As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Friday, January 30, 2009

Crisis, Opportunity, Lather, Rinse, Repeat

The economy shrunk at a 3.8% rate in the 4th quarter of last year. There were expectations of a loss as much as 5.5%, so the economy actually beat the street. The Dow will probably go UP as a result. But that will be temporary.

Although the initial result was better than economists expected, the figure is likely to be revised even lower in the months ahead and some believe the economy is contracting in the current quarter at a pace of around 5 percent. The current January-March period, they said, will probably turn out to be the worse quarter for the recession.

"The downturn is intensifying. The fourth quarter is worse than it looks," said Mark Zandi, chief economist at Moody's [...]

A build-up in business inventories — which in calculating GDP adds to economic activity — masked the fourth-quarter's true weakness. When inventories are stripped out, the economy would have contracted at a 5.1 percent pace in the fourth quarter, closer to the 5.4 percent drop that economists expected. Businesses couldn't cut production fast enough in response to waning customer demand and got stuck with excess inventories, economists explained.

It looks really bleak out there unless you're unbelievably rich, and your taxes came in at a lower average rate (just 17.2%) than most of the middle class. Income inequality is a major element of this crisis. There is excess money in the economy not being spent and simply being passed among 400 wealthy families. With 2/3 of growth based on consumer spending, that excess is truly wretched. Which is why a task force on the middle class, which Joe Biden will lead, is a very good idea.

For the backbone of America, it's insult on top of injury. Over the course of America's last economic expansion, the middle class participated in very few of the benefits. But now in the midst of this historic economic downturn, the middle class sure is participating in all of the pain. Something is seriously wrong when the economic engine of this nation - the great middle class - is treated this way.

President Obama and I are determined to change this. Quite simply, a strong middle class equals a strong America. We can't have one without the other.

Tristero, who I'm glad to see back in my other perch at Hullabaloo, thinks that the near future will be far worse than anyone imagined, and that Obama is just trying to get Republicans on the hook for part of it. But that's not how people think, we have the disease of Presidentialism in this country, and ultimately Obama will be responsible, no matter how much it's the fault of 30 years of economic insanity.

David Leonhardt has a giant think piece in the New York Times Magazine asking if Team Obama can really transform the US economy. The fact that the current one isn't working, not for the majority of Americans and not even for investors anymore, makes it easier for that transformation to occur. Opportunity in crisis and all that.

The parallels to the modern-day United States, though not exact, are plain enough. This country’s long period of economic pre-eminence has produced a set of interest groups that, in Olson’s words, “reduce efficiency and aggregate income.” Home builders and real estate agents pushed for housing subsidies, which made many of them rich but made the real estate bubble possible. Doctors, drug makers and other medical companies persuaded the federal government to pay for expensive treatments that have scant evidence of being effective. Those treatments are the primary reason this country spends so much more than any other on medicine. In these cases, and in others, interest groups successfully lobbied for actions that benefited them and hurt the larger economy.

Surely no interest group fits Olson’s thesis as well as Wall Street. It used an enormous amount of leverage — debt — to grow to unprecedented size. At times Wall Street seemed ubiquitous. Eight Major League ballparks are named for financial-services companies, as are the theater for the Alvin Ailey dance company, a top children’s hospital in New York and even a planned entrance of the St. Louis Zoo. At Princeton, the financial-engineering program, meant to educate future titans of finance, enrolled more undergraduates than any of the traditional engineering programs. Before the stock market crashed last year, finance companies earned 27 percent of the nation’s corporate profits, up from about 15 percent in the 1970s and ’80s. These profits bought political influence. Congress taxed the income of hedge-fund managers at a lower rate than most everyone else’s. Regulators didn’t ask too many hard questions and then often moved on to a Wall Street job of their own.

In good times — or good-enough times — the political will to beat back such policies simply doesn’t exist. Their costs are too diffuse, and their benefits too concentrated. A crisis changes the dynamic. It’s an opportunity to do things you could not do before.

It's a good piece, you should read the whole thing. From the quotes from Larry Summers, Rahm Emanuel, Peter Orszag, you get the sense that the Administration knows they have to think big, but they are somehow constrained over how to do it politically. We haven't had the opportunity to go this big in 40 years, maybe 70. The muscles are a little unworked and untested. They have to deal with a Republican death cult, a newly adversarial press corps, a team of special interest groups looking for bits and pieces for their industries, a greedy financial sector with a great deal of power, and a Washington committed to the status quo. It's a minefield. Will Obama be willing, or even able, to resist all this, and leverage his popularity and his grassroots support to fundamentally change the economy? We'll see.

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