A Second Stimulus: Much Bigger Than the First, and Focused on Infrastructure

It will soon dawn on Congress (although it may never dawn on the White House) that we need a much larger second stimulus package than is now being contemplated in order to give the economy the jump-start it needs and fill in for consumers who can't and won't spend more. My guess is that this second stimulus plan, including infrastructure, will ultimately reach $200 billion or more.

A special word about infrastructure spending. Not only is the nation sorely in need of it -- given deferred maintenance on roads and bridges, water and sewage systems, levees, and many of our ports, and the increasing need for public transportation -- but spending on infrastructure generates much more growth than cutting taxes. (This point, incidentally, was stressed in a paper earlier this year by Mark Zandi, chief economist at Moody's Economy.com and, not incidentally, an economic advisor to John McCain.)

A Modest Proposal for Ending Socialized Capitalism

Socialized capitalism of the sort the Fed and the Treasury are now practicing, consisting of private gains and public losses, is untenable. On the other hand, it's also true that giant Wall Street investments banks as well as Fannie Mae and Freddie Mac are too big to fail. How to reconcile these conflicting principles?

Here's a modest proposal: When taxpayers insure a giant entity against loss -- as we now are with Freddie, Fannie, and Wall Street investment banks -- those entities must agree that:

(1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the President of the United States, and

(2) the government gets five percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance) -- so that if and when the entities become profitable again, taxpayers are compensated for the risk they've taken on.

The End of the Great Moderation, the Bailouts of Freddie & Fannie and Wall Street, and the Tattered Safety Net for Everyone Else

As we bail out Wall Street along with Freddie and Fannie and all the top financial executives who have been pocketing tens of millions a year, yet allow millions of homeowners and jobless Americans to sink, it's worth contemplating what's happening to the American economy and to our social safety nets.

What economists have called "The Great Moderation" - a period when the business cycle evened out, and neither inflation nor recession posed much of a threat- began in the mid-1980s, and now appears to be over. It was good when it lasted. But it led the nation to think we didn't need much by way of social insurance.

No one knows for sure what caused the Great Moderation. Some had credited increased sophistication of financial markets and the wisdom of the Federal Reserve Board. Hindsight suggests it was more luck than anything else.

Well, folks, it turns out the great moderation was something of a fluke, and now tens of millions of Americans are in trouble with no safety net to help them.

That's because the apparent end of the boom and bust cycles led us to assume the economy would no longer impose huge, unexpected, and arbitrary losses on large numbers of Americans. So we basically got rid of the safety nets. We abolished welfare, let unemployment insurance wither, and paid scant attention when corporations eliminated defined-benefit pensions and cut health insurance benefits. We even stopped worrying about the safety of small investors, allowing federal deposit insurance to shrink as a proportion of total savings (witness the recent bank run in California).

But now we have to rethink safety nets. Right now, nets are being spread for the wrong people. The giants of Wall Street along with Fannie and Freddie get bailed out but there's still no relief in sight for most homeowners who can't pay their mortgages. Corporations that don't deliver on their pension obligations are helped but there's nothing for retirees and small investors whose savings are drying up because of Wall
Street's decline. Small investors are losing their shirts but the Fed stands by to help the biggest.

Yet I have to believe the end of the Great Moderation will eventually result in a broader safety net. Maybe not the old forms of social insurance, but new ones like universal health insurance, earnings insurance, and savings accounts in which the dollars you put away are supplemented by government dollars.

The very rich, fattest investors, and the biggest corporations don't need safety nets. Now that the booms and busts are back, the rest of us do.

Setting the Record Straight on Playground Bullies

To set the record straight, I do not believe all playground bullies become right-wing Republicans when they grow up, nor do I think all right-wing Republicans were playground bullies when they were young. Nor, for that matter, am I at all convinced that left-wing Democrats are innocent of bullying, either as adults or when they were children.

I feel compelled to say all this because of a short interview I gave to Deborah Solomon of the New York Times Magazine, which was published last weekend. In it, I mentioned that I had been bullied when I was a youngster, mainly because I was very short. She then asked me "what do you think playground bullies grow up to be?" With my tongue planted firmly in my cheek, I answered "Right-wing Republicans."

For the last few days my email has been inundated with angry messages from self-defined right-wing Republicans, taking umbrage at my remark. Apparently they did not see the humor in it. A majority of the emails have been civil, but a large minority have been, well, how shall I put it? Filled with the sort of epithets and threats I last heard on the playground.

Phil Gramm's Upcoming Ambassadorship to Belarus

John McCain today announced his first foreign-policy appointment, should he become president. He will name Phil Gramm Ambassador to Belarus. McCain's decision apparently was precipitated by Gramm's insight into the American economy, when he said Americans were suffering from a "mental recession," and were "whining" about the economy. McCain obviously agrees with Gramm, because McCain himself said just a few months ago that a lot of the problems the economy is facing were "psychological" in nature. Just months before that, McCain said that the economy was making significant "progress."

But sending Gramm to Belarus may not reduce America's tensions with that part of Asia, or with Russia for that matter. Gramm may decide that Belarus is suffering from mental depression.

Fannie, Freddie, and the Pending Taxpayer Bailout

Fannie Mae and Freddie Mac, the two giant quasi-public housing lenders that together own or guarantee about half the $12 trillion in home loans outstanding, are heading into insolvency. No surprise. As housing prices continue to drop, more and more middle-class homeowners who got their loans from Fannie or Freddie are under water -- owing more on their homes than their homes are now worth. And as the economy continues to go south, more and more of them can't meet their loan payments.

While it's true that most of their home loans were made before 2006 when lending standards were tighter, that doesn't really matter because the rip-tide of this sinking economy is now hitting a much broader group of home owners.

Fannie and Freddie may not be technically insolvent yet, but I'm betting that if their lending portfolios reflected the true market prices of their loans they would be. That's why their own investors are bailing out.

So who gets stuck with the tab? Investors in Fannie and Freddie have always believed that the loans issued by the two giants were guaranteed by the federal government but technically they aren't. The guarantee has always been assumed but has never been put into law explicitly, and the liabilities have never been carried on the federal books. Yes, the companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default, and the two companies have access to the Fed's so-called Fedwire payments system allowing them to access funding if needed. But these won't keep the two afloat for long.

As a practical matter, we're facing a Bear Stearns squared. Fannie and Freddie are way too big to fail -- especially now. There's no question the government will have to take over the companies, which means taxpayers will get stuck with the tab yet again.

Here we have another example of socialized capitalism. The executives of Fannie and Freddie have been among the best paid in all of corporate America. We're talking tens of millions a year in CEO pay alone. Fannie and Freddie are treated like giant investor-driven entities as long as they're healthy and their investors and executives are doing well. But when they start to go down the tubes they become public entities with public responsibilities, the rest of us have to bail them out.

Why Most Who Lose Their Jobs Don't Get Unemployment Benefits

The great American jobs machine is grinding to a halt. In response, Congress has just extended unemployment benefits 13 additional weeks, over and above the 26 weeks normally provided. That’s good as far as it goes.

But most people who lose their job these days don’t qualify for any unemployment benefits at all.

How can this be? Simple. In order to be eligible, most states require you to have been working in the job you lost full time, and for a certain number of years.

These requirements made sense decades ago when labor markets were far more stable – when most working people stayed in the same full-time job for years, and only lost it temporarily during the downdraft of a recession, picking it up again when the economy rebounded. And back then, one full-time breadwinner could keep a family whole. In those days, unemployment insurance counter-balanced recessions by keeping money in the pockets of working families.

But nothing is stable about today’s labor market. Every time the economy sinks, employers fire workers permanently. Even when the economy is doing fine, pink slips proliferate -- although under these circumstances it's easier to find a new job. All of which means a growing fraction of the labor force is in a job only a few years.

Meanwhile, full-time jobs are vanishing. More companies are contracting out their work. As a result, more people are doing several part-time jobs, or are self employed. They’re also more likely to be part of a couple whose family depends on two sets of paychecks.

So when times get tough, as they are now -- and people lose a job after having it for only a few years or lose their part-time job or lose their client, or one member of a couple loses earnings -- a family can be in real trouble. And there are no unemployment benefits, not even partial benefits based on the proportional loss of income from a part-time job, to help them. Or to help counter-balance the economy as a whole.

It’s a disgrace that most Americans who lose their jobs don’t qualify for unemployment insurance. It's also bad for the economy because unemployment insurance is less effective as a counter-cyclical device. Congress should expand coverage (condition federal UI funding of states) so a majority of American families have some security in these perilous times.

McCain's Budget Whopper

George W. Bush took the largest budget surplus in history and transformed it into a giant deficit. McCain's economic plan, announced today, will to even worse. McCain says he’s going to balance the budget by the end of his first term (actually, he didn’t literally say that – he just “demanded” it – implying that a Democratically-controlled Congress would be ultimately responsible if it didn't happen). And then McCain came up with numbers that will blow the deficit into the stratosphere.

The non-partisan Congressional Budget Office projects that the budget deficit will be $443 billion in 2013, the end of the next president’s first term, if Bush’s tax cuts are made permanent (which McCain pledges to do). So start with this $443 billion hole. Now add in McCain’s promise to cut corporate taxes by a hundred billion a year ($4 billion of this for American oil companies, more than a billion for Exxon-Mobile alone). Then add in McCain’s promise to get rid of the Alternative Minimum Tax, designed to ensure that the very rich pay at least a minimum percent of their income in tax. Obama would properly index it to inflation but McCain will let the rich pay as little as they can get away with. Non-partisan tax experts put the ten year cost of this at $1 trillion. All told, McCain promises more than $650 billion of new tax cuts per year. (That doesn’t even include McCain’s promise to allow corporations to immediately expense all their investments – which, he asserts, would add nothing to the budget deficit at all!)

Who gets all these cuts? Mostly, the very rich and big corporations. The non- partisan Tax Policy Center estimates that 25 percent of McCain’s cuts would go to people earning over $2.8 million a year (the top one-tenth of one percent). Each would get an average tax cut of $269,000, over and above what George Bush gave them.

Back to McCain’s promise to balance the budget by the end of his first term. The big question is how he proposes to fill the giant budget hole he’s dug for himself, over and above the $443 billion already there. Answer: He doesn’t say. He calls for $160 billion in unspecified spending cuts, and unspecified “reform” of entitlements. Whaaaa?

Supply-side economics is one of those unfortunate half-brained theories actually to have been tried in practice, and failed miserably. Now we have a candidate for president of the United States who says to the American people, in effect: I know you know supply-side economics is a crock. Well, I’m going to do the biggest supply-side tax cut in history, mostly for corporations and the well-to-do. And I’m going to tell you I’ll balance the budget. If you believe this, you’ll believe anything.

The Terrible Jobs Report

Total job losses since the first of the year are now 438,000. That's a loss of 73,000 a month. The economy needs to CREATE 125,000 jobs a month just to keep up with population growth.

In other words, this hole is getting deeper.

Consumers have no money left. This is the first consumer-led recession in over twenty years. Consumer-led recessions are worse than the normal kind, where the Fed has overshot by raising interest rates too high or corporations have pulled back their spending. Consumer-led recessions are deeper and longer, which makes the case for major infrastructure spending. (The normal worry with infrastructure spending as a stimulus is the lag effect -- by the time the spending gets into the system and creates jobs, it's too late. But not this time.)