The Progressive Pen

Krugman: Obama "Clueless"

From Paul Krugman's blog:

I’m with Simon Johnson here: how is it possible, at this late date, for Obama to be this clueless?

The lead story on Bloomberg right now contains excerpts from an interview with Business Week which tells us:

President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

Obama sought to combat perceptions that his administration is anti-business and trumpeted the influence corporate leaders have had on his economic policies. He plans to reiterate that message when he speaks to the Business Roundtable, which represents the heads of many of the biggest U.S. companies, on Feb. 24 in Washington.

Oh. My. God.

Laffer Weighs In

Via the Huffington Post, supply-side charlatan Arthur Laffer appeared on CNN to offer his two cents on the subject of health care reform.

Okay, before we go any further, what in the world is CNN thinking in having Arthur Laffer on to discuss health care (or any other serious subject for that matter)?

Laffer’s most significant achievement, of course, was convincing Ronald Reagan that a massive tax cut would actually increase government revenue.  To no surprise, Laffer ‘s hypothesis was proven wrong in spectacular fashion. 

The Reagan-era tax cut debacle should have been the end of Laffer.  Yet, thanks to well-funded right-wing think tanks, Laffer is still around.  It's a good thing too; otherwise, we might never have heard Laffer in August 2006 dismiss the possibility of a recession in 2008 and declare:

“The US economy has never been in better shape.”

Given Laffer's lack of credibility, it should not have been a complete surprise when, during his CNN appearance this week,  a fear mongering Laffer warned:

“[J]ust wait till you see Medicare, Medicaid and health care done by the government.”

Touché.

Technorati Tags: Laffer,supply side,healthcare

On the Stimulus

Alec McGillis of the Washington Post reports:

Administration officials have said they did not push for more infrastructure spending because of concerns about how many projects are "shovel ready" -- a view that House members say is held most strongly by Lawrence H. Summers, Obama's chief economic adviser.

Even though most House Democrats say they will back the plan, many reject the administration's argument, saying that infrastructure projects could easily be expedited, that the economy will need additional infusions for years to come and that the real reason for shunning infrastructure was to make room for tax cuts. Obama, with a public mandate to do something big, is missing a rare opportunity to rebuild the country, they say.

Should infrastructure spending be limited only to those projects that are "shovel ready?"  It depends on how long this recession is expected to last. 

As Krugman mentioned in his appearance last Sunday on "This Week," we are most likely looking at an extended recovery time from the current recession.  Rather than the usual "V" shape, we are very likely facing a protracted "L" shaped recession, like the one experienced by Japan in the 1990s.

Where is the evidence?  Look no further than the Obama administration's official projection authored by Christina Romer and Jared Bernstein.

As you can see, according to the Obama administration's own projections, even *with* the proposed stimulus package, unemployment may stay above 6% until fourth-quarter 2011.

If we are indeed facing a prolonged recession, why limit infrastructure spending to "shovel ready" projects? 

Technorati Tags: Recession,Krugman,Romer,Bernstein,Stimulus

Double Standard

MSNBC reports that Senate negotiations on an auto bailout bill have collapsed.  Apparently Democrats and Republicans were near a deal, but the talks fell apart when Republicans insisted that the United Auto Workers union accept significant wage cuts, which the UAW refused.

So let's review where we are: Senate Republicans were willing to spend $700 billion bailing out the nation's banks without a precondition of placing limits on executive salaries.  Republicans did not demand that bank executives slash their salaries.  Republicans did not require banks to eliminate existing golden parachutes for senior executives.  However, Republicans are adamant that they will not support a $14 billion loan to the auto companies unless the auto workers accept pay cut.

Any questions about where Republicans' loyalties lie?

But wait, say Republicans.  We had to bail out the financial sector because letting the banks fail would disrupt the entire economy. 

Okay, but given the current economic climate, is anyone foolish enough to think letting the auto companies fail will not have dire consequences to the overall economy? 

Technorati Tags: Auto bailout,United Auto Workers,bank bailout,financial crisis

How Big?

The Times quotes Jan Hatzius, chief domestic economist for Goldman Sachs, as stating, “we will need a stimulus package of $600 billion at an annual rate, or $1.2 trillion over two years.”

The $600 billion figure was also floated by Paul Krugman; however, he has not yet gone the extra step of recommending a second year, as Hatzius has.

Technorati Tags: Paul Krugman,John Hatzius,stimulus,recession

Downward Spiral

Here is a post from Krugman that is both interesting and alarming:

I’ve been ruminating over economic prospects for next year, and I’m getting scared.

Two points:

1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month.

2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.

So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.

As many have heard by now, yesterday's employment report was even worse than Krugman predicted; 533,000 jobs lost in November -- "the largest monthly job loss total since December 1974," notes CNN.

Technorati Tags: Paul Krugman,recession,November employment report

Laffable

Speaking of supply-side economics, I came across this revealing graph on in a July 2007 post on Mark Thoma's blog.  How badly does the Wall Street Journal editorial board want to find real world evidence of the Laffer curve?  Badly enough that they are willing to stoop to the level of dishonesty exhibited in this graph.

As anyone who has ever run a regression analysis can tell right away, the WSJ's editors' line is obviously not a line of best fit; they simply have drawn a line through an outlier (Norway).  This was no mere accident; the WSJ editors clearly made a conscious decision to fudge with the graph in order to re-create the Laffer curve.

Thoma offers an alternative line, which clearly fits the data plot much better.  The evidence points to a linear relationship between corporate tax rates and tax revenues.

Technorati Tags: Arthur Laffer,Mark Thoma,Wall Street Journal,WSJ,Laffer curve,supply-side economics

Supply-Side Silly Season

The above title comes from Paul Krugman's 1999 book, "The Accidental Theorist...," in which Krugman points out the many absurdities associated with supply-side economics.

Over the last 15 years, defending supply-side doctrine has become increasingly difficult.  After Newt Gingrich and Phil Gramm warned of a severe recession prior to the 1993 Clinton tax increase, the US economy instead experienced unprecedented prosperity.  President Bush cut taxes in 2001 and 2003, yet the economy has deteriorated dramatically during Bush's presidency.

Taking the events of the last three decades  into account, for one to continue to preach supply-side doctrine requires a certain disconnect from reality.  Of course, one person who has always seemed to be disconnected from reality is the WSJ's Stephen Moore. 

Moore appeared on The Colbert Report on November 13 to promote his new book, "The End of Prosperity," which Moore co-authored with fellow supply-side charlatan Arthur Laffer. 

The Colbert ReportMon - Thurs 11:30pm / 10:30c

Stephen Moore

Ron Paul Interview
Bob Barr Interview

Green Screen
Bill O'Reilly Interview

To appreciate Moore's new book, one has to enter a fantasy world where the Clinton years were a period of economic hardship, and the Bush years a period of economic prosperity.

The message of Moore's book?  A grave warning: If the Obama administration and the Democratic Congress raise taxes, they will reverse our current economic prosperity.  Everybody got that?

As one would expect, Colbert made a fool of Moore ("It does not matter if the economy crumbles, you and I have a theory to protect!").  You have got to love the WSJ crowd.

Technorati Tags: Arthur Laffer,Paul Krugman,Wall Street Journal,WSJ,Stephen Colbert,Newt Gingrich,Phil Gramm,Laffer curve,supply-side economics,Stephen Moore

Krugman vs. Will

Appearing on the panel of "This Week" last Sunday, George Will attempted to rewrite history by claiming FDR's government intervention turned "a depression into a Great Depression."  Luckily, Nobel Laureate Paul Krugman was there to set the record straight. Thanks to the Huffington Post:

 

Technorati Tags: Paul Krugman,George Will,Great Depression,FDR

Clueless Campbell Brown

CNN's Campbell Brown has apparently just awoken from a two-month coma.

On her "Cutting through the Bull" segment last week, Brown made it clear that she has not been paying attention to the events surrounding the financial crisis, nor does she understand the basic facts. Here is what she said on November 12, 2008:

On Wednesday, there was a big change to the government bailout plan and already a lot of people are screaming foul.

Treasury Secretary Henry Paulson told us he now has a different plan for how to spend that $700 billion of your money.

When Congress OK'd the bailout package, they all told us it would be spent buying troubled mortgage assets.

That's what Congress voted on. That's what Congress approved.

Now, Paulson says it would be better for the economy if he uses the money to buy bank stocks as a way to help their balance sheets so they are more likely to lend you money for a car or student loan or credit card.

Stop the presses! Treasury will be buying stock in the banks, rather than buying toxic mortgage backed securities? Um, hasn't that been common knowledge for at least one month already?

For example, on October 14, the AP ran a story titled “Bush, Paulson reverse course in bailout plan,” which detailed Paulson's decision to purchase equity in the banks, rather than buying their trouble assets. Yet, Campbell Brown apparently only found out last week.

Brown also gets the basic facts wrong. Referring to Congress, Brown claims “they all told us [the $700 billion] would be spent buying troubled mortgage assets. That's what Congress voted on. That's what Congress approved.” Sorry Campbell, that is simply not true.

Obviously, the Treasury Department could not partially nationalize banks without receiving authorization from Congress -- that's why the bailout legislation specifically grants Treasury the authority to purchase equity!

As anyone following the events already knows, Paulson only asked Congress for the authority to purchase troubled assets. However, Congressional Democrats -- led by Chris Dodd and Barney Frank -- were skeptical of Paulson's proposal to purchase troubled assets. Frank and Dodd insisted that the legislation grant the Treasury Department authority to purchased equity, i.e. partially nationalize undercapitalized banks. Three weeks later, Paulson finally came around, and embraced the Democrats’ (and most economists') preferred approach of purchasing equity, rather than "trouble assets."

So Campbell Brown is wrong. The Treasury Department DOES have the authority to purchase equity -- it's right there in the bailout legislation, which Brown has obviously not read. In addition, “all” of Congress DID NOT claim the $700 billion would be used to purchase trouble assets; Democratic congressional leaders preferred a capital injection from the start -- that's why they included the provision in the legislation.

Another problem with Brown's commentary: she advances the notion of Paulson as a "flip-flopper.” Okay, so Paulson changed his mind. Big deal. The more important question, which Brown completely ignores: was Paulson's reversal justified? Absolutely. From the beginning, economists of all political persuasion -- from Paul Krugman to Gregory Mankiw -- insisted that a capital injection was the necessary fix.  If Paulson deserves blame, it is for not embracing the capital injection from the start.

One final point of criticism: Brown states “a lot of people are screaming foul” over Paulson's change in approach. However, Brown never specifies who these angry people are. Taxpayers? Why should taxpayers be angry about the government purchasing preferred stock, rather than toxic assets? Purchasing preferred stock in a bank will at least position the government to recover some or all its investment, should the bank recover. In contrast, spending taxpayer money on toxic assets would offer virtually ensure the $700 billion would not be recovered.

Without question, there are many alarming problems with the way Treasury has carried out the bailout plan.  However, Ms. Brown's superficial analysis ignores all of the legitimate concerns, and instead focuses on an alleged 'bait and switch' regarding the mechanism of the bailout.

I would advise Ms. Brown to do some research and get the facts straight if she wants to cover serious issues.