“We Should Be Guided by What Works”

President Obama, at the height of his powers, gave us his best shot today: a $787 billion stimulus program that delivers about $500 billion in new spending in the face of trillions of dollars of lost economic activity since last autumn, and about 35% in tax cuts that yield $1 per day, or so, for most people.

I’d like to believe this plan will indeed work, but I doubt it, especially given the largely incoherent reform of our financial system suggested by “Chief Economic Spokesman” (and tax-cheat) Treasury Secretary Tim Geithner. Markets appear to agree: they have dropped about 10% since the plan was announced. And, hark!, the White House now says more stimulus may be needed.

Obama will indeed be judged by what works. If in the interest of non-existent bipartisanship he so limited his reforms that we come to resemble Japan — repeated stimulus attempts, markets down almost 90% from their peaks; housing price declines for 15 years in a row; a GDP declining by almost 10% — the consequences for his administration will be dire. Fortes fortuna adiuvat. Be bolder, Obama: reality will have its due.

Amusing contrasting argument from a businessman who mystically claims to speak for the American people here.

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44 Comments . Leave a comment below.
  1. It's a start

    The tax cuts, I think, are almost entirely there to appease Republicans.  That didn't work in a direct way, but I think it has worked in building public support, which will enable Obama to continue, so the tax cuts may have been worth it.  But they're not much in terms of stimulus.

    So, what we're getting from this bill is really more like $500 billion of stimulus.  And I agree, that won't work, because it's probably not enough.  But it's a great start, as long as Obama can add another few hundred billion over the coming year.

    Therefore, the White House saying that more stimulus may be needed sounds, to me, like the sensible continuation of what he has started.  If it were politically possible to do it all in one bill maybe we'd have gotten that, but doing it over several bills several months apart can work just as well, and may be more effective from a political strategy point of view.

    As I recall, it took about a year for FDR's stimulus to begin a serious recovery from the Great Depression, and it took 3-4 years for that recovery to actually bring the country to a somewhat "recovered" state.  We're not nearly so deep into this one as the country was at the beginning of FDR's term, but we did spend a while diving into it without doing anything sensible to get out, and I don't expect recovery to start right away.

    • Japan suggests incrementalism won't work

      The imponderable is what -- having failed to get a more substantial package through Congress hard on the heels of a significant political victory in November -- Obama will be able to accomplish in, say, September if things have gotten worse.

      Moreover, the situation may be less in his control then, in other respects, than it is now. For example, the ability of the Treasury to borrow -- excellent now, which allows contemplation of a far larger stimulus absent the desire to placate Senator Collins etal -- may have changed by then ... leaving inflation caused by printing even more money as an unpalatable alternative.

      But most important, continued declines will hurt millions of families, and set all of us back in important ways. That's not what we elected this President to accomplish.

      • you keep doing that...

        This is not the first time recently that you're written something that shows that you're looking at all of this in terms of "try one thing, sit back and watch, see how it works, then try the next step".  Weird.  Also, not a good match for reality.

        • Well, sure, and quite realistic

          The reality is that this is not the last piece of economic legislation Obama will have to enact, and that the results of the stimulus enacted today will affect what is possible in the future.

          If you can see the present and the future simultaneously we need you in the White House, not wasting your talents at BMG :-)

          • prognostication

            Obama described this stimulus legislation as "the beginning of the first step", at the signing ceremony.  He's also talked about some of the things he intends to do next.  I predict:

            1. The next step won't wait until September, nor will the one after that.  They'll come in rapid sequence, starting now.

            2. Obama isn't going to wait to see how this stimulus works out on its own - he's going to pursue plans he already knows are necessary.

            3. We'll see more stimulus coming in various pieces over the course of the year, though not all of that will necessarily be marketed primarily as "stimulus".

            4. This one's not exactly a "prediction", but more of a summary statement: Obama knows the stimulus just passed was not enough, he knows we need more, he's already been working on that more that we need, and he's going to get it passed as expeditiously as political reality allows - and using his way of bending political reality somewhat.

      • Didn't work for Mr. Hoover, either.

        Condemned as we are to re-live history, is it not odd that this time the Democrats are following the failed efforts of the past Republican administration?  Wasn't that what was done in 1932?  If it is agreed that the failure of the economy is due to excessive credit and wanton spending, how does more credit and spending rectify the situation?  

        How about saving $787b?  Each year?  Could we do that by pulling out the military from places we have no need to be?  Didn't we beat the pants off Germany and Japan over a half century ago?  Where is the change?

        More and more I speak to people that, as myself, hoped that we as a nation would have a fresh start.  I share the disappointment.    

        Government is the Entertainment Division of the military-industrial complex. -- from the Real Frank Zappa Book

        • bipartisan agreement

          If it is agreed that the failure of the economy is due to excessive credit and wanton spending

          The bipartisan agreement on the why the economy failed is why the solutions are not creative.

          How about saving $787b?

          That kind of cut would all come out of medical bills, people would be dying in the streets.  

          • $quot;Creative?'

            Creative as in "thinking outside the box" or creative employment or product?  I agree they are neither.  When we get back to basics, we realize that government can only give from one group of people to another.  In the bailouts the government is only giving from the young and the next generations to the wealthy of today.  Most of us will get a lousy $400 per wage earner to buy a pizza every couple weeks.  Not even a "Thanks a lot, succa!"

            I doubt if closing the many overseas bases will result in people dying in the streets.  Most of these bases were occupied after WW II or Korea.  The US pays to occupy these facilities.  To another country. Year after year.  Close them up.  Bring the military home.  Create the infrastructure of facilities and jobs in this country.

            • I think you leave out...

              ... a key function of Government when you say that "government can only give from one group of people to another".  Government create solutions to problems of collective action.  Individually, none of us is very incentivised to fund an army, but the Government by way of policy can get around that problem in order to provide for a strong defense.  Of course, in some cases, a collective action solution can be more dollar efficient overall than the alternative.  For example, universal health care seems to be more dollar efficient, but would be unavailable to a society with a Government disinclined to stick its nose there.

              Of course the flip side of that is also true,... there might be any number of bad things that we are not individually incentivised to enact, but the Government can step in in those cases as well, like the invasion of Iraq.  

        • Diagnosis

          If it is agreed that the failure of the economy is due to excessive credit and wanton spending, how does more credit and spending rectify the situation?

          No, I don't agree that was the problem. I think the problem was this:

          1. Bubble Housing prices got terribly inflated particularly in coastal regions of the country. The bubble encouraged people to take on more debt than they should have. If your house's appreciation is going to outstrip your mortgage, you'd be foolish not to take on debt. People did that. When housing prices stalled, many were stuck.
          2. Housing debt bets Subprime mortgages were bundled into complex instruments kind of like unhomogenized milk. The "first-to-be-paid" debt (the "cream") was counted as secure debt; the "last-to-be-paid" debt (the "skim milk") was not. These instruments proved more clever than realistic: Once housing prices began to fall, their over-valuing became painfully obvious.
          3. Risky lending The Wall Street financial institutions that all recently collapsed attempted to support long-term debt using a merry-go-round of short-term debt that had to be frequently turned over. This is a system than can work week by week, but the first week it fails, everyone falls down. Beginning with Lehman Bros., that's what happened. This problem was caused by lack of regulation. A large Wall Street firm that did not engage in this practice would have been uncompetitive. Essentially market pressure forced everyone to be foolhardy.
          4. Collapse in demand The housing bubble fueled demand. Without house prices acting as enormous ATMs, demand collapsed. When demand collapses, so does commerce.
          5. Credit freeze With banks holding on to over-valued assets, banks become less willing to lend to each other. Why should Bank A trust Bank B? That coupled with the uncertainty of everything in the economy, and people and institutions alike hold onto their money rather than invest it. No investing, no credit.

          Make no mistake the Iraq War was idiocy itself. (The most the Bush Administration might have achieved would be a stable, religiously conservative, pro-Iranian regime in the Arab world. And that's the best outcome.) However, just as one cannot blame global warming on the Iraq War, I don't think one can blame the current economic crisis on it either. An increase in future indebtedness, possibly, but not the recession of 2008-2011.

          • $quot;excessive credit and wanton spending$quot;

            Thanks for providing the examples.

            As far as the Iraq war goes, the economics seem to be the same as the Johnson/Nixon war in Vietnam.  The spending will only increase the rate of inflation as it did when the market caught up in the Carter administration.  War doesn't provide the essentials of a strong economy.  The products created are quickly destroyed or obsoleted.  It's almost production for the sake of production.  

            • Inflation and recession

              Except for the structure inflation of the late 1970s, inflation is not so terrible thing for a recession. A deflation can prove disastrous.

              If you think about it, inflation imposes a penalty for sitting on money. In a sense, it forces ones to invest. In a recession, that's a good thing: too much money is being sat upon.

              • inflation

                No that's a mistake, inflation erodes your salary and your savings.  

                • I'm thinking structurally

                  not individually.

                  Otherwise, I'd agree with you.

                • Deflation is worse

                  I'm much more worried about deflation, which is far more damaging, because it would be like an accellerant on the existing economic bonfire.  That is because the incentives in a deflationary cycle are to hoard cash rather than spend it.  See 1930-33.

                  Mild inflation at this point would be a blessing, as it would help improve everyone's balance sheets over time, and is a strong incentive to engage in commercial activity in the short term.

                  • CentralMassDad

                    The question is are you talking about just a visible rise or fall in prices, or an overall monetary movement. For instance I'd say we are in the middle of a serious inflation which will bring gas prices close to $4/gallon barring any other changes. However with the collapsing economy gas is back below $2/gal. So is that deflation?

                    • It is neither

                      Gasoline prices are responding to specific market conditions. That is different than deflation, a general economic condition. (Similarly, the specific market conditions that produced $4/gal were not inflation either.)

                    • I believe you are missing something

                      Gasoline prices are responding to specific market conditions.

                      Supply and demand? But what if the unit of account changes value? The dollar lost value, I'd say more than half its value, during the runup from $2 to $4/gal.

              • Investing is sitting on money

                Money spent to "invest" will show up on your balance sheet as an asset.  Money spent to consume will show up on your income statement as a purchase.  I equate investing and sitting on money.  I know of no one who would allow his assets, "money", to "sit" without generating a return.  Often inflation forces one to "consume" because during inflationary times, holding hard assets rather than cash is a better finacial strategy.  Perhaps I've really just reworded your argument using different terminology.

                The problem as stated earlier is inflation robs people on fixed incomes of spending power and depleted savings. Politically I think it's dangerous because unlike a fall in the value of your home, a decline in the purchasing power of the dollar is felt immediately and by every consumer.  That's tough on an incumbent.

                • See $quot;Deflation is worse$quot;

                  by CentralMassDad higher on this page.

                  By "sitting on money", I mean not making it part of the circle of commerce. One measure of a recession is the velocity of money (how quickly it exchanges hands). In a recession it slows.

                  If Mr Jones puts it in his mattress, velocity = 0. If Mr Jones invests it with Mr Smith who hires Ms Doe and Mr E. Gratia who buy turnips from Ms Howard who pays the farmer Ms Freneuse to grow them, then we have velocity 0.

                  This is not about Mr Jones' balance sheet.

                  • I understand the velocity of money

                    It is increased by an increase in the nominal return rate.  Earn more with your assets and they will become more multiplied.  What I don't understand is why you think anyone at anytime would hold assets and not expect a return, "sitting on money".

          • what's a bubble

            Expanding debt and higher housing prices go hand in hand with an expanding real economy. How were the lenders and borrowers supposed to know that the Fed would raise rates eight times through 2006? How were employed people supposed to know that the Fed wanted them to be unemployed?

            The anti-debt argument breaks down at that point, because there is no way the borrowers at least can predict what will happen with the Fed, either with interest rates or the value of the dollar.  

            • Stunningly beautiful

              Speaking of expanding the real economy, I have some wonderful tulip bulbs for you.

              • is this really the best thing for you

                This repeated stimulation of your arrogant impulses, is this really a good habit for your health?

                • Very well, thank you, and you?

                  If I read you correctly, you don't believe there really was a bubble in housing prices but some sort of policy mistake (for example by the Fed in 2006) caused them to fall artificially.

                  I'm teasing because the evidence of there having been a housing bubble is rather convincing.

                  However, if I'm misreading you, I apologize.

                  • If

                    I'm teasing because the evidence of there having been a housing bubble is rather convincing.

                    I'm convinced. Try this theory out:

                    If you're convinced that there was a housing bubble, then, you probably should be convinced that the borrowing against that bubble (equity loans) caused a consumer spending bubble, and also a growth in government spending bubble. No?

                    So, should the remedy be to allow the housing bubble to deflate and actually encourage people to sell via foreclosure rather than rely on government to stall the process?

                    The consumer bubble takes care of itself.  People are spending at reduced level, but not yet at lower historical levels.

                    The government bubble is entering the deflation stage now: California.  Can the other states be far behind, and ultimately the Federal?

                    My personal theory is that the boomers are the 'pig in the python' and they carried with them the boom from 1950 to now, and caused the housing bubble, and now are causing the recession as they attempt to salvage a retirement.

        • Umm, huh, wha???

          Among the biggest mistakes Hoover made, as is well acknowledged, was cutting spending, rather than increasing it.  So, what're you talking about?

          In 1933, when FDR took office, the Federal government increased spending dramatically, and the recovery began within a year and continued for the next several years.  In 1937, when FDR cut spending, the recovery stopped and another recession began.  That ended in 1938 because FDR reversed course and increased spending again, and the recovery then continued into and through WWII (when Government spending increased even more).

          • You might try to read about the times.

            Although the SECTREAS, Andrew Mellon, advised the economy right itself, Mr. Hoover went on a binge of manipulation.  There are plenty of books explaining this in libraries and there are entries on wikipedia.  

            Good luck.

            • You might try not ignoring the substance of people's posts

              You claimed, in a response to concerns about Obama's efforts to stimulate the economy, that it "didn't work for Hoover." Well, if "it" is intervention, then you have us there. It certainly didn't. But it makes you sound ignorant (which I'm assuming you're not if you are as well read as you claim) to suggest that Hoover's efforts to raise taxes and cut spending are in some way equivalent to Obama's efforts to raise spending and cut taxes.

              And regardless of what Mellon wanted done in the '30s, no one today is counseling a hands off approach. Some want tax cuts, some want spending, most want some combination of the two. But there is pretty much unanimity on the idea that something needs to be done.

              • Obama wants to raise taxes

                I thought Obama wants to raise investment taxes. Is that off the table now?

              • We have to read of a time in the context of that time.

                Raise taxes?  Yes, but few people paid an income tax at the time.  It wasn't until WW2 that the income tax became so pervasive.  An increase of income tax was a tax on the rich.  No, it didn't work.  Neither did the estate tax.  And Mr. Hoover didn't cut spending.  Much of the Hoover plans were adopted by FDR under another name.  History can be your friend.

                Today we have a Congress that votes on bills without so much as reading them, much less analyzing them.  The same tactics of the previous administration are used by the present one.  The economic and financial leaders sit in obvious contempt when questioned as to the validity of their plans.  (How do they mimic the "Dick Cheney look" so well?)  It is looking as if the Democrats are as deficient in leadership as the Republicans. Neither show any signs of changing the economic course.  Is there a congressman that, while professing love for the environment, doesn't support a economic system that relies on consumption as does the Federal Reserve system?  Where is outrage?  The self-professed liberals and conservatives share the same philosophic bankruptcy.

                "...no one today is counseling a hands off approach"  Well, the guy in that clip is showing more progressive solution than the whole rest of the Congress.

                • Yes, History can be your friend.

                  Here, in fact, is it showing its friendship by supporting my case. From Hoover's October 31, 1932 campaign speech at Madison Square Garden (http://www.presidency.ucsb.edu/ws/index.php?pid=23317), where he touts his successful efforts to cut government spending.

                  [T]he Republican administration has made a successful effort to reduce the ordinary running expenses of the Government.

                  Our opponents have persistently interfered with such policies. ... [I]n spite of this, the ordinary expenses of the Government have been reduced upwards of $200 million during the present administration. They will be decidedly further reduced.

            • Still not making sense

              I have read about the times, but you sound like you either haven't, or you're failing to present your logic.  What exactly didn't work for Hoover?  Because what Obama is doing now is mostly the opposite of what Hoover did.  Hoover tried to balance the budget, and cut spending.  So what specifically is it that you're pointing out "didn't work for Hoover" that you think Obama is doing similarly?

        • Wrong church, dude.

          This is a Democratic Party forum.  Your catechism is in the wrong place.  Notice how fast the Democrats embraced the Bush doctrines?  And, don't try the Republicans, they're the same (or worse).  

          Anyway, what's wrong with the sneer?  I think it becomes them.  "The Prep School Sneer."  

          "We're all animals, the only difference is the price of our suits."  -Heard in the NYC subway

  2. not at the height yet, I hope

    He's at the Height of the Honeymoon, perhaps, not the Height of his Powers.  My fervent hope is that he'll learn and develop - as we saw him do during the campaign - and that at the Height of his Powers, he'll accomplish bigger things. This is a prayer!

  3. $quot;Amusing contrast'

    I wouldn't discount what Cianfrocca is outlining here.

    I have a good friend who is a fairly prominent economist (in fact, Christina Romer was his thesis advisor @ UCB) who has warned over the years over about the disconnect between economic theory and how things actually work in the financial world.  People act in their economic self interest, and if the POTUS keeps up with talking down the economy (hope he realizes the election is over and he won - time to start with the fireside chat approach instead of scaring everyone to death), this isn't exactly going to get better.

    Krugman is a smart guy, but having read him going back 20 years I've yet to ever read an article where he actually was positive about any economic move by any administration (including Clinton).  Maybe he's the boy who cried wolf (and the wolf is at the door), but he isn't taken entirely seriously by the members of NABE.

    • Delicacy

      You're right. We need a POTUS to spout hope. (Anagram intended.)

      This seems like a delicate matter though when 36 Republicans in the Senate vote to strip all spending out of the stimulus bill. Without the political pressure (and a quick resolution in Minnesota, a quick recovery in Massachusetts, and quick clarity in Illinois), I don't see how the Democrats are going to be able to get much through. What'll it take to keep Snowe, Collins, and Spector from condoning the reading of phone books into the Congressional Record?

      I don't see how one can have it both ways. Even with Axelrod.

  4. Pragmatism versus $quot;Centrism$quot;

    "We should be guided by what works," the true pragmatic principle, was blunted on this go-round by ideology masquerading as pragmatism, under the deceptive label of centrism, bipartisanship, and moderation.

    These are all categories that are only meaningful in terms of relationships between power blocks in Washington, something we wanted to change. In a crisis it is not tenable to filter everything through the status quo that got us there.

    I would not have supposed it, but the conflict between pragmatism and best-and-brightest centrism--which is looking more and more like center-right-ism--is emerging as the central problem for the new administration.

    I don't think this bill is a bad start, but Bob is right about it being nowhere near enough, and about time being of the essence.

    • If doing something right now was really that important . . .

      . . . why will more than half of the spending in the current stimulus bill not take place until 2011, and "only" $26 billion this current fiscal year, according to the CBO?

      Terrorist Emergency : Patriot Act :: Economic Emergency : American Recovery and Reinvestment Act of 2009

  5. I now see what's wrong with this post

    I glossed over the first sentence the first time I read it, but after our debate in the first few comments, I now see it more clearly:

    President Obama, at the height of his powers, gave us his best shot today

    So wrong!

    Obama has clearly been building political power recently.  It makes no sense to claim that he's "at the height of his powers", it's ridiculous.

    And "his best shot?"  Also ridiculous.  He's been clear all along that this is something he thinks we need to do quickly but is only the very beginning of a long program.  He repeated that at the signing ceremony.  This is one step at the beginning of many, not a lone "best shot".

  6. Be Calm and Prosper

    Words we should begin to live by methinks. Check out this aspirational interview with our President.  

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Fri 28 Nov 6:54 PM