Affordability Changes On The Way?

A bunch of Senate moderates praised Max Baucus for his health care bill yesterday, leading many to believe that Baucus-care wasn't totally dead. But there was an important caveat - the letter says, "While we each have outstanding concerns we wish to see addressed, Senator Baucus has taken an important and critical step forward with this legislation." It looks like the major concern is affordability. Olympia Snowe, one of those moderates, expressed as much in today's New York Times as well as the Washington Post.

Senator Olympia J. Snowe, Republican of Maine, voiced the same concern. In an interview with The New York Times and CNBC, Ms. Snowe said that for her to support the bill, “there would have to be more subsidies” for low- and middle-income people and that she was trying to figure out how to pay for them.

Ms. Snowe said “the time has come” to pass comprehensive health legislation. But she added that it was important to get the policy and the details right, because they would affect every American.

Max Baucus has signaled an openness to work on the affordability issue.

Specifically, Baucus is talking to Democratic members of his committee about addressing one of their chief complaints about the bill — that it won't do enough to make insurance affordable to the middle class. That's a crucial question, because the legislation would, for the first time, impose a requirement that virtually everyone have some kind of coverage or face a fine. Under Baucus' bill, the government would provide some help-giving subsidies to help those earning up to three times the poverty level (in other words, a family of four making as much as $66,000 a year) buy insurance and setting caps on their out-of-pocket expenses.

But many in his party say that help doesn't go far enough — especially in comparison with the version that the House is working on, which would provide assistance for those earning up to 400% of the poverty level (or a family of four making $88,000). "We're working to address that concern," Baucus said, adding that one idea "very much on the table" is to increase the refundable tax credits for those purchasing insurance. That, however, would likely increase the overall price tax for the measure, which in its current form would cost $774 billion over the next decade, according to estimates by the Congressional Budget Office.

Karen Tumulty gets at the main point here. Snowe has talked a lot about affordability, and wants to expand coverage subsidies. But she doesn't want to spend any more money on the bill, which in order to raise the subsidies, you would have to do. From the other side of this, Democrats and Republicans want to shrink the tax on high-end insurance policies which, under current health inflation, would quickly hit more average-sized policies. But of course, that's how the bill is paid for in the Baucus plan.

Senators of both parties said Thursday that they would seek significant changes in a Democratic proposal to tax generous high-cost health insurance policies.

The tax, proposed as a way to help finance coverage of the uninsured, would be levied on insurance companies. But the senators said they worried that it would be passed on to individual policyholders, families and employers who buy insurance for their workers.

Senator John Kerry, Democrat of Massachusetts, who first proposed the insurance tax, said Mr. Baucus had set the thresholds too low. As a result, Mr. Kerry said, “working folks with a lower level of income will get dragged in,” and the tax could affect union members who have sacrificed pay raises to get health benefits.

Mr. Kerry said the threshold for family coverage should be at least $24,000.

So those inclined to vote for health care want more subsidies in the bill and less taxes on insurers. And I want a pony. But the President laid down a marker of not adding to the deficit, and so in order to do both those things, you need to find another revenue source.

Fortunately, there are several. Just repealing the Bush tax cuts a year early and applying that to health care would save $135 billion dollars. Or using the initial Obama Administration idea of lowering the charitable deduction rate to 28% from 35% would capture something like $300 billion. Or the House's surtax on the wealthy would add even more. There are plenty of options; but will there be the political will?

There's definitely the will to increase the subsidies. The White House is assuring liberal members of that, although not about the public option. The question is, will that be enough to satisfy progressives, particularly in the House? Paul Krugman asks that today.

It would be disastrous if health care goes the way of the economic stimulus plan, earlier this year. As you may recall, that plan — which was clearly too weak even as originally proposed — was made even weaker to win the support of three Republican senators. If the same thing happens to health reform, progressives should and will walk away.

But maybe things will go the other way, and Mr. Baucus (and the White House) will, for once, actually listen to progressive concerns, making the bill stronger.

Even if the Baucus plan gets better, rather than worse, what emerges won’t be legislation reformers can love. Will it nonetheless be legislation that passes the threshold of acceptability, legislation they can vote for? We’ll see.

Indeed.

You Mean People With No Money Aren't Spending?

Economists, living in their bubble, managed to be surprised by this.

U.S. consumer credit plunged more than five times as much as forecast in July as banks restricted lending terms and job losses made Americans reluctant to borrow.

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991.

The credit crunch, stagnant incomes and declines in household wealth are casting doubt on the strength of the economic recovery. The arrival of the government’s “cash for clunkers” program in late July wasn’t enough to keep credit that covers car loans from plummeting by a record amount, as consumers delayed other purchases [...]

Economists had forecast consumer credit would drop $4 billion in July, according to the median of 31 estimates in a Bloomberg News survey. Projections ranged from declines of $12 billion to no change from the previous month. The Fed initially said consumer credit decreased by $10.3 billion in June.

I'm guessing that cash for clunkers was the only thing bringing anyone out to purchase something on credit. Otherwise, people simply don't have the money after years of wage stagnation and record unemployment. People are learning the "new normal" of frugality out of complete necessity. In the long run, living within means is a good thing; in the short run, it's debilitating to the US economy.

And it's another example of how economists are not living in the real world with their models and charts. They don't see anything wrong with corporations making massive profits off the backs of consumers living on credit, or how that entire system could fold like a house of cards. They viewed capitalism as a shiny object and never saw its potential pitfalls in an unregulated form.

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

Of course, their salaries in part depend on them not knowing these facts, as the Federal Reserve has essentially bought off the profession and tilted it toward the principles of the unfettered free market. Ryan Grim's article is a must-read.

...the head of China's sovereign wealth fund: "Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

Where Ya Been?

Steven Pearlstein is shocked, shocked to see dishonesty at the RNC:

After reading his broadside, one is left wondering exactly what health reform plan Steele thought he was attacking. At one point, Steele claims that Democrats would prevent Americans from keeping their doctors or an insurance plan they like. Later, he warns that government will soon be setting caps on how many heart surgeries could be performed in the United States each year. Where is he getting this stuff? Has the chairman of the Republican Party somehow gotten hold of a top-secret plan for a government takeover of the health-care system that GOP operatives snatched during a break-in at Democratic National Committee headquarters?

If all that sounds like a spurious and unsubstantiated allegation, it is. And it fits right in with the cynical lies, distortions and political scare tactics that Steele and other Republicans have used to poison the national debate over health reform.

Have you no shame, sir, have you no shame?

The answer is no, and a lot of us had this one figured out long, long ago. Here's Joe Klein discovering the same thing about conservative front groups and professional liars. James Fallows has been on this beat for a while, but even he succumbs to asking "will it never end?"

And now we have the New York Times, in a big take-out story, saying that Dr. Emanuel, in his role as Obama health-care advisor, is in an "uncomfortable place" because he is being criticized by*:

1) Betsy McCaughey !
2) Rep. Michele Bachman (look her up) !!
3) Sarah Palin !!!
4) Lyndon LaRouche !!!!

McCaughey, Bachman, Palin, LaRouche -- shaping American debate and media coverage about health policy? Was Zsa Zsa Gabor not available?

I think Fallows knows the answer: no. Being complete liars and obstructionists has worked out pretty well for the GOP. They get to maintain power even when they don't hold the Congress or the Presidency. They all make a lot of money off the lies in which they traffic. They go to beds with the clear consciences of people choosing not to see the suffering caused by their handiwork. And they get no penalty whatsoever from the media.

I suppose it's good that people like Pearlstein and Klein are waking up to this. But it won't take them long to balance themselves by saying, well, what Klein said in his recent piece, that liberals are scumbags too, sure, don't get him wrong. This amazing story of Klein confronted by aimai, the grand-daughter of I.F. Stone, and then sputtering about the god-damned liberals for the next hour, is very revealing. It doesn't matter how many instances of Republican perfidy confront them, establishment types and their reflexive hatred of hippies will always allow that reflexivity to color their thoughts.

Paul Krugman nails this.

It’s all true. But I’m having a hard time writing columns like that. Why? Because while the raw dishonesty of the modern GOP appears to be a revelation to Pearlstein, Joe Klein, and others, I thought it was obvious at least as far back as the 2000 election campaign. (If I’d really been paying attention, it would have been obvious much earlier.)

Don’t get me wrong: I welcome Pearlstein and Klein to the reality-based community — better 9 years late than never. And in a way they have an advantage: having fought this thing for so long, I just can’t muster the same sense of shock. But I think it is important to realize that the current behavior over health care is nothing new — in fact, it’s been this way for a very long time.

As Rick Perlstein, our premier historian of the rise of modern movement conservatism, puts it, crazy is a pre-existing condition.

It's just the way things are.

Baucus Caucus: Less Health Care For America NOW

The six-headed Presidential hydra, also known as the sub-group in the Senate Finance Committee, has decided to ignore everybody and keep working diligently to do absolutely nothing on the health care bill.

Senate health-care negotiators agreed late Thursday to ignore the increasingly strident rhetoric from Republican and Democratic leaders and to keep working toward a bill that can win broad support from the rank-and-file in both parties, according to sources familiar with the talks.

In a conference call, the three Democratic and three Republican members of the Senate Finance Committee agreed to redouble their efforts to craft a less costly alternative to the trillion-dollar initiatives so far put forward in Congress. They discussed the possibility of also reining in the scope of their package, the sources said.

The senators rejected the idea of imposing a deadline on their negotiations, and they agreed to talk again Sept. 4 -- four days before lawmakers are scheduled to return to Washington from their August break. The consensus, one participant said, was "to take your time to get it right." [...]

Before leaving for the month-long recess, Baucus had pegged the cost of the negotiators' ideas at less than $900 billion over the next decade. Thursday's discussions focused on driving that cost lower, the sources said.

Their draft bill was already woefully short in terms of subsidies for those who can't afford insurance. The Gang of Six wants to drive them even lower.

I'm sure the people most enamored of themselves did reject having a timeline on their circle jerk. But look who is making these decisions. Chuck Grassley has basically said he'd vote against his own bill, even if he gets everything he wants, if he cannot get more than 80 Senators total on board. The #2 ranking Republican in the Senate has already said that votes for reform aren't coming. So Grassley, one of the key negotiators here, has admitted that he won't support anything the Gang of Six does. Mike Enzi is probably stronger in that direction. Olympia Snowe admitted today that the public option was never on the table in this Gang of Six, and that co-ops are worth exploring, even though two months ago she called them worthless. Kent Conrad has been ideologically opposed to the public option for as long as anyone can remember, and came up with co-ops, in all likelihood, as a way to steal seed money for the "non-profit" Blue Cross of North Dakota, which has captured 90% of the market in his home state. Max Baucus admitted as far back as March that the public option was nothing but a bargaining chip. Jeff Bingaman hasn't been getting nearly enough heat for being part of this charade, but he has talked the talk on co-ops as well.

These six Senators, who come from states representing 2-3% of the population, have proposed ideas out of step with 77% of the public, and think they're entitled to hijack the entire process in Congress to serve those ends.

The question is what to do about this. 270,000 people listened to the President's strategy session yesterday, and over 5,600 supporters have contributed almost $350,000 to lawmakers standing up for the public option. These six lawmakers, most of whom probably want no bill at all, know that the longer they hold up the process the harder it becomes to pass anything. Harry Reid needs to use whatever means necessary to force a bill out of the Senate - discharge petitions, going around the committee of jurisdiction, whatever. At that point, we're talking about a conference committee. Which is what Obama has asked for all along. The problem is a matter of trust, as Paul Krugman put it today.

...Chris Bowers is right that this is the worst part about it - the Senate Finance Committee has decided to take two additional weeks off before meeting again. They are so bound and determined to get health care right that they'll do nothing for weeks, presumably in the hopes that health care reform will die on the vine and they won't have to do anything at all.

A Chip They Should Not Bargain

Everyone's freaking out about Kathleen Sebelius' statements about the public option on CNN over the weekend. I'm actually quite pleased that the conversation is moving back toward this, rather than the media obsessing over old conservatives shouting or people holding signs that confirm their ignorance. At least we're back to the policy. And talking about a health care reform with or without a public option in some way presumes a health care reform law. So maybe the teabagger protests have outlived their theatrical usefulness and everyone's ready to move on.

As to the specifics: Sebelius said that the public option was "not the essential element" in any reform. Which is of course true, based on the legislation they crafted. A bill where the public option would be an essential element would be a single payer bill. The bill that the White House and Congress put together relies far more on mandates and regulation, with a weak, walled-off public option that can only attract customers from the individual market and select small businesses thrown in to allow for "choice and competition," in their parlance. It's MassCare, which, depending on who you talk to, doesn't constrain costs enough or works pretty well. And MassCare does not have a public option. That part of reform was pretty much always designed as a bargaining chip, in the context of this legislation. And the White House has been bargaining with it consistently over a number of months.

As far as I can tell, there's been no change in the administration's position. It has always supported a public plan option. It has never claimed it essential, or the only path to competition in the insurance market. The one deviation came in July, when Obama said the words "must include" in a sentence that also had the words "public option." But it's not clear whether he was talking about the health insurance exchange or the public option. And that only happened, to my knowledge, once. That statement, not this one, was the deviation.

Try as we might to pin them down, the White House will never, ever, ever view a public insurance option as essential to passing a bill. Or anything else, for that matter, other than abstractions about "controlling costs" and "providing affordability." They want something to pass. Something they can call health care reform and tout as a victory after 40 years of defeats. If they think the best path to getting that through Congress is dropping the public option, they'll enthusiastically endorse such an approach. If they think it's not dispensable because 64 liberals in the House won't pass a bill without it, they'll have to keep it. The space in between, where the House doesn't compromise any further below a public option and the Senate doesn't allow anything beyond co-ops, is what Matt Yglesias describes as the legislative dead zone. This is basically the question House progressives must ask themselves:

If it comes right down to it and the senate is prepared to pass a bill that:

(a) subjects insurance companies to tough new restrictions,
(b) taxes employers who don’t provide decent health insurance to their employees,
(c) creates a new regulated marketplace in which individuals and small business employees can buy quality health insurance,
(d) expands Medicaid eligibility, and
(e) offers subsidies to ensure the affordability of insurance for middle class families

I have a hard time believing that House liberals will really kill the bill. But maybe they will.

This is where Mr. Krugman comes in today, comparing the plan on offer to what is occurring in Switzerland, where everyone must buy insurance, lower-income residents get subsidies, and the insurance companies have very strict regulations by which they must abide.

So where does Obamacare fit into all this? Basically, it’s a plan to Swissify America, using regulation and subsidies to ensure universal coverage.

If we were starting from scratch we probably wouldn’t have chosen this route. True “socialized medicine” would undoubtedly cost less, and a straightforward extension of Medicare-type coverage to all Americans would probably be cheaper than a Swiss-style system. That’s why I and others believe that a true public option competing with private insurers is extremely important: otherwise, rising costs could all too easily undermine the whole effort.

But a Swiss-style system of universal coverage would be a vast improvement on what we have now. And we already know that such systems work.

(One thing nobody who endorses this type of plan talks about is the fact that we have no national regulatory framework for health insurance companies, and the regulatory vigor in the states, where they are now regulated, varies widely from one to the other, so the plan on offer would either have to create a large new bureaucracy to accompany that regulation of insurers, or rely on the balkanized state approach. Neither is ideal.)

The public option could be an element of a Swiss-style system, but not the essential one. In essence, there's very little daylight between what Krugman says and what Sebelius said yesterday. So, what is one to think?

Those trying to minimize the importance of a public option are only looking at the one currently up for discussion, which is not available to anyone who gets coverage through an employer. That's not really a big enough market to change insurance company behavior anyway, which is why I favor the kind of plan offered by Ron Wyden, where employees can opt out of their coverage and buy into the insurance exchange. In fact, we have historically seen a government program like the public option refined and tweaked once it came into existence, from Social Security to Medicare. So we should not view it as static.

Which is why it's important to include it now. Sure, the public option could be added in future years as a deficit reduction element, much as MassCare is considering going to fee-for-service medicine after getting their universal system in place. But we're having the conversation now, and including a government-managed element in isolation down the road would allow everyone to train their guns very directly. This will not be the last health care reform bill in the history of America, but it's certainly the one with the most potential to codify something like a public option into law. And all the action for doing that is in the Senate - the White House will go along with whatever can pass.

...also, too: this is bigger than health care reform, it's about the progressive wing of the party being credible on standing their ground. That has implications on a host of issues.

Paul Krugman: making heads explode everywhere

Sorry I have not been a more reliable poster, but my weekend was relatively killer. I don't know how Dave does it. So I recommend you read Paul Krugman, like usual. This piece will make right-wing heads explode even more than anything else I've cited from him. Especially this part:

All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

But there's one key word in there: sometimes. What separates the modern liberal from the modern conservative in this era is the politics of pragmatism. Paul Krugman is not going to go out of his way, for instance, to claim that the private sector is always the problem and government is always the solution--far from it. Instead, he is saying, in the fashion of a true Keynesian economist, that neither option is going to be right 100% of the time.

This stands in marked contrast to the modern conservative movement, which holds that any government "intrusion" is bad--because if it's government, it must be bad, without recourse to any further policy debate. The modern conservative does not start a policy debate with the baseline of "what works?" but rather one of "government is always bad. Taking that consideration into account, what's the best we can do?"

A pragmatist, simply put, is one who is not bound by the rigors of such ideological purity testing, and feels obligated to come up with what actually works. For instance--you can get that if the health care system worked well, there wouldn't be such pressure to reform it.

Krugman, Dubois, and the "psychic wage" of being white.

(cross-posted from my DailyKos piece from today.)

It has been said many times before, and I'm sure it'll be said many times again. But if you only read one thing today, make sure it's today's NYT column by Paul Krugman.

For in today's column, Krugman merely goes to a place where no other traditional media figure has gone: namely, the only thing that makes sense. While other media figures are comparing the violence provoked by the Astroturfed radical right to previous contentious policy debates--such as that over Hillarycare in 1993, or over Social Security in 2005--Krugman just lays out the simple facts:

That dog won't hunt, and it's time to hunt for the real cause: the color of our President's skin.

There’s a famous Norman Rockwell painting titled “Freedom of Speech,” depicting an idealized American town meeting. The painting, part of a series illustrating F.D.R.’s “Four Freedoms,” shows an ordinary citizen expressing an unpopular opinion. His neighbors obviously don’t like what he’s saying, but they’re letting him speak his mind...

Some commentators have tried to play down the mob aspect of these scenes, likening the campaign against health reform to the campaign against Social Security privatization back in 2005. But there’s no comparison.

Why isn't there any comparison? Krugman's argument in breathtakingly simple: there was no violence. No physical assaults on elected representatives. No swastikas. No devil caricatures. No lynchings in effigy. Rather, we had policy debates. Bush thought his political capital was strong enough to touch the third rail. And the ensuing discourse wasn't always polite--but you never had members of Congress fearing for their life.

It's obvious that there's something different going on here--that the right wing is ablaze with passion in a way we have not seen in a long time. So inflamed, as a matter of fact, that they are willing to resort to lunatic conspiracy theories to try to disprove Obama's eligibility to hold office. What's up with that?

There was a telling incident at a town hall held by Representative Gene Green, D-Tex. An activist turned to his fellow attendees and asked if they “oppose any form of socialized or government-run health care.” Nearly all did. Then Representative Green asked how many of those present were on Medicare. Almost half raised their hands.

Now, people who don’t know that Medicare is a government program probably aren’t reacting to what President Obama is actually proposing...

That is, the driving force behind the town hall mobs is probably the same cultural and racial anxiety that’s behind the “birther” movement, which denies Mr. Obama’s citizenship....

And what is that driving force? The Southern Strategy, of course. Opposition to Obama based on the color of his skin.

But if you're like me, you end up wondering: how can the fact that our President is only half-white inspire so much blood-boiling hatred? So much that powerful moneyed interests can use that outrage to once again get regular people to seriously obey talking points about forced euthanasia? I mean, come on! How is that possible? Are these dead-enders really so racist that they believe a black Democrat will try to get euthanasia of the elderly written into law, but a white Democrat wouldn't?

No--because it's really not about that. I'd like you to go back and read TomP's recommended diary from yesterday about this subject. TomP's thesis was that the outrage that is being felt all across the country by this berserk minority represents the death throes of racism. I understand his general point, and it is one echoed in Paul Krugman's column--white racists are an increasingly small sliver of the electoral pie, which is what allowed Obama to get into office in the first place.

But I disagree mildly with TomP--it's not really the racism that's dying. As bloggers and as thinkers, we always, to use Newton's phrase, stand on the shoulders of giants when it comes to writing our ideas--and here, the shoulders I'm standing on are those of my fellow Calitics blogger Robert Cruickshank, whom you know around these parts as eugene.

It started, as so much does, with a simple tweet:

@DavidOAtkins DuBois had it figured out 75 years ago: Poor/middle class whites draw a psychic wage from being white.

(DavidOAtkins, by the way, is my brother and the preeminent thereisnospoon).

In the span of less than 140 characters, Robert Cruickshank has spelled out the emotional raison d'etre of the birthbagger movement. Put quite simply: W.E.B. DuBois, author of some of the standard readings in American History class about reconstruction and race relations in the United States, wrote about the "psychic wage" that racist white people derive simply from being white: a feeling of supremacy and moral superiority. Put in a more modern context, this "psychic wage" is what allows white birthbaggers on Medicare to scream about government-run healthcare. It's what allows the citizens of Alaska to scream about inner-city welfare. The "psychic wage" of being white stipulates that because they are white, they are superior in station and there is no moral problem with them receiving services--a paradox brilliantly explored by my brother shortly after election day. (Incidentally, this same concept of the "psychic wage" is a large factor in why bigots claim that same-sex marriage will destroy straight marriage: it's all about the psychic wage of being superior because one's heterosexuality.)

One of the key pillars of the so-called psychic wage has been, simply put, that the highest office-holders in the land were white, and nobody but whites stood a shot in hell at winning it--especially when it came to the highest office in the land, the Presidency of the United States.

And now that the Presidency is not an exclusive club for those of purely European heritage, the key pillar of the racial psychic wage has crumbled to dust.

So I want you to imagine a scenario. Imagine you've gone through your entire life believing you're superior. You're better than everyone else. You belong to an exclusive club. It's the root of your self-identity--and despite whatever is going on around you, you know that whatever else happens, you're still a member of the club that gives you a status higher than anyone else but your fellow members. And then one day, that club is gone. Imagine the angst. The fear. The passion and energy. You'll do whatever it takes to try to reconstitute that club--no matter how crazy it is to any outsider, and you'll oppose the people who took your membership away, no matter what it is that they're doing, just because of what they did to you.

That's what this is about. And I'd like to close with some stern words of warning from the piece that started this: Paul Krugman's column.

But right now Mr. Obama’s backers seem to lack all conviction, perhaps because the prosaic reality of his administration isn’t living up to their dreams of transformation. Meanwhile, the angry right is filled with a passionate intensity.

And if Mr. Obama can’t recapture some of the passion of 2008, can’t inspire his supporters to stand up and be heard, health care reform may well fail.

So show up, dammit. This movement rests on us.

70 Cents An Hour

As the final phase from a bill passed back in 2007, today the federal minimum wage rises to $7.25 an hour from $6.55 for workers across the country. This brings the federal minimum wage, adjusted for inflation, back to where it was in the 1990s. It's hard to determine how many minimum-wage employees there are out there, but the best guess is that five million people get a raise today. Here's one of them.

While those workers include thousands of financially secure students still living with Mom and Dad, they also include thousands of the most impoverished and vulnerable members of the workforce – those who sink further into debt each month as ordinary expenses outweigh their meager paychecks.

April Greer, 36, is one of them.

Her troubles began in December, when her husband was sent to prison for a parole violation, leaving her the sole provider for her three teenage children who live with her.

In January, she was fired from her job at a cellular provider. She said she was late for work because her sister-in-law commandeered her car.

She spent early spring trawling East Dallas for a new job, but, like millions of Americans, she found none.

In early May, Greer's electricity provider finally turned out the lights. A few days later, her landlord changed the locks. She and her children crowded into the South Dallas bungalow of her husband's parents.

She finally caught a break two months ago, when a nonprofit agency helped her land a part-time, minimum-wage job at T.J. Maxx, taking home about $800 a month.

Two weeks ago, after she started having dizzy spells at work, she collapsed and spent two days in the hospital.

Doctors aren't sure what's wrong with her. Maybe diabetes. Maybe her heart. Maybe just stress.

Greer knows she can't afford $434 a month for the medication her doctor says she needs. She can barely afford the $100 a week she's been paying her in-laws to cover their ballooning utility bills.

She wants to find a second job, but doesn't know if her body can take it.

"Since I'm the only one right now for my kids, I have to take care of my health," she said.

Those with the lowest incomes are often those who have the most health issues. That comes from stress, overwork, the lack of a nutritious diet, living in low-income environments where more pollution exists, and a variety of other factors. In this most cruel of American landscapes, the poor and the sick often are the same person.

But what we'll hear today is how adding 70 cents an hour will bankrupt businesses. In actuality it will act as a mini-stimulus, giving the poor about $28 more a week for necessities that will almost certainly get spent and cycled into the economy.

What we certainly won't hear about is how the struggle of these minimum-wage workers fits into the health care debate. Many are probably already on Medicaid, but a provision in the bill would limit out-of-pocket costs for everyone, and expanding access would help make sure nobody who needs health coverage slips through the cracks. The air-blown press corps may have thought Obama's press conference was bor-ring, but the issues discussed directly affect the lives of people like April Greer. It would be nice if they could take up the debate with some inkling of concern for her, rather than acting like theater critics critiquing how folsky or animated the President was during his press conference.

Republicans and fiscal scolds say we just cannot afford to help someone like April. She ought to just get a job with the government. But Krugman says something important today - contrary to conservative belief, access and cost control are complementary.

Why does meaningful action on medical costs go along with compassion? One answer is that compassion means not closing your eyes to the human consequences of rising costs. When health insurance premiums doubled during the Bush years, our health care system “controlled costs” by dropping coverage for many workers — but as far as the Bush administration was concerned, that wasn’t a problem. If you believe in universal coverage, on the other hand, it is a problem, and demands a solution.

Beyond that, I’d suggest that would-be health reformers won’t have the moral authority to confront our system’s inefficiency unless they’re also prepared to end its cruelty. If President Bush had tried to rein in Medicare spending, he would have been accused, with considerable justice, of cutting benefits so that he could give the wealthy even more tax cuts. President Obama, by contrast, can link Medicare reform with the goal of protecting less fortunate Americans and making the middle class more secure.

As a practical, political matter, then, controlling health care costs and expanding health care access aren’t opposing alternatives — you have to do both, or neither.

April Greer probably just wants the peace of mind that she can get treatment when she needs it, without going deeply and overwhelmingly into debt in the process. Long-term budgetary constraints and bending cost curves matter less to her. But Krugman is right that the two are not in conflict, and must be packaged together.

I'm happy April is getting a small raise for her troubles today. I want her to get a health care system that honors her struggle and provides her security. But Senators need a three-week recess, so she'll have to wait.

The Stimulus Trap

Krugman today:

Normally, then, we expect policy makers to respond to bad job numbers with a combination of patience and resolve. They should give existing policies time to work, but they should also consider making those policies stronger.

And that’s what the Obama administration should be doing right now with its fiscal stimulus. (It’s important to remember that the stimulus was necessary because the Fed, having cut rates all the way to zero, has run out of ammunition to fight this slump.) That is, policy makers should stay calm in the face of disappointing early results, recognizing that the plan will take time to deliver its full benefit. But they should also be prepared to add to the stimulus now that it’s clear that the first round wasn’t big enough.

Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we’ve been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans — and some Democrats — have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.

Hence the danger that the Obama administration will find itself caught in a political-economic trap, in which the very weakness of the economy undermines the administration’s ability to respond effectively.

This does seem to be the case. When officials try to find solace in only 565,000 new jobless claims, the credibility gap expands. And so the White House gets caught in between calling zero-growth, no-recovery policies the greatest thing since sliced bread, while constrained by the opposition from doing anything to fix the very real problems in the economy. Joe Biden and Barack Obama should defend a stimulus that has barely gone out to the public. A world without one would certainly be worse, and the last two quarters of the year should see much more money reaching the economy.

But we have to be honest about what's happening here. Foreclosures remain unsustainably high, and the efforts to shrink them have simply failed to this point because lenders stubbornly refuse to rework loan terms. The Administration is trying desperately to fix this, but with no success. And even if they could fix it, increased joblessness would supplant bad loans and keep foreclosures at a similar level. Unemployment's rise also begets reductions in consumer spending because nobody has any money. And more real estate meltdowns can be expected. In this environment, with the economy out of the woods for depression but hurtling toward a long period of stagnancy, of course further stimulus efforts should be readied.

But never let it be said that this White House isn't planning to help those in need. Not the people, mind you; the banks:

As the financial system tries to right itself after its near-collapse last fall, the Treasury Department has assembled a team to examine what could yet bring it down and has identified several trouble spots that could threaten the still-fragile lending industry.

Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.

Part of the mission is assessing which firms are the most vulnerable and trying to decipher what assets these companies hold and whether they pose a danger to the wider financial system. Plan C is a small-scale, relatively informal approach to a problem the administration hopes to address in the long term by empowering the Federal Reserve to oversee systemic risk.

They take care of their own.

Listen To The Hippies This Time

Looks like the leaders of the eight largest economies agree with the hippies, at least in part, that the economy still faces rough patches and additional stimulus could still be necessary.

G8 leaders believe the world economy still faces "significant risks" and may need further help, according to summit draft documents that also suggest failure to agree climate change goals for 2050 [...]

Documents seen by Reuters before the G8 summit began on Wednesday cautioned that "significant risks remain to economic and financial stability" while "exit strategies" from pro-growth packages should be unwound only "once recovery is assured."

"Before there is talk of additional stimulus, I would urge all leaders to focus first on making sure the stimulus that has been announced actually gets delivered," Canadian Prime Minister Stephen Harper said.

That chimed with comments from the International Monetary Fund, which said it believed the global economy was starting to pull out of recession but recovery would be sluggish and policies needed to remain supportive.

Harper isn't wrong, the stimulus in the queue must get out. But recovery has not yet been assured, and so the smart move would be to prepare for some contingency where more public money has to go into the economy.

It's interesting that everyone has whitewashed the debate from early this year.

During the initial discussion of the stimulus, the debate was framed almost entirely as a debate between Obama and those who said the stimulus was too big; the voices of those saying it was too small were largely frozen out. And they still are — if it weren’t for my position on the Times op-ed page, there would be hardly any major outlet for Keynesian concerns.

And here’s the thing: in this case, there isn’t any hidden evidence — you can’t argue that the CIA knows something the rest of us don’t. And the voices calling for stronger stimulus are, may I say, sorta kinda respectable — several Nobelists in the bunch, plus a large fraction of the prominent economists who predicted the housing crash before it happened.

But somehow, the pro-stimulus people are unpersons. Who makes these decisions?

I don't think Krugman wrote that without knowing the answer.

Well Then, This Time, Anticipate

Joe Biden went on ABC's "This Week" today and said that his Administration, along with the consensus economic community, misread the severity of the recession:

STEPHANOPOULOS: While we've been here, some pretty grim job numbers back at home -- 9.5 percent unemployment in June, the worst numbers in 26 years.

How do you explain that? Because when the president and you all were selling the stimulus package, you predicted at the beginning that, to get this package in place, unemployment will peak at about 8 percent. So, either you misread the economy, or the stimulus package is too slow and to small.

BIDEN: The truth is, we and everyone else misread the economy. The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there.

Everyone thought at that stage -- everyone -- the bulk of...

STEPHANOPOULOS: CBO would say a little bit higher.

BIDEN: A little bit, but they're all in the same range. No one was talking about that we would be moving towards -- we're worried about 10.5 percent, it will be 9.5 percent at this point.

STEPHANOPOULOS: But we're looking at 10 now, aren't we?

BIDEN: No. Well, look, we're much too high. We're at 9 -- what, 9.5 right now?

STEPHANOPOULOS: 9.5.

BIDEN: And so the truth is, there was a misreading of just how bad an economy we inherited. Now, that doesn't -- I'm not -- it's now our responsibility. So the second question becomes, did the economic package we put in place, including the Recovery Act, is it the right package given the circumstances we're in? And we believe it is the right package given the circumstances we're in.

We misread how bad the economy was, but we are now only about 120 days into the recovery package. The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money.

STEPHANOPOULOS: No, but a lot of people were saying that you needed to do something bigger and bolder then, including the economist Paul Krugman. He's saying -- right now he's saying the same thing again -- don't wait. You need a second stimulus, you need it now.

BIDEN: Look, what we have to do now is we have to properly, adequately, transparently and effectively spend out the $787 billion.

First of all, Stephanopoulos was the first to say "misread the economy." So it was kind of a leading question, and a Hobson's choice for Biden between two bad options - a bad read or a failed stimulus. Next, Biden and many of his White House colleagues have been pushing this idea that nobody could have anticipated the depths of the economy for several weeks now. But the truth is quite different. Plenty of people dating back to late last year were saying that unemployment was headed for double digits, and that the stimulus package conceived by the Obama Administration, especially with its 40% tax cuts, would be insufficient. The Administration's white papers and boasts about recovery didn't check out, the same way that their "adverse scenario" for the stress tests didn't check out. The worst thing about Biden's statement is that it's flat wrong.

But beyond that, the White House's touting of the stimulus as a world-historical fix to a broken economy presupposed this backtracking. They knew at the time that it would take months to get the stimulus funds out to people and businesses, and that the economy, which was already reeling, with four straight months of job loss over 400,000 at the end of 2008, would only continue to bleed. And yet the timing of passage, at the beginning of the first term, necessitated touting it as something of a panacea. But we all saw the gruesome legislative sausage-making that went into passage, with Presidents Nelson and Collins pulling this program and that out of the package just to reach some arbitrary number above which we could not spend.

The stimulus package is not bad, and much of it will hit the economy in Q3 and Q4 of this year, so its impact has yet to have been felt. But it was clearly not sufficient to meet the demand shortfall at the time, and the recent job numbers just prove it.

The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.

It’s clear that even if the recession were to be over anytime soon – and it’s not going to be over before the end of the year – job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over [...]

These job losses are going to have a significant effect on consumer confidence and consumption in the months ahead. We’ve also seen extreme weakness in consumption. There was a boost in retail sales and real personal consumption-spending in January and February, sparked by sales following the holiday season, but the numbers from April, May, and now June are extremely weak in real terms. In April and May you saw a significant increase in real personal income only because of tax rebates and unemployment benefits. In April, there was a sharp fall in real personal spending, and in May the increase was only marginal in real terms [...]

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11 percent next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11 percent in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans, and commercial loans – much bigger numbers than what the stress tests projected.

We're just in terrible trouble right now, and the 50 little Hoovers wreaking havoc on state budgets aren't exactly helping, either. At this point, a Japan-style decade of zero growth might be welcome, with a double-dip recession possible.

I think the Administration did a decent enough job reacting to the chaos of a potential depression. But now they need to look at the reality of the situation and recognize that we will need another stimulus, which I would like to see focused on fiscal stabilization for the states. For the second week in a row, a major Administration figure dodged the question when asked, but did not dismiss it out of hand. They need to at least draw up some plans. If nobody could have anticipated the state of the economy prior to the first stimulus, the least the White House can do is anticipate the second round.

...The Shrill One says it better.

And On A Lighter Note

...So I'm out to eat burgers and dogs and cole slaw with pineapple (our contribution), have a good holiday.

Here's a nice sing-along for your barbeques.

The Fight Over Border Adjustment

So the President, who during the 2008 campaign traipsed through Ohio turning into a second coming of Paul Wellstone, vowing to tear up every free trade agreement and ensure they under his Administration complied with labor and environmental statutes, wants you to know that elements of the Waxman-Markey bill are protectionist.

President Obama on Sunday praised the energy bill passed by the House late last week as an “extraordinary first step,” but he spoke out against a provision that would impose trade penalties on countries that do not accept limits on global warming pollution.

“At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade,” Mr. Obama said, “I think we have to be very careful about sending any protectionist signals out there.”

He added, “I think there may be other ways of doing it than with a tariff approach.” [...]

The House bill contains a provision, inserted in the middle of the night before the vote Friday, that requires the president, starting in 2020, to impose a “border adjustment” — or tariff — on certain goods from countries that do not act to limit their global warming emissions. The president can waive the tariffs only if he receives explicit permission from Congress.

The provision was added to secure the votes of Rust Belt lawmakers who were wavering on the bill because of fears of job losses in heavy industry.

In the floor debate on the bill Friday, one of its authors, Representative Sander M. Levin, Democrat of Michigan, said, “As we act, we can and must ensure that the U.S. energy-intensive industries are not placed at a competitive disadvantage by nations that have not made a similar commitment to reduce greenhouse gases.”

In the interview on Sunday, Mr. Obama said American industries like steel, aluminum, paper and glass had legitimate concerns about competition from developing nations. But he warned that trade sanctions based on the extent to which other countries curbed carbon dioxide emissions might be illegal and counterproductive.

You can read the transcript of these remarks here.

The thing about global warming is the word "global." More than that, the policy objective of cap and trade is to limit greenhouse gas emissions used by people in this country. Energy companies have already made the threat that, in the event of Waxman-Markey taking hold, they would simply process fuel and coal offshore and bring it to the United States to avoid the emissions cap. Border adjustment is a perfectly reasonable way to avoid that outcome, as Paul Krugman explains:

The truth is that there’s perfectly sound economics behind border adjustments related to cap-and-trade. The way to think about it is in terms of a well-established theory — the theory of non-economic objectives in trade policy — that owes its origins to Jagdish Bhagwati, who certainly can’t be accused of being a protectionist. The essential idea is that if you have a non-economic objective, such as self-sufficiency in food production, you should choose policy instruments to align incentives with that objective; in normal circumstances this leads to consumer or producer intervention, rarely to tariffs.

But in this case the non-economic objective is to reduce greenhouse gas emissions, never mind their source. If you only impose restrictions on greenhouse gas emissions from domestic sources, you give consumers no incentive to avoid purchasing products that cause emissions in other countries; as a result, you have an inefficient outcome even from a world point of view. So border adjustments here are entirely legitimate in terms of basic economics.

And they’re also probably OK under trade law. The WTO has looked at the issue, and suggests that carbon tariffs may be viewed the same way as border adjustments associated with value-added taxes. It has long been accepted that a VAT is essentially a sales tax — a tax on consumers — which for administrative reasons is collected from producers. Because it’s essentially a tax on consumers, it’s legal, and also economically efficient, to collect it on imported goods as well as domestic production; it’s a matter of leveling the playing field, not protectionism.

And the same would be true of carbon tariffs.

If the WTO can look at border adjustments and offer its blessing, surely the United States can. The dirty little secret is that countries use very real protectionist policies all the time - it explains the existence of Toyota. In this case, the goal is simple to avoid unintended consequences from the policy. I assume Barack Obama does want to reduce greenhouse gas emissions. This is the way to ensure that cap and trade doesn't simply result in leakage. In addition, making China concerned about a trade war is a good way, perhaps the only way, to get them on board with global climate change talks.

In addition, there's that dirty little secret about the Congress and also this nation: we have a lot of fair traders, enough to scuttle the bill:

First, I may be wrong on this, but given the closeness of the vote, is anybody sure that Waxman-Markey would've passed without the border adjustments? I'm not, and, I'm also pretty sure that nothing passes the Senate without them (maybe not even with them), so this surely deserves much larger weight on the 'pro' side of the ledger than people seem to be granting.

Second, the potential scale of losses from leakage don't sound trivial to me. A report by RFF says that the benefits of unilateral US carbon pricing are reduced by 25% if nothing is done to stop leakage. And, comparing border adjustments to other ways to curb this leakage while we wait on an international agreement make them look pretty good to me.

I am not very sanguine about the politics of losing a quarter of the benefits of an incredibly hard-fought legislative win every year while we wait on an international agreement - how durable do people think the WM win will be if opponents can come back every year with (not totally in-credible) estimates of how many jobs we've lost to trading partners because of it? The border adjustment in WM buys more than a decade to reach an agreement before it kicks in. This seems entirely reasonable to me.

Third, where I think Krugman is most right about this stuff is how bizarre it is that a (literally) textbook economics solution (albeit a second-best one) to this problem (that is probably even allowed under existing international trade law) has inspired such ferocious hand-wringing about protectionism, coercion, and making other countries furious. There is no rational reason at all why a carbon tariff that any country can unilaterally disarm through its own actions should be a serious hold-up to an international agreement.

Nobody wants to talk about the populist elements of the House, which is this case are the only ones who get the economics of the situation, IMO. But they must be reckoned with.

Done In By His Own Rhetoric

Paul Krugman puts into words something I've been feeling the past few days.

Back in March, when I was lamenting the inadequate size of the Obama stimulus, I made this prediction:

Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes — which they always want to do regardless of circumstances. If Mr. Obama comes back for a second round of stimulus, they’ll respond not by being helpful, but by claiming that his policies have failed [...]

It’s only June, but Republicans are already claiming that the Obama economic plan has failed. (Yes, that’s insane — hardly any of the money has flowed to the economy yet — but this was predictable.) Meanwhile, unemployment is already above 9 percent. And the green shoots are looking browner by the week, especially on the jobs front: new claims for unemployment insurance are stubbornly running at more than 600,000 a week, far above the 350,000 or so that would be consistent with a stable unemployment rate.

We really do need a bigger stimulus. But it’s going to be hard slogging.

Pointedly, when asked at his last press conference if we need a second stimulus, Obama said "Not yet."

My worry comes from the fact that Obama and his White House take every opportunity to sell the great economic benefits of the Recovery Act, how it creates a new era by investing in the policies we need to return to economic growth, etc. And yet they knew that the stimulus was kneecapped in the Senate and turned into a worthwhile but inadequate effort to deal with an historic shortfall in economic activity. It was always going to be hard to reconcile that disconnect between continuing bad times and this laudatory language used to describe a stimulus that has barely begun to reach the ground. But that tightrope is starting to fray at the edges.

Barely half of Americans are now confident that President Obama's $787 billion stimulus measure will boost the economy, and the rapid rise in optimism about the state of the nation that followed the 2008 election has abated, according to a new Washington Post-ABC News poll.

Overall, 52 percent now say the stimulus package has succeeded or will succeed in restoring the economy, compared with 59 percent two months ago. The falloff in confidence has been sharpest in the hard-hit Midwest, where fewer than half now see the government spending as succeeding. In April, six in 10 Midwesterners said the federal program had worked or would do so.

This was inevitable. With the global economy tracking the Great Depression (more charts on that) but the financial elites eager to get back to the hard work of accountability-free pillaging of the middle class, a credibility gap between the "green shoots" public statements and reality was bound to emerge. And if oil shoots back up to triple digits, the resulting squeeze in consumer spending could devastate growth even more.

This presents a vexing problem. Obama needs a national economic rebound and would probably support a new stimulus if he thought events warranted one, but he's hemmed in by his own rhetoric about the first stimulus.

Hey Paul Krugman, Where The Hell Are You Man

Paul Krugman just completely nails the Dan Froomkin firing. What's more, he does this as someone IN THE EXACT SAME POSITION as Froomkin - a mainstream liberal newspaper columnist, probably hated by his peers as much as Froomkin was allegedly hated by his. There's of course a difference between the editorial board of NYT and WaPo, but that's just a dangerous move by Krugman. And yet.

Not excerpting, you have to go read it.

...Conservatives are so persecuted on editorial pages like the Washington Post's, aren't they?

...By the way, on the day that Dan Froomkin gets fired, the WaPo published an op-ed from... Paul Wolfowitz. Man, talk about failing upwards...

Get Your Bananas

Paul Krugman actually understands the nature of the crisis here in California, and he writes about it today.

Despite the economic slump, despite irresponsible policies that have doubled the state’s debt burden since Arnold Schwarzenegger became governor, California has immense human and financial resources. It should not be in fiscal crisis; it should not be on the verge of cutting essential public services and denying health coverage to almost a million children. But it is — and you have to wonder if California’s political paralysis foreshadows the future of the nation as a whole.

It's a key point. Without the insanity of Prop. 13, making revenue so unstable and volatile from year to year, and completely inequitable, locking in older homeowners while increasing the tax burden on younger ones, the crisis would be as manageable as other states. Without the Trojan horse of the 2/3 rule for taxation snuck in through Prop. 13, the tax structure would not become the hideous, mangled beast we see today, where the effective tax rate is higher for the lowest-income Californians than for those with the highest income. And without the growing extremism of the Yacht Party, where anyone who breaks Grover Norquist's pledge draws an effort to drum them out of the party, perhaps Sacramento would be populated with public servants who want to fix the problem instead of break it.

Krugman's point is to sound a warning bell for the nation at large, to view the problems of obstruction and dysfunction at the state level with a wider lens. He explains that Republicans have "been driven mad by lack of power," with the extremist rump faction predominant. But even then, he gets that California's problems are unique.

So will America follow California into ungovernability? Well, California has some special weaknesses that aren’t shared by the federal government. In particular, tax increases at the federal level don’t require a two-thirds majority, and can in some cases bypass the filibuster. So acting responsibly should be easier in Washington than in Sacramento.

But the California precedent still has me rattled. Who would have thought that America’s largest state, a state whose economy is larger than that of all but a few nations, could so easily become a banana republic?

It's a sad commentary, when the finest liberal columnist in America basically reassures his readers that no government could possibly be as ridiculously constructed as California's.

The Lingering L-Shaped Recession

The OECD has joined the "green shoots" caucus by affirming that signs of a recovery are imminent, and the President of the European Central Bank is openly talking about central bankers scaling back their support once this recovery hits.

I really don't know what these people are talking about. If they want signs, I can give them signs. And there are just as many on the down side of the ledger as there are on the up side. There's the second wave of the foreclosure crisis. And let's add the credit card default crisis nipping at its heels. As more layoffs accrue, less people have the ability to pay their bills; that's just axiomatic. And the stress tests calculated credit card losses at a lower level of unemployment that what could easily happen in an adverse scenario.

The banks have an incentive to make profits, despite these scenarios that would eat into them, because they can reduce their capital needs if profit inch higher. There's only one way for them to do that - reduce lending and hoard money, along with gouging customers with fees to increase profits.

Finally, there's this historic shift from spending to saving that has accompanied economic insecurity. Now, in the long term, saving needs to increase to a more manageable level. But the paradox of thrift in the short term is harmful to any recovery.

Whatever the reason, I expect the saving rate to continue to rise over the next year or two. And that raises a question: what will be the impact on PCE (personal consumption expenditures) of a rising saving rate?

I created the following scatter graph for the period from 1955 through Q1 2009. This compares the annual change in PCE with the annual change in the saving rate.

Note that R-squared is only .125, so there are other factors impacting PCE (like changes in income!).

But a rising saving rate does seem to suppress PCE (as expected). If the saving rate rises to 8% by the end of 2010, this suggests that real PCE growth will be about 1% below trend per year.

So with wages barely rising, and a rising saving rate suppressing PCE, I'd expect PCE growth to be sluggish for some time. And since PCE is usually one of the engines of recovery (along with residential investment), I expect the recovery to be very sluggish too (no Immaculate recovery).

Let's recap: lower consumption, lower wages, higher unemployment leading to more credit card defaults, a potentially devastating second wave of foreclosures, and banks that must hoard capital and take profits, leading to less lending.

This is considered a GOOD outlook?

That only makes sense with a giant second stimulus, but the "green shoots" happy talk undercuts that option. Instead, I think Krugman is right - we're looking at half-steps that get the economy into some uneasy equilibrium without any serious recovery, and we just float for a decade.

"We're doing half-measures that help the economy limp along without fully recovering, and we're having measures that help the banks survive without really thriving," Krugman said.

"We're doing what the Japanese did in the nineties," he told a small group of reporters during a visit to Beijing.

He said it was not clear that China would suffer sub-par growth as a consequence of the fallout of the present crisis.

"I'm mostly worried that the U.S. and the euro zone will have Japanese-type lost decades," he said.

Krugman said he expected little or no employment growth this year or next in the United States, where the jobless rate in April hit a 25-year high of 8.9 percent.

Without a second stimulus, I don't know how this ends.

An End To Tax Havens

I guess the President met with Joe Stiglitz and Paul Krugman last week. Ultimately, these one-off meetings mean little in the context of the larger discussion inside the White House, which appears dominated by the axis of Summers and Geithner. But notably, the President came out the very next week with a plan to put a halt to offshore tax havens.

President Obama will present a set of proposals on Monday aimed at changing international tax policy, calling for the elimination of benefits for companies and wealthy individuals that harbor their cash in offshore accounts.

The president and Treasury Secretary Timothy F. Geithner will announce their plans during a late-morning appearance at the White House. The proposed overhaul in the tax code, which will be fully unveiled in the administration’s budget later this week, could help raise $210 billion in revenues over the next 10 years.

One of the key proposed changes would restrict companies from deferring the payment of taxes on profits earned overseas. Administration officials said the plan also would keep firms from taking deductions against their taxes by inflating the amount of foreign taxes they paid.

Mr. Obama raised the idea frequently during his presidential campaign. In a speech to Congress in February, as he outlined his priorities for the year, he pledged to make the tax code more equitable by “finally ending the tax breaks for corporations that ship our jobs overseas.”

We have heard the "end tax breaks for companies that ship jobs overseas" line since the Kerry campaign. But what we're really talking about here goes back even further than that. The Obama campaign wants companies to pay their taxes under the law. That's pretty much it. As quoted in the press release put out by the Administration, corporations have a 2.3% effective tax rate on their foreign earnings. That's absurd and wrong. The use of tax havens in the Cayman Islands and elsewhere suck wealth out of the country and give corporate interests a free ride to use the commons at virtually no cost. The tax breaks for shipping jobs overseas is only a part of this plan. Here's President Obama with more.

The way we make our businesses competitive is not to reward American companies operating overseas with a roughly 2 percent tax rate on foreign profits; a rate that costs -- that costs taxpayers tens of billions of dollars a year. The way to make American businesses competitive is not to let some citizens and businesses dodge their responsibilities while ordinary Americans pick up the slack [...]

For years, we've talked about ending tax breaks for companies that ship jobs overseas and giving tax breaks to companies that create jobs here in America. That's what our budget will finally do. We will stop letting American companies that create jobs overseas take deductions on their expenses when they do not pay any American taxes on their profits. And we will use the savings to give tax cuts to companies that are investing in research and development here at home so that we can jump start job creation, foster innovation, and enhance America's competitiveness.

For years, we've talked about shutting down overseas tax havens that let companies set up operations to avoid paying taxes in America. That's what our budget will finally do. On the campaign, I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 business -- businesses claim this building as their headquarters. And I've said before, either this is the largest building in the world or the largest tax scam in the world.

And I think the American people know which it is. It's the kind of tax scam that we need to end. That's why we are closing one of our biggest tax loopholes. It's a loophole that lets subsidiaries of some of our largest companies tell the IRS that they're paying taxes abroad, tell foreign governments that they're paying taxes elsewhere -- and avoid paying taxes anywhere. And closing this single loophole will save taxpayers tens of billions of dollars -- money that can be spent on reinvesting in America -- and it will restore fairness to our tax code by helping ensure that all our citizens and all our companies are paying what they should.

We're talking about what amounts to an illegal fraud of the public commons, to the tune of at least $21 billion dollars annually. Corporations have grown accustomed to it and see it as their birthright. Their sycophants in the media try to turn history on its head and claim that the founding principle of what it means to be an American is to cheat on taxes.

SCARBOROUGH: They tell me though it's all legal - ALL LEGAL.

BURNETT: Of course it is.

SCARBOROUGH: There's a big difference between tax avoidance and being an all out tax cheat.

BURNETT: That's right. Isn't it your obligation in this country - there is a tax code for a reason, to take advantage of every bit of it you can and pay as little as you can.

I'd be fine with lowering the corporate tax rate if I thought corporations actually paid it. But they don't. They "avoid" (not cheat! Don't you dare say cheat!) them and increase the burden on working people. And it's time this stopped. Obviously, the corporate interests who want to maintain the status quo will fight like hell to stop this. Here's Robert Gibbs at his presser today;

Q Okay. And on the announcement he made today about international tax policy, several big corporations are lined up against it, the deferral provision -- Pfizer, Oracle, Microsoft and trade associations like the Chamber of Commerce, Business Roundtable. And I'm just wondering how you think you're going to overcome that opposition and if you think this faces a big fight in Congress.

MR. GIBBS: Well, I don't think change is ever easy and I think whenever you're taking on some bigger interest that mountain gets a little bit steeper.

But the President strongly believes that the policy that he outlined, the steps that we have to take to close tax loopholes and ensure some fairness in this process is the right policy for America and the right policy for American business. By closing these loopholes and replacing these tax advantages with fairness, using a portion of the money that's recouped to make or to fund research and development and experimentation tax credit for the next 10 years is an important investment for American business.

Since 1981 the R&D tax credit has expired on 13 separate occasions. So providing business with some certainty for research and development we think is important. And as the President said throughout the campaign, we have -- our tax code has an incentive that provides -- an incentive that rewards companies that are investing overseas at the expense of investing here in America. We know we're going to take on some tough interests in that, but the President believes this is a fight we should have and one that we can win.

As you can see, corporations would get a permanent R&D tax credit out of this, which would save them billions in the exchange, in effect a bribe that must be offered in exchange for getting them to actually pay their taxes.

I'm glad Obama's making this fight, and when you combine it with his comments on the shrinking of the financial sector, maybe we can say that the Krugman/Stiglitz meeting did the trick.

The Danger of Wage Cuts

The Washington Post perfectly fails to summarize the problem in its headline, "Wage Growth Is Eroding As Firms Rush To Slim Down". Um, actually, most of the examples in the piece show extreme wage cuts, not an erosion of growth. As Hilzoy notes, the bottom 90% of wage earners saw their wages "grow" a mere 10% over the past 30 years, while those in the top 10% grew 232%. Wages are falling now for that same group of workers not at the very top, because the threat of job loss forces them to accept cuts. And the result for the broader economy is tragic.

Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.

But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.

In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.

Constant wage deflation led to economic stagnation in Japan in the 1990s. That's what it looks like we're saddled with. There's a difference between saving the economy and leading to a real recovery. Wage cuts lead to the former but not the latter.

Krugman Opens The Overton Window

The upcoming cover of Newsweek, the Village weekly reader, will feature Paul Krugman, or at least 60%-65% of his face, with the headline "OBAMA IS WRONG: The Loyal Opposition of Paul Krugman.”

Krugman, who won the Nobel Prize in economics last fall, has been arguing that Obama is doing too little to respond to threats to the nation’s banking and economic system, and he has contended that the $787 billion stimulus bill should have been bigger [...]

Newsweek Editor Jon Meacham explains the choice in a letter to readers: “Every once a while, … a critic emerges who is more than a chatterer—a critic with credibility whose views seem more than a little plausible and who manages to rankle those in power in more than passing ways. As the debate over the rescue of the financial system—the crucial step toward stabilizing the economy and returning the country to prosperity—unfolds, the man on our cover this week, Paul Krugman of The New York Times, has emerged as the kind of critic who, as Evan Thomas writes, appears disturbingly close to the mark when he expresses his ‘despair’ over the administration’s bailout plan. …

“There is little doubt that Krugman—Nobel laureate and Princeton professor—has be come the voice of the loyal opposition. What is striking about this development is that Obama’s most thoughtful critic is taking on the president from the left at a time when, as Jonathan Alter notes, so many others are reflexively arguing that the administration is trying too much too soon.

"A devoted liberal, Krugman hungers for what he calls ‘a new New Deal,’ and he prides himself on his status as an outsider. (He is as much of an outsider as a Nobel laureate from Princeton with a column in the Times can be.) Is Krugman right? Is the Obama administration too beholden to Wall Street and to the status quo, trying to save a system that is beyond salvation? Does Obama have—despite the brayings of the right—too much faith in the markets at a time when prudence suggests that they cannot rescue themselves? We do not know yet, and will not for a while to come. But as Evan—hardly a rabble-rousing lefty—writes, a lot of people have a ‘creeping feeling’ that the Cassandra from Princeton may just be right. After all, the original Cassandra was.”

Now, some supporters of the President might see this rise of Krugman as a negative development. I see it differently. Krugman has been remarkably consistent to his principles, praising Obama where warranted, even on economic issues. He appreciated Obama's budget and his very legitimate move toward health care reform. His is not a knee-jerk reaction in opposition. Rather, Krugman has taken a critical look at each Obama proposal and made his judgments on the merits based on his own expertise. He has consistently argued that we are in a crisis where the normal rules no longer apply, and we need to look to the past to use the principles of Keynesian economics to dig us out of this rut. And with respect to the banks, he has argued the increasingly consensus view that insolvent banks must be taken over temporarily, their management and bad assets cleared out, and their institutions sold off after the debts are resolved, rather than what he sees as the half-measure of the Geithner plan. In addition, he has the opinion that banks that are "too big to fail" are too big to exist, and we need to fundamentally restructure the financial sector instead of making the sector whole and just turning back the clock to a couple years ago.

Now, you don't have to agree with everything Krugman says - I've seen some very good critiques of things he's said recently. But he is a serious thinker and this is his area of expertise, and he performs an important function. It's an odd quirk of fate that Krugman has as big a megaphone as he does, and so using it to put pressure on the Obama Administration from the left does several things: 1) provides a counter-weight to the conservative critiques of the President, which are usually so nutty that they pale in comparison to reasoned dissent, 2) forces Obama to at least debate the merits of his proposals rather than dismiss all critics, and most important, 3) gives Obama space on the left to put out an more progressive agenda than otherwise. Bill Clinton sums up the dynamic:

I recently heard an interesting anecdote about the 1993 budget fight. While it is probably the most progressive piece of sizable legislation to pass into law in two decades, it was a grueling fight--passing both branches of Congress by a single vote--and it still could have been better. At the signing ceremony, President Clinton found then Representative Bernie Sanders, and told Sanders that he, Sanders, should have made a much bigger public display of how he, Clinton, wasn't giving enough to liberals in the new budget. Such a public display would have provided Clinton more room to maneuver on the left.

The moral of the story is that if no one is criticizing a Democratic administration from the left, then there is no rationale or political space for that Democratic administration to operate on the left. Such criticism is thus even useful to, and desired by, a Democratic administration. If the left stays quiet, it will not be relevant.

Krugman is fulfilling that role, opening what many have called the Overton window, moving the conversation away from the failed conservative ideas of the past.

I also appreciate Krugman's modesty in reacting to the cover story:

I’ve long been a believer in the magazine cover indicator: when you see a corporate chieftain on the cover of a glossy magazine, short the stock [...] Presumably the same effect applies to, say, economists.

You have been warned.

The full article is here.