Tag Archives: economy

Can We Have Accountability with Our Stimulus?

Originally published at http://www.care2.com/causes/politics/blog

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President Barack Obama and the 111th Congress have achieved their goal of creating stimulus legislation to bring aid to the declining economy.  

While both parties agreed that some action was needed to stimulate the economy, the Democratic embrace of public spending did not receive Republican support. Both sides did agree on tax cuts, which put more money in private hands, where it theoretically could be entrusted without fear of misuse.

Remarkably, the stimulus legislation was assembled, debated and negotiated quickly and follows the Bush administration’s $700 billion financial support program, showing both administrations’ willingness to act quickly and boldly–to avoid mistakes made by Depression-era governments.

The public has largely followed party positions with Democrats accepting President Obama’s claims that spending, with accountability, is necessary and proper, and Republicans rejecting public spending beyond the financial bailout as unjustified, except that a significant vocal minority of the public from across the political landscape believe that the government’s management of public funds is corrupt, self-serving, and unnecessary.

The conflict highlights a problem President Obama gave voice to in the 2008 presidential campaign, before the economic crisis captured center state. Many Americans have lost faith in their government. They perceive government as the game board of the wealthy and powerful, where tax revenues and rights to government spending are divided up by lobbyists and their representatives in office.

The truth is likely more complicated.  But Obama campaigned for more openness and accountability in the federal government, and crucially in the government’s use of public funding. Now is the time to make good on those promises.

Both the Treasury plan to support bank balance sheets and real estate values and the new stimulus legislation will only gain legitimacy if the public believes that they are worth the money. President Obama must put great effort into communicating and demonstrating that each dollar was spent wisely, obtained value, and served a public purpose that could not have been achieved otherwise.

This is no easy task. But with such doubt in the responsibility of government and the economic justice of our system, it is necessary. When the crisis ends and President Obama needs to move to the difficult tasks of cutting government spending, including entitlements, and working again towards a balanced budget, such calls for sacrifice by our leaders will require for their success the trust of the American people.

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Economy in Decline (part 2 of a 3 part series)

 

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Stimulus legislation comes in at $789 billion.

 

As the stimulus legislation is formalized into law, the public is still reeling at the price tag.  

Congress has committed $789 billion in new spending and tax relief, as well as the $700 billion already committed in October of 2008 to support failing banking institutions and an additional $2 trillion dollars, proposed by Treasury Secretary, Tim Geithner, to support financial and real estate sector recovery.

Economists from government, academia and business, whose trade is big numbers and abstract concepts, have been at the forefront of analyzing this crisis.  There is fervent activity among economists across the political spectrum and disagreement as to what should be done to solve problems that individually and collectively are not exactly like those faced, studied and dealt with in the past.

A Major Government Effort

A significant number of leading economists agree that stimulation of the economy, as it slows, will help counter the worst effects of its decline. 

This is more than a political concern for the personal hardships of unemployment, foreclosure, bankruptcy and lost opportunity that recessions engender.  The overall cost to the nation in growth, productivity and economic leadership is also significant.

With an economy estimated to lose trillions of dollars in activity because of the credit crisis and recession, only a massive stimulus law could have substantial impact.

Painted with a broad brush, the stimulus bill gives money to the pubic in the form of tax cuts ($282 billion – $400 per individual, $800 per family or $250 in Veterans and Social Security benefits) and increased unemployment benefits.  It increases public spending ($507 billion) on a wide variety of programs including infrastructure, green technology, support for cancer research and education.  It also provides emergency funding to states ($87 billion) to support state Medicaid funding.  

The hope is that this money will keep people employed, spending and receiving services until the worst of the recession is over and private business activity resumes at a level sufficient to increase employment, spending and tax revenue.

Doubts and Fears

The bill is only a part of the government’s efforts to remedy the economic decline, and yes, the price tag is staggering. 

Despite fears about the economic decline, many Americans have expressed concern and outrage at the scale of public spending, fearing that the money will be wasted and that increasing the deficit will pass the buck for fiscal responsibility to our children and grandchildren.  

Some accept the tax cuts as needed for stimulation of the economy, preferring money in private hands to government spending.  The abrupt increase in public spending also raises fears of inflation in the long run, even as deflation from falling prices and incomes is the current worry.

Among supporters, there is the belief that money lost from the private economy should be made up at least in part through public and private spending, but also that public services have been shortchanged and commitments to public education, green initiatives and infrastructure will improve the nation and lives of citizens.

Costs and Benefits

The real aim of the legislation is to stabilize the economy by supporting business activity through the most dangerous phase of the slowdown.  President Barack Obama has spoken of keeping the recession from spiraling downward as more layoffs cause more foreclosures and drops in personal and business spending, eventually leading to more businesses closing their doors and a snowball effect of economic contraction.

An alternative to this action is to accept dramatic decreases in economic activity with resulting unemployment, business closures and cuts in government services and wait for the eventual economic recovery.  

While this approach would risk less in the way of upfront public spending, current leaders feel that to do nothing or only cut taxes, when the risk of long-term economic decline is significant, would be to repeat the mistakes that led to the Great Depression, which lasted more than a decade.  Other proposals, such as one for a short-term capital gain tax waiver to stimulate reinvestment and market confidence were ignored in this bill, but remain available to a government firmly committed to fighting large-scale economic collapse moving forward.

From this perspective, the aggressive action taken by Federal Reserve Chairman Ben Bernanke, Treasury Secretaries Henry Paulson and Geithner, President Obama and two Congresses seem promising.   

The government is being responsive, bold and aggressive.  Now, whether it will work, remains for the future to tell. 

Economy in Decline (part 1 of a 3 part series)

 

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More evidence surfaces in spite of Bush tax cuts, bank support and lower interest rates.

 

With more bad economic news pointing toward bank failures, business closures and layoffs, politicians on both sides of the aisle are crafting plans to aid the economy.  As the recession teeters on the brink of an even deeper slump, politicians are reaching for ever-larger and less traditional solutions.

The next few weeks will unleash an unprecedented national recovery program.  This three part series will examine the problems, proposed solutions and politics of the economic crisis.

What We Know

 

While Republicans and Democrats certainly have different philosophical beliefs about the causes, both sides agree we are in a severe recession.  The growth rate of the economy has fallen (by 3.8 percent annual rate last quarter) and unemployment is now rising significantly as a result.  This recession is more precarious than many others in that the failings of two specific industries, the financial industry and real estate, have seen extreme shifts and have threatened to slow other sectors of the economy dramatically beyond a “normal” recession.


The financial industry collapse is particularly devastating because it is restricting financing to consumers and businesses, which must further curtail their activity to avoid risking hardship and failure.  The deflation in real estate has undermined American wealth and confidence since so many counted their home as a no-risk asset and investment vehicle. 

Stakes Are High

 

Economists fear that the speed, breadth and worldwide scope of decline could lead to a downward spiral in world economies.  Markers of this decline include extremely high unemployment rates, poor business confidence and long-term economic stagnation with low or negative GDP growth.  The decline in gross domestic product for the U.S. in the first quarter of 2009 is already anticipated to be at a -5 percent annual rate.

The choices for private businesses under stress are limited.  Either downsize and try to weather the economic storm, file bankruptcy and try to maintain operations in a leaner structure, or shut down.  In some cases, the writing is on the wall; in others, it depends on how long the recession lasts.

In the face of this economic distress, the Bush administration moved to support the economy as a whole and the institutions in greatest risk of failure.  Interest rates were lowered to promote borrowing for future business activity.  Taxes were lowered so the public could spend more.  Controversially, banks were given public funds to keep them in business.


What We Don’t Know

 

Unfortunately, neither interest rate cuts, tax cuts, nor bank bailouts have stopped the decline.  It is not just the fact that government action can take many months or years to filter its way through the economy and show up in statistics.  In the immediate term, the banking system continues to fail, the real estate market continues to worsen and the economy stands on the doorstep of a significant period of decline.  

Adding to these larger-than-life issues is the fact that many Americans are facing the reality of large-scale layoffs.

No recovery can occur until the banking crisis and real estate decline have stabilized.  These problems require extraordinary solutions that will be costly, uncertain and politically unpopular.   Yet, only once a permanent fix has been set in place, can the government’s plans for stimulus have meaningful effect.

The next parts of this series will focus on the Obama administration’s banking and real estate fixes, as well as the Congressional stimulus proposals and their effectiveness at returning the economy to health and prosperity.

The Obama administration has promised to present proposals on these issues in coming weeks.

Temporary Bank Nationalization

 


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Image by http://www.flickr.com/photos/gi/388322867/; license under creative commons

 

I believe it is likely that President Barack Obama and his Treasury Secretary, Tim Geithner, will move to nationalize one or more major banking institutions in the coming weeks. 

This would be a controversial step for the new administration.  And a courageous one. 

The very idea of nationalization is so antithetical to free market economic principles, that this article is bound to illicit alarm and condemnation.  And rightfully so.  Nationalization, especially on this scale, must truly be a last resort.

The two most likely targets are Citibank and Bank of America, with an estimated combined worth of more than $100 billion.  Two banks that are “Too big to fail.”

These banks are also very likely insolvent.  

The Bush administration tried to solve immediate financial problems by investing through the Treasury’s previous $700 billion bailout fund.  Bank of America and Citibank (Citigroup), in addition to receiving their portion of the bailout, also required many additional commitments to insure against losses.  

Lately, the press has focused on scandals over executive pay, lack of accountability for public funds and concern that banks were not doing their part to extend credit. These may be valid, but they obscure the concern that the investment, to date, does not appear to be enough to keep the banks operating.  

So the government has a choice.  

Continue to invest more taxpayer funds, in hopes the tide will soon turn, or face the music and take over the failed entities.  It would be one thing if we were near the end of this recession and the funds were just a bridge to an inevitable recovery, but we’re not. 

Unfortunately, predictions for 2009 are bleak, and as finances go, so does the viability of banks.  A significant rise in unemployment risks another round of foreclosures and a further weakening of bank mortgage portfolios.  

In this light, nationalization is courageous.  With banks insolvent, doing anything else simply puts off the reckoning for a later date.  

Nationalization does not eliminate financial risk, but does give the government the sole right to collect from the sale of bank assets when they are returned to private hands.  

Under this scenario however, current shareholders would most likely see their interests wiped out.

The Obama administration’s plan to support the real estate market is still unknown.  A dramatic act could conceivably stop the mortgage weakness that continues to weigh down the banks, making the path forward more positive. 

However, for the new administration, there is great political risk.  Already facing criticism for preparing to spend nearly a trillion dollars on fiscal stimulus, some of which looks like pork-barrel politics as it goes through Congress, the administration would face a whole new magnitude of concern for its attempt to run the megabanks.
 

There is no doubt that the administration would only be seeking temporary nationalization.  The new team has professed no desire to control or profit from the business of banking, but does have a few good options.  The banks are involved in so many credit, retail and financing operations that a shut down would be disastrous for an innumerable number of its customers still fighting for survival.  

On the other hand, when the bank is returned to private hands, the government, not the current shareholders, would likely recoup much of its investment.

Let’s unlock politics, where do you stand on nationalization of insolvent banks?

Our Government in Action — Will Stimulus Succeed?

By Marc Seltzer; originally published on November 17, 2008, at politicsunlocked.com

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Know Your History
The Federal Reserve lowered interest rates back in 2007, with hopes of persuading businesses to borrow more money, bolstering their operations and growth.  Unfortunately, there is a considerable lag time between when rate cuts are enacted and resulting increases in business activity occur.  These rate cuts may have stopped even more dramatic declines than we are currently seeing, but they certainly have not reversed the downward slide in stock prices or business activity leading the global recession.

Consumer and business spending reflects confidence in stable prices, employment and business prospects.  As exploding oil prices sucked up a disproportionate share of family budgets and business profits and as real estate values declined, confidence fell.  Now, with the unemployment rate rising significantly, people are increasingly less confident, and more importantly, spending less, regardless of whether they have a job or not.

Now What?
The talk in Washington and near water-coolers around the country, concerns fiscal policy related to revenue and spending.

There are two approaches:  Lowering taxes to leave money in private hands and government spending to boost commercial activity and jobs.

Polls have found that the middle class tended to pay off debts and save for a rainy day with recent tax rebates, although these rebates were meant to stimulate spending in the economy.  Small tax cuts for a distressed middle class may ease hardship in the heartland, but have not stimulated the economy as predicted.

On the other hand, rebates for the lowest income segment of society are immediately put back into the economy, being used on day-to-day necessities.  Tax cuts for wealthy Americans may promote entrepreneurial enterprise, but were already significantly lowered during the Bush administration.

President-elect Obama campaigned against the widening gap between the richest members of society and the middle class, so it is unlikely he will lower high-end income taxes further.  However, Obama may decide to delay repealing Bush’s tax cuts for the wealthy, so that in the near term, this money could enter the economy directly rather than being paid to the government.

Government spending programs also face a significant delay from the passage of legislation until full implementation.  If we could predict recessions more than a year in advance, it would be highly advantageous to commence most of our nation’s infrastructure spending before recessions and slow public spending when the economy heats up.

Traditional stimulus legislation allocates public money for infrastructure, although bailing out the auto industry could also be seen as maintaining or promoting economic activity.  Spending on defense programs such as FDR’s Manhattan Project or Reagan’s Strategic Defense Initiative, “Star Wars,” also created jobs, as did civilian spending, such as the Kennedy’s Moon Mission and the great dams of the Tennessee Valley Authority.  “Star Wars” led to a boom in civilian software and Internet technologies, which were responsible for a lion’s share of the prosperity and productivity gains in the 1990s.

President-elect Obama gave a hint of his thinking on fiscal stimulus recently, responding to a reporter’s question about aid to the auto industry, “It should be a bridge to somewhere, not a bridge to nowhere.”

The real risk with government spending is not deficit, but waste.  Temporary deficit spending that produces a stronger economy, more prepared to compete in the global marketplace, is well worth the cost.  Infrastructure such as bridges, ports, green technology and alternative energy or even a trained and educated workforce, that advances the productivity and competitiveness of the nation, creates employment and serves the long-range national interest.

However, if the money only temporarily stimulates jobs and spending, but produces no long term productive gains, it will be just a “bridge to nowhere,” the moniker attached to an expensive and unnecessary Alaskan pork-barrel spending project.  Such wasteful spending not only uses up limited resources, but increases the deficit without providing improvement to the foundation of our future economic prosperity.