Monday, February 9, 2009

There's a tapeworm in the system

First, a brief update on the proposed tax cuts and why I'm so apopleptic about them. The current version of the bill before the Senate is split nearly 50-50 between tax cuts and stimulus spending.  Is this the best the Democrats could do?  Tax cuts simply, unequivocally do not yield the same return as federal spending. Mark Zandi, chief economist of Moody's—hardly a liberal site—calculates that permanent tax cuts bring only about 30 to 40 cents on the dollar back into the economy (people tend to hoard tax savings or use it to pay off debt, which is not stimulative), whereas spending on things like unemployment insurance benefits or investing in infrastructure yields a return of $1.50-1.73 for each dollar spent. Don't we usually prefer a larger return on our investments and seek to avoid outright losses?

Even more frightening is the little-publicized character of the tax cuts being promulgated: the Republicans want to make Bush-era tax cuts to corporations and the wealthiest 1% permanent.

But the most egregious political failure right now is the inability of the Obama administration to tie the money given (and about to be given) to the banks to regulations with real teeth. Capping salaries at $500K is almost beside the point--although it goes toward satisfying populist schadenfreude, it just doesn't have anything to do with how the financial system actually operates and therefore does nothing to address the real problem.  Attorney James Lieber gets to the origins of this mess in The Village Voice. In "What Cooked the World's Economy?" he relates hedge funds to their 19th century precursors, the "bucket shops":
Also sometimes known as "boiler rooms," bucket shops emerged after the Civil War. Usually, they were storefronts where people came to bet on stocks without owning them. Unlike their customers, the shops actually owned blocks of stock. If customers were betting that a stock would go up, the shops would sell it and the price would plunge; if bettors were bearish, the shops would buy.  In this way, they cleaned out their customers. Frenetic bucket-shop activity caused the Panic of 1907. By 1909, New York had banned bucket shops, and every other state followed.

In the mid-90's, though, the credit-derivatives industry was hitting its stride and argued vehemently for exclusion from all state and federal anti-bucket-shop regulations. On the side of the industry were Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and his deputy Lawrence Summers.  Holding the fort for the regulators was Brooksley Born, who headed the Commodity Futures Trading Commission (CFTC). The three financial titans ridiculed the virtually unknown and cloutless, but brilliant and prophetic Born, who warned that unrestricted derivatives trading would "threaten our regulated markets, or indeed, our economy, without any federal agency knowing about it." Warren Buffet also weighed in against deregulation.

But Congress loved Greenspan - a/k/a/ "the Maestro" and "the Oracle" - and Clinton loved Rubin. The sleepy hearings received almost no public attention. The upshot was that Congress removed oversight of derivatives from the CFTC and preempted all state anti-bucket-shop laws.  Born resigned shortly afterward.   
Now we see why the choice of Rubin and Summers for Obama's team is so, well, wrong.  There is a tapeworm in our economy that has been draining the system for decades, and it is the unregulated rapacious greed of financiers—but our chief economic advisors are on the side of the worm. 

Tapeworms are furtive creatures whose presence can go undetected for years. They exist by diverting a large portion of the host's diet to their own belly. (Think credit derivatives.) As the tapeworm grows in size it demands more and more of the host; no matter how much the host organism eats, it cannot gain weight.  If the parasite is evolutionarily clever, it will tamp down its greed and coexist relatively peacefully with the host.  But our worm got cocky and let its greed run roughshod over us (all those junk mortgages).  Eventually the worm's energy demands are so great that the host begins to sicken and lose weight. We are that sick host. Simply pumping money into the banks will not work—it's merely feeding the implacable worm. The problem must be addressed at its root, and that means strict oversight and new laws to rein in rampant greed. 

Sorry, did I say 'new' laws? Heck, even the old ones will do.

Friday, February 6, 2009

Against tax cuts: the NYC example

The New York Times editorial board got it right today, in "Getting Tough in Washington:" Obama must be much more aggressive in defending the stimulus plan. At times, his desire for bipartisanship has seemed to be more an end than a means. But we are in no position to wait for the farthest-right Republican ideologues to step on the road to Damascus.  New York City, where I’ve lived for the past six years, provides a case study in the failure of tax cuts directed toward the wealthy to accomplish lasting good.  If supply-side economics was to work anywhere, it should have worked in the city boasting some of the deepest pockets in the world, right?

It didn’t. The NYC budget report released from Mayor Bloomberg’s office on January 30, 2009 unwittingly offers proof that tax cuts do significant damage over the long term to infrastructure and public services—the very areas that, not surprisingly, most need our investment now. The report read in part: “Wall Street firms are expected to lose a total of $47.2 billion in 2008 and further losses are expected in 2009. Those losses can be carried forward, potentially exempting those firms from paying business taxes for potentially [sic] years to come.”  The report then details all the areas our Mayor is cutting back: the numbers of policemen and firemen (job losses), children’s services (child welfare positions, “low priority” child care services and foster care), senior center funding, parks, and libraries. (As if the publishing business isn’t hurting enough already— now people who can’t afford to buy books won’t be able to read them in public libraries, either). These cuts amount to $142M, a small percentage of the revenue that would be brought in annually if not for the tax cuts that have relieved corporations and the extremely wealthy of their civic duty for the past few decades.

Not convinced? Here is recent news from the Manhattan Transit Authority: “The MTA is facing 2009, a projected US$1.2 billion shortfall... The deficit was caused by fallen revenues from real estate and corporate taxes.” Meanwhile, MTA services are being cut, trains are packed beyond capacity, infrastructure repairs are delayed, and the fourth busiest subway system in the world is increasingly prone to flooding from ordinary rainfalls. As the bridges in Minneapolis, the levees in New Orleans, and the report of the American Society of Civil Engineers indicate, we are hardly alone in our decrepitude. But the worst of it is that the consequences of the spending cuts on our services and infrastructure disproportionately (and sometimes exclusively) affect the middle class and the poor, and not just through job losses. Civic goods such as schools and hospitals, parks and libraries, subways and potable water are preconditions for civic life. Without them, we destroy communities, and the very possibility of community. 

Civic goods cannot, and should not, depend on cause-specific philanthropy to thrive.  What billionaire really wants his name plastered across the entrance to a sewage treatment plant? The fact is, there are some things that only governments can do well.  Opposition to the stimulus package is not economic but political: it stands for a theory of government that has been derided for so long that the public (and, apparently, some Democrats) need to be re-educated. President Obama should play to his strengths: he needs to proclaim his philosophy of good government to the public in the same inspiring way he spoke of race. Then he needs to look over the 2008 budget, figure out how much federal support went to the red states, face those Republican ideologues who maintain they don’t want government handouts and say:

Okay.  Then give it back.

* * * * * * * * * * * * * * * *

Related articles from The New York Times, Friday Feb 6, 2009:

A terrific piece by the Netflix CEO: "Please Raise My Taxes"
Paul Krugman: "On the Edge"

A Modest Proposal for the Obama Administration

Considering the fact that 36 out of 41 Republican senators just voted to nix the idea of a stimulus package entirely and instead pledged their allegiance to a package that consisted entirely of tax cuts (!), I would like to make a modest proposal to President Obama. Actually, there are two versions. He can pick whichever he likes best.

The Obama Administration needs to craft a stimulus package that will actually stand a chance of halting our economic free-fall, go directly to the people with a half-hour speech/econ 101 lesson—Paul Krugman could be his TA—and say, “This is what we believe is our best chance for survival. We gave Republican ideology a go, and it turns out that prosperity does not, in fact, trickle down. The evidence is in: tax cuts for the wealthy, rampant de-regulation, and eviscerated government programs have produced misery on a global scale. [Points to scary graphs in Nobel Laureate’s hands.] So let us experiment. We in this Administration are willing to put ourselves on the line for a progressive agenda. If we fail, you can vote for a different approach in four years.” Along with this, the Democrats would stop yielding ground to the Republicans over this economic plan, and those quivering souls who are doubting the idea of stimulus spending would get a grip and remember November 4th: the public voted for a progressive economic philosophy, so the Dems can always blame their constituents if things go bad.

Alternatively, the Administration could say that all the states that went blue in this last election get full stimulus-package treatment—investment in infrastructure, child healthcare, unemployment insurance, library subsidies, education programs, you name it— while those states that were solidly red (or who elected hard-right Republicans like John Boehner) can continue experimenting with their tax cuts and shrinking government programs. In four years, we’ll re-evaluate which states have fared better and are overall happier, wealthier, smarter, closer to achieving eudaimonia (human fulfillment). This plan has two distinct advantages: 1) if 21 states didn’t receive federal funding, more could go to the rest of us, and 2) it combines a certain libertarian, laissez-faire, we-won’t-force-you-to-pass-Econ-101-if-you-don’t-want-to coolness with that Republican you-made-your-bed-now-you-must-lie-in-it attitude toward personal responsibility. (I’m sure Phil Gramm, for example, would love to be able to boast that Texas didn’t take any government handouts.) If the Republicans are ideologically consistent, they should love this idea.

Hmmm. The more I think about it, the more I favor Option #2…