Reich Calls It A Depression

Thanks for blowing my whole weekend, Robert Reich.

The March employment numbers, out this morning, are bleak: 8.5 percent of Americans officially unemployed, 663,000 more jobs lost. But if you include people who are out of work and have given up trying to find a job, the real unemployment rate is 9 percent. And if you include people working part time who'd rather be working full time, it's now up to 15.6 percent. One in every six workers in America is now either unemployed or underemployed.

Every lost job has a multiplier effect throughout the economy. For every person who no longer has a job and can't find another, or is trying to enter the job market and can't find one, there are at least three job holders who become more anxious that they may lose their job. Almost every American right now is within two degrees of separation of someone who is out of work. This broader anxiety expresses itself as less willingness to spend money on anything other than necessities. And this reluctance to spend further contracts the economy, leading to more job losses [...]

This is still not the Great Depression of the 1930s, but it is a Depression. And the only way out is government spending on a very large scale. We should stop worrying about Wall Street. Worry about American workers. Use money to build up Main Street, and the future capacities of our workforce.

I agree with Tim Fernholz - this whole notion that employment is a "lagging indicator" of the economy is dangerously out of balance. 663,000 people had their lives turned upside down in the last four weeks. Fixing their situation and getting them working again is actually the MEASURE of the economy, in my opinion.

So how do we do it? Obviously, the stimulus funds already in the pipeline and just starting to make their way out to the public will help. But Reich argues we'll need much more. Brad DeLong has some macro-economic ideas, including additional government spending, central banks buying government bonds, and boosting financial asset prices. I don't know exactly what needs to be done, and I'm willing to wait to see how this initial stimulus affects employment before calling for a new one. But this is a very tough time in the economy, and with the lack of retirement savings leading our elderly to the want ads, I'm just very worried about how we're going to come back.

Party Of No Clue

I briefly alluded to Mark Sanford rejecting stimulus funds that will result in up to 7,500 teachers being laid off. South Carolina legislators are trying to outflank him on that. But he's not the only one. Governor Goodhair of Texas is denying his citizens stimulus funds, too:

Gov. Rick Perry will announce today that he is blocking the state from accepting $550 million for expanded unemployment benefits as part of the federal stimulus package.

With an upscale Houston hardware store as his backdrop, he will paint the expansion as a burden on small business.

The Legislature still could move to change state law to draw down the money, but those changes would be subject to a Perry veto.

To be eligible for all the money, Texas must enact legislation that would change how the state’s calculates a worker’s eligibility and extend benefits to more workers, including those looking for part-time work.

Arnold Schwarznegger is trying the same thing in California, with the same argument that the changes in eligibility would impose an "unnecessary burden" on state businesses. Actually, what would impose a burden on them is them having to file for bankruptcy because nobody's buying goods because their unemployment ran out.

There's no real argument for this obstinacy from a policy perspective, just shopworn and outdated ideology. Sanford compared the stimulus to the policies of Zimbabwe, saying all this federal spending will lead to hyper-inflation. I wish! Right now we're in a deflationary spiral, and the only thing the Fed has the monetary tools to combat is inflation at this point. If we were experiencing any inflation at all, it would mean that the economy is at least sort of working again.

Then there's the argument that all this fiscal policy is like what FDR did during the Depression. Yes, they use that as a negative. The Bible for this revisionist history is a book by Amity Shlaes, and Jon Chait fairly well demolishes it.

Now here is the extremely strange thing about The Forgotten Man: it does not really argue that the New Deal failed. In fact, Shlaes does not make any actual argument at all, though she does venture some bold claims, which she both fails to substantiate and contradicts elsewhere. Reviewing her book in The New York Times, David Leonhardt noted that Shlaes makes her arguments "mostly by implication." This is putting it kindly. Shlaes introduces the book by asserting her thesis, but she barely even tries to demonstrate it. Instead she chooses to fill nearly four hundred pages with stories that mostly go nowhere. The experience of reading The Forgotten Man is more like talking to an old person who lived through the Depression than it is like reading an actual history of the Depression. Major events get cursory treatment while minor characters, such as an idiosyncratic black preacher or the founder of Alcoholics Anonymous, receive lengthy portraits. Having been prepared for a revisionist argument against the New Deal, I kept wondering if I had picked up the wrong book [...]

Shlaes begins every chapter with a date (say, December 1936), an unemployment percentage (15.3) and a Dow Jones Industrial Average. The tick-tick-tick of statistics is meant to show that conditions did not improve throughout the course of Roosevelt's presidency. Yet her statistics are highly selective. As those of us who get our economic information from sources other than the CNBC ticker know, the stock market is not a broad representative of living standards. Meanwhile, as the historian Eric Rauchway has pointed out, her unemployment figures exclude those employed by the Works Progress Administration and other workrelief agencies. Shlaes has explained in an op-ed piece that she did this because "to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects." So, if you worked twelve hours per day in a coal mine hoping not to contract black lung or suffer an injury that would render you useless, you were employed. But if you constructed the Lincoln Tunnel, you had an anxiety-inducing make-work job.

In response to this criticism, Shlaes has retreated to the defense that unemployment was still high anyway. "Even if you add in all the work relief jobs, as some economists do," she has contended, "Roosevelt-era unemployment averages well above 10 percent. That's a level Obama has referred to once or twice--as a nightmare." But Roosevelt inherited unemployment that was over 20 percent! Sure, the level to which it fell was high by absolute standards, but it is certainly pertinent that he cut that level by more than half. By Shlaes's method of reckoning, Thomas Jefferson rates poorly on the scale of territorial acquisition, because on his watch the United States had less than half the square mileage it has today.

This is the intellectual heft on the right. And it manifests itself into policy with things like the "no-cost stimulus" - really - which would create two million jobs by, um, drill baby drilling, I guess. Never mind that oil prices are down, auto mileage is down and it takes ten years to get a drop of oil out of a new platform. That's going to be the "timely, targeted" stimulus to save our souls.

I'm beginning to think that, by trying to talk himself out of the RNC Chairmanship, Michael Steele is the SMART one.

Fears of A Real Crash

I'd like to laugh at the Republican growing pains from dealing with the minority and the near-universal opprobrium for their policies, and I'm sure I will in a future post. Maybe even the next post. But we're seeing the consequences of those policies resulting in a seemingly unending death spiral, a global death spiral, and I'm afraid schadenfreude can't even cheer me up.

A year ago Roubini was forecasting an 18-month recession with a U-shaped recovery; now, he's now expecting the downturn to last at least 24 months and possibly 36-months. He also sees rising risks of a Japanese-style L-shaped stagnation, i.e. a prolonged period with little or no economic growth.

"I was one of most bearish people [but] the economy has surprised the bears on the downside," says Roubini of NYU's Stern School and RGE Monitor. "What's happening in the world now is scary."

Indeed, while the U.S. economy contracted 6.2% in the fourth-quarter, Roubini's main concern is economic activity in much of the rest of the world is in much worse shape. And while he is often critical of U.S. policymakers - including over the stimulus package, Fed policy and bank bailouts - Roubini says "the rest of the world is way behind the curve," in terms of doing the "right things" to confront the worst economic crisis since the 1930s.

It's the global component to this that has me extremely worried, aside from the Geithner/Summers effort to pay off the banksters. The EU is stiffing Eastern Europe as that region bears some of the toughest burdens of the financial crisis. Case-by-case support will simply staunch the bleeding without saving the patient. The Hungarian Prime Minister called it "a new Iron Curtain" to divide Europe. Before long, what is currently happening in Ukraine - where tent cities on the main square bear signs saying "Everyone Out" and many cities are WITHOUT HEAT AND WATER - could set a depressing standard. The European Central Banker seems like he's in a dreamworld, predicting that there's no threat of deflation against all evidence. There's a report that European banks have $24 TRILLION in toxic assets on their balance sheets. That is a bona fide crisis in global debt that is destroying entire nations. Put it this way, when the lender of last resort is increasingly the Mafia - yes, the actual Mafia - there's a serious problem. Basically, there is an increase in savings to manage the debt, and it's causing investment to plunge. And somewhere in the world, one of the richer countries has to pick up the slack for all this shortfall in demand, and nobody is doing it with the speed or decisiveness required.

It's quite scary, and our brainiacs Tim Geithner and Larry Summers aren't helping at all. In an article designed by the leakers to pin the blame of any failure on them, their policies on the financial crisis are displayed:

Treasury Secretary Timothy F. Geithner and National Economic Council Chair Lawrence H. Summers pushed for weeks for a strict cap on the nation's debt. And while other advisers argued that the administration needed a more flexible spending plan, they could not deter the president from ultimately agreeing with the views promoted by the partnership of Geithner and Summers [...]

Geithner and Summers are also taking the lead in shaping the Obama administration policies for creating millions of jobs through the economic stimulus plan, rescuing the banking system, revitalizing the housing market, restructuring the auto industry and overhauling financial regulation.

Obama's decision to make Summers and Geithner the key players in such a wide-ranging agenda has left some within the government concerned that they will be unable to handle so many complex issues at once. Geithner already was widely criticized on Wall Street for being too vague when he announced the financial rescue package last month.

The reviews are in on this dynamic duo, and they are not good. Not good at all. As Paul Krugman says:

The sickening feeling of drift — the sense that policymakers are refusing to face hard facts, and are dithering while the world economy burns — just keeps getting stronger.

I may throw up.

No Economists On The Teevee

Turns out that the traditional media doesn't put a premium on informing the public. Over the last month, which has been dominated by debate about the stimulus package, the experts most likely to be able to actually perform the debate in a credible and intelligent manner, economists, haven't been on the scene.

In the hour following President Obama's February 9 press conference -- during which he gave a brief address about the economic recovery legislation currently moving through Congress -- cable news programs featured guests and panelists to discuss Obama's remarks. But CNN, Fox News, and MSNBC did not bring on a single economist to discuss the plan. The absence of economists in the post-press conference discussion was consistent with the observation made by Crooksandliars.com founder John Amato in a February 4 article on The Huffington Post: "I'm sure you've heard about the hundreds of economists that are either for or against President Obama's stimulus plan. My question to the media is: Where are they?" Indeed, a Media Matters for America review of the Sunday talk shows and 12 cable news programs from January 25 through February 8 found that during 139 1/2 hours of programming on Sunday mornings and weekday afternoons and evenings, of 460 total guest appearances in discussions about the economic recovery legislation and debate in Congress, only 25 were made by economists -- a mere 5 percent.

Economists actually differed wildly on the stimulus, and had their own biases that they brought to the debate. But surely that would be a debate grounded more in facts than what we currently see on the teevee. Of course, economists aren't adept at determining whether Obama flipped the bird to Hillary Clinton when he was scratching his nose, or how Obama's body language signifies his belief in civil rights, so they are kind of useless on cable. John Amato and Digby have more.

When you have a debate about the economy without the economists, you end up having a debate featuring this guy.

U.S. Rep. Steve Austria said he supports a scaled-down federal economic-stimulus proposal, but the Beavercreek Republican told The Dispatch editorial board that the huge influx of money into the economy could have a negative effect.

"When (President Franklin) Roosevelt did this, he put our country into a Great Depression," Austria said. "He tried to borrow and spend, he tried to use the Keynesian approach, and our country ended up in a Great Depression. That's just history."

That is just history, with the added invention of a time machine so that Roosevelt could return to the 1920s and be President when the stock market crashed. Now, this was such a stupid statement that Austria had to walk it back, but there are hundreds more little white lies that come up from the know-nothings, which the media turns into a debate worthy of broadcast entertainment. But it lacks one thing - precise information.

In fact, for most of the New Deal era, the economy grew quickly -- an annual rate of about 13 percent from 1933 to 1937 and more than 10 percent from 1938 to 1941, Commerce Department data show.

Many liberal economists say that shows the virtue of boosting spending. Dean Baker, co-director of the Center for Economic and Policy Research, said that "when Roosevelt came in, he started spending money, and from 1933 to 1937 the economy grew at a double-digit annual rate. It was soaring, and the unemployment rate fell at 4 percentage points a year."

But in 1937, the economy started tumbling backward again. Drawing an analogy to today's fiscally conservative Democrats in Congress, Baker said Roosevelt "listened to the Blue Dogs of his day and cut spending, and the unemployment rate rose again."

Here's a handy chart:



I got that from Rachel Maddow's show, the oasis in the cable desert.

Goodnight Bush

I promise this will be the last time I come back to this today, then I'll start looking forward and not backward. But just to look way backward for a moment, The Nation reprinted their editorial from 1933 waving farewell to Hoover and the Republicans in favor of FDR, and the similarities are striking.

At the risk of gilding the tinsel, let the record be set down finally as The Nation takes leave this week of the "only party fit to rule." American memories are short. Four years from now the public will be asked to restore the Republicans and prosperity [...]

There is no need to set down once more the repeated mistaken prophecies which issued from the White House as the country sank deeper into economic chaos. Those forecasts were sufficiently quoted during the recent Presidential contest. But Mr. Hoover's record as a false prophet continued consistent to the end [...] It is needless to stress the hollowness of these final promises and assertions. Unemployment mounts—thirteen million men out of work is today a conservative estimate; a 3.9 per cent drop in employment with a 5 per cent pay-roll decrease was recorded for the month ending January 15, according to the latest Department of Labor statistics available. The people's savings continue to be confiscated as banks close at an undiminished pace—272 closed in the month of January, 1933, and toward the close of February they closed, no longer singly, but by States —Michigan, Maryland, Ohio. Bankruptcy is becoming epidemic. The private and local relief upon which Mr. Hoover's policies relied are increasingly inadequate; destitution, undernourishment, actual hunger are spreading through the land.

But we are taking leave not merely of a single Administration. For twelve years the Republican Party has been in power. During ten of those years it controlled the executive and legislative branches of the government. When, a few years hence, an attempt is made to minimize the disaster of this last quadrennium, and to point to a preceding eight year period of material development and growth, let it be noted that in a purely material sense the American people are much worse off today than they were twelve years ago. Far more than was gained has been swept away. Savings have been dissipated, lives have been blasted, families disintegrated. Misery and insecurity exist to a degree unprecedented in our national life. And spiritually the American people have been debauched by the materialism which made dollar-chasing the accepted way of life and accumulation of riches the goal of earthly existence. The record of Republicanism must be judged as a whole, although, in fairness, the consequences of the World War and the major responsibility of the Democrats for putting the United States into it must not be forgotten. The Republicans were as eager to make war—and both parties continued, until well after the crash, to be proud of their attitude in 1917. Moreover, economic disaster has been only a part of this sterile decade's legacy, the burdens of which will descend to unborn generations. Our worthiest traditions have been impaired; vital tenets of American life have been destroyed. What has become of that fundamental American axiom "salvation by work"? In all our previous history it has been taken for granted that ours was a land of opportunity, and that rewards bore some relation to initiative, effort, and ability. Granting the large mythical content of these beliefs, they were more nearly valid in America in the first century and a half of our national existence than anywhere else on earth. They are no longer true today. The promise of American life has been shattered—possibly beyond repair [...]

Have these captains and kings departed—not to return? The epoch of their wanton and repulsive leadership is ending. Their incompetence and their betrayal are manifest. But much of the evil they have done lives after them. The coming years will see the struggle to purge America, to reassert the promise of American life, to validate, in consonance with the changed times and conditions, the high aspirations of the founders of the nation. Mr. Roosevelt has the opportunity to be the leader of this renaissance, but he will have to forge as his instrument a wholly different Democratic Party from that which so long has been indistinguishable from the Republican.

I mean, it's uncanny. And in a sense, it is the continuum we have often faced in this country. People vs. powerful. Rich vs. poor. Special interests vs. the rights of man. Roosevelt, in the wake of the misery created by Republicanism, chose a different path and ushered in both eventual prosperity and the weaving of a social safety net that is probably the only reason we aren't all in bread lines today. It remains to be seen how Obama will react, though there were some good signs in the address today (I will cover that in a later post).

What needs to be remembered is that George W. Bush, while a dull, selfish, pathetic figure, is not remarkable in the annals of Republicanism. His policies and the work of his execrable staff falls along the same lines of the moneyed Republicanism of the 1920s, the Nixonian secrecy and lawlessness of the 1960s and 1970s, the anti-government crusades of the 1980s and the theocratic revolutions of the 1990s and beyond. In the Bush years, the consolidation of all these efforts into an insidious whole created a government that hated itself, that existed for the benefit only of the wealthy, concerned with taking profits and humiliating enemies. And it produced success for those few, but utter failure and disgrace for the country, and ultimately for those individuals that directed it. The depressing final-night soiree of those souls oozes metaphor.

"Are these all white people -- I mean White House people?" I asked someone in a genuine Freudian slip. Turned out the crowd was a mix of alumni from the White House, State Department, Treasury, and Justice and a few campaign workers. The mood felt more sweet than bitter. Many staffers had spent the weekend clearing out their offices. The question I kept hearing was "What's next?" Some were applying to grad schools, others were heading to D.C. law firms or think tanks, and others were returning to their home states or traveling. One outgoing Treasury employee had already landed a job as a manager at Abercrombie & Fitch [...]

"This is objectively the finest group of people ever to serve our country," he said. "Not to serve me, not to serve the Republican Party, but the United States of America."

"I am glad we made this journey," he went on. Then he engaged in a little reminiscence. "Remember the time in 2003 when Bartlett came to work all hung over?" Laughs. "Nothing ever changes."

He continued: "We never shruck--"

"Shirked!" someone yelled.

"Shirked," Bush corrected, smiling. "You might have shirked; I shrucked. I mean we took the deals head on."

This is not unusual. This is the consequence of putting people into power who hate government. May America not have such short memories again.

Neo-Hooverism Quashed

Barack Obama was pretty unequivocal last night making the case for Keynesian deficit spending to lift us out of the recession.

STEVE KROFT: Where is all the money going to come from to do all of these things? And is there a point where just going to the Treasury Department and printing more of it ceases to be an option?

PRESIDENT-ELECT BARACK OBAMA: Well, look, I think what's interesting about the time that we're in right now is that you actually have a consensus among conservative Republican-leaning economists and liberal left-leaning economists.

And the consensus is this:

That we have to do whatever it takes to get this economy moving again. That we're gonna have to spend money now to stimulate the economy. And that we shouldn't worry about the deficit next year or even the year after. That, short term, the most important thing is that we avoid a deepening recession.

Very good news. It doesn't mean that journalists like Kroft are going to stop asking these know-nothing types of questions, or that the Beltway chattering class isn't going to rend their garments over it. But Obama has the right perspective. Government is the spender of last resort in an economic downturn.

And good on Paul Krugman for knocking down the revisionist nonsense that George Will was spewing on ABC's This Week.



In essence, private investment was already bottomed out before FDR came into power. He didn't discourage it at all. After the New Deal was working well for a few years, he tried to go back to balancing budgets and the economy was too fragile to take it. FDR's problem, then, was that he was TOO CONSERVATIVE at a time that led to a new recession. This chart is instructive.



I think there's a subset of official Washington that believes the economy runs like their checkbook, and that in a downturn you have to cut back, but I think the public is waiting to be sold on that idea, and what they're really looking for is effective government. Should they get that with the new Administration, they'd be immune to Republican fearmongering.

The exception is that moderates remain far more skeptical about government -- and government spending -- than liberals do. Conservative misrule has given them every reason to believe that large portions of their taxes are wasted. Not surprisingly, Republicans and conservatives have already been trying to paint Obama as a tax-and-spend liberal, while bemoaning the fact that Bush ran up deficits at the same time he increased spending across the board.

But progressives needn't be defensive about the majority that is dubious about government spending. Making government work effectively is at the heart, not the capillaries of the progressive agenda. This test doesn't distract; it focuses us on our task. No progressive majority can ever be consolidated for long if it doesn't demonstrate that government can be an effective ally for everyone.

And that is all moderates are looking for. They aren't skeptical about the need for government. By large margins, they think regulation does more good than harm. They want investments made in education and training. They favor a concerted government-led drive for energy independence. They far prefer a health-care plan with a choice between their current insurance and a public plan like Medicare, rather than one that would give them a tax credit to negotiate with insurance companies on their own. Their concern is less that government will do too much and more that government will fail to do what it must and waste their money in the process.

Obama has a moment to change that conversation and show how government can effectively respond to challenges. It may only be a moment, but it's better than nothing.

Honey I Broke The Economy

This Bear Stearns sale, for less than the COST OF THEIR OFFICE SPACE in Manhattan, is really ominous. This is Great Depression kind of stuff: a run on the bank, government intervention to prevent disaster, and a chief executive who is unconcerned of the consequences. Here's Bonddad.

-- For all practical purposes, Bear Stearns is bankrupt. Despite the shotgun nature of the Bear/JP Morgan deal, Bear would not have agreed to a $2/share valuation unless there the damage to their business was extremely severe.

-- JPM swooped in quickly on this deal. My guess is they have been watching this situation for some time and waited for the right moment to get this deal. All the players lined up too quickly in JPM's favor for this to be a happy coincidence. JPM sees a play here and went for it. This actually is good news. If there are other firms in financial straights right now, others know about it. The Fed has demonstrated they will help to finance the deal. In short, if another firm goes bankrupt it will be a quick procedure to deal with it.

-- The Federal Reserve is scared shitless. There is no reason for them to get involved in this deal unless they were worried about one of two things (and probably both): 1.) the ripple effect and/or 2.) other banks in a similar situation. The Fed is looking for any tool (and making some new ones up) to prevent a system wide crisis.

The Fed is also lowering its discount rate and setting itself up as a "lender of last resort" for government securities. There's great coverage on this all over the econosphere; Calculated Risk and others. Matt Stoller had the best summation of this entire mess.

For some time going forward, there's going to be lots of econo-speak about bail-outs and Federal Reserve tools to manage insolvent banks, but remember one basic fact. You can't run a political system and an economy based on loan-sharking, intimidation, and socialism for the rich and powerful. Now, that might sound like a screed, but it's not. I'm not just saying that the rich stealing from the public is a bad thing, I'm saying that it no longer works because there isn't enough left to steal such that the theft can be hidden. Our policy apparatus is falling apart when it has to resort to bribery and threats.

They've privatized wealth and socialized risk for too long, and relying on consumers to bail them out isn't going to work anymore. We're no longer the world's largest economy and as we contract and depress we risk becoming totally irrelevant. We're at the point where our economic leaders are openly talking about "restoring faith" in the economy, because faith, not fundamentals, is all we have left.

Hoard your money. We're in for a panic.