The economy sputters on. Meanwhile, our elected leaders debate what to do about it, in fact, much of the ongoing midterm campaign centers on it.

The Democrats, being in power, have already played their hand. The stimulus package of early 2009 was a grab bag of spending and tax cuts. [Not really the point of this post, but I’m so tired of the counterargument that “the stimulus failed, because they promised that unemployment would peak at 8%.” Any thinking person understands that the meaning of that presentation back in those days was that the stimulus package would lower the peak unemployment rate by about 1.5%. At the time, they estimated it would peak at 9.5% if no action was taken; hence, the stimulus would lower the peak rate to 8%. Instead, the recession proved to be much more severe, and so it peaked at 10%, versus 11.5%. Either way, every economic analysis supports the contention that about 3 million more Americans would be out of work today without it. Every counterargument I have ever seen is ideological, not economic.]

Republicans, being the minority party, have played the role of critic. As far as I can tell, the only policy prescription they have supported is the extension of the Bush tax cuts for the wealthy. There is also a lot of talk about “cutting spending” and “balancing the budget,” but I severely discount that talk. I discount it because: (1) cutting spending will weaken the economy in the short run. Spending discipline is a crucially necessary solution for the long term, but harmful in the short run — why, after all, do people think Congress never cuts spending? Because all the benefits are long term and all the short term impact is negative; and (2) I have watched the Republican party increase federal spending every time they have held power over the past 30 years, so, yeah, I don’t believe it. Anyway, that leaves the Republicans with tax cuts as their sole credible policy option.

Into this policy debate wades the intrepid CBO. They have analyzed 11 separate policy prescriptions. Of the eleven, extending the Bush tax cuts ranks dead last in terms of short term economic benefit. Why is this? Because tax cuts for the wealthy are a supply-side solution. The current weakness in the economy is based on low demand: people just ain’t buyin’ stuff. Tax cuts for the wealthy have little impact on consumption, because they tend to save the additional money, not spend it.

Think about it this way. The Republican argument is that economic growth depends on small business; that is where jobs are created. True enough. But why exactly does a small business owner hire the next employee? Because his tax rate is lower? No. Because he has more customers to serve. Period. I myself started a business in 2003, and now it has about 1000 employees. I can tell you that never once did we set our hiring plans around federal tax policy. “Hey, Bush cut my personal taxes… let’s go hire a few more people.” Nonsense. We hire whenever demand for our services outpaces the capacity of our current team to meet it. So, you fix the economy by creating more customers. Tax cuts for the wealthy fail to do that, so that is why it scores so dismally on the CBO analysis.

Back to the March 2009 stimulus package. Every Republican out there campaigning that the stimulus failed, and arguing instead for tax cutting policies, needs to explain why the $250 billion in tax cuts provided by the government in the stimulus package failed to work, and why more tax cuts would work the next time. Personally, my conviction is deep that the stimulus did exactly what it was supposed to do. Find me the maintstream economist who says otherwise.


There are only two possibilities, mathematically speaking — either we have a balanced budget, or debt goes up. Can people of all political stripes agree on that?

Here is my question to my friends on the conservative end of the spectrum. Assuming that continuously increasing debt is intolerable, we must balance the budget, right? Okay, how do we accomplish that? There are only two variables in the balanced budget equation: spending and taxation. But you flatly reject taxation as a solution. So that leaves us trying to balance the budget ENTIRELY through spending cuts. With the deficit running at $1.3 trillion annually, we would need spending cuts in that amount to balance the budget. I would be curious just what cuts you have in mind of that magnitude. If you cannot cut $1.3 trillion in spending, and if we cannot raise taxes, then how is it mathematically possible to balance the budget? And if you cannot balance the budget, are you not advocating for for increased federal debt? The math is inescapable.

Here is my question to my friends on the liberal end of the spectrum. This is a breakdown of Obama’s FY2010 budget:

Mandatory spending: $2.184 trillion (+15.6%):
$695 billion (+4.9%) – Social Security
$453 billion (+6.6%) – Medicare
$290 billion (+12.0%) – Medicaid
$0 billion (−100%) – Troubled Asset Relief Program (TARP)
$0 billion (−100%) – Financial stabilization efforts
$11 billion (+275%) – Potential disaster costs
$571 billion (−15.2%) – Other mandatory programs
$164 billion (+18.0%) – Interest on National Debt

Discretionary spending: $1.368 trillion (+13.1%):
$663.7 billion (+12.7%) – Department of Defense (including Overseas Contingency Operations)
$78.7 billion (−1.7%) – Department of Health and Human Services
$72.5 billion (+2.8%) – Department of Transportation
$52.5 billion (+10.3%) – Department of Veterans Affairs
$51.7 billion (+40.9%) – Department of State and Other International Programs
$47.5 billion (+18.5%) – Department of Housing and Urban Development
$46.7 billion (+12.8%) – Department of Education
$42.7 billion (+1.2%) – Department of Homeland Security
$26.3 billion (−0.4%) – Department of Energy
$26.0 billion (+8.8%) – Department of Agriculture
$23.9 billion (−6.3%) – Department of Justice
$18.7 billion (+5.1%) – National Aeronautics and Space Administration
$13.8 billion (+48.4%) – Department of Commerce
$13.3 billion (+4.7%) – Department of Labor
$13.3 billion (+4.7%) – Department of the Treasury
$12.0 billion (+6.2%) – Department of the Interior
$10.5 billion (+34.6%) – Environmental Protection Agency
$9.7 billion (+10.2%) – Social Security Administration
$7.0 billion (+1.4%) – National Science Foundation
$5.1 billion (−3.8%) – Corps of Engineers
$5.0 billion (+100%) – National Infrastructure Bank
$1.1 billion (+22.2%) – Corporation for National and Community Service
$0.7 billion (0.0%) – Small Business Administration
$0.6 billion (−14.3%) – General Services Administration
$19.8 billion (+3.7%) – Other Agencies
$105 billion – Other

Why must we have a 13.1% increase in discretionary spending? Isn’t that the height of irresponsibility in these times? The economy is booming again. The stock market is up by 60% in the past year. The massive job losses  of 2007-08 have ended, and all signs point to job creation around the corner as the economy continues to expand. Surely we can have a budget that acknowledges the economic drag that $1.3 trillion annual deficits, and $13 trillion of cumulative federal debt, have.

No matter how I look at things, I come back to the same conclusion. Ideologues are America’s greatest enemy.

The NY Times is reporting new estimates from the Treasury Department about the extent of the government’s exposure from the TARP programs. Some of the highlights:

  • Treasury Department loans under the TARP program now total $370 billion.
  • Of that amount, a net $328 billion is projected to be recovered. That includes profits on TARP investments. The losses are centered on the TARP bailouts to GM, Chrysler and AIG. Bailouts to banks are expected to be net positive (more gains than losses).
  • The improved picture lowers the estimated deficit for the fiscal year by $200 billion.
  • Most of the exposure comes from the TARP I program from October 2008. Of the additional $500 billion in authority granted in February (TARP II), only $7 billion has had to be expended.

Of course, the article points out that there are other huge government exposures related to rescuing the financial markets, including a trillion dollars of mortgage-backed securities purchased by the Federal Reserve. But looking at just the TARP piece of the government intervention, is it just me, or does this emerging picture demonstrate a vastly more successful TARP program than we first imagined? I wonder if Geithner’s critics are going to be willing to reevaluate his performance.

Obama has been in office for about  ten months. In terms of important economic issues, let’s assess his results so far.

(1) Monthly federal budget deficits have been decreased by one-fourth. For October 2008, the CBO reported a federal budget deficit of $232 billion. The CBO reports the October 2009 deficit at $175 billion, a reduction of 24.6%.

(2) Equity markets have soared by about 59%. After hitting a low in early March just below 6500, the DJIA has risen past 10,300.

(3) Monthly job losses have declined substantially. All through 2008, the net number of jobs shed by the economy grew each month, reaching its worst point in January, when the economy lost more than 700,000 jobs. From that moment forward, the picture has been improving, with net losses shrinking each month to 190,000 in October. Of course, losses are losses, and so this means that total unemployment has continued to rise. But how can we look at Chart 2 in this link and not conclude that the jobs market has been heading in the right direction since early 2009?

(4) Credit markets have resumed functioning in a more or less normal manner; and

(5) The severe recession ended, at least enough for the economy to grow in the third quarter.


Which president is this?:

This president faced a severe recession early in his administration, which he battled with a combination of tax cuts and spending increases. The stock market responded to the economic improvement with a long, sustained rally. To be sure, federal debt skyrocketed as a result, but that was left for later generations to deal with.

Barack Obama?  Ronald Reagan? The answer is, of course, both.

That’s not to say there aren’t big differences, certainly. Federal debt nearly tripled under Reagan, where it is increasing at “only” about 10% per year under Obama, although from a much higher starting point. The economic crisis Obama has had to battle was far more severe than the Reagan recession. And there’s something we don’t know yet. Reagan’s years ended with a thud: the financial markets in free fall (remember the crash of 1987?) and the economy headed into another recession, which landed during GHW Bush’s term. We don’t yet know if that fate will befall Obama.

My point is, if you find yourself lauding President Reagan and critical of President Bush — or listening to pundits who adopt that posture — you should ask yourself why. Isolate what Reagan did right and what Obama is doing wrong, and then analyze how they are different. It’s harder to do than you may think.

Does anyone seriously believe that the vast current level of deficit spending is anything other than stimulative? The criticism – that, because unemployment is going to crest at a higher level than first thought, the stimulus has failed to do what it was supposed to do – makes no sense whatsoever. It is akin to arguing that, because the New Orleans levies failed, they shouldn’t have been built. That’s asinine. They, just like the stimulus so far, were insufficient to fully turn aside the storm. Whatever the depth of this recession, find me a serious economist who thinks it would have been less severe without the stimulus. For the life of me, I cannot understand why Administration voices are not pushing the truth of this message.

Of the stimulus package passed earlier this year, the tax cutting part is already implemented and the spending part has just begun. If one is to draw the conclusion that the stimulus package has failed, it is only because the tax cuts, among the largest in US history, have failed to stimulate the economy. Remember that when Republicans begin campaigning for 2010.

The real success of Obama’s actions, so far, has been in restoring normal function to the credit markets in a remarkably short time. Yes, there are genuine concerns from the actions of government in the past six months (and even more so in the past six years) – more debt, higher deficits. But that the stimulus has failed is not among them.