Small Addition to Previous Post
What I forgot to mention is that in World War II, the system of price and wage controls only really worked because there was also rationing, not of everything of course, but of many essentials. Given the inflationary problems I expect to plague us after recovery–I’m so optimistic!–my suggested solution of a system of price and wage controls needs to be supplemented by rationing, as in WWII.
Wednesday, December 17, 2008
On the Agenda? Wage-Price Controls
On the Agenda? Wagae-Price Controls
The most important thing the Fed is doing is not targeting the federal funds rate at zero (or zero to .25%–whatever this range can possibly mean). That’s because the federal funds rate has been virtually zero for about a month, even though the target was 1%. (See a recent comment I made explaining what the federal funds rate is, if this is unclear.) Instead, what is really significant is that the Fed intends to buy, according to the Times, "large quantities" of "mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans." Now, this is spectacularly new.
When you add to this "new monetary policy," or whatever you call it, the $600 billion to $1 trillion stimulus planned by Obama, (alas) over 2 years, and not one, the chances are that the economy will stop dropping either by the fall of 2009, being optimistic, or hopefully by the summer of 2010. This reversal will happen sooner if a huge part of the Obama stimulus goes to aid states and cities. By a huge part, I mean at least $300 billion. The effect of this spending will be almost immediate, and I suspect will also be considered as worthy and credible–on schools, libraries, and the like–whereas all the variations of the infrastructure stimuli I read of may take a considerable period of time to get off the ground, worthy though they may be.
But Alan Blinder, a Princeton Professor of Economics, and formerly, Vice-Chairman of the Federal Reserve, and a liberal, is worried about the inflationary potential of what is being done, or proposed, not what will happen in 2009, but what will happen after a recovery picks up steam, if we can be optimistic, in, say, 2010. Blinder is right to be concerned, since the Fed, it looks like, is going to be printing money by the trillions.
In a recent comment, I wrote that at some point the Fed will reverse itself, when the inflation begins, and that the longer-run period ahead of us will contain high interest rates to contain this inflation and therefore cause the economy to be sluggish. This means the normal state of the economy will have higher rates of unemployment than what we are accustomed to, even during relatively good times.
However, there is an improbable answer to this, a "solution" to inflation used in the early 1970's, one which seemingly is forever discredited, opposed by almost all in the political spectrum, with vows made at the time that this so-called solution never be used again. I am of course referring to the system of wage and price controls thrust on us by Nixon in August, 1971 (the 15th if I remember correctly) and which went through a number of phases until 1974.
Nixon wanted to keep low for political purposes what I believe could be considered a relatively minor amount of inflation. What happened is that the Fed chief, Arthur F. Burns, Nixon’s appointee, caved in to Nixon, and kept the 1969-70 recession relatively short–see my earlier comment on Federal Reserve heads. By keeping the recession short, by lowering interest rates–at that point traditional monetary policy worked, unlike now--the inflation of the 1960's, partly caused by the Vietnam War, was only partially reduced. The politics of this is that Nixon didn’t want to go into the 1972 election with a large amount of unemployment (he didn’t know, in 1971, his opponent would be a patsy–George McGovern), but he also worried that inflation might also do him in, so he began a wage-price freeze which phased into a system of wage-price controls.
But in 2010 or 2011, if the choice is: (a) high unemployment to keep prices down, given the trillions being printed, and the trillion of stimuli, along with the expected deterioration of the dollar, leading to higher costs for everything being imported, or (b) a system of price controls, for, say, a 5 year period, to borrow a number from our former (?) arch-enemies (a system that also may require controls on wages), I have hopes the phony-baloney Nixon program of 1971-1974 should not nix this solution, in 2010-2015.
And there is, of course, a successful precedent–World War II. Wage-price controls worked then, and worked well, and were not unpopular, since their need was readily understood. With some prepping–public discussion and leadership--the need for something like this could possibly be accepted. And if accepted, succeed. If not, the alternative seems to me far more dismal–high rates of unemployment, kept high by high rates of interest, designed to keep the rate of inflation caused by the unprecedented bail-out to reasonably low levels.
Blinder is right to be concerned. As we get closer to the period he is concerned about–yet a few years away, unless the various stimuli work far better than anyone anticipates–let’s hope leaders of his caliber talk about a solution of the type I am suggesting.
The most important thing the Fed is doing is not targeting the federal funds rate at zero (or zero to .25%–whatever this range can possibly mean). That’s because the federal funds rate has been virtually zero for about a month, even though the target was 1%. (See a recent comment I made explaining what the federal funds rate is, if this is unclear.) Instead, what is really significant is that the Fed intends to buy, according to the Times, "large quantities" of "mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans." Now, this is spectacularly new.
When you add to this "new monetary policy," or whatever you call it, the $600 billion to $1 trillion stimulus planned by Obama, (alas) over 2 years, and not one, the chances are that the economy will stop dropping either by the fall of 2009, being optimistic, or hopefully by the summer of 2010. This reversal will happen sooner if a huge part of the Obama stimulus goes to aid states and cities. By a huge part, I mean at least $300 billion. The effect of this spending will be almost immediate, and I suspect will also be considered as worthy and credible–on schools, libraries, and the like–whereas all the variations of the infrastructure stimuli I read of may take a considerable period of time to get off the ground, worthy though they may be.
But Alan Blinder, a Princeton Professor of Economics, and formerly, Vice-Chairman of the Federal Reserve, and a liberal, is worried about the inflationary potential of what is being done, or proposed, not what will happen in 2009, but what will happen after a recovery picks up steam, if we can be optimistic, in, say, 2010. Blinder is right to be concerned, since the Fed, it looks like, is going to be printing money by the trillions.
In a recent comment, I wrote that at some point the Fed will reverse itself, when the inflation begins, and that the longer-run period ahead of us will contain high interest rates to contain this inflation and therefore cause the economy to be sluggish. This means the normal state of the economy will have higher rates of unemployment than what we are accustomed to, even during relatively good times.
However, there is an improbable answer to this, a "solution" to inflation used in the early 1970's, one which seemingly is forever discredited, opposed by almost all in the political spectrum, with vows made at the time that this so-called solution never be used again. I am of course referring to the system of wage and price controls thrust on us by Nixon in August, 1971 (the 15th if I remember correctly) and which went through a number of phases until 1974.
Nixon wanted to keep low for political purposes what I believe could be considered a relatively minor amount of inflation. What happened is that the Fed chief, Arthur F. Burns, Nixon’s appointee, caved in to Nixon, and kept the 1969-70 recession relatively short–see my earlier comment on Federal Reserve heads. By keeping the recession short, by lowering interest rates–at that point traditional monetary policy worked, unlike now--the inflation of the 1960's, partly caused by the Vietnam War, was only partially reduced. The politics of this is that Nixon didn’t want to go into the 1972 election with a large amount of unemployment (he didn’t know, in 1971, his opponent would be a patsy–George McGovern), but he also worried that inflation might also do him in, so he began a wage-price freeze which phased into a system of wage-price controls.
But in 2010 or 2011, if the choice is: (a) high unemployment to keep prices down, given the trillions being printed, and the trillion of stimuli, along with the expected deterioration of the dollar, leading to higher costs for everything being imported, or (b) a system of price controls, for, say, a 5 year period, to borrow a number from our former (?) arch-enemies (a system that also may require controls on wages), I have hopes the phony-baloney Nixon program of 1971-1974 should not nix this solution, in 2010-2015.
And there is, of course, a successful precedent–World War II. Wage-price controls worked then, and worked well, and were not unpopular, since their need was readily understood. With some prepping–public discussion and leadership--the need for something like this could possibly be accepted. And if accepted, succeed. If not, the alternative seems to me far more dismal–high rates of unemployment, kept high by high rates of interest, designed to keep the rate of inflation caused by the unprecedented bail-out to reasonably low levels.
Blinder is right to be concerned. As we get closer to the period he is concerned about–yet a few years away, unless the various stimuli work far better than anyone anticipates–let’s hope leaders of his caliber talk about a solution of the type I am suggesting.
Tuesday, December 16, 2008
Potpourri, But Mostly Economic Tidbits
Potpourri, But Mostly Economic Tidbits
1. Smart Witnesses: A Sad Sign of the Times
The Sunday Times, in a page one article entitled "An Evangelical Article of Faith: Bad Times Draw Bigger Crowds," had this interesting paragraph:
"The Jehovah’s Witnesses, who moved much of their door-to-door evangelizing to the night
shift 10 years ago because so few people were home during the day, returned to daylight witnessing this year. "People are out of work, and they are answering the door," said a spokesman, J.R.Brown."
To me, should the Jehovah’s Witnesses lose their faith, they could get jobs as economists, as they
know how to marginally readjust their resources as costs and benefits change.
2. B’s & M’s
A friend wrote and asked me how one (Bernard Madoff, to be specific) could create a Ponzi scheme involving as much as $50 million. Oops. He made a mistake. $50 million is actually no problem, just con a few hundred rich friends and voila! But the reality, $50 billion, does seem a bit difficult, even for your most adept Ponzi-er. How did he do it?
3. Negative interest rates soon?
Yesterday, the Fed lowered its target rate to a range between zero and 1/4 of 1%. It’s the first time I’ve ever seen a range, but that is hardly the main point. Zero–that’s the point. Now this is a target, so I’ll do some Econ 101: The Federal Reserve requires banks to keep a small fraction of their deposits as reserves at the Fed–about 10%. Now sometimes, expected deposits don’t come in (to be put in reserves) and the bank is short. At the same time, another bank decided not to make a loan, so it has an excess of reserves. The first bank (short of the required reserves) borrows from the 2nd bank, which has an excess. And what is the interest rate on this loan, which is usually over-night? Well, as parrots are trained to say: supply and demand. Or in other words, it depends on how many banks are short (and by what amounts) and how many have excessive reserves.
If the Fed wants to lower rates, it buys Treasury bills that are out there in the market and the recipients of the Fed’s check deposit it into a bank. And thus increased reserves result. By the logic of S & D, the interest rate on borrowed reserves falls (banks borrowing reserves from other banks), since there are more banks with excess reserves who are willing to loan them overnight (to other banks or at least to other banks that look healthy). The Fed typically has a target and if, say the target is 2%, and the actual loaning rates are 2 1/4 %, the Fed buys more T-bills. If the rate is 1.85 %, then the Fed sells T-bills. It tries to achieve the target by either buying or selling T-bills.
The target is now zero (or 1/4 of 1 %). In the past, this rate nudged other rates, which firms and individuals could relate to, such as the prime rate, a rate banks base all their rates on, and the prime would drop ½ % when the Fed dropped its target ½ %. And many credit cards have rates pegged to the prime.
But perhaps even more important, the Fed, feeling that its open market operations are all but useless, is now considering buying long term Treasury bonds, in the hope that reduced rates in the long term markets will bring other long term rates down and that, in turn, will induce potential borrowers to borrow. And stocks reacted positively today (Tuesday) in response)--the Dow was up 4.2%--but stocks always react to news of this sort, even if nothing of substance occurs later on (and I think, in general, the stock market over-reacts whenever positive news hits the headlines). It doesn’t at all mean prosperity is around the corner, as Hoover used to say.
To me, the Fed looks increasingly desperate. Normal monetary policy is simply not working. Zero is a record, but not one we should be in the streets cheering. It’s an indication that times are getting ever more desperate. The odds are that the economy will hit double-digit unemployment during the next year (although Monday’s Times has an article that predicts only 9%) and that recovery will be slow in coming and possibly (even probably) only partial. That is, increasingly it looks like we may be saddled with a weak economy for many, many years.
4. "In the long run we are all dead."
Most persons, by now, know this was stated by John Maynard Keynes. Actually, he wrote it in "A Tract on Monetary Reform" in 1923, long before the Great Depression, during which he authored "The General Theory of Employment, Interest and Money," the classic that made Keynes the greatest economist of the 20th century (and whose approach to hard times is as pertinent today as it was in the 1930's). He was expressing his distaste at economists who would argue, during a time of stress or economic malfunctioning, that in time everything would settle back to normality.
But I bring up the long run to write about the future and the past (what some might refer to as the long run). I have two related but different situations in mind. The first relates to what investment advisers currently suggest. I met an intelligent adviser at a family party recently and he suggested diversification is the answer and one’s portfolio should stocks, primarily, and then bonds and possibly other alternatives–like real estate, CD’s, etc. He like others knows that the present is not exactly like the past, but nonetheless will use figures from the past indicating that over a long period of time stocks have outperformed bonds. The implication, also, is that as you get closer to retirement you might reduce your holdings of stocks, which are more speculative in the short run, and increase your holdings of bonds, which, typically, are not (unless there is an upsurge of inflation, as we had in the 1970's).
But what if the future is significantly different from the past? How does one know it will not be? What, in any event, does significantly mean? So let me bring in the other situation, the overall workings of the economy. Suppose that the future is what some in the 1930's thought of as "secular stagnation?" Secular, has noting to do with religion, or its lack thereof, but means "long run." (My somewhat old Random House dictionary offers, as definition 6 of secular, "going on from age to age; continuing through long ages.")
In the 1930's, deep in the Great Depression, the phrase arose and a conservative economist from Harvard, Alvin Hansen, converted to liberal Keynesianism and gave the 1938 address, as President of the American Economic Association, on just this topic–secular stagnation (and why it existed). Now we all know that after the war, this view of things melted away as there was prosperity and not stagnation. But it’s time to reconsider.
The United States is clearly in some kind of secular decline, possibly un-reversible. Our manufacturing is down enormously from what it was, as a percentage of our GDP. Our trade balance is just awful. And we only seem to survive by bubbles that inevitably burst. What is to propel us in the future? I know there are optimists who believe our science and superior level of education will enable us to lead the way in developing an appropriate green technology, but while I think this is possible, I doubt very much it will happen. I’ll believe it when we are able to pass what is absolutely necessary if we are to successfully switch to electric cars–a whopping gasoline tax of, say, $4 a gallon, with further increases to come. No way, Jose.
If we do bounce back some from the disaster we are now in but then limp along, aided by huge levels of Federal government spending, that simply continue, and are not temporary, we will in effect be in what was known 70 years ago as secular stagnation. If this is the case, then it would seem to me stocks will not be surging ever upward, but worse--interest rates will be high and partly because of this, the economy will stagnate even more. Interest rates will be high, since we are printing money by the trillions to try to jump-start the economy, and then keep it moving upward, and at some point the dollar must weaken and inflation will appear. Who of our creditors wants to hold a currency that is being massively printed into worthlessness (or perhaps less emotionally into less and less worth). To deal with the declining dollar, and the inflation it will create–all foreign goods will cost more–interest rates have to be high.
This means that over the next generation, it is likely that bonds will outperform stocks, although there is a matter of timing to be dealt with. That is, after the dollar starts weakening, and bond rates rise, then, and only then, will one’s investment in bonds outstrip one’s investment in stocks, if I am correct. The decline of the dollar may actually have begun (or begun again). After seeking safety in the dollar, the dollar strengthened this summer against the Euro, but it has been weakening recently, against the Euro, and has weakened enormously against the Japanese yen. Is it not possible then that over the next two or three decades bonds might be a better investment than stocks? If the future is like the past, of course not. But if it isn’t?
What all this also suggests is that "full employment" is going to be higher than what it has been. At one point, earlier in the post-war period, full employment was perhaps defined as 3 %, rarely achieved, or 4%, last achieved in the late 1990's. During the mid-nineties, Greenspan refused to raise rates, when the existing theoretical apparatus suggested that full employment was about 6 % (or a tad more), meaning that levels of unemployment below this 6 % would lead to increases in the rate of inflation. But Greenspan rightfully decided this statistical measure, based on the past, was inappropriate. He didn’t raise rates to prevent inflation, because he thought there was no inflation to worry about. (We leave off the question of whether he should have raised rates to slow down the dot-com bubble or at least raised margin requirements to 100% or repeat periodically his fear of "irrational exuberance.")
But given what the Fed will have to do to stop inflation, it is possible that full employment will be higher than it was thought to be in the nineties. That is, the Fed will believe it has to keep rates at a level that will lead to 7 or 8 % unemployment or we will have increasing inflation. This means, to me, we will be living in world of secular stagnation, in spades.
Let’s modify Keynes: "In the long run, almost all of us will be deadly poor."
5. TIAA Real Estate Fund and Empty Stores
Although only persons who have holdings in TIAA-CREF, the enormous college retirement fund, have a financial interest in its real estate fund, there is, I think, an intellectual interest in what is happening. Plus there is discussion of real estate in general.
Ignore that I had over 90% of my retirement funds in the TIAA Real Estate Fund, violating the conventionally held view, by maybe 99.5% of economists and financial advisers, and ignore that I did very well and even partially convinced a very smart economist that because of its lack of volatility, my arguments for holding this fund might, in the last analysis, be sound. [For about the first three months of the year, the fund was up about 1%; then, for the next three months it declined so that it was only up by about one half of one percent–that’s when I got out. Now it is down 9 ½ % for the year, far less than the CREF stock funds, but obviously not doing well.
The TIAA Real Estate Fund is unique. You give them money and when they have enough, they invest it by buying commercial buildings, or shopping malls or storage facilities, etc., without a mortgage. (I’m oversimplifying: they keep some funds as a cash reserve and a small percentage in gated communities and a few buildings had mortgages.) Unlike REITs (real estate investment trusts), which you buy into by buying stocks that others sell, the Real Estate Fund was not sold in a market.
I once looked over its day-to-day listings since it was formed in the late nineties. Usually, it had gains of .06 in a fund worth, say 200, so that your holdings increased to 200.06. On very, very big days, it increased by .75. Or perhaps it lost .5. This happened maybe two or three times a year.
Well things have changed! On Friday, in one day, it dropped 5.0, from 287.91 to 282.91, almost 2%. It could be compared to the Dow dropping 23% in one day, in 1987. Though I find this amazing, I was asked by someone I got to put more money into the Real Estate Fund a few years ago and then told him to get out, when I did, "since the real estate fund was the last to go down, will the Real Estate Fund be the first to revive or the last?"
Here was my answer: "I think the real estate fund (of TIAA) is a lagging indicator. That is, it started down after the economy started down because it was only over time that its leases fell due and its customers, those in reasonably good health, could either ask for lower rents or move to smaller and cheaper quarters. By the same token, I think it will go up after the economy starts going up, if it ever does."
An acquaintance of mine has a very pessimistic of things and believes we are not far from seeing stores being boarded up and tent cities. I’m not sure. But another friend tells me that there are a lot of stores on Broadway near 96th Street that are empty. On my own corner, there is a site that used to be a restaurant, and one that was usually close to being full, that closed about two years ago and remains un-rented. What I think happened is that the landlord asked for a huge increase in rent that the restaurant couldn’t pay (maybe double the rent) and then after fixing up the place some, put the site up for rent. And it simply hasn’t rented. Whether the landlord is going to get more realistic I have no way of knowing.
I think this slump is going to take an enormous toll on owners of business property just as it has on people who own residential property.
We’ll know, for sure, we’re in a real depression when there are increasing numbers of homeless sleeping in doorways and others are selling in the streets the 21st century equivalent of apples (or maybe apples are what will still be sold).
1. Smart Witnesses: A Sad Sign of the Times
The Sunday Times, in a page one article entitled "An Evangelical Article of Faith: Bad Times Draw Bigger Crowds," had this interesting paragraph:
"The Jehovah’s Witnesses, who moved much of their door-to-door evangelizing to the night
shift 10 years ago because so few people were home during the day, returned to daylight witnessing this year. "People are out of work, and they are answering the door," said a spokesman, J.R.Brown."
To me, should the Jehovah’s Witnesses lose their faith, they could get jobs as economists, as they
know how to marginally readjust their resources as costs and benefits change.
2. B’s & M’s
A friend wrote and asked me how one (Bernard Madoff, to be specific) could create a Ponzi scheme involving as much as $50 million. Oops. He made a mistake. $50 million is actually no problem, just con a few hundred rich friends and voila! But the reality, $50 billion, does seem a bit difficult, even for your most adept Ponzi-er. How did he do it?
3. Negative interest rates soon?
Yesterday, the Fed lowered its target rate to a range between zero and 1/4 of 1%. It’s the first time I’ve ever seen a range, but that is hardly the main point. Zero–that’s the point. Now this is a target, so I’ll do some Econ 101: The Federal Reserve requires banks to keep a small fraction of their deposits as reserves at the Fed–about 10%. Now sometimes, expected deposits don’t come in (to be put in reserves) and the bank is short. At the same time, another bank decided not to make a loan, so it has an excess of reserves. The first bank (short of the required reserves) borrows from the 2nd bank, which has an excess. And what is the interest rate on this loan, which is usually over-night? Well, as parrots are trained to say: supply and demand. Or in other words, it depends on how many banks are short (and by what amounts) and how many have excessive reserves.
If the Fed wants to lower rates, it buys Treasury bills that are out there in the market and the recipients of the Fed’s check deposit it into a bank. And thus increased reserves result. By the logic of S & D, the interest rate on borrowed reserves falls (banks borrowing reserves from other banks), since there are more banks with excess reserves who are willing to loan them overnight (to other banks or at least to other banks that look healthy). The Fed typically has a target and if, say the target is 2%, and the actual loaning rates are 2 1/4 %, the Fed buys more T-bills. If the rate is 1.85 %, then the Fed sells T-bills. It tries to achieve the target by either buying or selling T-bills.
The target is now zero (or 1/4 of 1 %). In the past, this rate nudged other rates, which firms and individuals could relate to, such as the prime rate, a rate banks base all their rates on, and the prime would drop ½ % when the Fed dropped its target ½ %. And many credit cards have rates pegged to the prime.
But perhaps even more important, the Fed, feeling that its open market operations are all but useless, is now considering buying long term Treasury bonds, in the hope that reduced rates in the long term markets will bring other long term rates down and that, in turn, will induce potential borrowers to borrow. And stocks reacted positively today (Tuesday) in response)--the Dow was up 4.2%--but stocks always react to news of this sort, even if nothing of substance occurs later on (and I think, in general, the stock market over-reacts whenever positive news hits the headlines). It doesn’t at all mean prosperity is around the corner, as Hoover used to say.
To me, the Fed looks increasingly desperate. Normal monetary policy is simply not working. Zero is a record, but not one we should be in the streets cheering. It’s an indication that times are getting ever more desperate. The odds are that the economy will hit double-digit unemployment during the next year (although Monday’s Times has an article that predicts only 9%) and that recovery will be slow in coming and possibly (even probably) only partial. That is, increasingly it looks like we may be saddled with a weak economy for many, many years.
4. "In the long run we are all dead."
Most persons, by now, know this was stated by John Maynard Keynes. Actually, he wrote it in "A Tract on Monetary Reform" in 1923, long before the Great Depression, during which he authored "The General Theory of Employment, Interest and Money," the classic that made Keynes the greatest economist of the 20th century (and whose approach to hard times is as pertinent today as it was in the 1930's). He was expressing his distaste at economists who would argue, during a time of stress or economic malfunctioning, that in time everything would settle back to normality.
But I bring up the long run to write about the future and the past (what some might refer to as the long run). I have two related but different situations in mind. The first relates to what investment advisers currently suggest. I met an intelligent adviser at a family party recently and he suggested diversification is the answer and one’s portfolio should stocks, primarily, and then bonds and possibly other alternatives–like real estate, CD’s, etc. He like others knows that the present is not exactly like the past, but nonetheless will use figures from the past indicating that over a long period of time stocks have outperformed bonds. The implication, also, is that as you get closer to retirement you might reduce your holdings of stocks, which are more speculative in the short run, and increase your holdings of bonds, which, typically, are not (unless there is an upsurge of inflation, as we had in the 1970's).
But what if the future is significantly different from the past? How does one know it will not be? What, in any event, does significantly mean? So let me bring in the other situation, the overall workings of the economy. Suppose that the future is what some in the 1930's thought of as "secular stagnation?" Secular, has noting to do with religion, or its lack thereof, but means "long run." (My somewhat old Random House dictionary offers, as definition 6 of secular, "going on from age to age; continuing through long ages.")
In the 1930's, deep in the Great Depression, the phrase arose and a conservative economist from Harvard, Alvin Hansen, converted to liberal Keynesianism and gave the 1938 address, as President of the American Economic Association, on just this topic–secular stagnation (and why it existed). Now we all know that after the war, this view of things melted away as there was prosperity and not stagnation. But it’s time to reconsider.
The United States is clearly in some kind of secular decline, possibly un-reversible. Our manufacturing is down enormously from what it was, as a percentage of our GDP. Our trade balance is just awful. And we only seem to survive by bubbles that inevitably burst. What is to propel us in the future? I know there are optimists who believe our science and superior level of education will enable us to lead the way in developing an appropriate green technology, but while I think this is possible, I doubt very much it will happen. I’ll believe it when we are able to pass what is absolutely necessary if we are to successfully switch to electric cars–a whopping gasoline tax of, say, $4 a gallon, with further increases to come. No way, Jose.
If we do bounce back some from the disaster we are now in but then limp along, aided by huge levels of Federal government spending, that simply continue, and are not temporary, we will in effect be in what was known 70 years ago as secular stagnation. If this is the case, then it would seem to me stocks will not be surging ever upward, but worse--interest rates will be high and partly because of this, the economy will stagnate even more. Interest rates will be high, since we are printing money by the trillions to try to jump-start the economy, and then keep it moving upward, and at some point the dollar must weaken and inflation will appear. Who of our creditors wants to hold a currency that is being massively printed into worthlessness (or perhaps less emotionally into less and less worth). To deal with the declining dollar, and the inflation it will create–all foreign goods will cost more–interest rates have to be high.
This means that over the next generation, it is likely that bonds will outperform stocks, although there is a matter of timing to be dealt with. That is, after the dollar starts weakening, and bond rates rise, then, and only then, will one’s investment in bonds outstrip one’s investment in stocks, if I am correct. The decline of the dollar may actually have begun (or begun again). After seeking safety in the dollar, the dollar strengthened this summer against the Euro, but it has been weakening recently, against the Euro, and has weakened enormously against the Japanese yen. Is it not possible then that over the next two or three decades bonds might be a better investment than stocks? If the future is like the past, of course not. But if it isn’t?
What all this also suggests is that "full employment" is going to be higher than what it has been. At one point, earlier in the post-war period, full employment was perhaps defined as 3 %, rarely achieved, or 4%, last achieved in the late 1990's. During the mid-nineties, Greenspan refused to raise rates, when the existing theoretical apparatus suggested that full employment was about 6 % (or a tad more), meaning that levels of unemployment below this 6 % would lead to increases in the rate of inflation. But Greenspan rightfully decided this statistical measure, based on the past, was inappropriate. He didn’t raise rates to prevent inflation, because he thought there was no inflation to worry about. (We leave off the question of whether he should have raised rates to slow down the dot-com bubble or at least raised margin requirements to 100% or repeat periodically his fear of "irrational exuberance.")
But given what the Fed will have to do to stop inflation, it is possible that full employment will be higher than it was thought to be in the nineties. That is, the Fed will believe it has to keep rates at a level that will lead to 7 or 8 % unemployment or we will have increasing inflation. This means, to me, we will be living in world of secular stagnation, in spades.
Let’s modify Keynes: "In the long run, almost all of us will be deadly poor."
5. TIAA Real Estate Fund and Empty Stores
Although only persons who have holdings in TIAA-CREF, the enormous college retirement fund, have a financial interest in its real estate fund, there is, I think, an intellectual interest in what is happening. Plus there is discussion of real estate in general.
Ignore that I had over 90% of my retirement funds in the TIAA Real Estate Fund, violating the conventionally held view, by maybe 99.5% of economists and financial advisers, and ignore that I did very well and even partially convinced a very smart economist that because of its lack of volatility, my arguments for holding this fund might, in the last analysis, be sound. [For about the first three months of the year, the fund was up about 1%; then, for the next three months it declined so that it was only up by about one half of one percent–that’s when I got out. Now it is down 9 ½ % for the year, far less than the CREF stock funds, but obviously not doing well.
The TIAA Real Estate Fund is unique. You give them money and when they have enough, they invest it by buying commercial buildings, or shopping malls or storage facilities, etc., without a mortgage. (I’m oversimplifying: they keep some funds as a cash reserve and a small percentage in gated communities and a few buildings had mortgages.) Unlike REITs (real estate investment trusts), which you buy into by buying stocks that others sell, the Real Estate Fund was not sold in a market.
I once looked over its day-to-day listings since it was formed in the late nineties. Usually, it had gains of .06 in a fund worth, say 200, so that your holdings increased to 200.06. On very, very big days, it increased by .75. Or perhaps it lost .5. This happened maybe two or three times a year.
Well things have changed! On Friday, in one day, it dropped 5.0, from 287.91 to 282.91, almost 2%. It could be compared to the Dow dropping 23% in one day, in 1987. Though I find this amazing, I was asked by someone I got to put more money into the Real Estate Fund a few years ago and then told him to get out, when I did, "since the real estate fund was the last to go down, will the Real Estate Fund be the first to revive or the last?"
Here was my answer: "I think the real estate fund (of TIAA) is a lagging indicator. That is, it started down after the economy started down because it was only over time that its leases fell due and its customers, those in reasonably good health, could either ask for lower rents or move to smaller and cheaper quarters. By the same token, I think it will go up after the economy starts going up, if it ever does."
An acquaintance of mine has a very pessimistic of things and believes we are not far from seeing stores being boarded up and tent cities. I’m not sure. But another friend tells me that there are a lot of stores on Broadway near 96th Street that are empty. On my own corner, there is a site that used to be a restaurant, and one that was usually close to being full, that closed about two years ago and remains un-rented. What I think happened is that the landlord asked for a huge increase in rent that the restaurant couldn’t pay (maybe double the rent) and then after fixing up the place some, put the site up for rent. And it simply hasn’t rented. Whether the landlord is going to get more realistic I have no way of knowing.
I think this slump is going to take an enormous toll on owners of business property just as it has on people who own residential property.
We’ll know, for sure, we’re in a real depression when there are increasing numbers of homeless sleeping in doorways and others are selling in the streets the 21st century equivalent of apples (or maybe apples are what will still be sold).
Tuesday, December 9, 2008
1929 and Now
1929 and Now
Paul Krugman (blog entry, from Sweden, squeezed in before he receives the award)
December 4, 2008, 9:07 am Worries about next year
I’ve been ruminating over economic prospects for next year, and I’m getting scared.
Two points:
1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month. IT WAS MUCH MORE
2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are "shovel-ready" are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.
So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.
**************
ME
I think, in general, more informed people are becoming more "deformed," not to mention scared to death, over the economy. One reason, though I haven’t seen it argued anywhere, may be as follows:
The current situation is much worse than what existed in 1930. Yes, the stock market had bubbled in the late 1920's, and had burst, and yes, there were enormous imbalances in the economy that needed to be addressed. But there were no derivatives to speak of, no credit default swaps, no slicing and dicing. Compared to the situation we are now in, solving the Great Depression was a snap.
However, what was lacking was the will. And by the time there was "will" (or at least a much greater amount of it), the deterioration of the economy was so great it was hard to bring back our prosperity, except by the massive expenditures devoted to World War II. Than you, Tojo.
Today, there is much more "will," (assuming the Republicans, or most of them, don’t become extreme obstructionists, making the recovery impossibly difficult), but the problems are incredibly harder.
In other words, we could have had a recovery starting in 1930 or, surely, by 1931, and a strong if not booming economy by 1932. Instead, we had a disaster by 1932. Today, it is an open question as to whether we can avoid a disaster since we are only in 1930, so to speak, and we simply don’t know (1) whether the financial chaos can be cleaned up enough so that we can begin to resume normal economic growth and (2) how effective the stimulus can be in the short run. Note Krugman’s citing the Goldman Sachs report, indicating that only a few tens of billions of projects are "shovel-ready." And much of what is really interesting about Obama’s list of projects–in essence his efforts in trying to green America–surely are not shovel-ready.
Therefore, while it seems not likely to me that we will have as bad an economic mess as we had in the thirties, it also seems to me that we will be struggling with our unique economic problem for a number of years to come.
Also, the setting is different. Once the United States got its act together (and it took World War II to make this happen), it was then clear sailing. No one could match our productivity and not only because our competitors–Japan and Western Europe–were knocked out by the war, and we were not, but because, in general, we had a huge technological lead. In 2008, that lead has vanished or is vanishing. One need only look at the trade picture. We have had, by any measure, record-setting trade deficits and will end 2008 with a trade deficit near $700 billion.
Now, it’s possible the trade situation may be significantly improved. I think Krugman leans to this view and may indeed be implicitly arguing this in his Nobel acceptance speech which I believe took place earlier yesterday. But I doubt that the picture is going to improve much unless we utilize our science and technology knowledge and come up with new exportable products. There is some hope: according to the Times, (Sunday), Obama seeks to have his stimulus package expand programs "to include new-era jobs in technology and so-called green jobs that reduce energy use and global warming emissions." But, unfortunately, time is of the essence, as people used to say.
But even if Obama gets what he wants, and what he wants is what we need, the road ahead is steep and it will be difficult to climb. Or put another way, even without the existing financial nightmare–say it never existed–we were increasingly losing our competitive advantages and certainly losing much of our manufacturing. And while the loss to Japan, starting in 1980 (or thereabouts), had its limits since Japan is ultimately not that large, the actual losses of our manufacturing to China have been stupendous, and the potential future losses are almost without limits, given China’s size and the fact that it has hundreds of millions willing to work at a fraction of what America’s average worker is paid.
The ultimate result is likely to be one that few in America can emotionally accept: an average living standard that does not grow and, worse, one that will probably decline. This could possibly be acceptable if we were a people that thought differently about the meaning of life, persons who could prefer a little more leisure to more goods. But we are not.
I think if living standards remain stagnant, and to some extent that has been the situation for most families for a few decades, the upper 5% (or maybe 20%) being exceptions, the political consequences are terrifying. As I have elsewhere mentioned, the Father Coughlins and Huey Longs flourished in the 30's and why wouldn’t deep economic despair make us ripe for future Coughlins or Longs.
Replies to this conjecture which emphasize our Democratic traditions are not convincing to me because our history, even our recent history, is not reassuring. Democracy has eroded under Bush–executive power has increased at the expense of the legislature; there was the firing of Democratic prosecutors; Abu Ghraib was sanctioned; the Iraq war was started, one we had no moral right to start, utilizing outright lies–the Saddam Hussein-Osama bin Laden connection, as well as all but claiming we had incontrovertible evidence that weapons of mass destruction existed in Iraq, when they did not.
But there is a longer history--and I'm just going back to WWII--of immoral behavior, such as overthrowing the Guatemalan government in 1954 and the Iranian government in 1953 and aiding the overthrow of Allende, in Chile, in 1973. Or covering up the mass slaughter of unarmed civilians at My Lai, in 1968. And decades earlier, we rounded up the Japanese and put them in camps. (Or read, with judiciousness, The Shock Doctrine, by Naomi Klein.)
While Sarah Palin’s unpopularity helped defeat John McCain, she still had something like 35% approval, when, with her credentials, not to speak of her creationist ideology, she deserved no support whatever. To me, this means that in a relatively calm atmosphere, 35% of our adult population are fanatics How far will authoritarian and dictatorial attitudes go when the economy fails to meet the expectations of vast numbers and the failure feels like it is never-ending? I suspect pretty far. And I write this believing we have come a long way, in racial attitudes (obviously, Mr. President-elect) and sexual attitudes, including both a modern and equal role for women (not completely, of course) and a greater acceptance of homosexuality, the California vote notwithstanding.
But under deep and lasting economic stress, why shouldn’t we be fearful of political desperados taking over? After all, Schicklgruber achieved power in a reasonably civilized society. So I’m "deformed" not only over the economy but over the political implications of a deformed economy.
Paul Krugman (blog entry, from Sweden, squeezed in before he receives the award)
December 4, 2008, 9:07 am Worries about next year
I’ve been ruminating over economic prospects for next year, and I’m getting scared.
Two points:
1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month. IT WAS MUCH MORE
2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are "shovel-ready" are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.
So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.
**************
ME
I think, in general, more informed people are becoming more "deformed," not to mention scared to death, over the economy. One reason, though I haven’t seen it argued anywhere, may be as follows:
The current situation is much worse than what existed in 1930. Yes, the stock market had bubbled in the late 1920's, and had burst, and yes, there were enormous imbalances in the economy that needed to be addressed. But there were no derivatives to speak of, no credit default swaps, no slicing and dicing. Compared to the situation we are now in, solving the Great Depression was a snap.
However, what was lacking was the will. And by the time there was "will" (or at least a much greater amount of it), the deterioration of the economy was so great it was hard to bring back our prosperity, except by the massive expenditures devoted to World War II. Than you, Tojo.
Today, there is much more "will," (assuming the Republicans, or most of them, don’t become extreme obstructionists, making the recovery impossibly difficult), but the problems are incredibly harder.
In other words, we could have had a recovery starting in 1930 or, surely, by 1931, and a strong if not booming economy by 1932. Instead, we had a disaster by 1932. Today, it is an open question as to whether we can avoid a disaster since we are only in 1930, so to speak, and we simply don’t know (1) whether the financial chaos can be cleaned up enough so that we can begin to resume normal economic growth and (2) how effective the stimulus can be in the short run. Note Krugman’s citing the Goldman Sachs report, indicating that only a few tens of billions of projects are "shovel-ready." And much of what is really interesting about Obama’s list of projects–in essence his efforts in trying to green America–surely are not shovel-ready.
Therefore, while it seems not likely to me that we will have as bad an economic mess as we had in the thirties, it also seems to me that we will be struggling with our unique economic problem for a number of years to come.
Also, the setting is different. Once the United States got its act together (and it took World War II to make this happen), it was then clear sailing. No one could match our productivity and not only because our competitors–Japan and Western Europe–were knocked out by the war, and we were not, but because, in general, we had a huge technological lead. In 2008, that lead has vanished or is vanishing. One need only look at the trade picture. We have had, by any measure, record-setting trade deficits and will end 2008 with a trade deficit near $700 billion.
Now, it’s possible the trade situation may be significantly improved. I think Krugman leans to this view and may indeed be implicitly arguing this in his Nobel acceptance speech which I believe took place earlier yesterday. But I doubt that the picture is going to improve much unless we utilize our science and technology knowledge and come up with new exportable products. There is some hope: according to the Times, (Sunday), Obama seeks to have his stimulus package expand programs "to include new-era jobs in technology and so-called green jobs that reduce energy use and global warming emissions." But, unfortunately, time is of the essence, as people used to say.
But even if Obama gets what he wants, and what he wants is what we need, the road ahead is steep and it will be difficult to climb. Or put another way, even without the existing financial nightmare–say it never existed–we were increasingly losing our competitive advantages and certainly losing much of our manufacturing. And while the loss to Japan, starting in 1980 (or thereabouts), had its limits since Japan is ultimately not that large, the actual losses of our manufacturing to China have been stupendous, and the potential future losses are almost without limits, given China’s size and the fact that it has hundreds of millions willing to work at a fraction of what America’s average worker is paid.
The ultimate result is likely to be one that few in America can emotionally accept: an average living standard that does not grow and, worse, one that will probably decline. This could possibly be acceptable if we were a people that thought differently about the meaning of life, persons who could prefer a little more leisure to more goods. But we are not.
I think if living standards remain stagnant, and to some extent that has been the situation for most families for a few decades, the upper 5% (or maybe 20%) being exceptions, the political consequences are terrifying. As I have elsewhere mentioned, the Father Coughlins and Huey Longs flourished in the 30's and why wouldn’t deep economic despair make us ripe for future Coughlins or Longs.
Replies to this conjecture which emphasize our Democratic traditions are not convincing to me because our history, even our recent history, is not reassuring. Democracy has eroded under Bush–executive power has increased at the expense of the legislature; there was the firing of Democratic prosecutors; Abu Ghraib was sanctioned; the Iraq war was started, one we had no moral right to start, utilizing outright lies–the Saddam Hussein-Osama bin Laden connection, as well as all but claiming we had incontrovertible evidence that weapons of mass destruction existed in Iraq, when they did not.
But there is a longer history--and I'm just going back to WWII--of immoral behavior, such as overthrowing the Guatemalan government in 1954 and the Iranian government in 1953 and aiding the overthrow of Allende, in Chile, in 1973. Or covering up the mass slaughter of unarmed civilians at My Lai, in 1968. And decades earlier, we rounded up the Japanese and put them in camps. (Or read, with judiciousness, The Shock Doctrine, by Naomi Klein.)
While Sarah Palin’s unpopularity helped defeat John McCain, she still had something like 35% approval, when, with her credentials, not to speak of her creationist ideology, she deserved no support whatever. To me, this means that in a relatively calm atmosphere, 35% of our adult population are fanatics How far will authoritarian and dictatorial attitudes go when the economy fails to meet the expectations of vast numbers and the failure feels like it is never-ending? I suspect pretty far. And I write this believing we have come a long way, in racial attitudes (obviously, Mr. President-elect) and sexual attitudes, including both a modern and equal role for women (not completely, of course) and a greater acceptance of homosexuality, the California vote notwithstanding.
But under deep and lasting economic stress, why shouldn’t we be fearful of political desperados taking over? After all, Schicklgruber achieved power in a reasonably civilized society. So I’m "deformed" not only over the economy but over the political implications of a deformed economy.
Monday, December 8, 2008
"Oh, if it were only 6.7%"
"Oh, if it were only 6.7%"
On Friday, the government announced that the unemployment rate rose from 6.5% to 6.7%. Also, employers cut 533,000 jobs. Have you noticed something strange?
Well, it’s not strange. It’s just that the unemployment rate, correctly calculated though it is, is not a very good measure of the job situation. What should be added are those too discouraged to look for jobs any longer. [And add to these, those who recently became ex-workers, who because of short term trauma, cannot yet start looking for jobs, knowing how hard it is to find one, and also knowing that what they are skilled in is no longer needed. This implies working at a low-paid unskilled job, if you can find it, at perhaps half the pay you were recently earning. ]
Add in also, on a calculated basis, those working part time who want to work full time, but can’t find full time jobs. By calculated, I mean that if there are 4 persons working 10 hours a week who want to work a 40 hour week, 3 persons should be thought of as unemployed. Without doing the 4 equals 3 calculation, the total number of part time workers who wanted to work full time rose by an additional 621,00. Another angle: the total number of people out of the labor force (not working, not looking) dropped by 637,000.
Actually, there is a 3rd addition that could be made, but isn’t–those working "full time," but for whom the length of the work week (and their salaries) have been reduced, as the employer says don’t come in this Friday. All recessionary periods are periods in which the "average" work week is decreasing. Who works overtime any more, pulling up the average, except bill collectors?
Anyway, the first two of these additions–the so-called discouraged workers (it should be called the DNW, discouraged non-workers) and the part time workers who want to work full time–are, indeed, calculated. For November, this calculation hit a record 12.5 percent (the government began calculating this in 1994) and it states in Saturday’s Times where I am taking this from–almost all economists know this calculation is made, though most, I think, do not follow this statistic religiously–that it rose 1.5% since September.
Thus, the Times on B1 (Saturday) has a story entitled "Grim Report On Jobs Not Showing Full Picture." The story goes on to say it is much worse than what it looks like.
Will Santa bring us more such presents? Or will his successor deliver the increasingly bad news in January? [More on the economy, hopefully, to follow shortly. Nothing like being retired! Unless your pension goes bust!!]
On Friday, the government announced that the unemployment rate rose from 6.5% to 6.7%. Also, employers cut 533,000 jobs. Have you noticed something strange?
Well, it’s not strange. It’s just that the unemployment rate, correctly calculated though it is, is not a very good measure of the job situation. What should be added are those too discouraged to look for jobs any longer. [And add to these, those who recently became ex-workers, who because of short term trauma, cannot yet start looking for jobs, knowing how hard it is to find one, and also knowing that what they are skilled in is no longer needed. This implies working at a low-paid unskilled job, if you can find it, at perhaps half the pay you were recently earning. ]
Add in also, on a calculated basis, those working part time who want to work full time, but can’t find full time jobs. By calculated, I mean that if there are 4 persons working 10 hours a week who want to work a 40 hour week, 3 persons should be thought of as unemployed. Without doing the 4 equals 3 calculation, the total number of part time workers who wanted to work full time rose by an additional 621,00. Another angle: the total number of people out of the labor force (not working, not looking) dropped by 637,000.
Actually, there is a 3rd addition that could be made, but isn’t–those working "full time," but for whom the length of the work week (and their salaries) have been reduced, as the employer says don’t come in this Friday. All recessionary periods are periods in which the "average" work week is decreasing. Who works overtime any more, pulling up the average, except bill collectors?
Anyway, the first two of these additions–the so-called discouraged workers (it should be called the DNW, discouraged non-workers) and the part time workers who want to work full time–are, indeed, calculated. For November, this calculation hit a record 12.5 percent (the government began calculating this in 1994) and it states in Saturday’s Times where I am taking this from–almost all economists know this calculation is made, though most, I think, do not follow this statistic religiously–that it rose 1.5% since September.
Thus, the Times on B1 (Saturday) has a story entitled "Grim Report On Jobs Not Showing Full Picture." The story goes on to say it is much worse than what it looks like.
Will Santa bring us more such presents? Or will his successor deliver the increasingly bad news in January? [More on the economy, hopefully, to follow shortly. Nothing like being retired! Unless your pension goes bust!!]
Fiscally Conservative: Clarification
Fiscally Conservative: Clarification
After I posted "Fiscally Conservative," I realized that the ending was, in a few respects,
simplistic.
There are people, who say they are fiscally conservative, or (with less sophistication) don’t use such hifalutin language, but think this. Among some, generally racists, they believe that the Federal government is simply giving welfare to blacks, who could work, but don’t. Since welfare is all but eradicated, this kind of thinking may have diminished, but long held views do not disappear "over night."
Then there are those who falsely generalize from a specific instance of what they think (perhaps properly, perhaps not) is wasteful and unneeded governmental spending. Seek and ye shall find. They sought and they found.
But perhaps these kinds of examples can be summarized under the category of those who feel that government is simply bad, or that big government is bad, so usually it is often expressed as a denigration of big government and a call for small government. This way of looking at government is perhaps culturally unique to the United States. (An extreme version of this view is libertarianism, which itself comes in different flavors, from the absolute form–no government, not even police, courts, or public streets [a view held by Ludwig von Mises and my former colleague, now deceased, Murray Rothbard]–to modified forms that generally allow big military expenditures and whatever else meets the fancy of the specific libertarian. Look at Ron Paul closely and you’ll understand. Or perhaps read carefully Ayn Rand, a writer for teen-agers and those who never rise intellectually above their teens.
But the same people who think government is bad are lined up with all the others for aid after the dikes burst or the tornado or hurricane hits. They accepted government-subsidized flood insurance at places of risk, such as Fire Island (truly an example of inappropriate fiscal policy, and one I participated in, when I had a house there, since, well, it was available). Others feel huge agricultural supports are justifiable. Still others heartily approve of Pell Grants and want even more aid given to students going or intending to go to college, especially since its expense is rising so.
I still think I was correct to say wealthier persons mouth the words–fiscally conservative–but do so because they think they, themselves, will be financially better off (and in general have not thought seriously about the pluses and minuses of government spending and taxes or maybe they have and simply don't care). But there are many others who think this way, because this is the kind of culture we live in (and all sorts of smart people from Milton Friedman on down influence them or, I would say, manipulate them).
I still very much enjoy reading the reincarnated Ben Stein, who in his earlier life was a "fiscal conservative" [until a few weeks or months ago], who is now calling for as massive a stimulus program as the President-elect says he favors. I take joy where I find it. Thank you, Ben Stein.
After I posted "Fiscally Conservative," I realized that the ending was, in a few respects,
simplistic.
There are people, who say they are fiscally conservative, or (with less sophistication) don’t use such hifalutin language, but think this. Among some, generally racists, they believe that the Federal government is simply giving welfare to blacks, who could work, but don’t. Since welfare is all but eradicated, this kind of thinking may have diminished, but long held views do not disappear "over night."
Then there are those who falsely generalize from a specific instance of what they think (perhaps properly, perhaps not) is wasteful and unneeded governmental spending. Seek and ye shall find. They sought and they found.
But perhaps these kinds of examples can be summarized under the category of those who feel that government is simply bad, or that big government is bad, so usually it is often expressed as a denigration of big government and a call for small government. This way of looking at government is perhaps culturally unique to the United States. (An extreme version of this view is libertarianism, which itself comes in different flavors, from the absolute form–no government, not even police, courts, or public streets [a view held by Ludwig von Mises and my former colleague, now deceased, Murray Rothbard]–to modified forms that generally allow big military expenditures and whatever else meets the fancy of the specific libertarian. Look at Ron Paul closely and you’ll understand. Or perhaps read carefully Ayn Rand, a writer for teen-agers and those who never rise intellectually above their teens.
But the same people who think government is bad are lined up with all the others for aid after the dikes burst or the tornado or hurricane hits. They accepted government-subsidized flood insurance at places of risk, such as Fire Island (truly an example of inappropriate fiscal policy, and one I participated in, when I had a house there, since, well, it was available). Others feel huge agricultural supports are justifiable. Still others heartily approve of Pell Grants and want even more aid given to students going or intending to go to college, especially since its expense is rising so.
I still think I was correct to say wealthier persons mouth the words–fiscally conservative–but do so because they think they, themselves, will be financially better off (and in general have not thought seriously about the pluses and minuses of government spending and taxes or maybe they have and simply don't care). But there are many others who think this way, because this is the kind of culture we live in (and all sorts of smart people from Milton Friedman on down influence them or, I would say, manipulate them).
I still very much enjoy reading the reincarnated Ben Stein, who in his earlier life was a "fiscal conservative" [until a few weeks or months ago], who is now calling for as massive a stimulus program as the President-elect says he favors. I take joy where I find it. Thank you, Ben Stein.
Sunday, December 7, 2008
"Fiscally Conservative"
"Fiscally Conservative"
At an annual family get-together, in Baltimore, a "conservative" 2nd cousin, one who typically votes Republican (including voting for Bush in 2004, but to his credit, for Gore in 2000), said to me "I’m fiscally conservative," and then added something like "on social issues I’m a moderate" or perhaps he even said "a liberal."
I don’t know what social issues he’s moderate on--perhaps a woman’s right to choose, perhaps the environment, perhaps Social Security and medicaid (for the poor) or medicare (for older people). Perhaps others.
But it is the first part of his statement I want to address–being "fiscally moderate." This can, of course, mean a number of things, but I think the most obvious is that you don’t like a government that runs deficits. If this is what people mean when they say this, then they should be voting Democratic. After World War II, there were only two major increases in the National Debt. There was the Reagan surge, causes by the skewed tax cut (justified by the increase in GDP, and therefore in government revenues, that would result in a balanced budget by 2004). This argument was absurd on the face of it. The economy would have had to increase at a pace it absolutely could not realize, over the next three years, to achieve the balanced budget the (thoroughly and near-universally rejected) theory of supply side economics predicted. The deficits of course kept rising through the Reagan years and Bush 1's term as well.
The second surge–obviously I like this word of manipulation, at least concerning Iraq–occurred under Bush 2 and primarily happened because of his even more skewed tax cut. (By skewed, I am referring to the disproportionate share of the cut given to the upper 5% or upper 1%.) Both of these unprecedented increases in the national debt sandwiched the Clinton years, where at first the deficits were reduced, and for the last three years or so, a huge surplus was achieved. The reduced deficits were initially caused by Clinton’s tax increase, designed to appease Robert Rubin who said businesses will only invest if the deficit is reduced. The taxes, with two very minor exceptions, were levied on the well-to-do. (Republicans in both houses of Congress voted unanimously against the increase and Republican leaders wrongly predicted a disastrous recession.) After a slow start, the economy soon boomed--and the endless and huge Federal deficit turned into an unprecedented surplus--partly perhaps for the Rubin reason or maybe, independent of his argument, because the dot-com boom "happened" and brought full employment (and therefore greater government tax receipts) as well as short term capital gains from the bubble (which were taxed normally).
Perhaps being fiscally conservative means you don’t overspend, say, on armaments. In this case, both parties have much to answer for–Kennedy in 1961 and Reagan in 1981. Or perhaps it means, more simply, the federal government simply doesn’t spend very much on anything. But, but, and one more, but. Eisenhower, who courageously reduced military spending by about 30% after the Korean War ended, nonetheless felt that America, if it was to be economically viable, had to have an Interstate Highway System. So he offers one, but then to cover his conservative ass, says it was needed for NATIONAL DEFENSE, the all-purpose excuse.
And today, even conservatives, or many of them, starting with Ben Stein, who writes regularly for the Times (someone who is usually hard to take) and Harvard economists, Martin Feldstein and Gregory Mankiw, (the former was chairman of Reagan’s Council of Economic Advisers while the latter held the same position for W) are in favor of a huge fiscal stimulus, the deficit be damned.
Add to the various arguments the fact that both the stock market has done better under Democrats and average family income, adjusted for inflation, has done better under Democrats, why would conservatives go on and on and on about being fiscally conservative?
Here is my answer. They are not really interested in this issue at all. It’s a cover up. What they are interested in is that government shouldn’t hurt them economically with taxes or hurt them with regulations that are in the public interest, such as on the environment or the health of workers. But you can’t argue this so easily (and sound humane). So they use the nice-sounding "I am a fiscal conservative" for selfish personal reasons, which have nothing to do with appropriate fiscal policies. (2nd cousin, if you or your wife reads this, please don’t take it personally. You did vote for Gore and that shows you’re an exception, of sorts.)
At an annual family get-together, in Baltimore, a "conservative" 2nd cousin, one who typically votes Republican (including voting for Bush in 2004, but to his credit, for Gore in 2000), said to me "I’m fiscally conservative," and then added something like "on social issues I’m a moderate" or perhaps he even said "a liberal."
I don’t know what social issues he’s moderate on--perhaps a woman’s right to choose, perhaps the environment, perhaps Social Security and medicaid (for the poor) or medicare (for older people). Perhaps others.
But it is the first part of his statement I want to address–being "fiscally moderate." This can, of course, mean a number of things, but I think the most obvious is that you don’t like a government that runs deficits. If this is what people mean when they say this, then they should be voting Democratic. After World War II, there were only two major increases in the National Debt. There was the Reagan surge, causes by the skewed tax cut (justified by the increase in GDP, and therefore in government revenues, that would result in a balanced budget by 2004). This argument was absurd on the face of it. The economy would have had to increase at a pace it absolutely could not realize, over the next three years, to achieve the balanced budget the (thoroughly and near-universally rejected) theory of supply side economics predicted. The deficits of course kept rising through the Reagan years and Bush 1's term as well.
The second surge–obviously I like this word of manipulation, at least concerning Iraq–occurred under Bush 2 and primarily happened because of his even more skewed tax cut. (By skewed, I am referring to the disproportionate share of the cut given to the upper 5% or upper 1%.) Both of these unprecedented increases in the national debt sandwiched the Clinton years, where at first the deficits were reduced, and for the last three years or so, a huge surplus was achieved. The reduced deficits were initially caused by Clinton’s tax increase, designed to appease Robert Rubin who said businesses will only invest if the deficit is reduced. The taxes, with two very minor exceptions, were levied on the well-to-do. (Republicans in both houses of Congress voted unanimously against the increase and Republican leaders wrongly predicted a disastrous recession.) After a slow start, the economy soon boomed--and the endless and huge Federal deficit turned into an unprecedented surplus--partly perhaps for the Rubin reason or maybe, independent of his argument, because the dot-com boom "happened" and brought full employment (and therefore greater government tax receipts) as well as short term capital gains from the bubble (which were taxed normally).
Perhaps being fiscally conservative means you don’t overspend, say, on armaments. In this case, both parties have much to answer for–Kennedy in 1961 and Reagan in 1981. Or perhaps it means, more simply, the federal government simply doesn’t spend very much on anything. But, but, and one more, but. Eisenhower, who courageously reduced military spending by about 30% after the Korean War ended, nonetheless felt that America, if it was to be economically viable, had to have an Interstate Highway System. So he offers one, but then to cover his conservative ass, says it was needed for NATIONAL DEFENSE, the all-purpose excuse.
And today, even conservatives, or many of them, starting with Ben Stein, who writes regularly for the Times (someone who is usually hard to take) and Harvard economists, Martin Feldstein and Gregory Mankiw, (the former was chairman of Reagan’s Council of Economic Advisers while the latter held the same position for W) are in favor of a huge fiscal stimulus, the deficit be damned.
Add to the various arguments the fact that both the stock market has done better under Democrats and average family income, adjusted for inflation, has done better under Democrats, why would conservatives go on and on and on about being fiscally conservative?
Here is my answer. They are not really interested in this issue at all. It’s a cover up. What they are interested in is that government shouldn’t hurt them economically with taxes or hurt them with regulations that are in the public interest, such as on the environment or the health of workers. But you can’t argue this so easily (and sound humane). So they use the nice-sounding "I am a fiscal conservative" for selfish personal reasons, which have nothing to do with appropriate fiscal policies. (2nd cousin, if you or your wife reads this, please don’t take it personally. You did vote for Gore and that shows you’re an exception, of sorts.)
Wednesday, November 26, 2008
Carl Davidson
Carl Davidson
My secretive informant has amended his previous message to me and has added, for Director of the Central Intelligence Agency, Carl Davidson. I am happy to report that Googling Davidson will show why he is appropriately qualified for this position. Also, Sandy Levinson either will be his assistant or our new Ambassador to Cuba, recognition of which is an early Obama priority. Finally, I have learned there is to be a new cabinet position, Secretary of Culture and Religious Affairs. and this post will be given to Michael Lerner.
My secretive informant has amended his previous message to me and has added, for Director of the Central Intelligence Agency, Carl Davidson. I am happy to report that Googling Davidson will show why he is appropriately qualified for this position. Also, Sandy Levinson either will be his assistant or our new Ambassador to Cuba, recognition of which is an early Obama priority. Finally, I have learned there is to be a new cabinet position, Secretary of Culture and Religious Affairs. and this post will be given to Michael Lerner.
Tuesday, November 25, 2008
Obama's Real Cabinet
Obama’s Real Cabinet
I suppose a lot of you have been taken in. I was. Hillary Clinton, Timothy Geithner and the others–these are not the real choices. These are cover-ups until Barrack Hussein Obama is sworn in, on January 20, 2009. I have heard from a source I cannot reveal the real Cabinet appointees as well as the appointees to other high positions. They are:
Secretary of State: Noam Chomsky
Secretary of the Treasury: Sam Bowles and Herb Gintis (sharing the role just as they co-
authored many books)
Secretary of Defense (also shared): Howard Zinn and Osama bin Laden (if foreigners are allowed)
Attorney General: Bernadine Dohrn (yes, she has a legal degree)
Secretary of the Interior: Jim Hightower
Secretary of Agriculture: Pete Seeger (always an environmentalist, except in Stalin’s Russia)
Secretary of Commerce: Dennis Kucinich (got to have some "conservatives" in these positions, somewhere)
Secretary of Labor: Stanley Aronowitz--who else?
Secretary of Health and Human Services: Michael Moore or Tom Hayden, still undecided
Secretary of Housing and Urban Development: Tom Hayden or Michael Moore, still undecided
Secretary of Education: Bill Ayres (an old friend and obvious choice)
Secretary of Veterans Affairs: George W. Bush (the bi-artisan angle and former draft dodger)
Secretary of Homeland Security: Bruce Franklin (a specialist on Moby Dick and long ago, fired from Stanford, although he had tenure, and a classmate of mine, at Amherst College)
********
White House Chief of Staff: Bernie Sanders (but only if he promises to wear a tie)
Administrator of the Environmental Protection Agency: Alexander Cockburn (a leftist who doesn’t believe in global warming--a perfect choice)
Director of the Office of Management and Budget: William Greider
Head of the National Drug control Policy: Ron Paul (uniting with libertarians)
U.S. Trade Representative: Naomi Klein (may be a shocking choice)
Chairman of the Federal Reserve System: Robert Borosage
Commissioner of the Social Security Administration: Victor Navasky
Director of National Intelligence: Eric Foner
UN Representative: Jane Fonda
Press Secretary: David Mermelstein (the real one, not the music critic)
I suppose a lot of you have been taken in. I was. Hillary Clinton, Timothy Geithner and the others–these are not the real choices. These are cover-ups until Barrack Hussein Obama is sworn in, on January 20, 2009. I have heard from a source I cannot reveal the real Cabinet appointees as well as the appointees to other high positions. They are:
Secretary of State: Noam Chomsky
Secretary of the Treasury: Sam Bowles and Herb Gintis (sharing the role just as they co-
authored many books)
Secretary of Defense (also shared): Howard Zinn and Osama bin Laden (if foreigners are allowed)
Attorney General: Bernadine Dohrn (yes, she has a legal degree)
Secretary of the Interior: Jim Hightower
Secretary of Agriculture: Pete Seeger (always an environmentalist, except in Stalin’s Russia)
Secretary of Commerce: Dennis Kucinich (got to have some "conservatives" in these positions, somewhere)
Secretary of Labor: Stanley Aronowitz--who else?
Secretary of Health and Human Services: Michael Moore or Tom Hayden, still undecided
Secretary of Housing and Urban Development: Tom Hayden or Michael Moore, still undecided
Secretary of Education: Bill Ayres (an old friend and obvious choice)
Secretary of Veterans Affairs: George W. Bush (the bi-artisan angle and former draft dodger)
Secretary of Homeland Security: Bruce Franklin (a specialist on Moby Dick and long ago, fired from Stanford, although he had tenure, and a classmate of mine, at Amherst College)
********
White House Chief of Staff: Bernie Sanders (but only if he promises to wear a tie)
Administrator of the Environmental Protection Agency: Alexander Cockburn (a leftist who doesn’t believe in global warming--a perfect choice)
Director of the Office of Management and Budget: William Greider
Head of the National Drug control Policy: Ron Paul (uniting with libertarians)
U.S. Trade Representative: Naomi Klein (may be a shocking choice)
Chairman of the Federal Reserve System: Robert Borosage
Commissioner of the Social Security Administration: Victor Navasky
Director of National Intelligence: Eric Foner
UN Representative: Jane Fonda
Press Secretary: David Mermelstein (the real one, not the music critic)
Obama's National Bank
Obama’s National Bank
I just learned today, in Bob Herbert’s column, in the Times, that Obama promised during the campaign to create "a national infrastructure bank." THIS could be the successor to the 2nd National Bank (ended by Andrew Jackson, in 1836) that I thought we needed, and mentioned in a previous posting, but only if the infrastructure bank was also allowed to make (a few hundred billion dollars of) loans to businesses and individuals, with branches of the bank set up throughout the country. Not likely, I agree. Instead, what we have is the Federal Reserve making loans to banks now approaching one trillion dollars, with effects no one knows how to evaluate. I am considering incorporating myself as a bank, so I can be in on it all.
I just learned today, in Bob Herbert’s column, in the Times, that Obama promised during the campaign to create "a national infrastructure bank." THIS could be the successor to the 2nd National Bank (ended by Andrew Jackson, in 1836) that I thought we needed, and mentioned in a previous posting, but only if the infrastructure bank was also allowed to make (a few hundred billion dollars of) loans to businesses and individuals, with branches of the bank set up throughout the country. Not likely, I agree. Instead, what we have is the Federal Reserve making loans to banks now approaching one trillion dollars, with effects no one knows how to evaluate. I am considering incorporating myself as a bank, so I can be in on it all.
Monday, November 24, 2008
Normalcy? I doubt it.
Normalcy? I Doubt It
[This entry is long, maybe overly so. My apologies. Most persons are focusing on the current toxic mess and what is needed. This is most appropriate. In spite of a statement by the President-elect of a vast stimulus package, given "the fact we are facing an economic crisis of historic proportions," I fear that the stimulus will be less than what is really needed. But I thought we should also look at the longer picture. (I don’t want to say the long run since you know what Keynes had to say about that.) What happens after the economy begins at some unknown date in the future to begin its climb upward is also important. The short term crisis obviously must be tended to, but the long term issues are also paramount. I am skeptical as to whether we can ever achieve the prosperity we once had, and make it last. This entry explains why I have such serious doubts. Whether I do the question justice is for others to say. ]
It’s really comical that wincing conservatives, or budget hawks, are calling (almost screaming) for more government, one example being the deficit hawk, Matt Miller, whose thoughts I recently reprinted. And yesterday, in the Sunday Business section of The Times, Ben Stein (a conservative I usually do not enjoy reading) is not only demanding "we turn to the federal government for relief," but ends his column by saying "allowing them (the automakers) to die is a step toward a terrifying dusk." (I reprint his column at the end.) Perhaps, in being amused by their anguished twists, I am engaging in schadenfreude. An ignoble pleasure, to be sure, but I will not deny myself.
On rereading Miller, I realized I had missed something. He writes how, after this crisis is over, we should then install Congressional procedures that make deficit spending difficult, though not impossible. The problem, I think, is that implicit in what he is saying (unlike what Ben Stein is saying) is the assumption that we will return to normalcy in the not too distant future and live happily ever after, more or less, the way we used to live before the crisis began.
Reminds one of Warren Harding, no? I guess we did return to normalcy, for a while–the Teapot Dome scandal, the recessions of 1923-4 and 1926-7, but then, whoops–1929!
First, I’d like to look at the national debt situation. After World War II, our national debt exceeded our GDP, by about 20%. But it was almost all internally held. This meant there were no currency value questions, although the average taxpayer probably couldn’t care less whether he or she was paying the interest to tycoons who lived on Park Avenue or tycoons who lived in French or English castles.
The "problem," if there was one, was solved, first, by inflation. Holders of the debt found it was worth considerably less, over time, in terms of what it could buy. (After price controls were removed by the Republican Congress in 1946, prices increased almost 40% over the next few years.) But the second solution was that GDP grew over time greater than the national debt grew over time. So by the middle of the1970's, the national debt was only about 25% of GDP. In general, economists believe (correctly, in my view) that as long this ratio is relatively low and not rising, there is no reason for concern.
For example, if a recent college graduate owes $50,000 in student loans and makes $50,000, just after he (or she) graduates, but then ten years later earns $100,000 and owes $25,000, what’s the problem? Or to exaggerate, if this person earns $1,000,000, and owes $100,000, we know that by tightening his belt, switching to a Honda Civic Hybrid (the car I and Marianne own) from a Mercedes-Benz, and makes a few other "sacrifices," he can be easily be free of debt.
After 1980, and Reagan, came supply side economics. Cut taxes and you end up with more governmental revenue. In Reagan’s case, the claim was made that the 1981 tax cut would bring in a surplus by 1984. Of course nothing of the kind happened and the national debt quadrupled during the Reagan years. Partly, his tax cut was an attempt to starve the (governmental) beast. That is, claim we have no money and therefore can’t afford Medicaid, Medicare, Social Security and the like. (Our esteemed Vice-President, Dick Chaney, is said to have "reluctantly" voted against increases for Head Start, because, in his words, we can’t afford it.) But Medicaid, Medicare and Social Security were too popular and Reagan was not able to destroy them. Nor was his successor, George W. Bush.
Consequently, because of the Reagan tax cut (and military spending increases), the debt/GDP ratio rose to over 60% by the 1990's and will be approaching 70% this coming year and possibly move even higher as less taxes come in during the next few years, since so many are out of work and so many companies are not making profits. Also, of course, there are the massive bailouts already in existence and, according to President-elect Obama, a vast stimulus package on its way.
However, it is worth a moment to mention the most absurd comment ever made by a public official, someone many think has been a distinguished public servant, namely Alan Greenspan. The last years of the Clinton Administration produced huge fiscal surpluses. These were due to the fact that we had full employment, more or less, and people therefore paid more taxes, and corporations made more profit and therefore they too paid more taxes. Also, the dot-com bubble produced taxes. People would buy stocks at $25 a share and sell them a month later for $50. This led to huge capital gains but also to huge capital gains taxes.
So large were the surpluses that Alan Greenspan publicly worried that we would in a decade or so have no national debt. And for some reason this would be a disaster. Now why he would fear this is one question, and a complex and puzzling one at that, but that he would fear something the chances of which were about one in a billion is truly mind-boggling. Since I don’t think Greenspan is an uniformed moron, there must be more than a political motive–wanting Bush’s tax cut to be enacted–something Rand-ish or unknowably idiosyncratic. But whatever: it stands as one of the all time stupidest statements ever made by a high official of any American administration.
Back to normalcy. After World War II, it was a heyday. Europe and Japan were wiped out by war and as a consequence we could sell our goods with relative ease. But in time, all that changed. I realized that economists were behind the curve, when, in an article I prepared for The New York Times Magazine, just before 1980, I asked of twenty economists, many Nobelists, all distinguished, "how the United States can extricate itself from its economic troubles?" Not a single economist, myself included, realized the enormous problem which was about to unfold–the partial conquest of the American automobile market by the Japanese, one which helped create the "rust belt."
Now, nearly 30 years have passed, with much of our manufacturing facilities transferred to China. Nonetheless, we are shaken, or should be, by the fact that what is left of our manufacturing is increasingly in trouble, symbolized by the potential collapse of the auto industry, once America’s largest manufacturer.
If, in the past, we were able to deal with our national debt, and our ability to provide high-paying jobs to most of the people most of the time, primarily through manufacturing, it would appear, we currently face a bleak future. We can’t solve the problem, as we have been "solving" it, by taking in each other’s wash–I eat at restaurants and the waitress has her nails clipped and the nail clippers hire plumbers named Joe, and he hires an accountant, and the accountant visits Las Vegas, and the croupier buys haircuts and the barber, well he eats at the restaurant and we begin again.
Simply put, we can’t keep buying all our goods from China (and Japan) and printing the money to pay for them. (More on this in a moment.) So what can we do? We could try to do what Japan and, to a lesser extent, Europe does. Prevent foreign goods (or some of them) from coming in. There can be rationales: no goods made by children or convicts; no goods made under inappropriate environmental conditions; no goods made under dictatorships which do not allow workers to unionize; and so on. This is a tricky road, and might help some, but it also might lead to an all out trade war of the type set off by the disastrous Smoot-Hartley (tariff) Act of 1930.
We could, on the other hand, simply sit back and watch while wage rates slowly decline to Chinese levels, except we can’t, since this path is obviously disastrous. Or another version of disaster is that our creditors realize, at some point in the future, that all we are able to do is print money to pay for our insatiable needs, or what we think are our insatiable needs, and decide to start selling the dollar and, voila, one day the dollar simply crashes. Just as in 1987 stocks fell about 23% in a day, the dollar falls about 50% in a day. The party is over, prices have doubled and we are in penury.
What is unlikely is that the problem will be solved by a huge new manufacturing industry, one
we can control and keep its production here. Of course no one knows the future, but even if such a new industry appeared, it must be much, much bigger than the auto industry was in its day, since we have a much, much bigger economy and a much, much bigger labor force.
Other than a new ethic, one which teaches us to enjoy life in a simpler way and do without so many of the things we feel we need–a forlorn hope, I’m afraid–there is only one possibility I can think of which offers a chance for a new, revitalized America. But it is one that absolutely has to get over the obstacle that our culture teaches so many of us and that is that Government is the problem, not the solution.
Suppose, we–by that, I mean the Government, backed by the people–are ready to spend vast sums of money, even beyond the vast sums that are being contemplated for dealing with the crisis of the sub-primes, derivatives, collateralized debt obligations–and all that, sliced and diced–and put them into infrastructure and education, and in the following ways.
Fast trains. The "bullet" has been tested at 443 kilometers per hour (about 265 mph–let’s round it off at 250) and the French TGV has been tested at 515 km/h (or over 309 mph). So let’s settle for 275 mph. With 5 trillion dollars spent over 10 years, we could have a high speed rail if done intelligently that would connect all but the furthest points (say New York to Los Angeles). Boston to New York, in an hour. (Supplemental locals, from Providence and New Haven.) New York to Washington in less than an hour, with supplementals from Philadelphia and Baltimore. Perhaps New York to Memphis (a trip my spouse often makes), by way of, say, Charlotte, maybe three or four hours. And so on. And then add to this, suburban commuting trains and light rails, here there and everywhere, accompanied perhaps by huge taxes on gas, tolls on roads and bridges, and we’d have a different world, one that was environmentally safer. (Maybe we could add in electric car fueling stations.)
But this is simply step one. What we also need is a labor force with greater inventiveness and creativity, in order to produce new goods, in all areas, including, perhaps, health care–goods we could export. And this can only come from a genuine overhaul of our education system. It can’t be locally run any more, because what we have now doesn’t work well (and therefore doesn’t promote creativity) and is patently unfair, to boot). I once gave a talk where I pointed out that in Texas the outlays per child in wealthy towns were five times that of outlays per child in poor towns. Apart from being a national disgrace, this means we can never utilize the abilities of tens of millions of our children, as they become adults.
Maybe, instead of a huge automobile industry, or its 21st century equivalent, whatever that might be, we could have 10,000 new but smaller industries, each of which employs 1,000 workers. Of course, I have no idea what can be produced, although I am sure that an unknown potential is there, if we spent the money to create the conditions that make it likely.
Take a small example that just recently I ran into at my local Morgan Chase Bank. I went to the ATM and it said you could now make deposits, without envelopes or other slips. I simply put my check in where the lights were flashing, pushed one button to indicate it went into my checking account, and then the screen showed the check, to verify that all was OK (and printed a receipt with the check on it).
Of course, I have no way of knowing whether a massive governmental outlay, in a different ideological atmosphere, can really generate the jobs and well-being we want. But I fear if we do nothing, and living standards start to fall, and keep falling, the political situation might turn grave. It was not that long ago that Father Coughlin and Huey Long had enormous influences. And even though we have made great improvements on race, gender and sexual orientation, there is nothing to guarantee that ugly movements will not gain strength if the economy fails to perform.
Bad as the current economic picture is, the real challenge, then, is to create an economy where returning to normalcy means moving on to an era in which there is a growing prosperity, not growing despair.
***********
Ben Stein: What if a Slowdown Is a Never-Ending Story?
I am endlessly charmed by chatter about when this slow-down/recession will end. Will it be late 2009? Maybe early 2010? Just a few days ago a man stopped me at a party and asked: "Are we in the fifth inning? The fourth inning?"
I am charmed by these comments and questions because they assume a fact not in evidence: that the slowdown/correction/recession will end within a short time–or even within a measurable time.
But this does not look like a typical recession. A typical recession is brought on by the Federal Reserve tightening in the face of excessive demand and rising prices. The economy still functions normally, but purposeful credit tightening slows activity. When the Fed loosens up and money starts flowing, demand increases and growth returns. This, at least, is the pattern of the large recessions we have had since the Great Depression, which was a special case, as we shall see.
Smaller recessions have been brought on simply by the inventory-business cycle, but they, too, were amenable to Fed stimulus.
That was because normal credit mechanisms were working.
This time it’s different. Or, because that is a dangerous phrase, let me say that maybe this time it’s different.
The problem now, as in 1929 to 1940, is that the economy is not functioning normally. It is shot through and through with fear, even terror. Worse yet, and unlike the situation in the Depression, government miscues have been only a part of the problem. This fear is so pervasive that it has brought the credit sector to a virtual shutdown, even to borrowers with good credit. At this point, the lending sector is so panicked —largely from the government’s inconsistent behavior and failure to rescue Lehman Brothers — that it is frozen. Not totally, but way too much for ease of lending and maybe even for the survival of a robust economy. And if a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious.
The unemployment rate is rising. Housing is in collapse. Manufacturing is weak. The unionized auto sector is dying before our eyes. Commodities are falling hard and fast.
In this situation, the nation faces a real peril: we could reach a state of long-term equilibrium — as economists say — well below full employment. This condition had been thought by classical economists to be impossible to reach. But the Depression taught us that if there is enough fear in the economy, lenders will not lend and economic activity will continue indefinitely at a level consistent with serious recession or even depression.
This was John Maynard Keynes’s great contribution to economic understanding, and it’s a big one. Of course, it is contested, as all macroeconomics is, and it may not be the full explanation, but we know from observation that an industrial economy can run well below capacity for a long time.
We should be terrified by this prospect. It would mean real suffering for tens of millions of people in America — maybe billions worldwide.
In this situation, where fear rules, we must turn to the federal government for relief. The private sector is the patient, not the doctor. Solvency guarantees for banks that lend are a must. No more Lehmans can be allowed to happen. A truly serious stimulus package is very much in order. It has to be big enough and last long enough that Americans do not just sock it away under the mattress. We cannot nickel-and-dime our way out of this. The inflation threat is small in an economy in full credit-collapse mode. There is virtually no dose of stimulus that is too much in an economy as shellshocked as today’s.
Closely related is the question of the Big Three automakers. To let them fail or go through bankruptcy would be a mistake horrifyingly similar to allowing Lehman to fail, and in some ways worse. It would kick the economy to the curb, increase the dose of fear running through the nation’s bloodstream, frighten consumers from buying, choke lending, and tend to keep the economy from returning to full employment.
I understand well the arguments against rescuing Detroit, as I have often said. But I also understand that if you have a wayward child who’s hit by a falling tree, you don’t stop to lecture her about her wayward ways. You get her to the hospital right away.
Once we have a Treasury secretary who gets this, once we enact a stimulus package that is big enough and long-lasting enough to do the job, perhaps with Treasury rebates for buying cars, trucks, refrigerators and toasters, we can be strict with Detroit. But to add hundreds of thousands of workers from the auto sector to the jobless ranks would be suicidal during these times.
We must remember that economies don’t always revive automatically. And the credit crisis, the deleveraging crisis and the Treasury gaffes are more than enough to keep the economy weak. To add to the patient’s woes by allowing a vital organ to fail — in this case, the auto industry — is just plain foolish.
This whole thing is not guaranteed to end in smiles. But we can stop pretending that it will get better no matter what mistakes we make in policy. Saving the automakers is a step out of the darkness. Or, I might say, allowing them to die is a step toward a terrifying dusk.
[This entry is long, maybe overly so. My apologies. Most persons are focusing on the current toxic mess and what is needed. This is most appropriate. In spite of a statement by the President-elect of a vast stimulus package, given "the fact we are facing an economic crisis of historic proportions," I fear that the stimulus will be less than what is really needed. But I thought we should also look at the longer picture. (I don’t want to say the long run since you know what Keynes had to say about that.) What happens after the economy begins at some unknown date in the future to begin its climb upward is also important. The short term crisis obviously must be tended to, but the long term issues are also paramount. I am skeptical as to whether we can ever achieve the prosperity we once had, and make it last. This entry explains why I have such serious doubts. Whether I do the question justice is for others to say. ]
It’s really comical that wincing conservatives, or budget hawks, are calling (almost screaming) for more government, one example being the deficit hawk, Matt Miller, whose thoughts I recently reprinted. And yesterday, in the Sunday Business section of The Times, Ben Stein (a conservative I usually do not enjoy reading) is not only demanding "we turn to the federal government for relief," but ends his column by saying "allowing them (the automakers) to die is a step toward a terrifying dusk." (I reprint his column at the end.) Perhaps, in being amused by their anguished twists, I am engaging in schadenfreude. An ignoble pleasure, to be sure, but I will not deny myself.
On rereading Miller, I realized I had missed something. He writes how, after this crisis is over, we should then install Congressional procedures that make deficit spending difficult, though not impossible. The problem, I think, is that implicit in what he is saying (unlike what Ben Stein is saying) is the assumption that we will return to normalcy in the not too distant future and live happily ever after, more or less, the way we used to live before the crisis began.
Reminds one of Warren Harding, no? I guess we did return to normalcy, for a while–the Teapot Dome scandal, the recessions of 1923-4 and 1926-7, but then, whoops–1929!
First, I’d like to look at the national debt situation. After World War II, our national debt exceeded our GDP, by about 20%. But it was almost all internally held. This meant there were no currency value questions, although the average taxpayer probably couldn’t care less whether he or she was paying the interest to tycoons who lived on Park Avenue or tycoons who lived in French or English castles.
The "problem," if there was one, was solved, first, by inflation. Holders of the debt found it was worth considerably less, over time, in terms of what it could buy. (After price controls were removed by the Republican Congress in 1946, prices increased almost 40% over the next few years.) But the second solution was that GDP grew over time greater than the national debt grew over time. So by the middle of the1970's, the national debt was only about 25% of GDP. In general, economists believe (correctly, in my view) that as long this ratio is relatively low and not rising, there is no reason for concern.
For example, if a recent college graduate owes $50,000 in student loans and makes $50,000, just after he (or she) graduates, but then ten years later earns $100,000 and owes $25,000, what’s the problem? Or to exaggerate, if this person earns $1,000,000, and owes $100,000, we know that by tightening his belt, switching to a Honda Civic Hybrid (the car I and Marianne own) from a Mercedes-Benz, and makes a few other "sacrifices," he can be easily be free of debt.
After 1980, and Reagan, came supply side economics. Cut taxes and you end up with more governmental revenue. In Reagan’s case, the claim was made that the 1981 tax cut would bring in a surplus by 1984. Of course nothing of the kind happened and the national debt quadrupled during the Reagan years. Partly, his tax cut was an attempt to starve the (governmental) beast. That is, claim we have no money and therefore can’t afford Medicaid, Medicare, Social Security and the like. (Our esteemed Vice-President, Dick Chaney, is said to have "reluctantly" voted against increases for Head Start, because, in his words, we can’t afford it.) But Medicaid, Medicare and Social Security were too popular and Reagan was not able to destroy them. Nor was his successor, George W. Bush.
Consequently, because of the Reagan tax cut (and military spending increases), the debt/GDP ratio rose to over 60% by the 1990's and will be approaching 70% this coming year and possibly move even higher as less taxes come in during the next few years, since so many are out of work and so many companies are not making profits. Also, of course, there are the massive bailouts already in existence and, according to President-elect Obama, a vast stimulus package on its way.
However, it is worth a moment to mention the most absurd comment ever made by a public official, someone many think has been a distinguished public servant, namely Alan Greenspan. The last years of the Clinton Administration produced huge fiscal surpluses. These were due to the fact that we had full employment, more or less, and people therefore paid more taxes, and corporations made more profit and therefore they too paid more taxes. Also, the dot-com bubble produced taxes. People would buy stocks at $25 a share and sell them a month later for $50. This led to huge capital gains but also to huge capital gains taxes.
So large were the surpluses that Alan Greenspan publicly worried that we would in a decade or so have no national debt. And for some reason this would be a disaster. Now why he would fear this is one question, and a complex and puzzling one at that, but that he would fear something the chances of which were about one in a billion is truly mind-boggling. Since I don’t think Greenspan is an uniformed moron, there must be more than a political motive–wanting Bush’s tax cut to be enacted–something Rand-ish or unknowably idiosyncratic. But whatever: it stands as one of the all time stupidest statements ever made by a high official of any American administration.
Back to normalcy. After World War II, it was a heyday. Europe and Japan were wiped out by war and as a consequence we could sell our goods with relative ease. But in time, all that changed. I realized that economists were behind the curve, when, in an article I prepared for The New York Times Magazine, just before 1980, I asked of twenty economists, many Nobelists, all distinguished, "how the United States can extricate itself from its economic troubles?" Not a single economist, myself included, realized the enormous problem which was about to unfold–the partial conquest of the American automobile market by the Japanese, one which helped create the "rust belt."
Now, nearly 30 years have passed, with much of our manufacturing facilities transferred to China. Nonetheless, we are shaken, or should be, by the fact that what is left of our manufacturing is increasingly in trouble, symbolized by the potential collapse of the auto industry, once America’s largest manufacturer.
If, in the past, we were able to deal with our national debt, and our ability to provide high-paying jobs to most of the people most of the time, primarily through manufacturing, it would appear, we currently face a bleak future. We can’t solve the problem, as we have been "solving" it, by taking in each other’s wash–I eat at restaurants and the waitress has her nails clipped and the nail clippers hire plumbers named Joe, and he hires an accountant, and the accountant visits Las Vegas, and the croupier buys haircuts and the barber, well he eats at the restaurant and we begin again.
Simply put, we can’t keep buying all our goods from China (and Japan) and printing the money to pay for them. (More on this in a moment.) So what can we do? We could try to do what Japan and, to a lesser extent, Europe does. Prevent foreign goods (or some of them) from coming in. There can be rationales: no goods made by children or convicts; no goods made under inappropriate environmental conditions; no goods made under dictatorships which do not allow workers to unionize; and so on. This is a tricky road, and might help some, but it also might lead to an all out trade war of the type set off by the disastrous Smoot-Hartley (tariff) Act of 1930.
We could, on the other hand, simply sit back and watch while wage rates slowly decline to Chinese levels, except we can’t, since this path is obviously disastrous. Or another version of disaster is that our creditors realize, at some point in the future, that all we are able to do is print money to pay for our insatiable needs, or what we think are our insatiable needs, and decide to start selling the dollar and, voila, one day the dollar simply crashes. Just as in 1987 stocks fell about 23% in a day, the dollar falls about 50% in a day. The party is over, prices have doubled and we are in penury.
What is unlikely is that the problem will be solved by a huge new manufacturing industry, one
we can control and keep its production here. Of course no one knows the future, but even if such a new industry appeared, it must be much, much bigger than the auto industry was in its day, since we have a much, much bigger economy and a much, much bigger labor force.
Other than a new ethic, one which teaches us to enjoy life in a simpler way and do without so many of the things we feel we need–a forlorn hope, I’m afraid–there is only one possibility I can think of which offers a chance for a new, revitalized America. But it is one that absolutely has to get over the obstacle that our culture teaches so many of us and that is that Government is the problem, not the solution.
Suppose, we–by that, I mean the Government, backed by the people–are ready to spend vast sums of money, even beyond the vast sums that are being contemplated for dealing with the crisis of the sub-primes, derivatives, collateralized debt obligations–and all that, sliced and diced–and put them into infrastructure and education, and in the following ways.
Fast trains. The "bullet" has been tested at 443 kilometers per hour (about 265 mph–let’s round it off at 250) and the French TGV has been tested at 515 km/h (or over 309 mph). So let’s settle for 275 mph. With 5 trillion dollars spent over 10 years, we could have a high speed rail if done intelligently that would connect all but the furthest points (say New York to Los Angeles). Boston to New York, in an hour. (Supplemental locals, from Providence and New Haven.) New York to Washington in less than an hour, with supplementals from Philadelphia and Baltimore. Perhaps New York to Memphis (a trip my spouse often makes), by way of, say, Charlotte, maybe three or four hours. And so on. And then add to this, suburban commuting trains and light rails, here there and everywhere, accompanied perhaps by huge taxes on gas, tolls on roads and bridges, and we’d have a different world, one that was environmentally safer. (Maybe we could add in electric car fueling stations.)
But this is simply step one. What we also need is a labor force with greater inventiveness and creativity, in order to produce new goods, in all areas, including, perhaps, health care–goods we could export. And this can only come from a genuine overhaul of our education system. It can’t be locally run any more, because what we have now doesn’t work well (and therefore doesn’t promote creativity) and is patently unfair, to boot). I once gave a talk where I pointed out that in Texas the outlays per child in wealthy towns were five times that of outlays per child in poor towns. Apart from being a national disgrace, this means we can never utilize the abilities of tens of millions of our children, as they become adults.
Maybe, instead of a huge automobile industry, or its 21st century equivalent, whatever that might be, we could have 10,000 new but smaller industries, each of which employs 1,000 workers. Of course, I have no idea what can be produced, although I am sure that an unknown potential is there, if we spent the money to create the conditions that make it likely.
Take a small example that just recently I ran into at my local Morgan Chase Bank. I went to the ATM and it said you could now make deposits, without envelopes or other slips. I simply put my check in where the lights were flashing, pushed one button to indicate it went into my checking account, and then the screen showed the check, to verify that all was OK (and printed a receipt with the check on it).
Of course, I have no way of knowing whether a massive governmental outlay, in a different ideological atmosphere, can really generate the jobs and well-being we want. But I fear if we do nothing, and living standards start to fall, and keep falling, the political situation might turn grave. It was not that long ago that Father Coughlin and Huey Long had enormous influences. And even though we have made great improvements on race, gender and sexual orientation, there is nothing to guarantee that ugly movements will not gain strength if the economy fails to perform.
Bad as the current economic picture is, the real challenge, then, is to create an economy where returning to normalcy means moving on to an era in which there is a growing prosperity, not growing despair.
***********
Ben Stein: What if a Slowdown Is a Never-Ending Story?
I am endlessly charmed by chatter about when this slow-down/recession will end. Will it be late 2009? Maybe early 2010? Just a few days ago a man stopped me at a party and asked: "Are we in the fifth inning? The fourth inning?"
I am charmed by these comments and questions because they assume a fact not in evidence: that the slowdown/correction/recession will end within a short time–or even within a measurable time.
But this does not look like a typical recession. A typical recession is brought on by the Federal Reserve tightening in the face of excessive demand and rising prices. The economy still functions normally, but purposeful credit tightening slows activity. When the Fed loosens up and money starts flowing, demand increases and growth returns. This, at least, is the pattern of the large recessions we have had since the Great Depression, which was a special case, as we shall see.
Smaller recessions have been brought on simply by the inventory-business cycle, but they, too, were amenable to Fed stimulus.
That was because normal credit mechanisms were working.
This time it’s different. Or, because that is a dangerous phrase, let me say that maybe this time it’s different.
The problem now, as in 1929 to 1940, is that the economy is not functioning normally. It is shot through and through with fear, even terror. Worse yet, and unlike the situation in the Depression, government miscues have been only a part of the problem. This fear is so pervasive that it has brought the credit sector to a virtual shutdown, even to borrowers with good credit. At this point, the lending sector is so panicked —largely from the government’s inconsistent behavior and failure to rescue Lehman Brothers — that it is frozen. Not totally, but way too much for ease of lending and maybe even for the survival of a robust economy. And if a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious.
The unemployment rate is rising. Housing is in collapse. Manufacturing is weak. The unionized auto sector is dying before our eyes. Commodities are falling hard and fast.
In this situation, the nation faces a real peril: we could reach a state of long-term equilibrium — as economists say — well below full employment. This condition had been thought by classical economists to be impossible to reach. But the Depression taught us that if there is enough fear in the economy, lenders will not lend and economic activity will continue indefinitely at a level consistent with serious recession or even depression.
This was John Maynard Keynes’s great contribution to economic understanding, and it’s a big one. Of course, it is contested, as all macroeconomics is, and it may not be the full explanation, but we know from observation that an industrial economy can run well below capacity for a long time.
We should be terrified by this prospect. It would mean real suffering for tens of millions of people in America — maybe billions worldwide.
In this situation, where fear rules, we must turn to the federal government for relief. The private sector is the patient, not the doctor. Solvency guarantees for banks that lend are a must. No more Lehmans can be allowed to happen. A truly serious stimulus package is very much in order. It has to be big enough and last long enough that Americans do not just sock it away under the mattress. We cannot nickel-and-dime our way out of this. The inflation threat is small in an economy in full credit-collapse mode. There is virtually no dose of stimulus that is too much in an economy as shellshocked as today’s.
Closely related is the question of the Big Three automakers. To let them fail or go through bankruptcy would be a mistake horrifyingly similar to allowing Lehman to fail, and in some ways worse. It would kick the economy to the curb, increase the dose of fear running through the nation’s bloodstream, frighten consumers from buying, choke lending, and tend to keep the economy from returning to full employment.
I understand well the arguments against rescuing Detroit, as I have often said. But I also understand that if you have a wayward child who’s hit by a falling tree, you don’t stop to lecture her about her wayward ways. You get her to the hospital right away.
Once we have a Treasury secretary who gets this, once we enact a stimulus package that is big enough and long-lasting enough to do the job, perhaps with Treasury rebates for buying cars, trucks, refrigerators and toasters, we can be strict with Detroit. But to add hundreds of thousands of workers from the auto sector to the jobless ranks would be suicidal during these times.
We must remember that economies don’t always revive automatically. And the credit crisis, the deleveraging crisis and the Treasury gaffes are more than enough to keep the economy weak. To add to the patient’s woes by allowing a vital organ to fail — in this case, the auto industry — is just plain foolish.
This whole thing is not guaranteed to end in smiles. But we can stop pretending that it will get better no matter what mistakes we make in policy. Saving the automakers is a step out of the darkness. Or, I might say, allowing them to die is a step toward a terrifying dusk.
Sunday, November 23, 2008
Is Obama Reading My Blog?
Is Obama Reading My Blog?
Well hardly. I think I have about a half-dozen serious readers, a few dozens every-so-often readers and then another few dozens occasionally-but-infrequently readers. I write because I enjoy doing it and hope occasionally I’ll say something that clarifies things for people or alerts them to ideas that are helpful or otherwise have an appeal.
Back to the headline. I argued that Barrack should give the tax cut he promised to those earning under $200,000, even though it is not an efficient way of stimulating the economy, since many will pay off their bills (this is tantamount to saving the money) or save for a rainy day. But a promise is a promise.
But I thought Barrack should not increase the taxes on the $250,000 + group, since the tax law enacted in 2001 automatically raised the rates back to what they were, in 2011 (I mistakenly thought it was 2010). It would avoid an unnecessary political wrangle.
Today’s headline story, in the Times, indicates (it appears) that he will simply let the cuts for the wealthy expire in 2011. My thoughts indeed.
Well hardly. I think I have about a half-dozen serious readers, a few dozens every-so-often readers and then another few dozens occasionally-but-infrequently readers. I write because I enjoy doing it and hope occasionally I’ll say something that clarifies things for people or alerts them to ideas that are helpful or otherwise have an appeal.
Back to the headline. I argued that Barrack should give the tax cut he promised to those earning under $200,000, even though it is not an efficient way of stimulating the economy, since many will pay off their bills (this is tantamount to saving the money) or save for a rainy day. But a promise is a promise.
But I thought Barrack should not increase the taxes on the $250,000 + group, since the tax law enacted in 2001 automatically raised the rates back to what they were, in 2011 (I mistakenly thought it was 2010). It would avoid an unnecessary political wrangle.
Today’s headline story, in the Times, indicates (it appears) that he will simply let the cuts for the wealthy expire in 2011. My thoughts indeed.
Saturday, November 22, 2008
Matt Miller on Deficits
I just received this in my email and I thought it was interesting, with two provisionals: the first, of lesser importance, is that (unlike Miller) I think Peterson is wrong and Perot I think is a nutcake. The second is that I think Miller is optimistic when he writes of a Trillion Dollar Deficit. If we do nothing, revenue will fall enormously and the deficit will probably approach a trillion. With an appropriate stimulus, the deficit will probably be closer to two trillion than one. DM
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
How I Stopped Worrying and Learned to Love Trillion Dollar Deficits
by Matt Miller
from Fortune.com November 20, 2008~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
We're looking at a mind-boggling, trillion-dollar budget deficit next year and I say keep the red ink rolling. My wife, who's heard me rail against deficits since I served as a budget hawk back in Bill Clinton's White House, thinks I've lost my mind - or at least my principles. I used to be a deficit fetishist, an oddball who read one of Pete Peterson's budget doomsday books on his honeymoon, and who has bored countless friends with filibusters on our fiscal follies. But I've changed.What's a fallen fiscal conservative to say? When a character in Hemingway's The Sun Also Rises was asked how he went bankrupt, he famously replied, "Slowly, then suddenly." My journey into the heart of the New Deficit Indifference feels the same.
I came of age as an economics student just as Ronald Reagan was on his way to quadrupling the national debt. I imbibed the wisdom that deficits crowd out private investment, hurt productivity growth and living standards, and pass big burdens to the next generation. All because politicians were afraid to make a few unpleasant choices! By 1992 I was the kind of New Democrat who thought Ross Perot performed a tremendous public service when his charts and graphs proved that 20% of the electorate could be roused to care about our fiscal mess. In the early Clinton White House I was the resident deficit monomaniac, the guy who griped that we weren't moving fast enough to shrink the debt even as we skimped on needed investments in health care, infrastructure and education. I even wanted to go the next step and teach the public about a few sensible steps to slow the growth of Medicare and Social Security.
Yet Bill Clinton, helped by a booming economy, ultimately turned a tide of red ink into unprecedented surpluses. Now, of course, our fiscal situation has grown dire. Indeed, before the credit crisis hit us, I would have said the absence of a successor to Perot's voice was one of the consequential gaps of the 2008 campaign. After all, the costly retirement of the Baby Boomers isn't far off in the future anymore; it's upon us. The fiscal hole is deeper than ever, with Uncle Sam sporting $50 trillion in unfunded health care and pension liabilities. In short, we're spending beyond our means, saving next to nothing as a nation, and thus dooming our kids to ruinous tax hikes and spending slashes unless we start to pay our own way. In the face of all this, how can a deficit hawk like me now blithely countenance the coming trillion-dollar gap? It's apt to invoke the godfather of deficit spending himself. "When the facts change, I change my mind," John Maynard Keynes once growled when grilled about an inconsistency. "What do you do, sir?"
In ways that 9/11 didn't, today's economic meltdown really does change everything, at least for a few years. Every day brings fresh proof that the credit crunch and the exhaustion of debt-fueled consumer spending threatens to dangerously collapse aggregate demand. There's simply no way to avoid a major recession without the federal government stepping in to bolster demand until we work through the subprime hangover. Toss in reasonable down payments by the Obama administration on expanded health coverage, green energy, infrastructure and schools, and the only question is how the new president can manage appearances so that this trillion dollar milestone doesn't become a political millstone to boot.
The key (and here you'll see I haven't really changed my stripes) is to enact a long-term framework for fiscal sanity even as we test the limits of how much debt the Treasury can peddle. Bob Litan of the Brookings Institution suggests building such triggers into Obama's blueprint from the start. Once unemployment gets back beneath 6%, for example, we could require a supermajority vote in Congress to run deficits higher than, say, 2% or 3% of GDP (by comparison, the trillion dollar figure will push us toward 7%, an all-time high). Yes, promises like this can be broken. But given the extraordinary circumstances, writing this kind of future restraint into law would tell world markets that we know the debt spree has to end.
Obama could also set up a bipartisan commission on Social Security and Medicare with a view to building consensus for action in a second term, by which time the current crisis will with luck be a fading memory. All this will push conventional thinking past the breaking point on everything from how much federal debt markets can absorb to how much cash can be spent on infrastructure fast and wisely. The defining drama of the next six months will be the fight to get this framework right and sell it to skeptical publics here and abroad. In the meantime, I'm putting my zeal for budget rectitude on the back burner. For the economy's sake, we're all deficit-addicted Keynesians now.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
How I Stopped Worrying and Learned to Love Trillion Dollar Deficits
by Matt Miller
from Fortune.com November 20, 2008~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
We're looking at a mind-boggling, trillion-dollar budget deficit next year and I say keep the red ink rolling. My wife, who's heard me rail against deficits since I served as a budget hawk back in Bill Clinton's White House, thinks I've lost my mind - or at least my principles. I used to be a deficit fetishist, an oddball who read one of Pete Peterson's budget doomsday books on his honeymoon, and who has bored countless friends with filibusters on our fiscal follies. But I've changed.What's a fallen fiscal conservative to say? When a character in Hemingway's The Sun Also Rises was asked how he went bankrupt, he famously replied, "Slowly, then suddenly." My journey into the heart of the New Deficit Indifference feels the same.
I came of age as an economics student just as Ronald Reagan was on his way to quadrupling the national debt. I imbibed the wisdom that deficits crowd out private investment, hurt productivity growth and living standards, and pass big burdens to the next generation. All because politicians were afraid to make a few unpleasant choices! By 1992 I was the kind of New Democrat who thought Ross Perot performed a tremendous public service when his charts and graphs proved that 20% of the electorate could be roused to care about our fiscal mess. In the early Clinton White House I was the resident deficit monomaniac, the guy who griped that we weren't moving fast enough to shrink the debt even as we skimped on needed investments in health care, infrastructure and education. I even wanted to go the next step and teach the public about a few sensible steps to slow the growth of Medicare and Social Security.
Yet Bill Clinton, helped by a booming economy, ultimately turned a tide of red ink into unprecedented surpluses. Now, of course, our fiscal situation has grown dire. Indeed, before the credit crisis hit us, I would have said the absence of a successor to Perot's voice was one of the consequential gaps of the 2008 campaign. After all, the costly retirement of the Baby Boomers isn't far off in the future anymore; it's upon us. The fiscal hole is deeper than ever, with Uncle Sam sporting $50 trillion in unfunded health care and pension liabilities. In short, we're spending beyond our means, saving next to nothing as a nation, and thus dooming our kids to ruinous tax hikes and spending slashes unless we start to pay our own way. In the face of all this, how can a deficit hawk like me now blithely countenance the coming trillion-dollar gap? It's apt to invoke the godfather of deficit spending himself. "When the facts change, I change my mind," John Maynard Keynes once growled when grilled about an inconsistency. "What do you do, sir?"
In ways that 9/11 didn't, today's economic meltdown really does change everything, at least for a few years. Every day brings fresh proof that the credit crunch and the exhaustion of debt-fueled consumer spending threatens to dangerously collapse aggregate demand. There's simply no way to avoid a major recession without the federal government stepping in to bolster demand until we work through the subprime hangover. Toss in reasonable down payments by the Obama administration on expanded health coverage, green energy, infrastructure and schools, and the only question is how the new president can manage appearances so that this trillion dollar milestone doesn't become a political millstone to boot.
The key (and here you'll see I haven't really changed my stripes) is to enact a long-term framework for fiscal sanity even as we test the limits of how much debt the Treasury can peddle. Bob Litan of the Brookings Institution suggests building such triggers into Obama's blueprint from the start. Once unemployment gets back beneath 6%, for example, we could require a supermajority vote in Congress to run deficits higher than, say, 2% or 3% of GDP (by comparison, the trillion dollar figure will push us toward 7%, an all-time high). Yes, promises like this can be broken. But given the extraordinary circumstances, writing this kind of future restraint into law would tell world markets that we know the debt spree has to end.
Obama could also set up a bipartisan commission on Social Security and Medicare with a view to building consensus for action in a second term, by which time the current crisis will with luck be a fading memory. All this will push conventional thinking past the breaking point on everything from how much federal debt markets can absorb to how much cash can be spent on infrastructure fast and wisely. The defining drama of the next six months will be the fight to get this framework right and sell it to skeptical publics here and abroad. In the meantime, I'm putting my zeal for budget rectitude on the back burner. For the economy's sake, we're all deficit-addicted Keynesians now.
Thursday, November 20, 2008
Three Proposals
Three Proposals
1. When I took American Studies my sophomore year in Amherst, we used a series of books, published by Amherst College, that were edited by George Rogers Taylor (who taught my seminar). One of them was called: Jackson versus Biddle: the Struggle Over the Second Bank of the United States. I think (wrongly, by my current perspective) I supported President Jackson, who caused the bank to be closed down in 1836. Be that as it may, I think the time has come for the Second Bank to be reopened, perhaps under a less inflammatory name: say, The People’s Financial Organization.
Given that neither deserving individuals, nor deserving business organizations, can borrow money very easily (or at reasonable terms), it would be helpful if The People’s Financial Organization was chartered. Its charter would require that it go out of business in 10 years. Perhaps it should be capitalized at $1 trillion.
What it would do is simply make loans to deserving borrowers and perhaps make loans to persons who are unable to pay their housing mortgages, but only to those deemed to have acted honorably, if not prudently. It should charge a lower than market rate of interest, but this should still enable it to make a profit. When it is sold, the earnings would be used to reduce the national debt. Ideology apart, it seems to me a winner.
2. Here we are in an awful financial mess, while a relatively small handful of wheelers and dealers have walked off with billions of dollars in salaries and golden parachutes, the firms they have left in shambles. Clearly it’s unfair. Also, I don’t believe you can tax them ex post facto.
But you could offer all those who earned more than $5 million in any year since 1998 (or maybe as low as $1 million), and who worked in finance, viewed broadly, the following option: for those who earned over $20 million, they should volunteer to pay back 75% of their earnings. For those who earned between $10-$20 million, they should volunteer to pay back 60% of their earnings. And for those who earned $5-$10 million, they should volunteer to return half.
Now, why should they do this? Because: each and every one of them will be carefully audited and the maximum penalty will be imposed on those who did not volunteer, including prison, if that is legally possible. (And not to some tennis court prison but more a prison like Sing Sing.) I doubt there are many rich persons who have not stretched the tax laws beyond the permissible. If nothing else, it would give jobs to accountants.
3. During the 1970's the government gave tax incentives for insulating. In general, for most home owners (and perhaps owners of commercial buildings), insulating would have been rational, in terms of the long run saving of money, even if it meant short run outlays. Whether the 1970's measure did much good I have no idea.
This time, I think we should make homeowners, apartment building owners, and all other commercial building owners an offer they cannot refuse. The government should simply pay 50% of the cost of the installation of insulation and loan at very low rates the remaining 50%. The social benefits: jobs will be created and the environment will be improved. Why not?
1. When I took American Studies my sophomore year in Amherst, we used a series of books, published by Amherst College, that were edited by George Rogers Taylor (who taught my seminar). One of them was called: Jackson versus Biddle: the Struggle Over the Second Bank of the United States. I think (wrongly, by my current perspective) I supported President Jackson, who caused the bank to be closed down in 1836. Be that as it may, I think the time has come for the Second Bank to be reopened, perhaps under a less inflammatory name: say, The People’s Financial Organization.
Given that neither deserving individuals, nor deserving business organizations, can borrow money very easily (or at reasonable terms), it would be helpful if The People’s Financial Organization was chartered. Its charter would require that it go out of business in 10 years. Perhaps it should be capitalized at $1 trillion.
What it would do is simply make loans to deserving borrowers and perhaps make loans to persons who are unable to pay their housing mortgages, but only to those deemed to have acted honorably, if not prudently. It should charge a lower than market rate of interest, but this should still enable it to make a profit. When it is sold, the earnings would be used to reduce the national debt. Ideology apart, it seems to me a winner.
2. Here we are in an awful financial mess, while a relatively small handful of wheelers and dealers have walked off with billions of dollars in salaries and golden parachutes, the firms they have left in shambles. Clearly it’s unfair. Also, I don’t believe you can tax them ex post facto.
But you could offer all those who earned more than $5 million in any year since 1998 (or maybe as low as $1 million), and who worked in finance, viewed broadly, the following option: for those who earned over $20 million, they should volunteer to pay back 75% of their earnings. For those who earned between $10-$20 million, they should volunteer to pay back 60% of their earnings. And for those who earned $5-$10 million, they should volunteer to return half.
Now, why should they do this? Because: each and every one of them will be carefully audited and the maximum penalty will be imposed on those who did not volunteer, including prison, if that is legally possible. (And not to some tennis court prison but more a prison like Sing Sing.) I doubt there are many rich persons who have not stretched the tax laws beyond the permissible. If nothing else, it would give jobs to accountants.
3. During the 1970's the government gave tax incentives for insulating. In general, for most home owners (and perhaps owners of commercial buildings), insulating would have been rational, in terms of the long run saving of money, even if it meant short run outlays. Whether the 1970's measure did much good I have no idea.
This time, I think we should make homeowners, apartment building owners, and all other commercial building owners an offer they cannot refuse. The government should simply pay 50% of the cost of the installation of insulation and loan at very low rates the remaining 50%. The social benefits: jobs will be created and the environment will be improved. Why not?
Auto Bailout
Brief Thoughts On An Auto Bailout
1. The automobile industry should be condemned not only for its historic incompetency–way behind the curve on fuel efficiency and reliability, among other problems–but also because it has opposed governmental efficiency standards. They really deserve to go broke. Nonetheless, justice aside, if we do not bail out General Motors (and Ford and Chrysler, if needed), there will be huge costs to the public at large, the same argument being made for the financial bail out.
2. The costs will primarily be the vast increases in the numbers of unemployed–millions–since the American automobile industry still is a major force in what is left of our manufacturing base. And it will be devastating to certain areas, such as Michigan, especially Detroit. Having these auto firms go bankrupt will only make recovery from the disastrous recession we are now in that much harder.
3. If Toyota, Honda, Hyundai or others eventually take over what remains of our auto-making facilities (and "build" cars here), such a take-over will take time, when time is of the essence, and even then, much of the creative design of the cars will remain in Japan and (one assumes) South Korea and Germany. Moreover, much of what goes into their cars will be built in those countries and to a considerable extent what will take place here is simply "assembling," (the reason for quotes around the word, build, in the first sentence of this paragraph).
4. If we are to flourish economically, we must have industries like the automobile industry, especially one which uses the best technology and is in the forefront of being fuel efficient. This implies that any agreement to bail out any of these companies, but especially the largest, GM, must force on them conditions that require it to do what is needed for a globally endangered 21st century. These conditions should require that these automobile companies not only work with the government in making cars, which use less and less (and finally no) gas, but that include clauses that their executives do not get paid salaries in the stratosphere.
5. If I had my (socialist) druthers, I would pay the stockholders what these firms are worth now, (to prevent investors from gaining a windfall), and have government own and run the companies, and, by doing this, creating firms which use the latest technology. Presumably, this will also mean that the government would create a system of electric car recharging stations. Then, in 10 years or so, my socialist proclivities satisfied, I would sell the newly successful companies to private investors at what the market will bring, hoping that the sales price will in effect reimburse, or more than reimburse, the tax payers for the bail out.
6. Finally, if (5) is unavailable, as I am sure it will be, part of my aid program–always conditioned on forcing the companies to utilize the latest non-polluting technology (and even helping them to develop this technology)–would be to offer to select buyers of cars, that are genuinely made in America, and not just assembled here, buyers whose incomes are less than $100,000, vast rebates–say, $5000 per car, maybe on some kind of sliding scale, along with government payment of normal upkeep for a period of, say, 5 years.
ps Alabama’s conservative Republican Senator, Richard Shelby, is absolutely opposed to aiding GM and the other auto firms, since Mercedes-Benz, Honda, and Hyundai have plants in his state and have them there because Alabama subsidized them.
1. The automobile industry should be condemned not only for its historic incompetency–way behind the curve on fuel efficiency and reliability, among other problems–but also because it has opposed governmental efficiency standards. They really deserve to go broke. Nonetheless, justice aside, if we do not bail out General Motors (and Ford and Chrysler, if needed), there will be huge costs to the public at large, the same argument being made for the financial bail out.
2. The costs will primarily be the vast increases in the numbers of unemployed–millions–since the American automobile industry still is a major force in what is left of our manufacturing base. And it will be devastating to certain areas, such as Michigan, especially Detroit. Having these auto firms go bankrupt will only make recovery from the disastrous recession we are now in that much harder.
3. If Toyota, Honda, Hyundai or others eventually take over what remains of our auto-making facilities (and "build" cars here), such a take-over will take time, when time is of the essence, and even then, much of the creative design of the cars will remain in Japan and (one assumes) South Korea and Germany. Moreover, much of what goes into their cars will be built in those countries and to a considerable extent what will take place here is simply "assembling," (the reason for quotes around the word, build, in the first sentence of this paragraph).
4. If we are to flourish economically, we must have industries like the automobile industry, especially one which uses the best technology and is in the forefront of being fuel efficient. This implies that any agreement to bail out any of these companies, but especially the largest, GM, must force on them conditions that require it to do what is needed for a globally endangered 21st century. These conditions should require that these automobile companies not only work with the government in making cars, which use less and less (and finally no) gas, but that include clauses that their executives do not get paid salaries in the stratosphere.
5. If I had my (socialist) druthers, I would pay the stockholders what these firms are worth now, (to prevent investors from gaining a windfall), and have government own and run the companies, and, by doing this, creating firms which use the latest technology. Presumably, this will also mean that the government would create a system of electric car recharging stations. Then, in 10 years or so, my socialist proclivities satisfied, I would sell the newly successful companies to private investors at what the market will bring, hoping that the sales price will in effect reimburse, or more than reimburse, the tax payers for the bail out.
6. Finally, if (5) is unavailable, as I am sure it will be, part of my aid program–always conditioned on forcing the companies to utilize the latest non-polluting technology (and even helping them to develop this technology)–would be to offer to select buyers of cars, that are genuinely made in America, and not just assembled here, buyers whose incomes are less than $100,000, vast rebates–say, $5000 per car, maybe on some kind of sliding scale, along with government payment of normal upkeep for a period of, say, 5 years.
ps Alabama’s conservative Republican Senator, Richard Shelby, is absolutely opposed to aiding GM and the other auto firms, since Mercedes-Benz, Honda, and Hyundai have plants in his state and have them there because Alabama subsidized them.
What Is To Be Done?
What Is To Be Done? (In appreciation of Vladimir Lenin, but no Vanguard Party, unless it’s led by Bernie Sanders)
I was going to begin with fiscal stimuli that are no-brainers, but W, our deeply compassionate conservative, outfoxed me, by just announcing his support for an extension of unemployment compensation to 39 weeks, instead of 26, after having opposed this in the past. This extension has been done seven previous times in seven previous recessions, often, like in this case, late in the game. Democrats should one-up Bush and extend it for more than 13 more weeks, given the fact that so many have exhausted their benefits and that there are many more long term unemployed than usual. In fact they should also increase the average amount received from $15,000 a year to something higher–say $20,000 (and aid the states in being able to do this). This is as effective a stimulus as there can be, as almost all will be spent and the delay in spending this money is minimal. [There is also little fear, in light of how little the amounts are, and how short the payment period is, that the number of free-loaders will be significant.]
Other no-brainers are food stamps and avoidance of cutbacks in Medicaid. Again, if needed, aid to the states should be immediately forthcoming, so these measures can be done promptly.
Philadelphia, I read, has announced library cutbacks. New York is planning to cut back subway service and raise rates. I am sure similar things like this are happening all over the country. The most effective stimulus, because of its speed in being used to bolster employment, after enactment, is Federal aid to states and cities, to prevent cutbacks of this type. I have no real idea as to how much should be enacted to avoid these cutbacks, although I do recall reading a figure of $100 billion. I suspect we should be thinking in terms of $250 billion. I doubt even Republicans will block this effort–it simply doesn’t sound like the actions of the Socialist devil –although at some point the amounts involved will bother some. The goal, simply is to prevent cities and states from laying off their employees and cutting back needed services, although perhaps it might help some states and cities to make infrastructure improvements they otherwise would not be able to do.
But the main fiscal stimulus had to be broader and include infrastructure and research and investment of a type that will help in the long run our environmental needs. Here, I hope those in charge separate expenditures into two categories–those that can immediately employ workers, and do so intelligently–and those that are needed long term–but require careful planning, if inappropriate projects are to be avoided. I should think fixing potholes and repairing bridges fall more into the first category while setting up electric car recharging stations (apparently big in Australia), which will have to be co-ordinated with improvements in electricity production, might require more time and be in the long term group, although partly, I assume, some activities (beyond planning) can be started sooner rather than later.
The two main New Deal projects were the Civilian Conservation Corps (CCC) and the Works Progress Administration (WPA). The first is hard to duplicate today since many workers lived in camps and wore uniforms as they planted trees, worked to prevent soil erosion and built telephone lines. But the WPA, started in 1935, involved spending on parks, bridges and schools all over America. The main problem, then, as now, is that there will be inappropriate political considerations involved, such as earmarks for "roads to nowhere," or roads to somewhere, but where you need a magnifying glass to find what you are looking for. [Will someone please tell me why "earmarks" has apparently replaced "pork barrel?"]
I have three responses to this. First, haste makes waste, but waste makes jobs. Second, the WPA built the very useful and magnificent Triborough Bridge (just yesterday renamed the RFK Bridge) and if a few unnecessary earmarks were also created–well life isn’t perfect! Finally, it’s hard to know what’s waste and what’s needed. Years ago, just after the War, when driving down Liberty Heights Avenue in Baltimore (yes, the name of the street a recent Barry Levinson movie was named for), my father pointed to a three foot wall near the sidewalk, in back of which was Hanlon Park. This park had a reservoir, tennis courts–yes I played on them–and hills, such that the absence of a wall would mean that the dirt from the park might fall onto the sidewalk and even onto the street. He told me this wall was built with WPA funds. Was it really needed? I don’t know, but I do notice that Central Park has walls, but perhaps for other reasons.
By all means, let us hope the expenditures on infrastructure will be, for the most part, useful. But if we are to avoid catastrophe–and as I write, the Dow has just dropped another 5 1/4 percent, to about 7,550–we have to accept that waste will exist. (Keynes once said, possibly with whimsy, that in a depression it would be better to dig holes and drop currency into them, and then cover the holes, and let the free market induce people to dig out the money, than do nothing at all.)
Finally, if the first order of business is a fiscal stimulus, to jump-start the economy, the other parts of the Obama program can be thoughtfully introduced later in the spring. I have in mind a universal medical program, educational reforms and environmental programs. [More on General Motors and the auto situation another time, and more on some of the long run problems greater deficits will bring, and also delayed to the future, possibly, a few wild card proposals I hesitate even to print.
I was going to begin with fiscal stimuli that are no-brainers, but W, our deeply compassionate conservative, outfoxed me, by just announcing his support for an extension of unemployment compensation to 39 weeks, instead of 26, after having opposed this in the past. This extension has been done seven previous times in seven previous recessions, often, like in this case, late in the game. Democrats should one-up Bush and extend it for more than 13 more weeks, given the fact that so many have exhausted their benefits and that there are many more long term unemployed than usual. In fact they should also increase the average amount received from $15,000 a year to something higher–say $20,000 (and aid the states in being able to do this). This is as effective a stimulus as there can be, as almost all will be spent and the delay in spending this money is minimal. [There is also little fear, in light of how little the amounts are, and how short the payment period is, that the number of free-loaders will be significant.]
Other no-brainers are food stamps and avoidance of cutbacks in Medicaid. Again, if needed, aid to the states should be immediately forthcoming, so these measures can be done promptly.
Philadelphia, I read, has announced library cutbacks. New York is planning to cut back subway service and raise rates. I am sure similar things like this are happening all over the country. The most effective stimulus, because of its speed in being used to bolster employment, after enactment, is Federal aid to states and cities, to prevent cutbacks of this type. I have no real idea as to how much should be enacted to avoid these cutbacks, although I do recall reading a figure of $100 billion. I suspect we should be thinking in terms of $250 billion. I doubt even Republicans will block this effort–it simply doesn’t sound like the actions of the Socialist devil –although at some point the amounts involved will bother some. The goal, simply is to prevent cities and states from laying off their employees and cutting back needed services, although perhaps it might help some states and cities to make infrastructure improvements they otherwise would not be able to do.
But the main fiscal stimulus had to be broader and include infrastructure and research and investment of a type that will help in the long run our environmental needs. Here, I hope those in charge separate expenditures into two categories–those that can immediately employ workers, and do so intelligently–and those that are needed long term–but require careful planning, if inappropriate projects are to be avoided. I should think fixing potholes and repairing bridges fall more into the first category while setting up electric car recharging stations (apparently big in Australia), which will have to be co-ordinated with improvements in electricity production, might require more time and be in the long term group, although partly, I assume, some activities (beyond planning) can be started sooner rather than later.
The two main New Deal projects were the Civilian Conservation Corps (CCC) and the Works Progress Administration (WPA). The first is hard to duplicate today since many workers lived in camps and wore uniforms as they planted trees, worked to prevent soil erosion and built telephone lines. But the WPA, started in 1935, involved spending on parks, bridges and schools all over America. The main problem, then, as now, is that there will be inappropriate political considerations involved, such as earmarks for "roads to nowhere," or roads to somewhere, but where you need a magnifying glass to find what you are looking for. [Will someone please tell me why "earmarks" has apparently replaced "pork barrel?"]
I have three responses to this. First, haste makes waste, but waste makes jobs. Second, the WPA built the very useful and magnificent Triborough Bridge (just yesterday renamed the RFK Bridge) and if a few unnecessary earmarks were also created–well life isn’t perfect! Finally, it’s hard to know what’s waste and what’s needed. Years ago, just after the War, when driving down Liberty Heights Avenue in Baltimore (yes, the name of the street a recent Barry Levinson movie was named for), my father pointed to a three foot wall near the sidewalk, in back of which was Hanlon Park. This park had a reservoir, tennis courts–yes I played on them–and hills, such that the absence of a wall would mean that the dirt from the park might fall onto the sidewalk and even onto the street. He told me this wall was built with WPA funds. Was it really needed? I don’t know, but I do notice that Central Park has walls, but perhaps for other reasons.
By all means, let us hope the expenditures on infrastructure will be, for the most part, useful. But if we are to avoid catastrophe–and as I write, the Dow has just dropped another 5 1/4 percent, to about 7,550–we have to accept that waste will exist. (Keynes once said, possibly with whimsy, that in a depression it would be better to dig holes and drop currency into them, and then cover the holes, and let the free market induce people to dig out the money, than do nothing at all.)
Finally, if the first order of business is a fiscal stimulus, to jump-start the economy, the other parts of the Obama program can be thoughtfully introduced later in the spring. I have in mind a universal medical program, educational reforms and environmental programs. [More on General Motors and the auto situation another time, and more on some of the long run problems greater deficits will bring, and also delayed to the future, possibly, a few wild card proposals I hesitate even to print.
Will this Pass Over?
Will This Pass Over?
Mah nishtanah ha-laila ha-zeh mi-kol ha-lelot? Why is this night different from all other nights?
Seder-ing the current situation: why is this recession different from all other post-WW II recessions. (1) In the first place there is loan toxicity the likes of which we have never seen, not even in the 1930's No one knows whether the worst is over, bailouts notwithstanding. [On the hurricane scale, I would rank this as Category 5.]
(2) Next this downturn is more international than any other, including not just Western Europe, but also Japan, South Korea, India, China and the OPEC countries (since the price of oil has plummeted)–and Brazil and I assume other places in South America and places I haven’t read of or followed. This means that exports, which were weak anyway, at least compared to imports–our trade deficit was unprecedented–cannot help us and will probably diminish and hurt us, especially since the dollar is incredibly strong against the Euro, one of which cost us about $1.60 a few months ago, and which now cost us about $1.27. (An ideal time to go to Europe, if you’re not broke.) [Category 3]
Third (3), consumption expenditures, which were at the heart of the "boom," and boom is used advisedly since the economy was only creeping upward, with most of the benefits going to the well-to-do, has plummeted, with household retail names going bankrupt–such as Linens & Things and Circuit City, with General Motors months or possibly weeks away. [Category 5]
Fourth (4), recessions since 1945 have been characterized by inflation bad enough that the Fed created the recession, by raising rates. Recovery occurred after they lowered rates. This time, inflation was not that serious and rates were not raised that high. Lowering them to 1% (with still another cut expected) has not increased loans much if at all. In other words, monetary policy is all but totally ineffective. Without going into it, that’s what’s meant by "liquidity trap." [Category who knows what, but high.]
Last (5) housing. Nothing like this since the thirties. Prices, as I read it, have fallen by about 10%, and have another 10% to fall. This, and the huge number of impending housing defaults, means that housing construction will be feeble for some time to come. (New construction for commercial real estate will undoubtedly also be equally feeble. [Category 5]
**********
The Times, on days after the markets are open, has a 5 x 2 graphic, with a title "Economic Indicators." Of recent, Real (adjusted for inflation) Economic Growth, as I suppose most know, turned negative. Housing Starts have been dropping steadily and are less than one half of what they were a few years ago. The change in Retail Sales, from a previous year, have been dropping for years and are now negative–this is really rare. Capacity Utilization, the percentage of factories being used (or, inversely, lying idle) has plunged.
Employment is now less than what it was a year ago, and, whereas for about 3 years, the increase in employment had been getting smaller, it is now declining. Manufacturing has recently plunged. The change in Construction Spending, from the previous year, has been dropping for years, but remained positive, but now it is considerably less than the previous year. Real Hourly Earnings declined for a number of years after 2003, then rose modestly for about a year but for the last year has been declining and for the last months declining at a faster rate. And the Leading Indicators–which are used to foretell the future–had shown a rate of increase, which had been declining since 2003, but is now actually declining this year, 2008, and recently declining at a much faster rate. No good news, period.
********
Consumption is being hurt for four reasons, as I see it. First, there are the cutbacks by those who are earning less (or no) income and whose assets (in stocks and in the value of their houses) have declined,); second, there are those who cannot borrow any more against their houses to spend as they did during the earlier 2000's (and in some cases cannot use their credit cards as much); third, there are the retired whose savings have been partly lost–whether held in stocks or other assets owned outright or in pensions declining in value; and finally, there are many saving for a rainy day, fearful that they may be fired soon or simply believing caution is imperative in rocky times like this. [When it rains in England on St. Swithin’s Day (July 15), it is supposed to rain for another 40 days. I’m afraid that after St. Lehman’s Day, it is going to rain for another two years, if we’re lucky.]
A tax cut for many of these persons will be used to pay off debts or otherwise saved, but not spent (or much of it will not be spent). It is not an effective (or, dollar for dollar, efficient) stimulus. [However, for political reasons, Obama should, nonetheless, go through with his tax cut for those earning up to $200,000, but perhaps he should avoid unnecessary political wrangling by holding off his increase for those earning over $250,000, since their tax cuts will be rescinded in 2010, as required by the law enacted in 2001. For this group, perhaps, he should simply let the law take its course, avoiding a bitter but ultimately unnecessary fight.
Thus we are left with this conclusion: Since investment is weak, and growing weaker, and increases in exports are not likely to happen and if they did, they wouldn’t be that significant, and consumption is crashing, all that remains, to get us out of this mess, in a time span that is not disastrous, is a massive government stimulus program–i.e., spending. [This will discussed in a separate entry.]
Mah nishtanah ha-laila ha-zeh mi-kol ha-lelot? Why is this night different from all other nights?
Seder-ing the current situation: why is this recession different from all other post-WW II recessions. (1) In the first place there is loan toxicity the likes of which we have never seen, not even in the 1930's No one knows whether the worst is over, bailouts notwithstanding. [On the hurricane scale, I would rank this as Category 5.]
(2) Next this downturn is more international than any other, including not just Western Europe, but also Japan, South Korea, India, China and the OPEC countries (since the price of oil has plummeted)–and Brazil and I assume other places in South America and places I haven’t read of or followed. This means that exports, which were weak anyway, at least compared to imports–our trade deficit was unprecedented–cannot help us and will probably diminish and hurt us, especially since the dollar is incredibly strong against the Euro, one of which cost us about $1.60 a few months ago, and which now cost us about $1.27. (An ideal time to go to Europe, if you’re not broke.) [Category 3]
Third (3), consumption expenditures, which were at the heart of the "boom," and boom is used advisedly since the economy was only creeping upward, with most of the benefits going to the well-to-do, has plummeted, with household retail names going bankrupt–such as Linens & Things and Circuit City, with General Motors months or possibly weeks away. [Category 5]
Fourth (4), recessions since 1945 have been characterized by inflation bad enough that the Fed created the recession, by raising rates. Recovery occurred after they lowered rates. This time, inflation was not that serious and rates were not raised that high. Lowering them to 1% (with still another cut expected) has not increased loans much if at all. In other words, monetary policy is all but totally ineffective. Without going into it, that’s what’s meant by "liquidity trap." [Category who knows what, but high.]
Last (5) housing. Nothing like this since the thirties. Prices, as I read it, have fallen by about 10%, and have another 10% to fall. This, and the huge number of impending housing defaults, means that housing construction will be feeble for some time to come. (New construction for commercial real estate will undoubtedly also be equally feeble. [Category 5]
**********
The Times, on days after the markets are open, has a 5 x 2 graphic, with a title "Economic Indicators." Of recent, Real (adjusted for inflation) Economic Growth, as I suppose most know, turned negative. Housing Starts have been dropping steadily and are less than one half of what they were a few years ago. The change in Retail Sales, from a previous year, have been dropping for years and are now negative–this is really rare. Capacity Utilization, the percentage of factories being used (or, inversely, lying idle) has plunged.
Employment is now less than what it was a year ago, and, whereas for about 3 years, the increase in employment had been getting smaller, it is now declining. Manufacturing has recently plunged. The change in Construction Spending, from the previous year, has been dropping for years, but remained positive, but now it is considerably less than the previous year. Real Hourly Earnings declined for a number of years after 2003, then rose modestly for about a year but for the last year has been declining and for the last months declining at a faster rate. And the Leading Indicators–which are used to foretell the future–had shown a rate of increase, which had been declining since 2003, but is now actually declining this year, 2008, and recently declining at a much faster rate. No good news, period.
********
Consumption is being hurt for four reasons, as I see it. First, there are the cutbacks by those who are earning less (or no) income and whose assets (in stocks and in the value of their houses) have declined,); second, there are those who cannot borrow any more against their houses to spend as they did during the earlier 2000's (and in some cases cannot use their credit cards as much); third, there are the retired whose savings have been partly lost–whether held in stocks or other assets owned outright or in pensions declining in value; and finally, there are many saving for a rainy day, fearful that they may be fired soon or simply believing caution is imperative in rocky times like this. [When it rains in England on St. Swithin’s Day (July 15), it is supposed to rain for another 40 days. I’m afraid that after St. Lehman’s Day, it is going to rain for another two years, if we’re lucky.]
A tax cut for many of these persons will be used to pay off debts or otherwise saved, but not spent (or much of it will not be spent). It is not an effective (or, dollar for dollar, efficient) stimulus. [However, for political reasons, Obama should, nonetheless, go through with his tax cut for those earning up to $200,000, but perhaps he should avoid unnecessary political wrangling by holding off his increase for those earning over $250,000, since their tax cuts will be rescinded in 2010, as required by the law enacted in 2001. For this group, perhaps, he should simply let the law take its course, avoiding a bitter but ultimately unnecessary fight.
Thus we are left with this conclusion: Since investment is weak, and growing weaker, and increases in exports are not likely to happen and if they did, they wouldn’t be that significant, and consumption is crashing, all that remains, to get us out of this mess, in a time span that is not disastrous, is a massive government stimulus program–i.e., spending. [This will discussed in a separate entry.]
Wednesday, November 19, 2008
Depression Ahead: FDR and Obama
Depression Ahead: FDR and Obama
The picture is dreadfully clear. The economy is headed downward and there is little to turn it around, except a fiscal stimulus which has yet to be enacted. Monetary policy, for the first time since the Great Depression, is totally ineffective (a condition economists call a liquidity trap). In short, if there ends up being no fiscal stimulus, which of course I doubt, the chances are that we would have a repeat of the Great Depression, maybe not so bad, maybe worse. Bush has been imitating Hoover, doing a little, just as Hoover did. In 1932, Hoover instituted the Reconstruction Finance Corporation (RFC), which loaned to state and local governments and made loans to banks and businesses. It helped a little, but basically, it was too little, too late.
Also, we should keep in mind something that is not always realized: Roosevelt did not get us out of the Great Depression. He did more than Hoover, much more, but he, too, did too little. What he did do helped improve the economy from where it was when he was inaugurated, in March, 1933, but we were still deep in the depression when, in 1937, fearful of the deficit, and still addicted to the orthodoxy of trying to balance the budget (and ignoring the new Keynesian ideas, whose "General Theory" was published in early 1936), he raised taxes and cut back spending. The result was a disaster–the economy plummeted almost to the levels that existed when he came to power. This is known as the recession within the depression and it lasted 13 months. Only the massive spending of World War II got us out of the Great Depression.
In short, many good things occurred under Roosevelt–such as Social Security, FDIC, the Wagner Act, TVA and even WPA–but he was far too conventional and far too timid, at least in his efforts to create a recovery. I fear that political pressures, along with own his natural caution, may lead Obama to imitate, in a negative way, the president many hope he will be, Franklin D. Roosevelt, by being more timid than what the times call for–BOLDNESS.
Even with a well thought-out and appropriate stimulus package, unemployment is likely to approach 10%. And this is a minimalist way of looking at the job situation. It leaves off those who were looking for jobs and stopped because they thought there simply were no jobs available–the so-called discouraged workers; it excludes all those working part-time who want to work full time. These figures are collected and the Times should print them along with the official rate, but it doesn’t. No one, to my knowledge, adds in to this calculation the decline in hours worked, when employers make relatively small cutbacks–stay home this Friday, etc. When I last looked at what was collected, the increase of the more inclusive measure was much greater than the increase of those officially unemployed. We’re talking, right now, of more than 10% "unemployed" by the broader measure, pushed up the most by those working part time who want to work full time.
And of course, distress is not measured simply by loss of employment. Even those employed have been losing their savings and watching, as we in New York are doing, city and state cutbacks that affect us, such as the cutbacks announced in subway service and the announcement of substantial increases in fares to be imposed. Add to the people hurt in this way, many of those in retirement, who are now finding it difficult, as their savings are being wiped out, many of whom may be forced to seek employment, if there are jobs to be had. In short, personal distress is widespread and growing. How people will fare depends on how large, how quickly and how intelligently a fiscal stimulus will be put in place. As Krugman has put it, if you think we need a $500 billion dollar stimulus (or whatever figure he used), increase it by 50%. We can always reimpose monetary restraints if we over-stimulate. Think BOLD, Obama.
[I’ll leave to future entries further comments on the special aspects of this decline, thoughts about the kind of stimulus needed, thoughts about GM, and a few pet programs which I know won’t come into existence, but should.]
The picture is dreadfully clear. The economy is headed downward and there is little to turn it around, except a fiscal stimulus which has yet to be enacted. Monetary policy, for the first time since the Great Depression, is totally ineffective (a condition economists call a liquidity trap). In short, if there ends up being no fiscal stimulus, which of course I doubt, the chances are that we would have a repeat of the Great Depression, maybe not so bad, maybe worse. Bush has been imitating Hoover, doing a little, just as Hoover did. In 1932, Hoover instituted the Reconstruction Finance Corporation (RFC), which loaned to state and local governments and made loans to banks and businesses. It helped a little, but basically, it was too little, too late.
Also, we should keep in mind something that is not always realized: Roosevelt did not get us out of the Great Depression. He did more than Hoover, much more, but he, too, did too little. What he did do helped improve the economy from where it was when he was inaugurated, in March, 1933, but we were still deep in the depression when, in 1937, fearful of the deficit, and still addicted to the orthodoxy of trying to balance the budget (and ignoring the new Keynesian ideas, whose "General Theory" was published in early 1936), he raised taxes and cut back spending. The result was a disaster–the economy plummeted almost to the levels that existed when he came to power. This is known as the recession within the depression and it lasted 13 months. Only the massive spending of World War II got us out of the Great Depression.
In short, many good things occurred under Roosevelt–such as Social Security, FDIC, the Wagner Act, TVA and even WPA–but he was far too conventional and far too timid, at least in his efforts to create a recovery. I fear that political pressures, along with own his natural caution, may lead Obama to imitate, in a negative way, the president many hope he will be, Franklin D. Roosevelt, by being more timid than what the times call for–BOLDNESS.
Even with a well thought-out and appropriate stimulus package, unemployment is likely to approach 10%. And this is a minimalist way of looking at the job situation. It leaves off those who were looking for jobs and stopped because they thought there simply were no jobs available–the so-called discouraged workers; it excludes all those working part-time who want to work full time. These figures are collected and the Times should print them along with the official rate, but it doesn’t. No one, to my knowledge, adds in to this calculation the decline in hours worked, when employers make relatively small cutbacks–stay home this Friday, etc. When I last looked at what was collected, the increase of the more inclusive measure was much greater than the increase of those officially unemployed. We’re talking, right now, of more than 10% "unemployed" by the broader measure, pushed up the most by those working part time who want to work full time.
And of course, distress is not measured simply by loss of employment. Even those employed have been losing their savings and watching, as we in New York are doing, city and state cutbacks that affect us, such as the cutbacks announced in subway service and the announcement of substantial increases in fares to be imposed. Add to the people hurt in this way, many of those in retirement, who are now finding it difficult, as their savings are being wiped out, many of whom may be forced to seek employment, if there are jobs to be had. In short, personal distress is widespread and growing. How people will fare depends on how large, how quickly and how intelligently a fiscal stimulus will be put in place. As Krugman has put it, if you think we need a $500 billion dollar stimulus (or whatever figure he used), increase it by 50%. We can always reimpose monetary restraints if we over-stimulate. Think BOLD, Obama.
[I’ll leave to future entries further comments on the special aspects of this decline, thoughts about the kind of stimulus needed, thoughts about GM, and a few pet programs which I know won’t come into existence, but should.]
Monday, November 17, 2008
Various
VARIOUS
TIAA Once More–and Buffett: (Mostly for teachers with TIAA-CREF holdings)
When you look at the holdings of the TIAA Traditional Annuity, it shows that 37% of their holdings are in "Structured Finance." In a paragraph on structured securities, it indicates they are created by bundling loans and then slicing the contractual cash flow they will produce into "tranches." [And so on, on p 7: TIAA Traditional Annuity: Adding Safety and Stability To Retirement Portfolios (dated August 2008). To get to this, you must be able to get on the TIAA home page. Then click: Help and Resources. Then click: View an Online Publication. Then scroll to TIAA Traditional Annuity White Paper and click the one and only box. You then need to have Adobe Reader. Then go to page 7, mentioned above.]
Slightly unnerving, but of course what is mentioned here is hard to evaluate. However, about 6 months ago, I switched from the Real Estate Fund, when it was up about one-half percent, year to date (it had previously been up over 1%) and is now down about 4%, year to date, with decreases the likes of which I have never seen for this fund, but far less than what happens to stocks on a bad day. When I switched to the Traditional, they promised 6% for the rest of their year, which ends February 28. Someone who bought into the traditional in the summer was guaranteed 5 ½ %. Nothing has changed since then. Since it often bounces about a half point or so, nothing about it looks as though it were in trouble. Otherwise, I would have expected another half point decline, or more.
Conclusion: I’ll stay with the Traditional, which I am more or less locked into, but I’ll hold off transferring in the other half of my holdings, which are in a CREF money market fund.
Buffett’s advice to buy American stocks now, which I previously criticized, makes little sense for retired persons or older persons, if safety is paramount. For persons in their 30's or 40's, perhaps one might switch one’s holdings from their money market fund to stocks (or stay in the stocks you’ve lost so much in). But for older persons, consider this: if you switched $1000 to stocks and the Dow falls to 6,000 [the level stocks should go according one Guru in this Sunday’s Times, if the recession is "severe," and therefore not altogether unlikely], and then stocks increase at 7%, after 7 years, the stocks will be worth $1204. If, instead, you took that $1000 and divided it between Traditional, at 6%, and Money Market, at 2%–or an average of 4%-- in 7 years the $1000 will be $1316.
And in truth, the increases in stocks from whenever the recovery begins (or before, since it’s a leading indicator), may not do half as well. This appears to be an unprecedented and catastrophic recession. With conditions that were much less serious, stocks were pretty stable–no increases–for about a decade beginning in the early 70's. And then there’s the Japanese Nikkei 225, at present little more than a third of its peak reached at the end of the 1980's. Maybe it will retrieve its peak by 2050. Maybe.
Nonetheless, if you are an optimist, and you believe that stocks have reached their bottom, obviously you should buy them, and who knows you may turn out to be right. Me, I’m remaining cautious, although if stocks drop as far as 6000, I may then start putting part of my CD money into them.
***************
Tidbits
1. I read someone who said that Jeb Bush will change his last name to McGillicutty. I then looked up Gillicutty and generally it has a negative connotation–in I love Lucy, it was "You silly McGillicutty," and in other sources, far worse. But in doing this, I came across an ad for a
T-shirt worn by an attractive young woman, which had on the front of the T-shirt: Make Awkward Sexual Advances, Not War.
2. It appears that the story that Palin didn’t know Africa was not a continent is untrue, but someone named Bill in Portland, Maine, said Bush (our W) once said "We spent a lot of time talking about Africa as we should. Africa is a nation that suffers from incredible disease."
3. I went into the bedroom the other night where my wife was winding down, with the latest count from Oregon: between Stevens (the convicted Republican felon, who if he wins, will resign or be forced to resign, paving the way for Palin to be elected Senator) and Begich. The Steven lead has been dwindling from the 3,000 or so plurality (there was a libertarian in the race also), that existed on November 5, since absentee ballots (and problem ballots) have not all been counted. She said, out of the blue, you’re here to tell me Begich is ahead by three, picking the number out of the hat. Amazingly, the report I just read had Begich ahead by 3. Now he’s ahead by about 800, when I last looked, and all the good pollsters, like 538, believe the uncounted votes are all in Democratic areas and Begich will win.
4. I Have never seen so many upsetting economic headlines in the Times and upsetting economic stories: Headline (Tuesday, November 11) "Almost Entire Town Is Drowning In Debt as Home Values Plunge." Allen Sinai, a well known business economist: "Consumption literally caved in" (referring to the dip in consumption reported on Friday, October 31), an article in which was stated the fact that consumer spending dipped for the first time in 17 years. "It is a prelude," Sinai goes on, "to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere."
Or: "Spending Stalls and Businesses Slash U.S. Jobs," Sunday,. October 26. The article goes on to list some companies announcing their intention to cut workers: "Merck, Yahoo, General Electric, Xerox, Pratt & Whitney, Goldman Sachs,. Whirlpool, Bank of America, Alcoa, Coca-Cola, the Detroit automakers and nearly all the airlines."
5. I previously wrote about the election, but the following from a friend has led me to mention my own peculiar circumstances: "I don’t how you were on election day but I was a mess. I spent all day (several really) calling for Obama and was so anxious that night that I was calling Colorado up until 8:30. I didn’t really relax until he won Ohio and then I really yelled (until my ribs hurt). He may not be perfect, but I saw him on 60 Minutes tonight and – it is so damned good to see a president who can think and talk."
When at about 7:30 election night, it was mentioned that Indiana was too close to call, I felt pretty sure Obama would win, since 538 and others had called Indiana either leaning Republican (538's only mistake other than the one vote in Nebraska) or too close to call. If the polls were way off, for whatever reason, and Indiana been called Republican a half an hour after the polls had closed, this would have totally unnerved me. After it became clear that Obama would win Virginia, since the McCain lead existed only because much of the Obama strongholds (primarily northern Virginia) had not been counted, and after he won handily in Pennsylvania, I was pretty sure he would win. Of course, Ohio absolutely cinched it.
I then leave my party at 97th and Columbus, where incidentally they are building a Whole Foods store, even though recently I read that profits have practically evaporated because people are economizing, I walk home and don’t hear horns blaring or anything else. They may have been, but I could concentrate on only one thing. I didn’t have my keys and my spouse, Marianne, was asleep. I didn’t have my keys because Marianne had seen me out, so instead of locking the door as I usually do when I leave the apartment, I simply walked out without my keys.
I call her as I walk home, but she’s asleep and the ringer was turned off. Fortunately, a neighbor was in front of the building and let me in. I then start banging on our apartment door. Curiously, the same thing had happened to Marianne a month ago and I wasn’t awakened, but our very attractive neighbor, Lisa, was, and Marianne was able to sleep at Lisa’s. Unfortunately or fortunately, Marianne was awakened before Lisa was awakened and I was able to get into the apartment. The upside is that Marianne, now unable to get back to sleep, was able to hear Obama’s victory speech.
I then stay up all night, watching the Franken race (one of two individuals I had given money to). I was on a site that showed the percentage of the votes already counted, in the high nineties, and the counties in which the vote was not fully counted, making it appear as though Franken could reduce the slim lead. But at 5:30 am, I couldn’t stay awake. The result was I didn’t wake up until about noon. I then went out to get my fix–The New York Times–and I suffer the way all addicts suffer when the addictive substance isn’t available. There were simply no New York Times anywhere. I was able to get a Daily News and then only because they printed an extra edition. But methadone isn’t heroine. Moreover, when I got back to the apartment, after eating at EJ’s, and got on The New York Times web site, they had already begun changing it. Only a weak later did I see the historic paper, with the headline–OBAMA.
Incidentally, one friend worked in Florida, another in Virginia, still another in Pennsylvania (and I made calls to Florida and Pennsylvania. I figure Obama owes his election to me and my Polytechnic colleagues.
TIAA Once More–and Buffett: (Mostly for teachers with TIAA-CREF holdings)
When you look at the holdings of the TIAA Traditional Annuity, it shows that 37% of their holdings are in "Structured Finance." In a paragraph on structured securities, it indicates they are created by bundling loans and then slicing the contractual cash flow they will produce into "tranches." [And so on, on p 7: TIAA Traditional Annuity: Adding Safety and Stability To Retirement Portfolios (dated August 2008). To get to this, you must be able to get on the TIAA home page. Then click: Help and Resources. Then click: View an Online Publication. Then scroll to TIAA Traditional Annuity White Paper and click the one and only box. You then need to have Adobe Reader. Then go to page 7, mentioned above.]
Slightly unnerving, but of course what is mentioned here is hard to evaluate. However, about 6 months ago, I switched from the Real Estate Fund, when it was up about one-half percent, year to date (it had previously been up over 1%) and is now down about 4%, year to date, with decreases the likes of which I have never seen for this fund, but far less than what happens to stocks on a bad day. When I switched to the Traditional, they promised 6% for the rest of their year, which ends February 28. Someone who bought into the traditional in the summer was guaranteed 5 ½ %. Nothing has changed since then. Since it often bounces about a half point or so, nothing about it looks as though it were in trouble. Otherwise, I would have expected another half point decline, or more.
Conclusion: I’ll stay with the Traditional, which I am more or less locked into, but I’ll hold off transferring in the other half of my holdings, which are in a CREF money market fund.
Buffett’s advice to buy American stocks now, which I previously criticized, makes little sense for retired persons or older persons, if safety is paramount. For persons in their 30's or 40's, perhaps one might switch one’s holdings from their money market fund to stocks (or stay in the stocks you’ve lost so much in). But for older persons, consider this: if you switched $1000 to stocks and the Dow falls to 6,000 [the level stocks should go according one Guru in this Sunday’s Times, if the recession is "severe," and therefore not altogether unlikely], and then stocks increase at 7%, after 7 years, the stocks will be worth $1204. If, instead, you took that $1000 and divided it between Traditional, at 6%, and Money Market, at 2%–or an average of 4%-- in 7 years the $1000 will be $1316.
And in truth, the increases in stocks from whenever the recovery begins (or before, since it’s a leading indicator), may not do half as well. This appears to be an unprecedented and catastrophic recession. With conditions that were much less serious, stocks were pretty stable–no increases–for about a decade beginning in the early 70's. And then there’s the Japanese Nikkei 225, at present little more than a third of its peak reached at the end of the 1980's. Maybe it will retrieve its peak by 2050. Maybe.
Nonetheless, if you are an optimist, and you believe that stocks have reached their bottom, obviously you should buy them, and who knows you may turn out to be right. Me, I’m remaining cautious, although if stocks drop as far as 6000, I may then start putting part of my CD money into them.
***************
Tidbits
1. I read someone who said that Jeb Bush will change his last name to McGillicutty. I then looked up Gillicutty and generally it has a negative connotation–in I love Lucy, it was "You silly McGillicutty," and in other sources, far worse. But in doing this, I came across an ad for a
T-shirt worn by an attractive young woman, which had on the front of the T-shirt: Make Awkward Sexual Advances, Not War.
2. It appears that the story that Palin didn’t know Africa was not a continent is untrue, but someone named Bill in Portland, Maine, said Bush (our W) once said "We spent a lot of time talking about Africa as we should. Africa is a nation that suffers from incredible disease."
3. I went into the bedroom the other night where my wife was winding down, with the latest count from Oregon: between Stevens (the convicted Republican felon, who if he wins, will resign or be forced to resign, paving the way for Palin to be elected Senator) and Begich. The Steven lead has been dwindling from the 3,000 or so plurality (there was a libertarian in the race also), that existed on November 5, since absentee ballots (and problem ballots) have not all been counted. She said, out of the blue, you’re here to tell me Begich is ahead by three, picking the number out of the hat. Amazingly, the report I just read had Begich ahead by 3. Now he’s ahead by about 800, when I last looked, and all the good pollsters, like 538, believe the uncounted votes are all in Democratic areas and Begich will win.
4. I Have never seen so many upsetting economic headlines in the Times and upsetting economic stories: Headline (Tuesday, November 11) "Almost Entire Town Is Drowning In Debt as Home Values Plunge." Allen Sinai, a well known business economist: "Consumption literally caved in" (referring to the dip in consumption reported on Friday, October 31), an article in which was stated the fact that consumer spending dipped for the first time in 17 years. "It is a prelude," Sinai goes on, "to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere."
Or: "Spending Stalls and Businesses Slash U.S. Jobs," Sunday,. October 26. The article goes on to list some companies announcing their intention to cut workers: "Merck, Yahoo, General Electric, Xerox, Pratt & Whitney, Goldman Sachs,. Whirlpool, Bank of America, Alcoa, Coca-Cola, the Detroit automakers and nearly all the airlines."
5. I previously wrote about the election, but the following from a friend has led me to mention my own peculiar circumstances: "I don’t how you were on election day but I was a mess. I spent all day (several really) calling for Obama and was so anxious that night that I was calling Colorado up until 8:30. I didn’t really relax until he won Ohio and then I really yelled (until my ribs hurt). He may not be perfect, but I saw him on 60 Minutes tonight and – it is so damned good to see a president who can think and talk."
When at about 7:30 election night, it was mentioned that Indiana was too close to call, I felt pretty sure Obama would win, since 538 and others had called Indiana either leaning Republican (538's only mistake other than the one vote in Nebraska) or too close to call. If the polls were way off, for whatever reason, and Indiana been called Republican a half an hour after the polls had closed, this would have totally unnerved me. After it became clear that Obama would win Virginia, since the McCain lead existed only because much of the Obama strongholds (primarily northern Virginia) had not been counted, and after he won handily in Pennsylvania, I was pretty sure he would win. Of course, Ohio absolutely cinched it.
I then leave my party at 97th and Columbus, where incidentally they are building a Whole Foods store, even though recently I read that profits have practically evaporated because people are economizing, I walk home and don’t hear horns blaring or anything else. They may have been, but I could concentrate on only one thing. I didn’t have my keys and my spouse, Marianne, was asleep. I didn’t have my keys because Marianne had seen me out, so instead of locking the door as I usually do when I leave the apartment, I simply walked out without my keys.
I call her as I walk home, but she’s asleep and the ringer was turned off. Fortunately, a neighbor was in front of the building and let me in. I then start banging on our apartment door. Curiously, the same thing had happened to Marianne a month ago and I wasn’t awakened, but our very attractive neighbor, Lisa, was, and Marianne was able to sleep at Lisa’s. Unfortunately or fortunately, Marianne was awakened before Lisa was awakened and I was able to get into the apartment. The upside is that Marianne, now unable to get back to sleep, was able to hear Obama’s victory speech.
I then stay up all night, watching the Franken race (one of two individuals I had given money to). I was on a site that showed the percentage of the votes already counted, in the high nineties, and the counties in which the vote was not fully counted, making it appear as though Franken could reduce the slim lead. But at 5:30 am, I couldn’t stay awake. The result was I didn’t wake up until about noon. I then went out to get my fix–The New York Times–and I suffer the way all addicts suffer when the addictive substance isn’t available. There were simply no New York Times anywhere. I was able to get a Daily News and then only because they printed an extra edition. But methadone isn’t heroine. Moreover, when I got back to the apartment, after eating at EJ’s, and got on The New York Times web site, they had already begun changing it. Only a weak later did I see the historic paper, with the headline–OBAMA.
Incidentally, one friend worked in Florida, another in Virginia, still another in Pennsylvania (and I made calls to Florida and Pennsylvania. I figure Obama owes his election to me and my Polytechnic colleagues.
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