from us and what we buy from overseas. (In algebraic terms that's: Y (income) = C + I + G + Xnet) According to the Department of Commerce, Consumer spending has averaged about 70% of total income (or GDP) for the last seven years, Government purchases (including State and Local Governments) about 20%. Private business investment up to 2008 varied between 15% and as high as 16.8% of GDP. If you were doing the math you might have noticed those percentages add up to more than 100%. That's because our trade deficit - with imports exceeding exports - has subtracted from the total. That amount has varied between 4 and close to 6% of GDP. Right now, investment is in free fall -- over $100 billion less at the end of 2008 than a year earlier. Consumption spending had been the main driving force of the economy during the last six years having risen from $7.3 trillion in 2002 to $9.7 trillion in 2007. Even in the summer of 2008, while investment was tanking, consumption was still rising but not any more. In the last three months of 2008, consumption tumbled over $100 billion. Even more significant, consumption has begun to fall as a percentage of GDP as people strive to increase their personal savings. Meanwhile, State and Local government expenditures have also started falling and despite the passage of the stimulus package, they are undoubtedly going to be lower in 2009 than they were in 2008. (Note, these are falls in absolute numbers - usually they rise with inflation but even prices were flat during 2008). All in all, the Congressional Budget Office estimated that output will fall approximately $2 trillion below our potential (what would exist if there were no recession) over the next two years. Thus, we are attempting to fill a $2 trillion hole in the economy with less than $800 billion dollars. Two weeks ago, I went through the different bangs for each buck associated with the various parts of the stimulus package. (Economists call this the multiplier effect - how much will total income rise for every dollar increase in spending.) For the $800 billion to be sufficient we would need a two and a half dollar bang for each buck to fill the $2 trillion gap. Moodys.com noted that all parts of the stimulus package produced less than $2 for every dollar in the package. Even worse, some of the tax cuts will have bangs of less than $1 per dollar lost to the treasury because many recipients of those tax cuts will pay down debt rather than making new purchases. Thus, we can virtually guarantee that the current stimulus package will not be enough. (The politicians and writers who claim this is "too big" are assuming that high government borrowing will somehow harm the economy. As I have argued in many of these commentaries, that claim is total nonsense - and particularly false when private investment is falling, employment is falling, and private consumption spending is falling.) That is why I urged people two weeks ago to try to get Congress to reject tax cuts in favor of spending increases and why I now urge everyone to pressure Congress to think of this stimulus package as only a down payment on what promises to be a long and hard battle against the downdrafts buffeting the economy this year and next. In previous recessions, private investment has been the last element in the economy to recover. Businesses have usually waited to see if consumer spending really is recovering before taking risks making new investments. Thus, we depend on the American consumer to end this recession. But the failure of incomes of the typical full time worker to rise significantly over the course of the previous eight years meant that most growth in consumption was fueled by debt. With debt contracting, consumers will not spend more until they receive increases in incomes. Wages represent the bulk of personal income. Thus, the key long run policy beyond the stimulus must include ways of increasing wages. Only then will consumption turn around. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 2/8/09: SPENDING HAS MORE BANG FOR THE BUCK THAN TAX CUTS As the economy has fallen into a severe recession, with some predictions stating that unemployment could top 10% by the end of the year, all agree that it is essential that Congress and the President agree on a "stimulus" package. The Senate is currently considering an $827 billion package aimed at stopping the descent and hopefully reversing the economy's course so that we will see recovery in our future by the end of the year. (The cut from a close to $900 billion package was the result of a compromise worked out on February 6.) So far, public opinion is strongly in favor of a stimulus spending bill and willing to give the President time to deliver on his campaign promises. But President Obama recently noted that the public's patience will run out and that he will be a one-term President if the economy does not revive within three years. It is in this context, that I want to focus on two assertions from opponents of the stimulus. First -- the argument that spending money only is not stimulus. It is true, for example, that if the federal government gives money to states who then refrain from laying off workers that doesn't create any new jobs. However, it still stimulates the economy because it reduces the rate at which people lose their jobs. Stopping the hemorrhaging of job loss is an essential first step before the economy can begin to create jobs again. Second -- the argument that the bill passed by the House has too much spending in it and not enough tax cuts. In fact, this criticism has it exactly backwards. Mark Zandi of Moody's.com, a non-partisan economic think tank, has produced an analysis in which he attempts to predict the different impacts of a dollar's worth of spending or tax cuts. For every dollar of either tax cut or spending increase, he calculated how much total income (GDP) would increase. For his specific analysis of the House Bill from Jan 21, 2009, see http://www.economy.com/mark-zandi/documents/Economic_Stimulus_House_Plan_012109.pdf Here are some examples: A cut in the corporation income tax of $1 will produce 30 cents in GDP growth. An across the board tax cut will produce $1.03 in rising income for every dollar lost to the Treasury. Making the Bush dividends and capital gains tax reductions permanent will increase GDP by 38 cents per dollar of reduced revenue. Why are these tax cuts likely to create such small increases in income? Because the beneficiaries of these tax cuts are mostly high income people. They already have high enough incomes to spend what they want to on current consumption items and with investment opportunities very "iffy" to say the least, they are most likely to save their increased income. In fact, even without these tax cuts, economically comfortable Americans have responded to hard economy times by increasing their personal savings rates. Tax cuts such as the ones in the House Bill, will probably lead to even more savings. By contrast, Mr. Zandi found that increasing unemployment compensation payments will raise GDP $1.63 for every dollar of spending, increasing food stamps will raise GDP $1.73, while increased infrastructure spending will raise GDP 1.59 per dollar of spending. Oh, and one of my favorites, aid to State and Local government will create a $1.38 bang for each buck. The reason for these larger impacts should be self-evident. Unemployed people and food stamp recipients' incomes are so low they are likely to need to spend every penny of increased government benefits immediately. (Need I remind everyone that this spending becomes income to many other folks.) Infrastructure spending will directly hire people who will then go out and spend a lot of their wages. Our bridges will be repaired and our potholes will be filled and our GDP will go up. Please make sure your Senators know that you want the bill as is OR even better, with more spending and less tax cuts. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 1/02/09: Obama's Recovery Plan MUST Be Bold and Far Reaching Two weeks ago, economics correspondent Louis Uchitelle of the New York Times noted that the massive public works spending that President Obama's economic team is putting together to jump-start the economy may not succeed because a program of public works spending must stimulate private sector spending. (See "Maybe It Can't: A Trap in Obama's Spending Plan." New York Times 12/21/2008 "Week in Review," p. 4) Uchitelle used the example of building a new road in good times and soon having "stores and malls filled with consumers" lining that new road. But, he warns, if business confidence is low, there will be no jump in private sector spending and the stimulus to the economy will be only temporary, while the money is being spent to construct the new road. Because of this danger, I and a group of like-minded economists are putting together "A Progressive Program for Economic Recovery and Financial Reconstruction." A short version has already been submitted to the Obama Transition team and is available on the web site of the Political Economy Research Institute. (See www.peri.umass.edu/fileadmin/pdf/other_publication_types/PERI_SCEPA_statement.pdf. The longer version is also available on the PERI website at www.peri.umass.edu/fileadmin/pdf/other_publication_types/PERI_SCEPA_full_statement.pdf.) The crucial element in our proposal is to oppose short term "fixes" to, in effect, hit a RESET button on a well-functioning economic machine. Oh No! As I have argued repeatedly in these commentaries, the US economic model since at least the early 1970s has been fundamentally flawed, an epidemic of deregulation, too much inequality, too much emphasis on high finance as opposed to the production of tangible goods and useful services. Thus we call for policies that allow people to stay in their homes - even if mortgage holders take a bath in the process - that help workers raise wages (rather than, for example, solving Detroit's problems by forcing the UAW to take pay cuts) - that fully regulate the financial sector so it becomes a source of credit, rather than a series of Ponzi schemes to make money seemingly out of thin air. We deny that there is any conflict between the need to get the economy moving again by creating jobs, and the long term goals of green technologies, national health insurance, and a fairer distribution of income. In fact, higher wages permit households to spend on goods without going more deeply into debt. Investment in technologies that will help free us from fossil fuel dependency would have significantly greater employment impact than tax cuts. Spending significant sums of money now to start the process of universalizing health insurance availability will pay off in the near future by freeing American business from the crushing burden of high premium costs for workers. This is one example. Imagine if the Obama Administration were to borrow whatever billions it took to re-tool medical information infrastructure so that all records were electronic and available to any health-care professional at the click of a mouse. Storage and duplicating costs would fall dramatically. In the first year, there would be a big increase in spending, but over time, the investment would pay off. You might ask, how can we afford this, when the government is already running a $1 trillion deficit. The answer is this -- when private investment is falling because business has lost confidence - when consumers are cutting back spending because they cannot get credit and they're worried about the future - when foreigners are not buying as many American goods as they did last year because their economies are in recession - government borrowing is not only possible, it is ESSENTIAL. During World War II, the US got out of the Great Depression and the deficit reached over 18% of GDP. Spending an extra $600 billion per year for the next few years (as of mid-December the Obama team was projecting about $850 b. over two years - significantly less than I believe will be necessary) would raise the deficit to only 7% of GDP. In reality, the size of the deficit is not a problem in the context of low spending from the private sector. The important thing is for the spending to be useful so that when the economy does recover, there will be important changes in place - a national health insurance system that is saving money by controlling costs, new green technologies that are reducing our dependence on expensive fossil fuels, and significantly improved infrastructure - especially in transportation. That would be change we can all believe in! Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 12/15/08: What Obama Must Do Barack Obama will take the oath of office confronted with an economic crisis similar to but so far not of the order of magnitude to the crisis that confronted Franklin Roosevelt during the Great Depression. One of the important similarities is what historian Arthur Schlesinger, in the first of his books on The Age of Roosevelt identified as "The Crisis of the Old Order." Just as the model of the American political economy that had emerged in the first three decades of the 20th century was destroyed by the facts of the Great Depression and changed drastically by the policies adopted during the New Deal and World War II, so the model of the American political economy that emerged at the end of the 1970s and continued uninterrupted right through the Presidency of George W. Bush now lies in tatters, completely repudiated, not only by the financial meltdown, but by the failure of the US economy to generate any shared prosperity during the past eight years and precious little of that in the previous 20. Let me briefly describe the post World War II model for the way the US economy grew. First of all, with the passage of the Social Security Act before the war and the Employment Act after the war, the US government became committed both to redistributing income to the retired, unemployed, disabled and surviving children and spouses and at the same time to using macroeconomic policy to push back whenever the economy experienced economic downturns. The watchword about depressions became, NEVER AGAIN. In addition, the US government created a framework within which labor unions could organize and bargain collectively. A result of this new framework was the creation of the great American middle class as many (but certainly not all) ordinary working Americans shared in the nation's prosperity between the end of World War II and the early 1970s. I will not go over the details of the model that has just imploded except to assert that pundits, politicians and journalists who are blaming "too much" government intervention - the Community Reinvestment Act, Fannie Mae and Freddie Mac - for the current meltdown are either ignorant or liars. The deregulatory model enabled by alleged free marketeers (whose support for free markets never extends to patents in pharmaceuticals for example!) like Alan Greenspan permitted first the Savings and Loan crisis of the late 1980s, the dot.com bubble of the late 1990s, and finally the housing bubble of the period from 2003 to 2007. Each bubble left a small percentage of the population rich beyond most people's wildest dreams while the majority of the population could only watch with wonder. Throughout the post war period, American public opinion has rarely cared about how rich the people at the top were compared to everyone else, so long as the "everyone else" was doing better year after year. The recent periods of increased inequality however have also brought us real income stagnation for too many of our fellow citizens. This is truly, a crisis for this (now old) order and we must hope that President Obama will have the courage and political will to deal with it as FDR did 75 years ago. His program must include policies to put people to work, to raise wages, and to provide a stronger, broader social safety net. Our society must provide health care for everyone as a right not as a commodity to be purchased in the marketplace. Our financial system must be highly regulated to prohibit the outright thievery that flourished as fancy new investment instruments were concocted, the value of which were unknowable, and sold based on dishonest appraisals of their value. In this regard, I would like to recommend the following book: It is called Obama's Challenge - America's Economic Crisis and the Power of a Transformative Presidency by Robert Kuttner. It is a good and hopeful read. I plan to return to this theme in future commentaries. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 10/7/08: With the Obama victory, the struggle for a more just economy has just begun. When the French political observer Alexis de Tocqueville visited the United States and wrote Democracy in America, he noted that a key to the vibrancy of American democracy in the 1830s was that we Americans were joiners. We got together in groups to advance common interests -- religious, political or cultural. Recently, Robert Putnam in his book Bowling Alone has argued that Americans have stopped joining and become more isolated within their families and as individuals. I would like to focus today's talk on how the de Tocqueville model of citizen participation is essential if we as a nation are to emerge from the current economic crisis and create a new political economic structure, one that turns its back on the trickle-down economics that triumphed during what I called The Reagan Revolution. The set of policies actually began before Reagan was elected and, in my view, continued with very little modification through the Bush I and Clinton administrations before a tragic culmination in the administration of George W. Bush. (For details, see my book Surrender, How the Clinton Administration Completed the Reagan Revolution.) Let us recall the elements of the Reagan model. We start with tax cuts that mostly benefited high income individuals and large corporations. Then the failure to enforce labor laws permitted employers to engage in illegal anti-union activity which led to a further erosion of union influence on wage-setting. Deregulation of financial and other industries occurred to the detriment of the public at large. In the 1980s, there was a policy of higher than average unemployment which was followed by intense international competition for middle income wage earners, leading to a virtual wage freeze in purchasing power per hour. This necessitated extending work hours per family and increased indebtedness as well. The resulting inequality of power and opportunity has culminated in the actual fall in median real incomes of year-round full time male workers and the median income of families from the last business cycle peak in 2000 to 2007. This was during a period of seven years where productivity growth was over 20%. The election of Barack Obama to the Presidency signals that the public is fed up with the economy - they want change But Obama's election will not bring change automatically. The people who benefited from George Bush's Presidency are very powerful. They will not surrender their advantages without a fight. Thus, if the people who mobilized to create the largest grassroots oriented Presidential election campaign in history decide that their work is done and that President Obama and Congress can be left to take care of business using their expertise and the expertise of the policy-making elite, we can be almost certain that the things the people want will never be realized. I am referring to a real change in policies in order to reduce inequality, to a real commitment to withdraw from Iraq and the renunciation of imperial ambitions around the world, and to a truly universal national health care system which in varying forms or exists in every other advanced country in the world. To make these things happen - to make Obama fulfill his promise as a change agent, we Americans have to get back to behaving the way de Tocqueville described us back in the 1830s. All the people who worked for Barack Obama, who donated to his campaign, who discussed issues with coworkers and family members, who fully participated in the election - many for the first time - cannot afford to simply go back to their previous lives. Instead, people should be getting together with friends, neighbors, family members, internet connections, co-workers and political allies to come up with ideas and proposals and what to do next. Once you have an idea - it could come from two people it could come from 200 - send it to Barack Obama - write to your Representative in Congress - to both Senators - to the local newspaper - post in on-line discussions - It was the actions of millions of Americans - as individuals and in groups - that have made it possible for Barack Obama to take office as President on January 20. It will take the actions of those same millions and many more - fully participating as citizens - to move Obama and the Congress to actually make necessary change. We can be the Americans de Tocqueville marveled at - we can change our country for the better - but we cannot do it unless we take action. Let's get going! (For detailed statistics to back up the assertions in this essay - and for further reading references, please contact Michael Meeropol at mameerop@wnec.edu.) Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 9/5/08: On Senator John McCain and Governor Sarah Palin I am not going to talk about economics today. Instead, I am going to discuss the implications of Senator McCain's pick of Governor Sarah Palin to be his Vice Presidential partner should he be elected President in November. John McCain has an impressive life story - POW in Vietnam, and strong national security credentials. During the primary campaign, Hillary Clinton acknowledged that McCain was ready to step into the role of Commander-In-Chief. The theme of the Republican Convention was "country first" and the sub-theme was a reiteration of the main thrust of the Republican campaign: Senator Obama is too inexperienced to be President. Then McCain gave the nation shocking insight into who he is and what his priorities are. In appointing as his Vice-Presidential running mate, one of the least qualified people (based on personal resume) ever nominated by either political party in the last 110 years, he revealed that all the talk about "country first" and how important it was to have an experienced and competent person in the White House was just political hypocrisy. The choice of a Vice President is arguably the single most important decision that a President has to make, short of the decision to go to war. What can we say about McCain's decision? That perhaps it bespeaks arrogance and contempt for the American people and the country he professes to love. I know everyone has heard the Republican talking points that Governor Palin has more administrative experience than the other three candidates (even McCain?) and certainly more useful experience than Obama. But that argument deliberately ignores an essential fact. The American people, when confronted by candidates with relatively thin resumes (like former Governor George W. Bush of Texas) have had a chance over the primary campaigns to make up their own mind. In the case of Senator Obama, he campaigned in almost all 50 states and subjected himself to either a primary or a caucus in all of them. Over 37 million people participated in those primaries and caucuses and over half of them chose Senator Obama. During the general election, the entire country will be able to decide if the Republican arguments against Obama have merit. Governor Palin received ONE VOTE for Vice President - the vote of John McCain. Everyone knows that voters vote based on the TOP of the ticket -- Voters will never have a chance to cast an independent vote for or against Palin. Why did he choose her? It's pretty obvious. He decided not to choose a more prominent more competent Republican woman because unlike them, Governor Palin is an individuals who will energize and attract the extreme right wing of the Republican Party - the activists whose enthusiastic participation will be essential if Senator McCain is to win in November. Palin is governor of Alaska, a state absent most of the budgetary pressures of the other 49 states because it attracts a great deal of federal money and is awash in Oil Company tax payments. Her resume is thin to non-existent yet that is completely irrelevant to the true believer extremists of the Republican right. How ironic. McCain claims Obama "would rather lose a war than lose an election." Meanwhile, in an effort to win an election, McCain is willing to potentially damage the county - the country he claims to love. McCain is the oldest individual to ever begin a campaign for the Presidency. He has had four bouts with cancer. Does he actually expect us to believe that Palin is the most qualified Republican woman in the country to stand ready to step into the Presidency at a moment's notice? This bizarre choice tells us a great deal about McCain. We will ignore this revelation at our peril. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. 7/7/08: The Connection Between High Gas Prices and the Bush Administration's Push for War with Iran I was originally going to talk about the price of gasoline. I was going to focus on supply and demand and long term policy ideas -- a typical economist, trying to speak dispassionately at a time when public opinion and the presidential election campaign are focused on hotter issues. I decided instead to address one of these -- the prospect of war with Iran. Unfortunately, some American political and intellectual leaders believe that war with Iran is essential to stop it from becoming the major regional power in the Middle East. [According to the reporting of Seymour Hersh in the July 6, 2008 New Yorker ("Preparing the Battlefield"), the Bush Administration has already begun a covert operation against Iran.] In addition, there may be some Republican politicians who are willing to take that gamble to insure McCain's election to the presidency. One of the results of the failure of US policy in Iraq has been that Iran's stature and power in the region has increased dramatically. After destroying a major counter-weight to Iranian power in the region (the Saddam Hussein government), some US leaders are planning to "double down" on their bad initial bet and attempt to "take out" the government of Iran. Now it is possible that the Bush Administration will try to encourage the Israelis to make a pre-emptive strike against Iran's nuclear program. However, everyone knows that Israel would never make such a move without tacit approval from Washington, and thus, should the attack come from Israel rather than the US, the Iranians and the rest of the world will know who is behind it. Why am I talking about war with Iran? Because the major consequence of an attack on Iran will be an economic one -- to raise the price of oil to about $200 a barrel (one member of Congress suggested $400!). On Friday, July 4, the price was $145 a barrel. Gasoline was averaging $4.09 a gallon. $200 a barrel oil will increase gasoline to approximately $5.00 a gallon. $400 means $10 a gallon. Some have accused speculators of causing the recent price increases. It is tempting to blame speculators, because the growth in demand from India and China cannot explain the speed with which prices have risen. But what's the basis of that speculation? Speculators are betting on a war with Iran which will severely cut the supply of oil. Iran is not Iraq - they will not just be bombed without massive retaliation. They will choke off the Straits of Hormuz through which most Persian Gulf oil is exported. Business commentators are already identifying the rising tensions around Iran as the reason for the rapid rise in oil prices. (See the following statement from Jonathan Kleisner an oil analyst from the Rex Capital Group: "It that [tension between Iran and Israel and the US] accelerates the upside to crude oil prices is astronomical. Increased instability especially between Israel, a friendly nation to the US, and Iran one of our staunchest enemies would be extremely significant. We're certainly looking at that situation very closely." [available at http://www.mnblue.com/node/1731 ) From the speculators' point of view, buying oil at $145 a barrel in hopes of selling it in five months at $200 a barrel is a great bet. So how do we prove the speculators wrong and stop the astronomical rise in the price of oil? We must demand that the Bush administration and the Obama campaign unequivocably state that they will not authorize military action against Iran unless Iran attcks us first (that by the way, should have been the rule when Congress was debating whether to authorize the war in Iraq). We must insist that members of Congress sponsor a resolution in advance denying funds to the Administration for an attack on Iran absent an attack by Iran on us. It goes without saying that the price of gasoline is not the only reason to avoid war with Iran. Unfortunately, sometime only pocket-book issues have an impact on general public opinion. In 2003, when President Bush invaded Iraq, public opinion was very much in support of that war, in part because we thought it would be cheap and easy. Now, in 2008, maybe the economic dangers will induce us to behave as better world citizens and oppose our government's rush to war. Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution. |
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