February 24, 2009

Sizing the Problem Instead of Pretending Eveything's OK

Earlier this week, President Obama took the first steps toward establishing financial responsibility in Washington, banning the use of several accounting gimmicks repeatedly employed by the Bush Administration to conceal the true size of the federal deficit. While the country is already anxious over the size of our budget shortfall, the real picture is worse, because President Bush's White House routinely practiced the following deceits:
  1. Excluding the price of the wars in Iraq and Afghanistan
  2. Not counting Medicare reimbursements to physicians as spending
  3. Omitting expenditures related to disaster response and relief
  4. Failing to adjust revenue projections to account for annual adjustments to the Alternative Minimum Tax (AMT). (Despite the yearly and near-certain authorization of one-time fixes to the AMT, the White House assumed that it would not be addressed, thus overstating revenue.)
The Obama Administration estimates that correcting this off-the-books accounting will result in budgets that are $2.7 trillion deeper in the red over the next decade. As undeniably frightening as those numbers are, however, it is unquestionable that we need to have an accurate picture of country's finances if we are to get our house in order.

Republicans, meanwhile, eager to paint the recently passed economic stimulus package as irresponsible pork barrel spending, are finding themselves outflanked, as Mr. Obama is making no bones about stating that he inherited this now fully-revealed deficit from his predecessor. But are they right? Should we be listening to the GOP on matters of the national purse?

In a word, no, as the graph [h/t Crooks and Liars] below illustrates.

The national debt as a percentage of Gross Domestic Product (GDP) was at its lowest point after the second world war, when Ronald Reagan took office. In the era of Reagan Republicanism that followed (defined to include Presidents Reagan, Bush I and Bush II) - aside from a brief period of financial sanity during the Clinton Administration - the national debt has exploded. If history is any judge, then, modern Republican policies have fully demonstrated themselves to be anything but fiscally responsible. (Many people are unaware that the United States has, in aggregate, fared better economically under Democrats than Republicans since World War II. For more, see Time to Side-Step the Obstructionists and the Misinformed)

Of course, this in no way means that the stimulus bill is perfect, or that our new president can do no wrong. Far from it. However, Mr. Obama is taking what I regard to be the right first steps to put the country back on track after 8 years of wretched and divisive excess. So the next time a Republican shill or politician squawks about the need for fiscal responsibility, think about this graph, and just who got us into the mess we're in today.

February 20, 2009

What Really Drives the Debate Over Regulation

Although initial progress in dealing with the current, historically-proportioned recession has been made with the passage of President Obama's stimulus bill and the announcement of a plan to help homeowners avoid foreclosure, the question of what to do with the tremulous banking industry remains. At least so far, the White House seems unwilling to take the drastic step that the George H.W. Bush Administration took in addressing the savings and loan crisis of the late 1980's: temporarily nationalizing banks whose failure would further damage our reeling economy. Even conservative icon Alan Greenspan - as well as much lesser lights like Senator Lindsey Graham - are now saying this is, more likely than not, a necessary step.

My guess is that, underpinning this reluctance, there is concern on the part of the president that such a move might send ideological debates about government involvement in the market to such heights as to put any progress whatsoever at risk. With that in mind, as these arguments simmer, I want to highly recommend an article in Boston Review by economist Dean Baker called Free Market Myth. [h/t NewsTrust.net]

While Dr. Baker's observation that there is no such thing as the free market will come as little surprise to many, where his essay shines is in the dissection of the "more versus less" conflict in regard to regulation:

In general, political debates over regulation have been wrongly cast as disputes over the extent of regulation, with conservatives assumed to prefer less regulation, while liberals prefer more. In fact conservatives do not necessarily desire less regulation, nor do liberals necessarily desire more. Conservatives support regulatory structures that cause income to flow upward, while liberals support regulatory structures that promote equality. “Less” regulation does not imply greater inequality, nor is the reverse true.

Framing regulation debates in terms of more and less is not only inaccurate; it hugely biases the argument toward conservative positions by characterizing an extremely intrusive structure of, for example, patent and copyright rules, as the free market. In the realm of insurance and finance over the last two decades, calls for deregulation have been cover for rules tilted starkly toward corporate interests. And the recent change in bankruptcy law, hailed by conservatives, requires much greater government involvement in the economy.

Dr. Baker supports this proposition with well-stated examples of strong and intrusive regulation backed by conservatives, most notably around concerns such as copyrights, patents and professional licensing - and observes that the real crux of this issue is not about the extent of government intrusion, but the specific constituencies such involvement benefits:

Like conservatives, liberals generally acknowledge that people get ahead as a result of their skills and hard work, with some luck thrown in. The main difference in the liberal and conservative views of the economy is that liberals are more likely to believe that many people face serious impediments to their success and do not get the same chance as people from wealthier backgrounds. Liberals are also likely to feel guilty about the difference in opportunities and therefore support political measures that will reduce the gap and help those at the bottom. However, most liberals still accept the proposition that the distribution of income is fundamentally determined by the market rather than political decisions embodied in regulations such as patents, copyrights, and bankruptcy law.

But what if we accept a view that virtually every facet of the economy is shaped by policies that could easily be altered? Investment bankers get incredibly rich because the government gives them the shelter of too-big-to-fail but doesn’t impose any serious prudential regulation in return. Bill Gates gets incredibly rich because, through copyright and patents, the government gives him a monopoly on the operating system that is (or was) used by 90 percent of the computers in the world.

Doctors are well-paid because, unlike less politically connected workers, they enjoy protection from international competition. The same is true for lawyers and other highly paid professionals. The six-figure salaries depend less on skill and hard work than on being able to structure labor markets in ways that autoworkers, textile workers, and cab drivers cannot.

Dr. Baker concludes with what I think is a very sound basis for examining regulations specifically, and political action in general:
The less-versus-more framing of regulation supports the premise that there is in principle an unregulated market out there and that some of us wish to rein in this unregulated market while others would leave it alone. This is consistent with the idea that large inequalities in income distribution just happen as a result of market forces. But as the above examples illustrate, no one is really talking about an unregulated market - rather we are all just talking about whom the regulation is designed to benefit. Distribution of income has never preceded the intervention of government.
Free Market Myth is an incisive look into the fundamentals of the argument about the regulatory environment in this country, the forces that shape it, and the very real effects it has on the structure of our society. If you can spare 15 minutes, please check it out.

February 16, 2009

Party Before Country At Its Worst

Now that President Obama is preparing to sign the $787 billion economic stimulus bill tomorrow, it is worth taking a look at what Republicans - who fought it tooth and nail to the tune of zero GOP votes in the House, and three in the Senate - are saying and doing.

Arizona Senator John McCain, for instance - apparently stricken with blindness to the Clinton budget surplus squandered under 8 years of Republican rule, and the bottomless financial vortex that is George Bush's war of choice in Iraq - termed the stimulus bill "generational theft". With this type of rhetoric in play, one might reasonably expect that GOP legislators will want nothing to do with the public money to be disbursed under the stimulus package which they so vociferously opposed.

One would also be widely off-base.

The Salt Lake Tribune, for example, claimed that Utah's congressional delegation would "hold its nose, but take the cash," - as if it were being forced on them - and Republicans from Florida and Alaska went one step further, actively touting projects for their states within the stimulus bill they voted against. Meanwhile, Pennsylvania Senator Arlen Specter admitted that a number of his Republican colleagues were personally for the stimulus package, even though they attacked it vocally it in public:
Specter, along with centrist Maine Republican Senators Susan Collins and Olympia Snowe, joined with Democrats last week to move the stimulus bill forward. Specter said he doubted there would be any more Republican votes than those three Friday night.

"I think there are a lot of people in the Republican caucus who are glad to see this action taken without their fingerprints, without their participation," he said.

Specter was asked, How many of your colleagues?

"I think a sizable number," he said. "I think a good part of the caucus agrees with the person I quoted, but I wouldn't want to begin to speculate on numbers."
Perhaps this shouldn't be surprising, since the dirty little secret of Republican-dominated states is that they are so often the polar opposite of the rugged, self-reliant, individualists portrayed by GOP leaders like Ronald Reagan and George W. Bush. In fact, based on a study by the Tax Foundation, as of 2005 (the most recent year for which data is available), of the states taking in more federal dollars than they contribute in taxes, 8 of the top 10 - and 15 of the top 20 - voted for John McCain in 2008. To be sure, there is nothing wrong with wealthier parts of the country helping states that have less - after all, we're supposed to be in this together, as Americans - but it gets more than a little tiresome when the poorer relations routinely lecture their meal tickets on money management and fiscal responsibility.

In any case, what is most important, is that it is now very clear that a number of Republican legislators completely abdicated their duty to advocate policies they personally believed were in the best interest of the nation. Certainly, they should represent the wishes of the people whom they serve, but it is also their responsibility to shape public opinion in support of necessary policy. Instead, these Republicans effectively ceded their constituencies to people like Rush Limbaugh - who has made it clear he wants Democratic policies to fail far more than he cares whether the country recovers - but now have the gall to accept the benefits of the stimulus package, and even claim credit for projects it brings to their states.

This is party before country at its worst.

February 11, 2009

Some Sobering Perspective and a Small Glimmer of Encouragement

Tuesday's economic news from Washington was decidedly mixed. On the positive side, the Senate passed its version of an economic stimulus package, which will now have to be reconciled with the version passed earlier by the House of Representatives, before (hopefully) moving on for President Obama's signature. On the negative side, Treasury Secretary Timothy Geithner was less than impressive in announcing the Administration's plans for shoring up the teetering banking industry, providing few details to a financial sector desperate for some level of certainty about the future. Stocks closed down significantly, reflecting what was widely perceived as a sour reception for Mr. Geithner's largely insubstantial remarks.

While it is heartening that public money may soon be on the way to help put the surging ranks of the unemployed back to work, the banking mess is every bit as crucial to getting the economy on the road to recovery. There are clearly no easy answers, but the president and the Treasury need to make some painful decisions, and make them soon. While it's readily apparent that things are dire, there have been few efforts to put context around exactly how badly things had degenerated by the time the Bush Administration left the White House.

With that in mind, take a look at the following items. The first is a graph provided by the Office of the Speaker of the House comparing job losses during the current recession and the contractions in 2001 and 1990. (h/t Paul Allen.) Little commentary is needed to grasp the seriousness of our present unemployment situation:

Click image to enlarge.

The next item focuses on the financial sector. The video below features recent remarks from Congressman Paul Kanjorski which seem to indicate that, back in September, we literally avoided the complete collapse of the American economy by a matter of mere hours. (The relevant statements begin at roughly 2:08 into the video.) If true - and based on the public actions and demeanor of those involved, I have little doubt that it is - this is sobering stuff, to put it mildly:

While this is intensely frightening, it's important to note that, if nothing else, over the past several weeks, President Obama has let the Republicans in Congress very publicly hang themselves with their own obstructionist rope. The most recent Gallup poll indicates that not only is the public solidly behind the president with regard to the stimulus, a strong majority also views the manner in which the GOP has handled the issue in a negative light. As I have stated in the past, I do not believe that single party rule is something to which this country should aspire, but looking at the evidence above, it could hardly be more clear that we can ill afford to accommodate political grandstanding in the near term. Progress is slow and inconsistent so far, but it is being made.

Finally, in an effort to avoid being a complete downer, I'll leave you with Jon Stewart's review of the Republicans in Congress who have suddenly found renewed fervor for fiscal conservatism:

February 6, 2009

Carly Fiorina's Paen to Lax Oversight

Wednesday, President Obama imposed a salary cap of $500,000 on top executives at companies that want access to the Troubled Assets Relief Program (TARP) to shore up their ravaged balance sheets. Mr. Obama's move came in response to a series of painfully tin-eared actions on the parts of several major companies that had already received taxpayer funds from TARP, and which have caused significant public outcry.

Insurance giant AIG, for instance, received $152 billion from the American public, but almost immediately afterward proceeded to spend nearly half a million dollars on a luxury employee retreat, and had to be shamed into canceling a second such junket. Citigroup, recipient of $45 billion in TARP funds, was roundly thrashed after it was learned that the company was continuing with plans to purchase a $50 million 12-seat corporate jet, from which it eventually backed away after attention to the matter from Washington. Bank of America, meanwhile - which also received $45 billion in taxpayer money - determined that $10 million of that would be well-spent on a carnival-like promotion called the NFL Experience at this year's Super Bowl. And in a move that has made him the poster child for Wall Street arrogance and disconnection, Merrill Lynch's former CEO, John Thain, paid $1.2 million to redecorate his office - including a trash can costing more than $1,400 - while his firm lost $15.3 billion in the fourth quarter of last year.

Despite all this wretched profligacy, however, the final straw of excess was the tally of annual bonuses handed out across the American financial sector last week. As Wall Street drowns in red ink, high fliers in the industry continue to be enriched in a manner wholly out of sync with the performance of their companies, even as they belly up to the government trough for public bailout money. In fact, $18.4 billion in bonuses was distributed this year - the sixth highest total in history - leading President Obama to say this:
At a time when most of these institutions were teetering on collapse, and they are asking taxpayers to help sustain them - that is the height of irresponsibility. It is shameful... You know, the American people understand that we've got a big hole that we've got to dig ourselves out of. But they don't like the idea that people are digging a bigger hole, even as they're being asked to fill it up. Part of what we're going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.
Wall Street's response was every bit as staggeringly out of touch as their other behavior, justifying the disbursement of such huge sums in the name of "rewarding performance" and "retaining top employees." Following that logic, of course, financial industry performance ought to be somewhere around the sixth best it's ever been, and it should be easy for workers to find jobs at other firms. Since it would be difficult for that to be more obviously not the case, it's hard to know whether it is contempt or stupidity that has birthed this sense of entitlement.

My money is on a mixture of both, and on Thursday, former Hewlett-Packard CEO (and John McCain campaign adviser) Carly Fiorina made every effort to prove me right in a commentary at CNN.com. For those unfamiliar with Ms. Fiorina's work, under her leadership, HP laid off 20,000 workers and saw its share price drop by half, but she departed the company with a severance package worth $45 million, including a $21.4 million in cash. Clearly, she knows a little bit about unmerited compensation, and she doesn't disappoint in her opinion piece.

In it, her priorities are manifest, as she attempts to make the case that "it doesn't strengthen our economy when government decides how much each job is worth. In America we leave that job to markets," while - with what I can only describe as a jaw-dropping lack of irony - completely ignoring the fact that the firms who have lost "major bets" and at which "mistakes were made" are being spared those same market forces through taxpayer largesse.

Worse, she attempts to mask this fundamental hypocrisy by portraying Mr. Obama's new pay limits as some sort of broad assault on the American market that would be made permanent, rather than a short-term fix necessitated by greed and arrogance. Ms. Fiorina seems to imply that the president's policy could somehow affect enterprises operating independently of government support, and she even pretends that compensation caps aren't a routine condition of direct investment. (Just ask any entrepreneur looking for venture capital if his salary is unfettered by conditions from private equity investors.) While she proposes several other reforms (some of which would, in fact, be welcome), they would all be long-term solutions, and there is no disguising the central thrust of her argument: Executive compensation should never be restrained, even in cases where public money is involved.

Since they are not retroactive, it remains to be seen whether President Obama's restrictions on executive pay will even affect a large number of companies. Nonetheless, from a public policy standpoint, these limits are clearly the right thing to do. Going forward, firms that want to avail themselves of TARP will need to determine whether they wish to endure boundaries on the compensation of their leadership, but there is nothing antagonistic to capitalism in this at all. Pay caps in exchange for public assistance become merely a condition of the marketplace, and if it is a sufficiently unattractive one, companies are entirely free to make a go of it on their own.

At the same time, in the larger picture, I'm frankly at a loss to explain why anyone would argue that firms receiving tens - if not hundreds - of billions of dollars in public money shouldn't have to abide by some extraordinary rules. Certainly, under George W. Bush, favored companies like Halliburton received massive no-bid contracts - heck, $9 billion in cash simply went missing in Iraq - but the arrogance and wrong-headedness required to view that as "the way it should be" rather than a horrific and irresponsible aberration is indicative of a deep and abiding sickness among certain elements of our society.

What most clearly brands Ms. Fiorina's perspective as a paen to lax oversight however, is that it completely fails to acknowledge the fact that what limited restrictions are placed on TARP funds - and what caps may exist on executive pay - are no more than the other end of the very bonus spectrum which she and others like her so loudly champion. They are incentives to change behavior, and they work. In fact, Goldman Sachs Chief Financial Officer David Viniar has already stated that he wants to be free of those restraints as soon as possible, and is therefore working to ensure that his company repays the TARP money it accepted as quickly as it can.

I think most of us would agree that repayment of public money by troubled financial institutions is a good thing. Unless of course, you're someone like Carly Fiorina, whose own compensation was in no way linked to actual results, and who apparently thinks that the use of public money should come with no strings attached.

February 1, 2009

Swimming Clear of the GOP's Sinking Ship

On Wednesday, the House of Representatives passed an $819 billion economic stimulus bill. Despite the efforts of President Barack Obama to gain bipartisan support for the legislation, in the end, precisely zero Republicans voted in support of it. While the Democratic majority in the House is significant, it is narrow enough in the Senate that Republicans there have a chance to stop their version of the bill through a filibuster, and there are early indications that the GOP may do just that. Certainly, Senate Majority Leader Harry Reid believes it's likely.

Despite the dire straits in which the country finds itself after 8 years of Republican rule, and despite the fact that a majority of economists believe that a spending-based stimulus package is vital to America's economic recovery, GOP threats to derail the bill should come as no surprise. Republicans in the Senate have made obstructionism the norm in recent years, and in 2008, utterly shattered the record for filibusters. As Norman Ornstein, a congressional expert with the conservative American Enterprise Institute, notes:
The use of a filibuster as a routine measure on virtually every bill and the use of the filibuster on bills were there is a consensus on a tactic to slow things down, to make the place look bad, that is new... It is sending Congress' approval down into the sewer but it is also sending Republicans even further into the sewer.
Between the expressed hope of leading conservative infotainment personality Rush Limbaugh that he hopes President Obama fails, and their continued value of ideology over country, it is little wonder that, as Nate Silver puts it, the Republican Party is in death spiral:
... The more conservative, partisan, and strident their message becomes, the more they alienate non-base Republicans. But the more they alienate non-base Republicans, the fewer of them are left to worry about appeasing. Thus, their message becomes continually more appealing to the base - but more conservative, partisan, and strident to the rest of us. And the process loops back upon itself.
As I described in Time to Side-Step the Obstructionists and the Mis-Informed, the record of the Republican Party on economic matters over the past 100 years or so is inferior to that of Democrats with regard to any of number of metrics, including gross domestic product (GDP), treasury debt, inflation, S&P 500 performance and employment. The modern GOP's mantra of tax cuts, tax cuts and more tax cuts as the key to economic growth, simply isn't supported by historical data. As Larry Beinhart explains in an excellent article, the problem with the ideology of tax cuts is that it conflates profit-taking with wealth creation, and those two things are very definitely not the same:
High taxes create an incentive to reinvest profits into long-term growth.

With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business - in plants, equipment, staff, research and development, new products and all the rest.

The higher taxes are (and from 1940 to 1964 the top rates were around 90 percent), the more this is true.

This creates a bias toward long-term planning.

If a business is planning for the long term, it wants a happy, stable work force. It becomes worthwhile to pay good wages and offer decent benefits.

Low taxes create an incentive for profit taking.

It is easy to confuse profitability with wealth creation.

They are not the same.

President Eisenhower built the interstate highway system. There is no doubt that this gave the country an asset of great value, one that was very productive. It created great "wealth." But, aside from the construction companies that contracted the work, it was not profitable.

Selling subprime mortgages, trading in derivatives, packaging mortgage-backed securities and "flipping" condos were all very profitable but did not create wealth.

The theory is that if the rich can keep their money, they will invest in businesses that create jobs, more businesses, more tax revenue and greater "wealth" for the nation.

That sounds like logic and common sense. But is it, in practice, what happened?

Once tax cutting began, the culture of business changed.

It was no longer enough for a business to be a reasonably good business, making steady, reliable profits.

Clearly, the idea that taxes are the cure-all for what ails us is no more valid than the belief eliminating taxes altogether provides the answer. A balance - a point of equilibrium - needs to be established, but the all-tax-relief substitute stimulus bill submitted by House Minority Leader John Boehner last week makes it clear that Republicans have no concept of such a balance - or at least no interest in it - and no understanding of economic necessity:
Let’s lay out the basics here. Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.
As the GOP ravages itself into irrelevance, we must ensure that it doesn't take the nation down with it like a sinking ship pulling sailors to a watery grave. Single party rule is not something to which I believe the United States should aspire, but the fact is that the modern Republican Party has fully demonstrated that it is neither trustworthy nor competent. That either needs to change or the GOP needs to be replaced by another party, but in the meantime, America can ill afford Republican obstructionism.

Here are two videos for your consideration.

The first is a flashback to 1993 and the Clinton tax increase. As can be seen in the video, conservative smear merchant Robert Novak was against a tax increase then, and despite the record of history staring them in the face, he and the moronic Kate O'Beirne remain against tax increases today.

The second is from The Colbert Report, and in it, Stephen Colbert offers the ultimate litmus test for principled stands against the stimulus package. Given recent actions and statements by Republican governors like Bobby Jindal and Sarah Palin, however, it's unlikely that we'll see too many people take him up on it.