recession

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Dear Me: Jobs Outlook Worsens?

Well now, this is not good news. For a couple of weeks I have been arguing we should not panic when the report on new claims for unemployment insurance showed a slight worsening. First it was because the statistics were messed up by reporting glitches at the state level – or so we were told. Then it was a minor reversal due to faulty seasonal adjustment – or so we were told. So what is it this week?

This morning’s report shows an increase of 8,000 for new claims, bringing the total to 480,000. The expectation on Wall Street had been for a fall close to the 455,000 level. Obviously the employment situation has not begun to improve from the plateau reached back late last year. The momentum through last fall had been of steady gain, then, around late November, everything ground to a halt and has remained there. Indeed we now seem to be giving away some of the progress.

I don’t think there is a way of spinning this. The employment outlook has foundered. Many of us suspected that there was a ‘jobless’ scenario for the recovery in which the primary measures of economic health – such as GDP – started to regain positive motion, and yet underlying statistics, in particular unemployment, remained stuck in a much worse state. That scenario became the most frequently quoted and most likely outcome as people started to discuss the shape of growth over the next few years. Long gone are thoughts of a sharp recovery powering a rapid re-hiring process and, therefore, an equally rapid recovery on the jobs market.

This is going to be a long, tough haul.

Even the good news in today’s numbers is an illusion: there was a fall in the number of people collecting ongoing assistance. But that comes, most likely, from the fact that increasing numbers of workers have used up all their eligibility and are now not covered at all. Even though the long term claims figure is down 51,250, on a four week moving average basis, it is still over 4.62 million.

Jobs are evidently hard to come by.

Which is why talk of cutting the deficit is so premature. Draining demand from the economy, which is what cutting government spending amounts to, before unemployment has begun to decline substantially, is a very risky strategy. History tells us it could be extremely dangerous to balance the books until we are well beyond the crisis. Clearly we are not yet in such a safe spot.

We will see tomorrow what the actual unemployment numbers look like. The most important component to keep an eye on will be the long term figure: how are people who have been without a job for a few months faring? If that figure keeps on growing, we have a long term problem building that needs a urgent attention. People who have been unemployed for long periods consume their savings and then default on loans. As the backlog of such folks builds so does the potential for financial damage to the economy. Already nearly 20% of all homeowners have negative equity in their homes. If we compound the bubble collapse with long term unemployment the combined effect will be to slow consumption to a crawl. Since that is what drives our economy the recovery will be jeopardized.

We are not yet in double dip’ recession territory. But the longer unemployment loiters way behind the recovery the more of a downward drag it exerts.

Obama has proposed a very modest jobs program. Its passage, like everything else, is stuck in our do-nothing Senate. It should be a no-brainer. Helping our fellow citizens get back to work should not need much discussion. After all the next in line for help could be one of us.

In any case: the more American workers there are, the more customers there are for stuff. Paying to re-build the national customer base should appeal even to the most rabid conservative.

Pass that jobs program now.

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The Budget [non] Debate

Well the so-called debate about the federal budget deficit has not started well. Apparently we cannot even agree on the place at which to begin, let alone the place to which we need to travel. This is not good. Sometimes I feel so downcast at the juvenile nature of our discourse. Other times I simply am in awe of the degradation to our nation regular people are willing to allow in support of their own political viewpoint.

Moreover I am tired of being accused of writing ‘rants’ about the budget when all I am trying to do is establish the extent of the problem. At least I am not alone: James Kwak at the Baseline Scenario gets a whole lot more heated, and partisan, than I do. PLease read his commentary – via Brad DeLong.

My own frustration centers on those folks who are now predicting the end of America as we know it due to the ‘sea of red ink’ that lies ahead. There should be some sort of rule enforcing consistency: where were these same people calling for the ‘end of America’ back in 2004 when the deficits, in their current form, opened up? Anyone who stayed quiet then, but who now screams that the roof is caving in, should be banned from the discussion as being disingenuous. And why are more normal people now running scared and more easily upset? Where was their attention back then?

You can’t have it both ways. If you backed the tax cuts of 2001 and 2003 then you have no concerns about deficits. Unless you came out of the closet and argued for massive cuts in programs like Medicare and Social Security at the same time. Then at least you have integrity.

As Dick Cheney said at the time: ‘deficits don’t matter’. That was the mantra of the administration in 2004. What has happened since to make that philosophy go away?

Those of us who are fiscal conservatives have always argued that deficits do matter. I remember being shouted at by ardent Reagan supporters back in the 1980’s when I would make speeches criticizing the deficits he created.

It really ticks me off that a deficit created by Reagan or Bush is apparently benign, but that one in an Obama budget is a disaster.

Even more annoying is the fact that the media and intelligent folks around the country suddenly jump on the bandwagon and create an upswell of emotion sufficient to press Congress to cut spending at exactly the wrong moment. This is a re-run of the 1930’s. Doesn’t anyone read history?

And, no, I am not being shrill when I point out in simple declarative language that our problems began in 2003/2004, not last year – I am being factual. I am sorry if the facts get in the way of your political view, or vice versa. There is nothing I can do to re-write the 2001 through 2008 fiscal policies to make them better. We are stuck with them.

It is galling beyond belief to have spent several years trying to point out the error of those policies and then suddenly to see people who criticized me for talking about deficits get religion at the very moment when a deficit actually makes sense.

Let me be categorical:

I am one of those dull folks who thinks that the federal budget should be in, or close to, balance in normal years. A normal year being one where GDP is growing at its historical trend rate. Whenever GDP falters the budget should swing somewhat, but not excessively, to provide ballast. Under normal circumstances the first line of defense for economic policy should be monetary policy – raising or lowering interest rates. Only in unusual or extreme circumstances should fiscal policy be the main source of defense against a downturn.

The ‘ballast’ role of fiscal policy is automatic. Federal revenues will shrink as the economy drops into recession – tax receipts will be diminished. But outlays actually rise – unemployment insurance and other safety net programs kick into higher gear. This means that the deficit automatically widens as we enter recession. It also means that the deficit goes away, just as automatically, as the economy recovers.

Therefore, under normal circumstances, we don’t need to make radical shifts in policy to deal with a recession: simply raising or lowering interest rates will do.

But.

The 2001 through 2008 period was anything but normal.

We ran very high budget deficits and had very low interest rates. This was a deadly combination. I argued against it at the time. My argument being that we were using all our ammunition up in peacetime – we would have very few options if the wheels fell off the economy. Which is what happened in 2007/2008. [sorry about the mixed metaphors!]

We were left with very little room to lower interest rates, which meant monetary policy was ineffective – just as predicted. It also meant we had to deploy deficit spending at a time when we were already sinking in red ink.

In short, economic policy for the last decade has been reckless. Especially so in the light of the result: the worst downturn outside the Great Depression.

Things could not have been managed to worse effect.

Not only this, but the legacy deficit is huge and growing. The temporary deficit – that bit caused by the crisis itself – is enormous as well. Add the two together and we have the mother of all fiscal problems.

Which is why we need to be both clear and honest about what we are facing. Politically motivated finger pointing won’t help. Nor will any amount of diversionary smear tactics. The base of our problems reside in the huge cut in revenues caused by those 2001 and 2003 tax cuts. They were not accompanied by similar or offsetting cuts in spending. On the contrary, spending increased. Presumably the Republican run Congress back in 2004 did not perceive massive deficits to be a problem. They believed Cheney: ‘deficits don’t matter’. Now, apparently, they disagree with him. Now deficits do matter. In fact they are so dire that we need to slash and burn everything in sight. Except defense spending.

In the divisive atmosphere of the ‘politics of no’, it is very hard to maintain a discussion that could lead to sensible outcomes. It is hard to get agreement about the nature of the problem, let alone about solutions.

So let me -once again – set out the issue:

We have too little revenue over the long term to support our long term spending. Notice the long term nature of the problem. It is not a short term issue. The crisis spending is not what dug the hole. Those short term costs are simply added to a pre-existing and very deep problem we have avoided talking about for years.

We take in too little.

We spend too much.

In particular our spending on defense and health care are both hurtling out of control. Both need containing. Both need to be slowed down sharply. That means cutting out defense programs and rationalizing the military. And it means getting hold of Medicare and reducing its cost. Health care reform was central to reducing the budget deficit. All neutral scorekeepers agreed that the reform was a significant first step towards budget control.

The moment health care reform became politicized we lost control of our budget. Anyone who opposed that reform needs to come clean on what they would do to cut health care costs.

One suggestion is on offer from the GOP at the moment: cut Medicare for those under 55. Meaning that anyone under 55 would have to pay taxes to support those currently collecting good benefits, with the expectation that they themselves would never get those same benefits. That’s a massive shift in wealth from the young to the old. It is a blatant attempt to pander to old voters. It is politicizing the discussion and making it impossible to get agreement. Deliberately. Why on earth would younger voters go for such a rotten deal? Why is it that older voters have to be pandered too in the first place? Pitting one generation against another is hardly a good example of thoughtful problem solving.

But so low has debate in America sunk that asking for sensible suggestions, and laying out the facts from the historical record, is attacked as being shrill or partisan.

These are dangerous times for America. Its political discourse is now so embittered and divided that reasonable people are better off withdrawing. Its political system is so riddled with disfunctionality that sensible people cannot make decisions. It is Alice in Wonderland like, where minorities become majorities and larger is smaller. Where those who cause problems yell at others for having caused those same problems. Where facts are imagined and the imagined becomes factual. Where voters are so angry they act against their own interests. Where voters scream about the inaction of politicians, and where politicians won’t act for fear of the extreme reaction of voters.

These are the symptoms of a declining nation.

And they are why we will not solve our very real economic problems any time soon.

We have a big problem to fix. It has festered for years. We need to confront it, and deal with it sensibly. We are not off to a good start.

But that’s what we’ve become isn’t it?

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Yet More Mixed News

The recent pattern of mixed news about the economy continues this morning with the latest data on consumer spending, construction spending, and manufacturing all being released at once. Together these reports simply add to the overall difficulty we have in identifying a clear or firm trend.

Let’s take them one a t a time:

  • Starting with the good news. The monthly survey of manufacturing conditions published by the Institute of Supply Management tells us that activity at American factories continues to accelerate. The summary index the ISM reports rose to 58.4% in January, up from 54.9% in December. This is the highest level this index has reached since August 2004 so we have reason to be very optimistic about the near term outlook for manufacturing. Gains were widespread – 13 of the 18 industries surveyed had solid gains in activity, whereas only 9 had reported gains in December. That things are looking up was confirmed by that fact that 70% of those surveyed said they were having to pay higher prices for supplies. Such rising prices are a good sign of tightening conditions along the manufacturing supply chain, and are usually caused by demand rising ahead of capacity being added to meet that higher demand. If this keeps up we should see both rising prices at the consumer end – subject to consumer demand which I will talk about in a minute – and, at long last, an uptick in hiring as factories finally have to add extra shifts to meet demand. So, the manufacturing news today is very good.
  • Much less good is the report today about consumer spending. As you know consumption makes up about 70% of our economy on an annual basis, so any movement up or down in consumption has an exaggerated impact on GDP. Indeed was the implosion of demand that created the hole in GDP and sent us into recession, so we watch consumer spending very closely for signs of growth. In this context today’s report is not encouraging: consumers reduced spending in December from the rate of previous three months. Spending still rose – by 0.2% – but that was the lowest rate for any of the months leading up to year end and was well below forecasts. If we adjust that number for inflation spending barely rose at all, eking out a 0.1% gain. Suffice to say that this level of activity is not going to provide the power necessary to keep the economy moving.
  • In the same report as spending the government also reports of incomes, which rose 0.4% in December. This figure is a composite and includes personal income from a variety of sources. Most of the sub-categories grew quite well: income from rental property grew 0.7%; incomes from investments grew 0.6%; and small business incomes grew 0.8%. The clunker was in ordinary wage income, which grew a miserly 0.1% after having grown 0.4% in November. It looks as if this latter figure is the reason spending seems so weak at the moment: people are not getting any additional wage income, so they are being very cautious in spending.
  • Finally in today’s line up of reports is construction spending, which dropped an alarming 1.2% in December, much more than most experts predicted and a figure that we should certainly be concerned about. The drop in construction during 2009 makes for grim reading: residential construction was off 28% from 2008; private non-residential investment fell 11.2%; and, perhaps just as worrying given the economic outlook, spending on public works projects is also falling – state spending was off 6% in just the first half last year. While the loss of activity in residential construction is easily explained by the glut created during the boom, the slow down in other investment sectors is more of a problem: it will hamper the recovery and suggests that business has a decidedly less rosy view of the medium term.

What do we make of all this data?

Clearly the economy is still going through an adjustment period with no strong direction. The improvement in manufacturing is welcome as long as it can be sustained. The problem looks to be medium term: with consumers as cautious as today’s spending numbers indicate there is little room for price increases to bolster profits, and little margin for error in production cycles. With the boost to production created by the end of year inventory replenishment now coming to an end, businesses will have to look to sales growth for future profit opportunities. That will mean convincing consumers to spend. Given the high level of uncertainty surrounding the employment outlook, and the ongoing need most households have to rebuild wealth and pay off debts, such persuasion is going to be very difficult. A less risky strategy seems to be to modify sales expectations to a more reasonable and possibly lower level.

Unfortunately that all implies slow growth.

The economy’s trajectory appears positive – we will see GDP growth over the next few quarters – but there appears no motivation for an acceleration. Certainly the first quarter will see a sharp drop from the fourth quarter of last year.

Overall: hang tight. This is going to remain a tough economy. It will test the mettle of our businesses and strain the patience of our consumers. All the real risks remain on the downside, which means that any deviation from the current course is more likely to be negative than positive.

What can we do to fix this?

  • More stimulus to overcome the jobs problem. It doesn’t matter too much what the cost is as long as it’s enough to put a stop to the reduced activity at the state level. Our local governments are now acting as a very negative factor by cutting jobs in order to balance their budgets. This needs to be more than offset at the federal level. Otherwise we will be back in recession later this year. The private sector will follow the government’s lead, as yet there is no sign of a hiring surge, so the government has to do more.
  • Keep the pressure on bank reform. The banks are mending, not lending. I cannot blame them for that: the economy is still uncertain and sensible banking dictates that credit extension is limited until the economy perks up more. Of course this is a little of a chicken and egg situation: until credit eases the economy will not pick up; and as long as the economy doesn’t pick up banks will not lend easily. The break normally comes as business expectations become more optimistic and demand for credit expands in support of capacity increases – e.g. new factories, equipment etc. With the huge capacity overhang we still have – upwards of 6% according to the Congressional Budget Office – it is very unlikely that we will see large credit increases until later this year, if then. In this context bank reform needs to focus, inter alia, on creating more competition. For that we will need to see smaller, or more focused banks.
  • Stop fixating on the federal deficit. It is huge. Get over it. The problems are both cyclical and structural. We won’t fix the structural issues any time soon, and certainly not without tax increases. The cyclical problems will go away once the economy is growing again.

A wise friend once told me that when solving our problems we should always ‘shoot the wolf closest to the sled’. With that in mind our order of activity should be:

  1. More stimulus, aka ‘jobs programs’
  2. Stop the rot at the state level.
  3. Reform the banks.
  4. Fix the deficit.

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    Spending Freeze – Say What?

    I spent much of the time since I first heard about Obama’s proposed freeze on Federal discretionary spending trying to pretend I had misheard. After that failed to make the whole thing disappear, I began to wait for details that would reveal something that wasn’t a nightmare.

    No luck.

    This is just rotten economics.More to the point it is both rotten and Republican.We may just as well admit it: that 41 GOP caucus in the Senate is running the country. So much for majority rule. And so much for change.

    Imposing a lid on discretionary spending sounds very well to the populist ear. After the loss of that Massachusetts senate seat the administration has gone into populist overdrive and has thrown out any semblance of consistency in its politics. It looks an awful lot like panic to me.We still don’t know exactly what a freeze would look like, and whether there will be any exceptions – other than the sacred defense spending budget of course. America must not give up its swagger after all.

    From a purist standpoint putting a limit on government spending just when the government is the only reliable consumer in the economy is a about as close to being Hoover as one can be. The economy is not well. The private sector is hampered by fear and by an obsessive need to be frugal – either by way of debt reduction, or by way of limited spending. I have said it a hundred times – and you all are surely bored of my words: it is the government that currently stands between us and further recession.

    So what does Obama propose doing?

    Stop the government. Well kind of. The really odd thing about this proposal is that it affects such a small part of the budget. It ignores all the areas where the problems of run away spending lurk: entitlements and defense. In other words it is a joke: it curbs our ability to deal with recession and does nothing about the long term deficit. It is nuts.

    Huh?

    It makes no sense.

    What makes my skin crawl even more is that it carries with it an implicit surrender to the Bush strategy. Recall that Grover Norquist, the evil ’eminence grise’ of right wing politics, advocated starving the beast. His objective was to drain funding from the Federal budget and so prevent the implementation of any left of center entitlement programs – like health care reform. His ultimate goal was to reduce the Federal government to such poverty that it had to contemplate cutting hated [by him] New Deal programs like Social Security and the later Medicare. The Bush tax cuts were, in part, a cynical attack on Federal revenues designed to plunge the nation into years of deficits. The end result of which would be a forced debate about cutting spending.

    So here we are. Caving in to the Republican agenda.

    As I said above the freeze exempts entitlements and defense for now. I have my doubts about Obama’s commitment to maintaining that exemption as well: he has fallen for the right wing proposal to set up a commission to examine ways to reduce the deficits. Presumably if defense spending is allowed to maintain its sacrosanct status, and if there is no attack on health care run away costs via reform, such a commission will be forced to cut into entitlements too.

    Oh and by the way: the curbs on health care spending embodied in the bill languishing on the Senate floor contain the largest cuts in Federal spending ever contemplated by the Senate. If we are worried about cutting the deficit, the first and most significant thing we can do is to pass health care reform. Is that likely? Don’t hold your breath.

    Instead, Obama has opened the door to Republican rule.

    Let’s just reiterate the basic economics: the nation’s debt is very high. It is not at record levels in percentage terms. It will start to fall of its own accord as the economy recovers simply because revenues will rise again – employed people pay more taxes. The bond market is showing no concerted signs of fear about US debt levels, despite all the fuss in the media. The stimulus plan is the only large bulwark we have against more recession. State governments are cutting jobs and spending furiously and therefore adding to the crisis. Why? Because they face hard budget limits. In other words strict balanced budget rules at the state level are helping plunge us further into trouble. We have the equivalent of fifty Hoovers beavering away to undermine the country, why add another?

    Rational and calm policy right now is to maintain the Federal deficit at a high rate to offset the state retrenchment and the lack of private sector activity. It is a policy that is working. We avoided depression only because of it.

    So Obama decides to toss it out and channel Hoover.

    And yes, there is no doubt that we need to reduce the deficit once the storm has passed. Don’t forget – how could you? I have written it here before – that over half the current deficit is due to the Bush tax cuts which were not offset by spending cuts or by extra revenues generated by induced growth. On the contrary and like Reagan, after slashing Federal revenue Bush raised spending by record amounts. We are we sinking under a sea of red ink before the crisis. No one seemed to worry about freezing spending back in 2003 through 2009, why now? Our budget is a mess. That’s the great Reagan/Bush legacy. We overspend on everything. In particular we overspend on defense and entitlements. We cannot entertain a credible budget balancing policy that excludes defense spending. We spend as much as the next ten largest nations added up, plus some. What for? To bankrupt ourselves? To prevent our construction of schools? Our priorities need to be examined carefully and in the light of a longer term view of our role in the world. A panicked response to a near depression is not the best way, or time, to undertake such a review. In any case credible deficit reduction also has to include revenue increases – new taxes of one form or another so the entire burden doesn’t fall on spending cuts.

    Our generation’s legacy is in danger of being only war and the debt it created. And a weaker nation as a result. The best security comes from having a vibrant domestic economy that generates sufficient revenue that we can accommodate a variety of aims simultaneously. We can afford a strong safety net and a strong security system at the same time only when we have rebuilt our economy. Getting back to growth should, therefore take priority over balancing the books near term. Establishing a budget freeze is exactly counter to this approach. It puts faux frugality first and jeopardizes the long term in favor of short term window dressing.

    Is that what we want? It isn’t what we need.

    Addendum:

    In response to a couple of questions from you: the ‘discretionary’ part of the Federal budget currently amounts to about $477 billion in spending out of a total of around $3.7 trillion. The other big chunks of the budget are entitlement programs like Social Security and Medicare; defense; and interest on the national debt. As I mentioned above any credible deficit reduction program has to open up all these areas to scrutiny – except the interest payments of course.

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    Son of Stimulus? And Bonus Bonanza

    Some of you will find it odd that I link bonuses for bankers and Obama’s latest attempt at getting a jobs program organized, but in my mind the two are inseparable. After all the distorted short term incentives awarded to the folks in our big banks were a primary cause of the crisis, one effect of which is the continued need for stimulus. Put another way: were bankers paid properly we would not be talking about bailing out from a horrendous recession.

    So the two fit together. We should never look at one without vexing over the other.

    First let’s look at Obama’s next foray into stimulus land.

    Right from the get go we have to avoid calling it a stimulus. That word has become a no-go zone for the administration, bent as it is on avoiding any confrontation with centrists. Our apparent need to allow the likes of Olympia Snowe to run the country implies that we tread very carefully around issues such as government spending. Having so ceded control the administration now likes to position itself as an involved advisor nudging, but never bullying, Congress in the right direction. One such nudge is the proposed set of job creating activities that Obama unveiled this week. So far we have been told little of substance, so it is very difficult to assess their likely impact. Having said that if the rumored cost is correct – $70 billion – then we can almost guarantee they will produce a mediocre result.

    As you can tell from my tone of voice I have now sunk into a frustration with the administration that prevents me from cheerleading anything it does. Limp is in. Compromise dominates boldness. And self-imposed limitations constrain our imaginations. We must not dream too expansively for fear of upsetting folks. I would be fine with this, even though I would still champ at the bit, were our circumstances to match its mellow low key theme. But the world is a whole lot more harsh than the administration wants to believe it is. There are some really nasty problems lurking out there in the weeds. Some of them are quite big. They require equally big responses.

    Allow me to quote Robert Reich at length:

    “Main Street is hurting worse than ever. Ten percent unemployment translates into roughly 18 percent of our workforce unemployed or underemployed. Housing markets are in terrible shape: One quarter of homeowners are paying more each month than their houses are worth; the rates of tardy mortgage payments continue to rise. Thirty percent of American households contain someone who has lost a job and can’t find another, and yet almost all households are dependent on more than one wage earner in order to make ends meet. A quarter of all American children are now dependent on food stamps.”

    This is the country we are. These are the issues that press down hard on the economy. My view of the world demands that I take these things seriously and that I support appropriate action to ameliorate them. $70 billion just doesn’t cut it. It is nowhere near enough.

    So I am left, once again, with a sinking feeling. I have to ask why it is that Obama and his cadre of advisors hesitate to act on behalf on the people Reich talks about. Why is it that we, as a nation, cannot be led sufficiently strongly that we come together with enough resolution to deal with the horrible plight so many of our fellow citizens? Why is limp so popular when the problems are so muscular?

    I have not re-run the numbers myself recently so I cannot speak directly to Reich’s advocacy of a jobs plan of about $400 billion. But it looks about right given that the last time I did such a calculation I thought the stimulus plan was about $500 billion short. The economy has improved a tad since then so Reich’s figure is certainly plausible.

    So why is the administration not asking for something of that order of magnitude?

    Politics.

    Or so I am told.

    The political landscape is so infested with ideological traps that we, as a nation, would prefer to wallow in mediocrity and court constant disaster, than stir ourselves to do the right thing.

    I was always taught that politics is a malleable art. That politicians can shape the debate. That they can alter the balance rather than simply accept it. Obama clearly doesn’t agree. He seems to think that the ideologically crippled playing field presents a permanent constraint on his actions. He accepts this limitation and so modifies his agenda – which is certainly progressive in its underlying philosophy – to the landscape.

    Hence his avoidance of the word stimulus.

    Would it not be healthier for the country to be told clearly that a stimulus is necessary? That the stimulus has to be large? That it will add to our debt? And that we will all have to sacrifice at some point to repay that debt? Would this not allow the inevitable anger to be channeled constructively towards reform of the system so that we avoid future similar crises?

    But I misread the lay of the land.

    Instead we are treated to half measures because it’s any easier sell.

    $70 billion just won’t do. They know it. I know it. You know it. Why we are being pulled through this charade is beyond me. Because we are afraid of opposition? Then challenge the opposition to articulate an alternative. Expose that alternative for what it is – more of the old Reagan/Bush same. More of what caused this mess. I would applaud the emergence of a healthy debate about our national choices. But that requires enough courage to wade into the swamp first. I call that courage leadership. It’s what we, as a nation, are lacking.

    I have said it before: the debt hawks are right in the sense that we will need to reduce our deficits. There are three ways to accomplish such a reduction. Raise taxes. Cut spending. Inflation. Preferably a little of all three. But we should never be afraid to pile on the debt when it will assure our survival. Like now. In any case we need to discuss, like adults, which of the three we most want to enact. Wd cannot perpetually avoid the subject. Especially what to do about our debt.

    Not using debt at the moment is a bit like refusing to lower the lifeboats on a sinking ship because we don’t want them to get wet. That’s what they’re for. We can clean them up later.

    Likewise our ability to run deficits is essential in times of crisis. It’s in times of prosperity that we need to be fiscal hawks. It is apparently too hard a task to articulate that clearly. So debased is our discourse that all our politicians would prefer to avoid the word ‘taxes’, and the inevitable backlash it would create among voters. So childish have we all become that Obama is seemingly forced into tepid and convoluted policy advocacy instead of telling us straight to our faces what the cost has been, and will continue to be, of the mistakes we made over the past thirty years.

    You see, the years of illusion were based on the childish notion that we did not have to make choices. We wanted to believe the sugary message that the American economy, by simple dint of being American, could defy gravity. We could consume our capital and indulge in debt ridden ways and never pay the price. The hard choices, like if we want to have a huge military with which to tame the world then we have to … ummm … pay for it, were never presented. So we borrowed.

    The game worked on so many levels.

    We all did it.

    We all loved that inflation drove our home prices sky high. We never imagined that it was dumb luck. We all preferred to think of ourselves as clever. We were smart investors. Smart real estate dealers. Smart shareholders. And smart bankers.

    And we all turned our eyes away from the flood of statistics that started to show that the wheels would come off. The illusion was more fun than the real world.

    Especially, it turns out, if you were a banker.

    So let me provide the link I mentioned at the outset.

    Bankers live in an illusory world. Despite all the evidence of the last two years, they actually think that they’re smart. They still do. Witness their determination to pay themselves earth shattering bonuses even while the rest of us drown. They think they are skillful. They get all hissy when anyone dares suggest they cut back their egregious ways. Some of them threaten to flee to more supportive climes [ to which I say please don’t wait].

    In the UK this attitude has elicited, at long last, a counter attack by the government. Over there, serious consideration is being given to a special, one time, windfall tax on bonuses. The logic is compelling: the UK government deficit is huge and needs to be closed; those most able to pay need to chip in more than those less well off; and bankers are demonstrably better able to pay. In fact they flaunt the fact. Moreover, and this is the important part, the business conditions in which bankers earn the profits that they then pillage for bonuses rather than pay on to shareholders, are set by government policy. The low rate, safety net protected, liquidity flooded, and reduced competition arena in which the big banks now play is government sponsored. It is the taxpayers largesse that permits those profits being accumulated. We set the game up that way to protect ourselves from further predation by the bankers and their ill advised activities. We did not set them up so that bankers could pay themselves massive and socially abusive bonuses.

    In other words they’re not so smart after all. Not only did they just create the mother of all recessions through their collective ineptitude, but their current profitability is simply a function of our efforts to clean up after them. They owe us one. Big time.

    Now, if the administration needs to provide itself with enough popular cover so that it can do the right thing and spend $400 billion on getting middle America back to work, why not go after American bankers? They’re the root cause of our malaise. Making their lives miserable would be an easy sell to the public. And they’re deserving. They can also afford to help out a good cause. A good cause such as America.

    So how about a ‘Get America Back to Work Tax’ aimed at banker bonuses?

    I know it will provide only a drop in the bucket of the amount we need. But the popular support could propel even our timid administration into action on behalf of the regular folks who have been left to languish in the dust while Wall Street lavishes both largess and praise on itself.

    Bankers love helping charities. Since they turned our economy into a ‘charity case’, they can think of the special tax on their bonuses as a charitable contribution.

    A non-deductible one of course.

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