Economic Rescue Program to the Rescue!

In the research that I have come across, it seems that the only offered alternative to the stimulus was tightening up the national belt and riding out the economic chaos to avoid the long run costs of rescue.  That would essentially be the government saying, "I could throw you this lifeline, but then we'll have to fix the line in the future and we're both going to drift ashore anyway."  This type of inaction, or worse, policies that worsened the short run economy at the sake of sparing long run economic gain, are exactly what Keynes himself was adamantly against.  "In the long run, we're all dead," he said. 

Educated professionals, incidentally, were most vocal in their dislike of the rescue plan for the current recession.  Ironically this group denied that there even was a recession for the longest time because it is a group most insulated from the effects of the recession.  The arguements against the rescue plan from the side of the working class have taken a new socio-political rhetoric; namely, that such a government takeover is a step toward Socialism.  This is quite unfortunate, since this group is most rescued by the plan and also the group least individually responsible for paying for it.

The working class group is also most helped by the bailout of the financial institutions, since that group was more likely to have a sub-prime mortgage or go into default to begin with.  Without government or any other action, loss of investment capital would quickly have shrunk the GDP and the standard of living for the working class group would have decreased dramatically.  The invisible hand would have kicked in to set things in motion again eventually, and the advantage would have been economic growth without the offset of paying for the economic rescue.  So it is true that we are making things significantly worse for future generations by handing them a huge deficit that we made that their taxes and investments will have to go toward paying back instead of just going directly to pay for all their current government expenses.  This would not, however, erase some of the severe social problems that come with the level of poverty that we'd be facing without the rescue plan, such as homlessness, domestic violence, alcohol abuse, hunger, drug dealing, and theft.  These issues go beyond social in that they are costly to society in terms of money: costs of police interventions, jail, property loss, even lowering home values.  Many are spared this hardship because of the rescue plan, and future generations should be grateful for that.

F/F and Government Bailouts

How was it that instritutions such as Fannie/Freddie were able to make bad choices?  And how, assuming they did not know about an inevitable government bailout, did they expect to make good on these decisions?  This seems to be a case of inflation and tax distortion (as well as other distorion) leading financial advisors and lenders to make what turned out to be wildly inaccurate predictions.  From what I have read and seen regarding the housing bubble, it seems that the sub-prime lenders for the most part weren't doing anything illegal, even though the lending sheme does resemble a ponzi in many ways.  Conditions were good for home investments: the dot-com bust steered investors toward a more "safe" home investment, increasing demand for housing.  Rising house prices increased supply of new homes all over the country.  Interest rates favored lenders.  Tax breaks and increased short term profits provided extra incentive.  More buyers lead to prices driving up at an alarming rate, though the recent reductions in inflation seemed to mask the extent that this was at (see some neat charts).  As the value of houses went up, lenders felt more secure in lending to sub-prime borrowers, aka those with low credit ratings.  Combine that with ARMs and confused buyers that are told that refinancing will be available before the payments go up, and disaster starts brewing.  When the interest rate on the ARM begins to float in a few years, and lenders actually can't refinance, the increase in mortgage payments puts many in default and prices go down.

The toll this took was huge, but not necessarily forseeable (although some economists were expressing doubts as early as 2004, when the rate of increase in house prices became clear).  Either way, a company that makes bad decisions in the free market sinks.  Before the gov't stepped in, F/F should have had to bail themselves out by selling assets to other firms until they had matching assets and liabilities.  That would really have cut them down to size!  Instead, the gov't injected cash into their systems so that they could maintain operations at their current levels and the promise of being paid back plus interest.  I hope this never happens again, although for practical purposes it does seem to have helped.  Paying morgages for households just seems to be in the gov't best interest at that point, since the money they pay keeps the F/F afloat so that they will be able to repay their debt to the public.  But if you think into it deeply enough, your tax dollars went toward keeping these companies from ruin and potentially sinking the economy, and they are also going toward maintaining these companies so that people can keep their homes.  Realistically, this merely rewards ppl who tried to live beyond their means and punishes others who pay a similar portion of their income toward a mortgage on a house they could actually afford.  The deadweight loss on the increase in property taxes-now or in the future-will also be bad for the housing market and increase the price paid up-front by homeowners who already couldn't afford their purchases, forcing them to dedicate a larger part of their income toward payments, even without govt help.  The results are that those getting help from the govt will not be able to actually build wealth or add to their investment (renovations and the like).  So in the long run the housing market will remain depressed for longer than if the invisible hand were allowed to guide without tax dollars in it, but in the short run it does seem to help.

Spend and Cut: A 1-2 Punch at the Recession

Deficit spending is a clear example of an economic problem-turned-political issue.  But long before the current political divide, funding of war efforts was a hot topic of debate among leading economists.  Mankiw (p 408) offers the two principal economic arguments debt financing of a war: smooth tax rates over time and shifting the burden to future generations.  These arguments look sensible, and more importantly, are an easy "sell" for any politician.  Deficit spending is popular but also a historically-demonstrated economic policy.  Part of Keynesian Economic Theory, deficit spending during a recession is a counter-cyclical fiscal policy to stem the tides of the business cycle (growth and recession); during booming economic growth periods, increasing taxes and cutting stimulatory spending are meant to slow growth and delay the inevitable recession.  According to Keynes, the government must play an active role in managing the economy in the short run and not wait for the 'invisible hand' to steer the economy in the long run.  This was because, as Keynes is famously quoted, "In the long run, we are all dead."  (SOURCE: Wikipedia.org and associated references.)  

Economists have generally agreed with the necessity of a stimulus package, despite differences in professional opinion on the role of government or what the package itself ought to contain.  (Source: Washington Post; source used elsewhere in this post as well.)  The stimulus package is also based in Keynesian counter-cyclical policy and has historical precedent.  The ability of an economic stimulus to actually stimulate the economy in the wake of deficit spending and recession is based on the "Keynesian Multiplier": Developed by Richard F. Kahn in 1931, a monetary outlay 1.) Is spent mostly on consumption and modestly put in savings, and 2.) The spending and investment allows businesses to grow and create jobs.  Data from the 2009 stimulus suggests a multiplier of 2.5, with the number dampening to equilibrium (multiplier of 1) over time.  The size of the government, and therefore the level of control it has over the economy, plays a key role in this as well.  A large government will be able to have a more rapid effect on market outcome but place a larger burden on each citizen to support this, and the burden would be further exacerbated by the fact that the stimulus is increasing a deficit that is already large and growing due to the war effort.  The government we have today accounts for almost 50% of the GDP.

The size of the government in and of itself is as large today as it has ever been, save during the WWII era when it spiked to the 50% level but then shruck back to pre-war levels shortly after.  Combine this with a large and growing war deficit, a deep recession, bank failures, job losses, and a trade deficit, and the historical precedents no longer add up entirely: The situation has gotten out of the Keynesian Economic hand.  The government has the capability to run the private sector market down too far; the debt is so large that future generations aren't just going to pay with taxes, inflation, and higher interest rates, but with major cuts to social welfare programs.  A recent CNN Research poll mirrored the new political and economist view that something else must be done besides the stimulus to help the economy- namely, cut government spending now to prevent larger cuts in the future.  Americans now overwhelmingly (81%) support cuts to foreign aid programs in order to reduce the deficit; they overwhelmingly (80-85%) are against significant funding cuts for imperiled social programs such as Social Security, Medicare, and Veteran's Benefits.  Aligned with popular sentiment, there are budget cutbacks with which most politicians and economists agree (see CNN.Money article).  Budget cutbacks are a recessionary measure of Classial Economics theory, which contradicts Keynesian theory in premise.  Even without theory, it seems quite contradictory to go borrowing a large amount of money for government outlay and cutting taxes to stimulate the economy, then looking to lower government influence and cut as much spending as possible.  Important to note in this case is that Keynesian counter-cyclical policy measures are only meant to be short run.  The stimulus is the jab at the recession, looking to increase demand and availability of investment capital to jumpstart growth.  As the multiplier reaches equilibrium, and the supply of savings has increased, the government then takes the cross-punch to the recession by shrinking in size and paying the deficit in order to make more savings available to the private sector again as well as preserve social welfare programs for the future.

 

OTHER SOURCES:  http://money.cnn.com/2010/06/03/news/economy/U.S._debt_impact/index.htm?iid=EL&iid=EL

http://faculty.chicagobooth.edu/john.cochrane/research/papers/fiscal2.htm

We Smear For Obama

Ever gone to gop.com? Chances are that you haven't, and you're missing out. Really. If you delve deep enough into the Bible, surely there is something about "Know thine enemy" lingering somewhere, and if you go to the website you will immediately see that the G.O.P knows this all too well. In fact, the entirety of the site isn't even directed at the issues themselves, it's all about smearing Barack Obama. Apparently that is all they can do to try to make themselves look better at this point. As the Republican party is being abandoned by the Old Money that embody the nickname "GOP" (see a few entries back), as well as the neo-Evangelicals and other conservative Christians that have come to realize that war wasn't on Jesus' mind, and now by poor people who realize that they need things like health care and jobs, the best they can do is try to run Obama through the mud and hope that anyone still cares.

The main smear today is Obama's links with Tony Rezko. As you probably know, Rezko was charged with political corruption earlier this month and had both contributed $50-$60K to Obama and bought a property adjacent to Obama's in Illinois. (Read more at the Sun Times.) Barack had previously donated all of the Rezko money to charity and explained his involvement with Rezko to the media and to the public, and continues to take the non-smear High Road. The first transcripts of the trial say blatantly:

Obama was a tangential figure at the trial, mentioned only a few times as a beneficiary of Rezko's fund-raising. But Republicans are already exploiting the Democrat's long friendship with a now-convicted felon.

Apparently his name even being mentioned has given the GOP a reason to "question his judgment." Obama has since countered with a message from his campaign saying that any inquiries into his transactions with Rezko or Rezko connections would be no problem. Rather than smear, why not inquire into the facts?

Of course, when you have a candidate as bad as McCain, just one smear isn't enough to cut it. Obama's opt-out of public campiagn financing has fueled the GOP into calling him a two-face, boasting "Obama vs Obama" as a point of their "In The News" link.

What is this Public Financing of which we speak? Literally, it is money offered by the Federal Treasury to finance the campaigns of political candidates. The United States allows both public and private monies to be used in presidential elections at this time, and this would mean that McCain would be taking both money from the public AND from the deep pockets of the Republican National Committee AND from lobbyists. That sounds like Public Usury to me, and of course none of that is mentioned on the gop website. The fact remains that McCain is desperate for cash as the numbers roll in on how far behind he is on fundraising:

CAMPAIGN TOTALS SO FAR

Barack Obama:
Raised: $265m
Spent: $219m
Cash on hand: $46m
Debt: $2m

John McCain
Raised: $97m
Spent: $73m
Cash on hand: $24m
Debts: $968,301

Could it not already be said that Obama is already raising funds from the public? The vast funds already raised by his campaign have been mostly from small contributions from supporters over the internet and there are no lobbyists to answer to, so arguably you could say that his campaign is being run by the people- everyday people who can only donate what they can and their time- and why then run on the Public Finance system as well? As he says:

"It's not an easy decision, and especially because I support a robust system of public financing of elections," Mr Obama said in a video message to supporters.

"But the public financing of presidential elections as it exists today is broken, and we face opponents who've become masters at gaming this broken system."

He said Mr McCain's campaign was being financed by Washington lobbyists and special interest groups.

No kidding. If Obama does want to win, one way to not do that is by playing the GOP Game.

One visit to barackobama.com shows that he is above the smear, as no attacks appear on his page, only news reports on the issues. In true dirty Rebublican style, the "In the News" focus on demonizing Obama is not enough, and they have even started a direct Site of Smearage, MeetBarackObama.com. In it, I assume it will entail taking, twisting, and running with every possible point of contention that they can possibly dig up. Already you can get your own ticker widget counting down how many days it's been since Obama visited Iraq and since McCain invited him to town hall meetings (two of these meetings are, by the way, listed on Barack's Agenda already).

Why try to drag down a candidate running on Hope? The answer is this: Smear worked for the GOP. Just ask Al Franken, who detailed the horrible smearing of John Kerry's record as a War Hero in his book The Truth: With Jokes. The war in Iraq is still a major issue in the minds of Americans, and now the Democratic party is putting forth a candidate who has consistently been vehemently against the war (as are most Americans). While this is a point of legitimate contention, it is unlikely that the GOP could win on this issue alone this time. Obama's positions are also uniting struggling poor and middle-class workers, who want health care and jobs and financial security. So, the focus is shifting away from the fact that what the Republicans offer is the New Bush and politics as usual to the GOP website putting up a few well-edited quotes tying Obama to Tony Rezko. All it takes is a swift gathering of the facts and presenting them to the media to clear this, and I will make the call to public inquiry to do so. John Kerry's war record wasn't cleared fast enough from the smear and that led in part to his demise, as Al Franken puts it, so let's not let the GOP get away with it this time and clear Obama immediately.