The law can’t touch them at all

“Too big to prosecute” is the recurring headline this week after Attorney General Eric Holder’s remarkable statement before the Senate Judiciary Committee on Wednesday:

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

Where to begin? “Too big to fail” is one thing, but to say these institutions are too big to clean up their act is another. The attorney general seems to be implying that the big banks are more important than the laws themselves. It is one thing to say that the outright collapse of these institutions would bring economic ruin. It is quite another to assume that prosecuting criminal acts by them or some of their employees would also bring ruin.

Skeptics have long called the big banks “too big to prosecute” because their lavish campaign contributions give them unparalleled access and influence in Washington, but Holder’s remarks point to something more insidious: ideological capture. When cabinet officials are products of Wall Street or, worse, credulously believe Wall Street claims that their firms are delicate life-giving flowers that must never be disturbed, we have a problem that won’t go away anytime soon.

Fortunately, several members of Congress, including Republicans David Vitter and Charles Grassley and Democrats Sherrod Brown and Elizabeth Warren, are pushing back. Vitter and Brown have co-sponsored a bill to limit the size of the big banks. But we have been here before, as recently as 2010, when a similar bill lost by a vote of 61-33 and was opposed by the Obama administration. Until further notice, it’s hard to disagree with these words of Huey Long from 1932:

“They’ve got a set of Republican waiters on one side and a set of Democratic waiters on the other side, but no matter which set of waiters brings you the dish, the legislative grub is all prepared in the same Wall Street kitchen.”

The law can’t touch them at all.

Better than nothing

. . . is how I’d describe this month’s major developments on the fiscal and monetary policy front, namely Pres. Obama’s new jobs proposal and the Fed’s decision to reallocate its Treasury bond portfolio so as to try to push long-term interest rates down.

The Fed’s decision is simpler, so I’ll start with that one. Last Wednesday the Federal Open Market Committee kept its fed funds rate target unchanged at 0-0.25% and announced that it would sell most of its short-term T-bill portfolio and replace it with longer-term T-notes and T-bonds. This is quite a bit less than the “QE3” (quantitative easing, round 3) that many in the market were hoping for, as it does not involve a net increase in the Fed’s Treasury holdings, and the stock markets took a tumble that afternoon. The media quickly dubbed the Fed’s move “Operation Twist,” after a similar action in 1961. Nobody expects this move to have more than a marginal impact, not when mortgage and other long-term interest rates are already at historic lows, but it’s hard to argue against a positive marginal impact, purchased at so little cost. A Wall Street Journal editorial notes that the 1960s Operation Twist lowered long-term interest rates by about 0.20 percentage points, and “Some experts said that was enough to make the program effective; others deemed it a failure.” It seems to me that any reduction in unemployment from this move, however small, is welcome news at a time of 14 million unemployed.

The President’s new jobs bill is a more complicated animal. (Note that they’ve dropped the term “stimulus package,” apparently out of belated recognition that “jobs bill” is simpler and sounds more appealing and also because the $787 billion stimulus of 2009 is unpopular. I’ve been over this one before: leading estimates are that it saved a few million jobs, which is good, but it was supposed to save all of them, and that obviously didn’t happen. Thus it is unpopular.) The main complication is that it has no chance whatsoever of passing, given knee-jerk opposition to all things Obama in the Republican-controlled House and the Republican-filibuster-strength minority in the Senate. This despite the fact that, as Obama said, that virtually everything in it has been supported by Democrats and Republicans alike. (To be fair, not much in it has been supported by Republicans recently, i.e., since Obama became president.)

Specifics: The American Jobs Act (its official name) has a price tag of $447 billion, most of which apparently would be spent during the next 12 months, so roughly the same yearly amount as the 2009 stimulus. More than half of that is a $240 billion cut in payroll taxes, including a reduction in the payroll tax paid by workers, a cut in the employer share for small businesses, and a tax holiday for new employees. The next biggest item is $140 billion for infrastructure and local aid, notably transportation, retaining and rehiring teachers and first responders, and modernizing public schools. The last area is $62 billion for unemployment insurance extensions, tax credits for hiring the long-term unemployed, and subsidized employment for low-income individuals.

All of this seems reasonable, maybe too reasonable. In a less toxic political environment, this proposal would pass, but just like the 2009 stimulus, it would be way too small to fill America’s jobs deficit. The payroll tax has already been cut to 4.2% (down from about 6.2%), and the jobs bill would cut it to 3.1%, or about $11 on every $1000 of income.  Small potatoes. And while poorer workers would surely spend their payroll tax cut, upper-middle class and upper-class workers would probably save much of theirs. The current payroll tax cut is set to expire at the end of this year, and Republicans aren’t crazy about it (they prefer permanent tax cuts aimed at “job creators” in the top tax brackets) but don’t want to be cast by Democrats as favoring tax increases for the little guy, so a further extension of the 4.2% payroll tax rate seems likely.

The payroll tax holiday and ($4000) tax credit for hiring the unemployed should also be expected to have a positive but marginal impact on employment. The number one question in any prospective employer’s mind is “Can I sell the extra output that this person would produce?” Tax holidays and tax credits make a Yes more likely, but only if the product demand is strong enough to almost warrant hiring the person in the first place. Still, we economists live at the margin, and as with the Fed’s Operation Twist, anything that creates jobs at minimal cost is a positive thing.

And now on to costs. This is the main area where I have a problem with the president’s proposal. Obama says the program is fully funded, when really that’s the last thing we should be worrying about during a depression.The more you offset the new spending and tax cuts with spending cuts and tax increases elsewhere, the less stimulus you have. Obama said the program will be paid for by additional spending cuts in the future, closing corporate tax loopholes, and reinstating the “millionaire’s tax” on personal income. (Note: We last had a $1 million tax bracket in 1940, in nominal terms. Adjusting for inflation, we last had a $1 million tax bracket in 1973.) If the spending cuts are sufficiently far off in the future, like when the unemployment rate is back below 6%, they should do little macroeconomic damage. Ditto the closing of tax loopholes — which probably have little to do with hiring anyway — and the millionaire’s tax. As far as I can tell, those tax increases — and some others that I would support, like taxing hedge fund managers’ salaries as ordinary labor income instead of at the lower capital gains rate — would take effect immediately. While I don’t buy the Republican rhetoric about every rich person being a Job Creator, I still don’t think raising taxes in a depression is a good idea. It can wait.

If we make it through December

The BLS unemployment report for November is out, and it ain’t pretty.  Less than a third as much job creation (+39,000) as expected, not nearly enough to absorb new entrants into the labor force, so the official unemployment rate edged up to 9.8%.  (The comprehensive U-6 unemployment rate was unchanged at 17.0%.)

The private sector added 50,000 more jobs, and the government shed 11,000 jobs.  It is a bit hard to disentangle private sector jobs from the government, in view of the fact that the $787 billion stimulus went mostly to the private sector as opposed to new government jobs, but it is rather remarkable how little the government is doing in terms of direct job creation.  At the federal level this comes down to politics — in this conservative age, creating 3.5 million temporary government jobs, as the New Deal did each year, is considered a bad thing.  Indirectly creating or saving 3.5 million jobs, as the Obama Administration credits the stimulus with having done, is politically viable (or was in early 2009) but hard to prove, which is probably why the stimulus is unpopular with most of the public.  At the state and local level, of course, it comes down to balanced-budget requirements — with tax revenues down for the count, everyone’s cutting government payrolls to try to close the budget gap.  (Without emergency federal aid to make up the difference, the recession gets magnified at the state and local government level.)   If I eyeballed the numbers correctly, employment is down for the year at all three levels of government.

The only good news I noticed in the report was that the number of temp workers, a leading economic indicator of employment, increased for the fourth straight month.  (And even then, the increase is smaller than in several months earlier this year.)  Another leading indicator, weekly hours worked, did not improve, instead holding steady at 34.3 hours.

Now, the unemployment rate is a lagging indicator, and there are positive signs of recovery elsewhere, but that’s cold comfort to the nation’s 15 million unemployed. Seems like we’re back to where Merle Haggard  was in 1973, especially with Republicans in Congress so far refusing to extend unemployment benefits for the long-term jobless:

Stimulate some action

Michael Grunwald of Time has an interesting new article about the specifics of the stimulus spending, which began with “shovel ready” projects that could employ people right away but is now about to move onto “shovel worthy” projects that required more advance planning and are more in line with the Obama Administration’s long-term policy goals on energy, education, etc.  The article differs from others I’ve read on the stimulus in that the focus is not on its impact on jobs or GDP but on how these programs may yield a greener energy policy, expanded scientific research and broadband access, and school reform.  There’s an analogy to be made with the New Deal, whose early jobs programs were sometimes derided as “leaf raking” or “ditch digging” but which came to include enduring projects like highways, bridges, buildings, and parks.

The $787 million stimulus bill that passed in early 2009 is by now unpopular with the public.  A recent poll I saw in The Washington Post this summer (I’ll try to find the link later) found that the public, by a 56-41% margin, actually thought the stimulus had made the economy worse.  This is perhaps understandable considering that the unemployment rate has not come down much, but still mind-boggling in the face of empirical estimates by nonpartisan economists that the stimulus saved three million jobs.

The only part of Grunwald’s piece I didn’t like was his claim that “liberals” think the stimulus was not large enough.  While that much is basically true, it’s not just political liberals who believe that.  Keynesian economists, not all of whom are liberal Democrats, would tend to argue that another big round of stimulus is necessary to push the economy back toward “full employment,” i.e., an unemployment rate of about 5%, maybe 6% (it’s now 9.5%).  Three million jobs saved is better than none, but the glass is less than half full considering that there still are eight million more unemployed Americans now than in 2007, before the recession began.

Matt Yglesias presents another poll that tends to suggest that the stimulus’s unpopularity reflects not the content of the stimulus bill but basically just the sad state of the economy and the usual tendency of the public to blame it on the president — i.e., if the stimulus bill was his bill, then it must have been a bad bill, because the economy stinks.  Yglesias cites a poll that asks people whether they would like certain measures to be taken.  Asked if they would favor “additional government spending to create jobs and stimulate the economy,” 60% said yes.  Politicians, take note.

P.S. Today’s title is from J.J. Cale’s “After Midnight,” but the song I felt like posting was this one by The Flamin’ Groovies:

Keynes pulls a Lazarus

MSNBC.com:  “Obama outlines bailout for Main Street”

President Barack Obama outlined new multibillion-dollar stimulus and jobs proposals Tuesday, saying the nation must continue to “spend our way out of this recession” until more Americans are back at work.Without giving a price tag, Obama proposed a package of new spending for highway, bridge and other infrastructure projects, deeper tax breaks for small businesses and tax incentives to encourage people to make their homes more energy efficient….

A major part of his package is new incentives for small businesses, which account for two-thirds of the nation’s work force. He proposed a new tax cut for small businesses that hire in 2010 and an elimination for one year of the capital gains tax on profits from small-business investments.

Obama also proposed an elimination of fees on loans to small businesses, coupled with federal guarantees of those loans through the end of next year. He called for more government spending on infrastructure projects such as roads, bridges and water projects and for new tax breaks for consumers who invest in energy-efficient retrofits in their homes.

Works for me.  While I’d prefer to see more direct job creation in the form of federal jobs programs a la the Works Progress Administration or other New Deal agencies, my main reaction is what a difference a couple of weeks makes.

Barack Hoover Obama? (updated Dec. 4)

The administration has apparently ditched Keynesian economics in favor of Philistine economics, calling for a domestic spending freeze or even spending cuts in the midst of double-digit unemployment.

The Associated Press has the story here.

Focusing on deficit reduction during a depression did not work for Herbert Hoover in 1932, and I’m at a loss to see why Obama’s economists are embracing spending cuts now.  The article does quote budget director Peter Orszag as saying cutting spending too fast could undermine the recovery, so I can only hope that they do not mean to make these cuts until recovery is well underway.  (Then again, the article implies that Obama’s budget next February will ask every agency for spending freezes or 5 percent cuts.)  Given the dim prospects for a rapid recovery, the economy may not be ready to absorb any deep spending cuts for many years to come.

Perhaps a better analogy than Hoover in 1932 is Franklin D. Roosevelt in 1936-37.  At that time the U.S. economy had been recovering for about four years (after bottoming out in early 1933) but was still in depression, with unemployment above 9%.  But FDR, deciding it was time to focus on the budget deficit instead of the economy, cut spending and raised taxes (as the Fed doubled bank reserve requirements to soak up the vast excess reserves out there — which also sounds like a recent conversation), and the economy nosedived.  Had FDR and the Fed been less leery of deficits and excess reserves, the depression might not have lasted until World War II.

UPDATE, 18 November 2009:  Edward Harrison of Credit Writedowns, writing on the Naked Capitalism site, makes a similar argument with a lot more detail.

UPDATE, 21 November 2009: Krugman has an excellent piece on the matter here, and a “wonkier” one on deficits and interest rates here.

By the way, I changed the heading from “Barack Hoover Roosevelt?” to the current one, because FDR is so widely associated with pro-active steps like the Works Progress Administration and other jobs programs, fixing and reforming the banking and financial system, and ending the early-’30s deflation by going off the gold standard.  While his budget-balancing disaster of 1936-37 and his too-small budget deficits in other years show that he was no Keynesian when it came to fiscal policy, I’d be delighted to see Obama commit to policies that created three million relief jobs per year, as FDR did.  The stimulus is creating a fraction of that number, which seems unsurprising considering that the job creation is indirect:  rather than create new agencies to directly employ workers in various projects, the government is handing out money to lucky companies in the hope that they’ll hire people.  The fear of creating new federal government employees seems even stronger than the fear of deficits.

UPDATE, 4 December 2009:  Obama may have talking out of school when he said that last month.  In an interview yesterday just prior to the jobs summit, he said the following:

He ruled out an immediate effort to reduce the $1.4 trillion budget deficit until the economy rebounds further and the 10.2% unemployment rate begins to decline. Focusing on the deficit too soon, he said, could risk a “double-dip recession.”

“If we move too abruptly in that direction and we’re not thinking about all the people out there who aren’t working and businesses who aren’t making money, then we’re going to be in a negative spiral that I think would be very destructive,” the president said.

Instead, Obama said, any additional spending and tax cuts intended to spur job growth should be balanced later with deficit-reduction efforts. “The most important thing we could do for our deficits is to have robust economic growth and have people working and businesses selling products and they’re paying taxes,” he said. “That’s a hole that we can fill.”

On the other hand, he also said, “It is not going to be possible for us to have a huge second stimulus, because frankly, we just don’t have the money.”  Apparently the government jobs initiatives that the article mentions will somehow not involve government money.  Nice free lunch if you can get it.

So what we have is a mixed bag, but I’d say the bag is more empty than full.  While it is a relief to hear the president say that he’s aware that sudden deficit-reduction measures could trigger a double-dip recession, he has yet to retract his earlier remark, i.e, this one to Fox News:

“It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said.

Yes, if in a spontaneous shower of sparks, holders of U.S. Treasury bonds suddenly decided that mid-1990s debt/GDP ratios (like we have now) were completely unacceptable and decided to dump their T-bonds, interest rates would go up and the economy would go south.  Except the economy has already gone south.  And the debt-doomsday scenario (which some people have been predicting for decades) just ain’t very plausible.  What is plausible, and seems to be the consensus forecast of economists, is that unemployment stays in double digits well into next year and even rises (despite the good news for November).  By ruling out any more stimulus spending to counter that unemployment, Obama seems to be ruling in a depression.

Obama’s economists, Part I

This is a topic I’m sure I’ll be returning to many times.  Among my greatest post-election disappointments was Larry Summers’s comment that it was a misconception that deregulation was somehow responsible for the financial crisis.  Hello?  And I still don’t know what to think about Tim Geithner — New York Fed experience a big plus, accomplice role in flawed Paulson bank bailout and AIG handout a red flag (though the “just following orders” defense may apply here).  Clearly Geithner and the overall economic policy of the Obama Administration will be much more of a known quantity after 11 a.m. this morning when Geithner gets his “moment in the sun” to announce the new bailout plan.

In Sunday’s New York Times, Frank Rich, not for the first time, rips Obama’s economic team as pretty much the same Summers-Robert Rubin crew that rubber-stamped every major deregulatory initiative in sight, giving rise to behemoth too-big-to-fail banking conglomerates and unregulated credit default swaps.  A lot of it is familiar, but I’d missed this news item from last week.   Reports are that the great Paul Volcker, the former Federal Reserve chair who conquered double-digit inflation in the early ’80s and has been a voice of sanity in financial policy ever since, is being frozen out of policy discussions by Summers.  (This brings to mind Willem Buiter’s line that “adding Larry to a team is like putting a whale in an aquarium.”)  Now, the Economic Recovery Advisory Board that Obama set up and tapped Volcker to head is officially supposed to be an  independent voice, separate from the cabinet and Summers’s National Economic Council, so maybe the idea is to keep them separate and avoid a groupthink mentality.   But the word is that Volcker isn’t happy with his current treatment.   We’ll see what happens now that the Economic Recovery Advisory Board is finally up and running.

Shock therapy for the banks?

Thomas Friedman has a thought-provoking column in Sunday’s New York Times, titled “Time for (Self) Shock Therapy.”  Unfortunately, one of the thoughts provoked is “A lot of this is oversimplified,” but there are still some good ideas and some good exposition in it.  On the eve of the inauguration, Friedman suggests that President Obama’s first White House meeting should be with the presidents of the 300 biggest banks, and he should tell them there’s a new sheriff in town.  The first paragraph of Obama’s imaginary indictment of the bankers is nicely put, especially the heart metaphor:

“Ladies and gentlemen, this crisis started with you, the bankers, engaging in reckless practices, and it will only end when we clean up your mess and start afresh. The banking system is the heart of our economy. It pumps blood to our industrial muscles, and right now it’s not pumping. We all know that in the past six months you’ve gone from one extreme to another. You’ve gone from lending money to anyone who could fog up a knife to now treating all potential borrowers, no matter how healthy, as bankrupt until proven innocent. And, therefore, you’re either not lending to them or lending under such onerous terms that the economy can’t get any liftoff. No amount of stimulus will work without a healthy banking system.”

Friedman then has Obama announcing a thinning of the herd, kind of like FDR’s bank holiday of 1933, whereby the healthy banks would be recapitalized and the sick banks liquidated:

Blagojevich-Burris-free zone!

I don’t have time to write anything much this morning, but I did want to not write anything about this political sideshow in Illinois and the U.S. Senate.  So here it isn’t.

The closest I’ll get is to excoriate the media for ignoring everything else about President-elect Obama’s press conference yesterday about the economy.  Toward the end he took one off-topic question about his Senate heir apparent, and the MSNBC talking heads talked about virtually nothing else for the rest of the day.  (Or at least until I turned the TV off, which was not soon enough.)

Now this is more like it

Today in announcing his nomination of Mary Schapiro to head the Securities and Exchange Commission, President-elect Barack Obama picked up where he left off on “Meet the Press” on 7 Dec., when he declared his support of strong regulation of financial markets.  Obama’s two-minute statement today was strong as well:

“… regulators who were assigned to oversee Wall Street dropped the ball.”

“Financial regulatory reform will be one of the top legislative priorities of my administration.  And as a symbol of how important I view this reform, I’m announcing these appointments months earlier than previous administrations have.”

“Instead of appointing people with disdain for regulations, I will ensure that our regulatory agencies are led by people who are ready and willing to enforce the law.”

All this is in marked contrast to what I read in The New York Times on Thansksgiving eve, in a profile of the next National Economic Council Chair, Lawrence Summers, who appeared to dismiss the notion that deregulation was a major factor in the crisis (New York Times, 25 Nov. 2008).  David Leonhardt of  the Times put it this way:  “As Treasury secretary starting in 1999, he shepherded a couple of bills that helped deregulate financial markets, and he has made it clear that he doesn’t buy the notion that these laws caused the financial crisis.”  Either Summers is shooting down a straw man that says the laws were the sole cause of the crisis (which I don’t think anybody is arguing), or he’s saying the laws did not contribute to the crisis, period.  Leonhardt interrupts his glowing profile to state, “I wish he and other Clinton administration alumni were a bit more introspective about what they might have done differently.”  Me, too.

I stated these concerns a couple weeks ago on the old version of this blog, 25-26 Nov. 2008.  Here’s the rest of it:

The Best and the Brightest?

• Incoming National Economic Council Chairman Lawrence Summers is a brilliant man, but he seems to have had a hand in the current mess.  As Treasury Secretary under President Bill Clinton, he shared Robert Rubin’s and Alan Greenspan’s support for financial deregulation in the late 1990s, including signing off on Senator Phil Gramm’s Commodity Futures Modernization Act in 2000, which deregulated credit default swaps and other derivatives.
  • David Corn of Mother Jones has the story here.
  • Dean Baker takes issue with Leonhardt’s characterization of Summers as a “fearless truth teller,” saying he has yet to see Summers take on the nation’s bloated financial sector.
• The New York Times offers a tough but balanced assessment of Summers and incoming Treasury Secretary Tim Geithner in this editorial (25 Nov. 2008; hat tip: Dean Baker)
• Tom Toles says it all with a cartoon (26 Nov. 2008; h/t:  Dean Baker again)