Wednesday, January 21, 2009

A stimulus we can believe in

With the inauguration fanfare over and done with, the stimulus clock has started ticking. So as we’re getting back to business, I thought I should elaborate my kitchen-sink critique of Obama’s plan, to bring the point home and address some email commentary that was so misunderstood as to, well, hurt my feelings!

So the key problem I have with the “stimulus” package in its current form is that it confuses the distinction between a (true) stimulus and the implementation of a longer-term vision that the Obama administration may have for this country.

The former must be speedy and designed to have maximum impact, by addressing the root of the mess, while providing safety nets (e.g. unemployment/health benefits) for those who suffer while they suffer. The latter cannot (and should not) be speedy—it should be a meticulously thought plan, with a clear end-game and careful consideration of the broader measures needed to catalyze private participation in this vision, once financial conditions normalize.

As a result of this confusion, I fear we’ll be getting a “stimulus package” that is ever expanding in size (already up $50 billion in a week), piecemeal in addressing the root of the problem and, in parts, potentially wasteful.

Take financial-sector restructuring first. That’s priority no.1 for getting the economy back to its feet: You can’t talk about sustainable job creation and competitiveness, if American companies cannot finance their business plans with interest rates that make sense!

What’s the new administration’s end-game in this regard, how fast can it get there and how much will it cost?

I should say, the debate has been finally moving in the right direction (see for example the recent testimony by the Fed’s Donald Kohn). And, certainly, the wish list considered at the House is ambitious (though worrisome when it comes to potential conditions on bank lending).

But if you want to use $40-100 billion to stem foreclosures; and give money to every bank that asks for it, large, small, systemic or not; and bail out the automakers; and support new consumer lending by buying up asset-backed securities (ABS); and carve out the bad assets from banks to eliminate uncertainty over counterparty risk; and keep some money in case another bank goes bust… well, you should put a more realistic number to the “financial restructuring” component of the stimulus than the TARP’s $350 billion currently budgeted for. A number you should add to the rest of the stimulus being discussed. (And let us not forget the cost of the eventual resolution of the Fannie & Freddie quandary).

Else, it won’t be long before the second $350 billion is exhausted and the Summers/ Geithner(?) duo have to rush to Congress for yet another arduous approval process of “TARP, The Sequel”… with all the concomitant consequences for investor confidence and resumption of lending.

My preference would be for a forward-looking financial restructuring package that is bold in its size and honest in its trade-offs. Evidently, a clear communication of what's needed to resolve our mess is critical for surpassing the admittedly difficult politics involved. But hey, Obama surely can!

Then consider all the proposed spending for a clean, efficient and American energy. A laudable vision no doubt. But one that would be best discussed outside the stimulus framework and, rather, in the context of a comprehensive set of reforms designed to align private sector incentives in this direction.

You can give research grants or loan guarantees for renewable energy projects for two years. But if the private sector lacks the incentives to take over the financing of these projects, the spending will be wasteful (unless the government is willing to keep up). And arguably, with oil prices as volatile as they’ve been, and currently at $35 a barrel, these incentives may well be lacking.

Mind you, I don’t feel qualified to make specific proposals in this area myself. All I’m saying is that spending on energy and the environment should not occur in haste, under the mantra of a stimulus package. Especially since, per the estimates of the CBO, the implementation of the discretionary part of the stimulus is likely to be very backloaded—meaning little truly “stimulative” effect in the near term. Such spending should therefore be considered in the context of a more comprehensive medium-term plan. Ditto for plans to spend on other competitiveness-enhancing areas such as science & technology.

Then we have the tax cuts. As I said in my earlier post, I actually think the proposed tax cuts might be a more effective “stimulative” than tax cuts usually are, if they are seen as part of a permanent plan to increase disposable income (as per Obama’s election promise). But still. I’d rather see any permanent tax cuts as part/a first stage of a broader reform of the tax code that improves incentives for saving and investment and simplifies compliance.

Importantly, I’d like to see how the Obama team plans to reconcile the economic challenges in the short-term with the fiscal challenge of the medium-term: The large fiscal deficits “for years to come” with a credible plan to repay them subsequently... in order to avoid building expectations for higher interest rates and inflation in the future... and especially in the face of a growth in entitlements (social security, Medicare/Medicaid) that already makes America’s fiscal position unsustainable.

So there you go.. the "medium" and the short of it. Let's make that distinction clear and get the ball rolling.


Anonymous said...

Chevelle -- Social security isn't in as bad a shape as you suggest; yes, it has deficits on a cashflow basis after 2040, but those deficits strike me as modest relative to the structural cashflow deficit in the general government, especially once the general gov cannot borrow from social security to meet part of its financing need (the CBO forecasts that soc sec will be a source of financing for the rest of the gov over the next few years). that is what worries me about the general framing of the problem as entitlements. Health care is a huge problem and there is a looming fiscal issue there (but a lack of coverage is also a huge issue). the real problem in budget tho is that in good times the non soc security portion of the government runs a significant structural deficit, one far larger than the post 2040 deficit in the soc security system. but b/c of the way the us budget process works, that deficit isn't forecast out and discounted and presented as a huge looming problem.

this isn't an argument against a stimulus -- that is needed to offset a huge slump. but it is an argument against a framing that presents the long-run fiscal challenge as one of entitlements rather than a gap between revenue and expenditure in the general gov. accounts.


Anonymous said...

Like all right agenda ideologues(RAI) you have the Grover Norquist disease.
Lets talk about economic recovery. You have the notion that we can have a jobless recovery and have no time for re-development of our economic base - jobs. People can be as 'optomistic' as possible and if they have no job or have been reduced from a $50K job to a $15K McJob or worse a part time no benefits type of job(?) - then they will have nothing to spend and cannot consume past food and shelter. What the RAI have done for ideological reasons is to export unionized and well paying middle class jobs to Asia and other slave-wage economies; thereby effectively grossly lowering world demand and consumption ( the world's champion consumers, the American middle class, are being unemployed) and greatly reducing the global economy - which shrinks the economic pie for everyone except the wealthy. Deflation always benefits the wealthy because it makes money more valuable compared to goods and services which money commands - a huge benefit for the wealthy and a disaster for middle and lower economic classes.
Our real problem is that we have exported out well paid manufacturing related middle class jobs. In the history of industrialization no nation has ever exported its manufacturing jobs and survived economically!! Yet even though this is a fact the RAI insist that one-way trade deals which export all manufacturing jobs which pay workers more than the $5 a day an Asian slave-wage worker gets. The RAI are quite happy with North American workers having jobs as long as their pay is the same as those slave-wage economies in Asia. RAI are busy destroying the middle class while they have spent billions giving their wealthy banker/Wall Street friends a money stuffed pillow to land on while denying workers they outsourced any relief whatsoever!
Until we realize that we can have no recovery without creating and saving well paid middle class jobs in America we will deepen the economic depression that we are already in.

Villy Choute said...

This short-term strategy of dumping money in the economy is necessary to cause a speedy recovery. However, I also want to caution that drastic measures are necessary if the short-term gains are to be turned into long-term gain.

We all know most employers are reluctant of hiring and when they do they are very tight in the salary. To compensate for this income reduction of employees, we need to provide expense reductions that create real savings.

Here are a few tips i want to offer:
1. Change amortization schedule where more of our montly mortgage payment goes toward paying down the principal. Currently over 90% of the monthly mortgage payment goes toward interest during the first 7-10 years of the laon. we can not afford that.
2. Jobs are being created for the unemployed. However, most of these unemployed have had their credit impacted by the current market. Even with a job, they can't barely finance anything. And when they do, they will get hit by high interest rates. We need to overhaul the credit rating system to avoid these high loan costs.
3. Still current median income by most Americans is too low to qualify for the current market value of these homes. Demand will still remain low, giving current loan qualification guidelines.