Posts Tagged ‘fdr’

The deficits between politicians’ ears

17 August 2011

‘This isn’t hard. Hire people to build things with the free money the world is offering us.’

— Jay Ackroyd, at Eschaton (Hat tip: Brad DeLong)

Well, yeah. We should worry about the long-term deficit, but when the world is ready to lend us more money at zero real interest rates, the world clearly has other priorities. And so should we — like the 16% of the labor force that’s either unemployed or underemployed. What might we do with all this money the world is so eager to lend us?

The closest thing to a proposal to build things that’s come out of Washington lately is an infrastructure bank, to fund various improvements in the nation’s roads, bridges, levees, and such. A recent Bloomberg editorial praises the idea, and Pres. Obama is urging Congress to create such a bank. The obstacle, not surprisingly, is Congressional Republicans who view all domestic spending as “pork.” In this case, however, the pork is more like bacon bits. From the WSJ:

‘Under the White House plan, the infrastructure bank would augment current highway and transit programs. The bank would receive $30 billion over six years and would issue grants, loans and other financial tools.’

$5 billion a year? Barely a drop in the giant bucket that is the U.S. output gap. And barely a dent in our nation’s gaping infrastructure needs, which the American Society of Civil Engineers (ASCE) estimates as costing $2.2 trillion over 5 years. Way to think big, Mr. President. As Krugman wrote recently, the battle in Washington is between Republicans who want to do nothing and Democrats who want to do very, very little. And outside the beltway, we have a Republican presidential front-runner who thinks that doing anything to help the economy before November 2012 is not only wrong but treasonous.

But heroically assuming for a minute that Washington actually wanted to employ people to fix the nation’s infrastructure, the ASCE’s website provides ample details about where to do it. Talk about “shovel-ready projects.” Meanwhile, my former professor David F. Weiman recounts some of the infrastructural marvels of the New Deal. Even a longtime Great Depression researcher (me) was amazed:

‘The New Deal’s Public Works and Works Progress administrations spurred rapid productivity growth in the midst of the Depression. New roads and electrical power networks paved the way for post-World War II economic expansion built around the automobile and the suburban home. Astonishing 21st-century innovations such as next-day FedEx deliveries and Wi-Fi still rely on these aging investments. We associate FDR with massive hydroelectric dam projects — including the Grand Coulee and Hoover dams in the West, and the Tennessee Valley Authority in the South — but the New Deal also electrified rural America through cooperatives that distributed cheap, reliable power. Nearly 12 percent of Americans still belong to these collectives. Without the New Deal, they would be stuck in the much darker 1920s.

‘As would modern travelers. Without the New Deal, New York commuters would be without the FDR Drive, the Triboroughand Whitestone bridges, and the Lincoln and Queens-Midtown tunnels. There would be no air traffic at LaGuardia and Reagan National airports. D.C.’s Union Station, wired for electricity during the New Deal, would have a very different food court. Between New York and Washington, Amtrak runs on rails first electrified during the New Deal.

‘Out West, the New Deal gave us Golden Gate Bridge access ramps, the Oakland-San Francisco Bay Bridge, the first modern freeways, and San Francisco and LAX airports. Between the coasts, it brought more than 650,000 miles of paved roads, thousands of bridges and tunnels, more than 700 miles of new and expanded runways, improvements to railroad lines, and scenic routes such as the mid-South’s Natchez Trace Parkway. Without the New Deal, of course, some of these would have eventually been built by state and local governments or the private sector — years after America’s recovery from the Depression.

‘Moreover, private infrastructure improvements would have bypassed poor regions such as the South. Because of its vision and virtually unlimited borrowing capacity, the New Deal underwrote Southern modernization with new roads, hospitals, rural electrification and schools. These public investments paid off. After 50 years of stagnation, average Southern incomes began to catch up with the national average during the New Deal era.’

Granted, economic historians have long criticized FDR’s New Deal deficits as being too small to restore the economy to full employment, but neither were they insignificant. An average of 3.5 million workers a year worked in New Deal jobs. From the above it’s clear that a great many of those jobs produced great gains for America’s infrastructure, economy, and society.
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The beatings will continue until morale improves

4 August 2011

The stock markets are looking pretty Keynesian today. A 512-point (4.3%) drop in the Dow Jones average today, and drops of 4.8% and 5.1% in the S&P 500 and Nasdsaq; overall a drop of more than 10% (a.k.a. a “market correction”) in the past 10 days. Might it have something to do with the fact that Washington is obsessed with deficit-cutting while the rest of the world is obsessed with jobs and economic growth, or the lack thereof?

Jeff Macke of Yahoo! Finance’s Breakout blog puts it this way:

‘There’s a growing realization among even the most optimistic investors that the United States is entering a new recession — a dreaded “double-dip.” Adding to the pain is the sense that the government and Federal Reserve are out of both ideas and ways to stimulate the economy. Corporate America is sitting on record amounts of cash but is refusing to make new investments with so little end demand for its products. Consumers and corporations are hoarding cash, and the economy appears to be seizing. The debt ceiling debate was a fiasco, snuffing any remaining confidence traders had for help from Washington, D.C.’

Yes, Mr. President (and happy birthday, by the way), the time-suck that was the debt-ceiling negotiations was a “self-inflicted wound,” as you said last night. Now why couldn’t you have said the same about the debt ceiling itself? Worldwide investor confidence could not possibly have been inspired by this fight over a redundant institution that no other democratic country (besides Denmark) has and which serves no purpose besides political grandstanding. You may have looked like the only grownup in the room during that whole travesty, but I think the world would like to see a grownup with a clue. You’re talking about focusing on jobs now, but how on earth are you going to do that having just committed yourself to cutting government spending? If you were a Republican, the (specious) answer would be deregulate the hell out of everything, but traditionally Democrats have looked to fiscal stimuli, be they spending programs (Roosevelt), tax cuts (Kennedy-Johnson), or both (you in 2009). It looks to me like you’ve let the Republicans box you into a corner, and you’ve boxed yourself in even further by parroting their rhetoric about the primacy of deficit reduction and how government, like a family, has to spend less in hard times.

The Budget Control Act of 2011 took another hit today when Defense Secretary Leon Panetta said that the Pentagon could not absorb any more cuts beyond the $350 billion over 10 years in the first round of cuts. The second round calls for across-the-board cuts of $1.5 trillion, including $600 billion from the defense budget, if Congress can’t agree on specific cuts. Panetta said that would “do real damage to our security, our troops and their families, and our ability to protect the nation.” I’ll pass on whether or not he’s right, but I’m pretty sure his objection and the military-industrial complex will carry the day. Which makes it more likely that (a) the budget ax falls even harder on ordinary families who would spend the money they’d receive from the government, or (b) the spending cuts just don’t happen, which is better for the economy but bad for the government’s credibility. The battle over that second round of cuts looks to be nasty, brutish, and horrifying.

Uh oh, the 14th amendment might not help here

30 July 2011

Many, including Bill Clinton, have said the debt ceiling is unconstitutional because it goes against the 14th amendment’s clause that the validity of the public debt shall not be questioned. However, it’s also been pointed out that interest on the debt is a relatively small obligation of the government and can easily be paid for out of incoming revenues ($29 B in interest, $172 B in revenues, for August after the 2nd). So it seems to me that a reasonable interpretation of the 14th amendment is that it applies to the government’s debt obligations but not to their obligations to anyone else — government employees, contractors, retirees, veterans, etc. Perhaps that’s why President Obama has said his lawyers don’t think invoking the 14th amendment is a promising solution.

Tom Geoghegan, one of my favorite writers on politics and the law (his book Which Side Are You On? even manages to make organized labor funny), suggests a different “constitutional option”: Article I. Sections 8 and 9 of Article I list the powers of Congress and the limits on those powers, which are quite limited. Article 10, Powers Prohibited of States, says no state shall pass any “Law impairing the Obligation of Contracts.” (Geoghegan’s March article on the subject is also worth reading.) Geoghegan says it’s implied that this would extend to Congress, too, but I’m not so sure — Section 8 gives Congress all sorts of powers that are prohibited of states, as well as the power to “provide for .. the general welfare of the United States,” and the Supreme Court’s interpretation of the “general welfare” clause became a lot more expansive around 1937 (after the kerfuffle over the Court’s resistance to the New Deal and FDR’s attempt to pack the court by increasing the number of justices; the so-called “switch in time that saved nine”). The conservative majority on the Court could conceivably rule that keeping the debt ceiling constant would aid the general welfare by forcing reductions in the size of government or in the burden of the debt on future generations. Lame, far-fetched arguments, to be sure, but those have carried the day rather recently with the Court.

So it’s unclear what the way out of this morass will be. If the debt ceiling is not raised, we most likely get a partial government shutdown, which will go on until the Republicans in Congress decide that it’s hurting them at least as much as it’s hurting Obama and the Democrats (see: 1995-96). If we’re lucky, the Republicans realize that before Aug. 2, and the nation is spared a shutdown.

Raise the damn debt ceiling already

12 April 2011

As if the new agreement between the president and Congressional Republicans — to cut $38 billion in spending while the economy is still in a near-depression — weren’t bad enough, now the word is that the Republicans say they won’t vote to raise the debt ceiling, at least not without extracting several pounds of flesh first. Worse still, the overwhelming majority of the public opposes raising the debt ceiling.

I’ve blogged about this topic before. Not raising the debt ceiling would be like pushing the economy off a cliff. With a deficit of $1.5 trillion (and GDP of about $14 trillion), Congress would have to cut spending or raise taxes (or some combination thereof) by more than 10% of GDP. You don’t get that money back. That would be a depression of titanic proportions.  It would be ruinous under virtually any circumstances, but all the more so now, at a time of high unemployment. Herbert Hoover’s and FDR’s budget-balancing blunders during the Great Depression would be trivial by comparison. And Congress probably couldn’t come up with $1.5 trillion or anything close to that anyway. Normally we pay off our Treasury bonds as they come due by selling more bonds, which we would not be able to do anymore if the ceiling is kept constant. So we would default on all the maturing debt, and our new bonds would lose their AAA status, instantly and permanently, and we’d have to pay higher interest rates on our new bonds. With enough defaults our bonds would quickly be junk bonds, paying sky-high interest rates. This would add to the federal deficit and debt, possibly a lot.  So much for looking out for future generations.

If the Republicans pull the same game of brinkmanship that they did last week in nearly shutting down the government, by convincingly threatening to not to raise the debt ceiling and then raising it at the last minute, the bond market will still go oink (as one of my grad school professors used to say), and interest rates on Treasury bonds will still shoot up, meaning higher interest payments and a higher burden of paying them off. Bond investors hate uncertainty, and if default even looks possible, they will no longer regard Treasuries as riskless.

All of this opposition to raising the debt ceiling is a combination of cynicism, ignorance, and self-sabotage. We do have a long-term debt problem that needs to be addressed, but blowing up the economy is the most idiotic and counterproductive solution imaginable. Threatening to blow up the economy is not much better. As long as the economy is in a slump, the optimal amount of spending cuts is $0 (if continued stimulus is out of the question), not $1.5 trillion. And it would be even more optimal to have no more debt ceiling.

Lessons From FDR’s First Ten Days?

30 April 2009

Somewhat lost in this week’s media-created milestone of the first hundred days of the Obama Administration, and the inevitable comparisons to Pres. Franklin D. Roosevelt’s momentous First Hundred Days (so momentous that they became a proper noun) is FDR’s even more extraordinary accomplishment in his first ten days:  the resurrection of the U.S. banking system.  Such resurrection, as you may have heard, has so far eluded Pres. Obama and his predecessor.  Are there lessons from how FDR and his guys did it?

First, a quick timeline:  FDR took office on March 4, 1933 (after that, the 20th Amendment moved the inauguration date up to January).  On March 5, he declared the famous “bank holiday.”  On March 9, he got Congress to pass the Emergency Banking Act, to give his administration unprecedented powers over the banks.  On March 12, he gave his first “fireside chat,” assuring people that the banks were about to reopen and would be healthy when they did.  On March 13 (day 10), banks reopened in 12 cities.  By March 16, the administration’s massive audit and purge operation, more than 70 percent of U.S. banks had reopened, while others were closed.

Economic historians are in less-than-complete agreement about the New Deal’s overall macroeconomic impact, with a substantial minority in a recent survey agreeing with a proposition that the New Deal harmed the economy.  But there does seem to be consensus that the bank overhaul was a great success.  Even FDR advisor-turned-harsh-critic Raymond Moley described it in glowing terms.  With the president’s signing of the Emergency Banking Act, he wrote in After Seven Years (a classic among Roosevelt bashers), without sarcasm, “The sequence of bold, heart-warming action had begun.”

The personnel involved in the great bank triage operation, which involved some 15,000 banks (i.e., twice as many as we have now) were various Treasury and Federal Reserve officials, with Secretary of the Treasury William Woodin at the helm.  In Moley’s words:

‘ . . . as I look back at those frenzied days, it seems to me that the country has never quite realized the extent to which Woodin, [Hoover’s Undersecretary of the Treasury Arthur] Ballantine, and, last but no means least, [Hoover’s Acting Comptroller of the Currency F.G.] Awalt helped to restore the confidence of the country by a rapid and unprejudiced approximation of the equities — social as well as financial — involved in each case. . . .’

‘Capitalism was saved in eight days, and no other single factor in its salvation was half so important as the imagination and sturdiness and common sense of Will Woodin.’

Mister, we could use a man like William Woodin again.

(to be continued)

Shock therapy for the banks?

19 January 2009

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: (more…)