Here are two op-eds you won't like Ten, both call for massive government spending. It occurred to me on my morning walk that with these bailout plans, since they are all being done on debt collateralized by future taxes, the Federal Treasury has become a giant hedge fund. Here you go... both sides think this is the future:
A National Mobility Project
By DAVID BROOKS
Government spending is growing at an astounding pace. Congress and the president have thrown hundreds of billions into stimulus packages, domestic programs, military spending and other initiatives. Total federal spending is growing at a 13.8 percent annual rate.
Has all this money done anything to actually stimulate private economic activity? Not that you’d notice. Consumption is cratering. The U.S. economy just experienced the sharpest real drop in consumer spending since 1974.
The lesson here is that we have a right to be skeptical of so-called stimulus packages. The Federal Reserve can effectively stimulate the economy. There are certain automatic government programs, like unemployment insurance, which also do it. But the history of the past century suggests that politically designed, ad hoc stimulus packages rarely work.
Often they get the timing wrong; they come too late to do any real good. Often they get the pressure points wrong; the economy is simply too complicated for lawmakers to know where to apply the stimulus patch. Almost always, they get psychology wrong. When you give people a chunk of money in the midst of economic turmoil, they don’t spend most of it. They save it.
Nevertheless, economists continue to propose new stimulus ideas with unshaken confidence and over the next six months, the government will almost certainly pass more gigantic programs. Republican economists are talking of plans larger than $100 billion, and Democratic ones are hatching plans in the $300 billion range.
Bad policy ideas are coming in profusion. There are plans to bail out automakers. There are plans to issue more rebate checks (even though the last ones didn’t work). Barack Obama is proposing one-time tax credits for small businesses that are hiring. This is an ineffectual ploy that would shower federal money on those few firms that would be hiring anyway while doing nothing for companies in struggling sectors.
These and other plans amount to an economic sugar rush. And yet the political climate being what it is, something big is going to pass.
In times like these, the best a sensible leader can do is to take the short-term panic and channel it into a program that is good on its own merits even if it does nothing to stimulate the economy over the next year. That’s why I’m hoping the next president takes the general resolve to spend gobs of money, and channels it into a National Mobility Project, a long-term investment in the country’s infrastructure.
Major highway projects take about 13 years from initiation to completion — too long to counteract any recession. But at least they create a legacy that can improve the economic environment for decades to come.
A major infrastructure initiative would create jobs for the less-educated workers who have been hit hardest by the transition to an information economy. It would allow the U.S. to return to the fundamentals. There is a real danger that the U.S. is going to leap from one over-consuming era to another, from one finance-led bubble to another. Focusing on infrastructure would at least get us thinking about the real economy, asking hard questions about what will increase real productivity, helping people who are expanding companies rather than hedge funds.
Moreover, an infrastructure resurgence is desperately needed. Americans now spend 3.5 billion hours a year stuck in traffic, a figure expected to double by 2020. The U.S. population is projected to increase by 50 percent over the next 42 years. American residential patterns have radically changed. Workplaces have decentralized. Commuting patterns are no longer radial, from suburban residences to central cities. Now they are complex weaves across broad megaregions. Yet the infrastructure system hasn’t adapted.
The smart thing to do is announce a short-term infrastructure initiative to accelerate all those repair projects that can be done within a few years. Then, begin a long-term National Mobility Project.
Create a base-closings-like commission to organize federal priorities (Congress has forfeited its right to micromanage). Streamline the regulations that can now delay project approval by five years. Explore all the new ideas that are burgeoning in the transportation world — congestion pricing, smart highways, rescue plans for shrinking Midwestern cities, new rail and airplane technologies. When you look into this sector, you see we are on the cusp of another transportation revolution.
A mobility project would dovetail with the energy initiatives both presidential candidates have offered. It would benefit from broad political support from liberals and business groups alike. It would rebalance this economy, so there is more productive weight to go along with Wall Street wizardry.
Smart investors are going to take advantage of the current panic to make money. A smart president could take advantage of it to build something that will last for decades and decades to come.
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When Consumers Capitulate
By PAUL KRUGMAN
The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.
To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.
Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.
So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.
It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.
Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.
Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.
Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.
In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.
At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.
I’ll bet you can guess what’s coming next.
For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.
The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.
The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.
No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.
Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way. |
